Revenue Recognition

Effective January 1, 2018, the Company adopted FASB ASC Topic 606,

Revenue from Contracts with Customers

(“ASC Topic 606”). The Company did not generate any product related revenue prior to the three months ended March 31, 2020, and therefore the adoption of ASC Topic 606 did not have an impact to the Company’s financial statements for any prior periods or upon adoption. In accordance with ASC Topic 606, the Company recognizes revenue when the customer obtains control of a promised good or service, in an amount that reflects the consideration that the Company expects to receive in exchange for the good or service. The reported results for the three months ended March 31, 2020 reflect the application of ASC Topic 606.

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to arrangements that meet the definition of a contract under ASC Topic 606, including when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. For a complete discussion of accounting for product sales, see

Product Sales, net

(below).

Product Sales, net

The Company sells CAPLYTA to a limited number of Customers which include a number of national and select regional distributors. These Customers subsequently resell the Company’s products to specialty pharmacy providers, as well as other retail pharmacies and certain medical centers or hospitals. In addition to distribution agreements with Customers, the Company enters into arrangements with health care providers and payers that provide for government mandated and/or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products. As of March 31, 2020, the Company had executed agreements with its Customers in place; however, additional distribution agreements were signed subsequent to the quarter close. The Company recognizes revenue on product sales when the Customer obtains control of the Company’s product, which occurs at a point in time (upon delivery). Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances. If taxes should be collected from Customers relating to product sales and remitted to governmental authorities, they will be excluded from revenue.

Reserves for Variable Consideration

Revenues are calculated based on the wholesale acquisition cost that the Company charges to distributors for CAPLYTA less variable consideration for which reserves are established. Components of variable consideration may include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, payer rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between the Company and its Customers, payers, and other indirect customers relating to the Company’s sales of its product.

These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, include estimates that take into consideration a range of possible outcomes which are either considered mo

st

likely or probability-weighted in accordance with the expected value method in ASC Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, forecasted customer buying and payment patterns. The Company’s estimates regarding the payer mix for CAPLYTA and historical industry information regarding the payer mix for comparable pharmaceutical products and product portfolios, in particular, historical information related to similar products in their initial launch stages. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts after considering whether revenue should be constrained under ASC 606.

The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. The Company’s analyses also contemplated application of the constraint in accordance with the guidance, under which it determined a material reversal of revenue would not occur in a future period for the estimates detailed below as of March 31, 2020 and, therefore, the transaction price was not reduced further during the three months ended March 31, 2020. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product sales and earnings in the period such variances become known.

7

Trade Discounts and Allowances

— The Company generally provides Customers with discounts which include incentive fees that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, the Company compensates (through trade discounts and allowances) its Customers for sales order management, data, and distribution services. However, the Company has determined such services received to date are not distinct from the Company’s sale of products to the Customer and, therefore, these payments have been recorded as a reduction of net sales within the condensed consolidated statements of operations through March 31, 2020, as well as a reduction to trade receivables, net on the condensed consolidated balance sheets.

Product Returns

— Consistent with industry practice, the Company generally offers Customers a limited right of return for product that has been purchased from the Company based on the product’s expiration date, which lapses upon shipment to a patient. The Company estimates the amount of its product sales that may be returned by its Customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as an accrued expenses and other current liabilities on the condensed consolidated balance sheets. The Company currently estimates product return liabilities using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel. The Company has not received any returns to date.

Provider Chargebacks and Discounts

— Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivables, net. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by Customers, and the Company generally issues credits for such amounts within a few weeks of the Customer’s notification to the Company of the resale. Reserves for chargebacks consist of credits that the Company expects to issue for units that remain in the distribution channel inventories at each reporting

period-end

that the Company expects will be sold to qualified healthcare providers, and chargebacks that Customers have claimed, but for which the Company has not yet issued a credit. For the three months ended March 31, 2020, these amounts were not significant.

Government Rebates

— The Company is subject to discount obligations under state Medicaid and Medicare programs. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities on the condensed consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of estimates of claims under these programs for the current quarter, and estimated future claims under these programs that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.

Payer Rebates

— The Company contracts with certain private payer organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its product. The Company estimates these rebates and records such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability recorded as an accrued expenses and other current liabilities on the condensed consolidated balance sheets.

Other Incentives

— Other incentives which the Company offers include voluntary patient assistance programs, such as the

co-pay

assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug

co-payments

required by payers. The calculation of the accrual for

co-pay

assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel inventories at the end of each reporting period. The Company also has a voucher program whereby a patient can receive a prescription at no cost and whereby the Company reimburses the pharmacy for 100% of the sales price of the prescription. The Company estimates the number of claims through vouchers for product that is in the distribution channel inventories and reduces recognized revenue accordingly.

The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accrued expenses and other current liabilities on the condensed consolidated balance sheets.

Chargebacks, discounts, fees, and returns are recorded as reductions of trade receivables, net on the condensed consolidated balance sheets. Government and other rebates are recorded as a component of accrued expenses and other current liabilities on the condensed consolidated balance sheets.

8

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents consist of checking accounts, money market accounts, money market mutual funds, and certificates of deposit with a maturity date of three months or less. The carrying values of cash and cash equivalents approximate the fair market value. Certificates of deposit, commercial paper, corporate notes and corporate bonds with a maturity date of more than three months are classified separately on the condensed consolidated balance ~~sheet.~~sheets.

Investment Securities,

available-for-sale

Investment securities consisted of the following (in thousands):


	September 30, 2019									March 31, 2020
	Amortized Cost		Unrealized Gains		Unrealized (Losses)			Estimated Fair Value		Amortized Cost		Unrealized Gains		Unrealized (Losses)			Estimated Fair Value
	(Unaudited)									(Unaudited)
U.S. Government Agency Securities	$	55,402	$	70	$	(13	)	$	55,459	$	86,053	$	187	$	(4	)	$	86,236
Certificates of Deposit		3,000		—		—			3,000
Commercial Paper		33,705		16		(6	)		33,715		89,361		53		(22	)		89,392
Corporate Notes/Bonds		60,965		135		(3	)		61,097		94,092		120		(479	)		93,733

	$	153,072	$	221	$	(22	)	$	153,271	$	269,506	$	360	$	(505	)	$	269,361


	December 31, 2018
	Amortized Cost		Unrealized Gains		Unrealized (Losses)			Estimated Fair Value
U.S. Government Agency Securities	$	124,691	$	24	$	(289	)	$	124,426
FDIC Certificates of Deposit (1)		245		—		—			245
Certificates of Deposit		1,000		—		—			1,000
Commercial Paper		41,317		—		(45	)		41,272
Corporate Notes/Bonds		125,998		7		(365	)		125,640

	$	293,251	$	31	$	(699	)	$	292,583

~~(1)~~

~~“FDIC Certificates of Deposit” consist of deposits that are less than $250,000.~~


	December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized (Losses)			Estimated Fair Value
U.S. Government Agency Securities	$	35,462	$	35	$	(3	)	$	35,494
Certificates of Deposit		3,000		—		—			3,000
Commercial Paper		39,013		10		(5	)		39,018
Corporate Notes/Bonds		38,770		91		—			38,861

	$	116,245	$	136	$	(8	)	$	116,373

The Company has classified all of its investment securities

available-for-sale,

including those with maturities beyond one year, as current assets on the condensed consolidated balance sheets based on the highly liquid nature of the investment securities and because these investment securities are considered available for use in current operations. As of ~~September 30, 2019~~March 31, 2020, and December 31, ~~2018,~~2019, the Company held ~~$10.0~~$91.3 million and ~~$64.6~~$3.0 million, respectively, of

available-for-sale

investment securities with contractual maturity dates more than one year and less than two years.

~~The Company attributes the unrealized gains and losses on the~~

~~available-for-sale~~

securities as of September 30, 2019 and December 31, 2018 to the changes in related market interest rates. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell them prior to the end of their contractual terms. Furthermore, the Company does not believe that these securities expose the Company to undue market risk or counterparty credit risk. As such, the Company does not consider these securities to be other-than-temporarily impaired.

Fair Value Measurements

The Company applies the fair value method under ASC Topic 820,

Fair Value Measurements and Disclosures

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

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

Level 2—Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models, such as interest rates and yield curves that can be corroborated by observable market data.

Level 3—Fair value is determined by inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgments to be made by a reporting entity—e.g., determining an appropriate adjustment to a discount factor for illiquidity associated with a given security.

The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in determining fair value and where such inputs lie within the ASC Topic 820 hierarchy.

The fair value measurements of the Company’s

c

~~ash eq~~

u

~~ivalents~~ cash equivalents and

available-for-sale

investment securities are identified in the following tables (in thousands)

:


			Fair Value Measurements at Reporting Date Using
	March 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money Market Funds	$	84,966	$	84,966	$	—	$	—
U.S. Government Agency Securities		106,235		—		106,235		—
Certificates of Deposit		58,254		—		58,254		—
Commercial Paper		101,387		—		101,387		—
Corporate Notes/Bonds		93,733		—		93,733		—
Restricted Cash		1,400		1,400		—		—

	$	445,975	$	86,366	$	359,609	$	—

Fair Value Measurements at
Reporting Date Using

September 30,
2019

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Money Market Funds
$
55,355
$
55,355
$
—
$
—

U.S. Government Agency Securities

55,459

—

55,459

—

Certificates of Deposit

42,000

—

42,000

—

Commercial Paper

33,715

—

33,715

—

Corporate Notes/Bonds

61,097

—

61,097

—

$
247,626
$
55,355
$
192,271
$
—

Fair Value Measurements at
Reporting Date Using

December 31,
2018

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Money Market Funds
$
39,591
$
39,591
$
—
$
—

U.S. Government Agency Securities

124,426

—

124,426

—

FDIC Certificates of Deposit

245

—

245

—

Certificates of Deposit

8,500

—

8,500

—

Commercial Paper

41,272

—

41,272

—

Corporate Notes/Bonds

125,640

—

125,640

—

$
339,674
$
39,591
$
300,083
$
—

10

Table of Contents


			Fair Value Measurements at Reporting Date Using
	December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money Market Funds	$	49,882	$	49,882	$	—	$	—
U.S. Government Agency Securities		35,494		—		35,494		—
Certificates of Deposit		50,622		—		50,622		—
Commercial Paper		42,015		—		42,015		—
Corporate Bonds/Notes		38,861		—		38,861		—

	$	216,874	$	49,882	$	166,992	$	—

Financial Instruments

The Company considers the recorded costs of its financial assets and liabilities, which consist of ~~certain~~ cash equivalents, restricted cash, prepaid expenses, other assets, accounts payable, ~~right of use asset, net,~~ accrued liabilities, accrued employee benefits and lease liabilities, short-term, to approximate their fair value because of their relatively short maturities at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. Management believes that the risks associated with its financial instruments are minimal as the counterparties are various corporations, financial institutions and government agencies of high credit standing.

Accounts Receivable, net

The Company’s accounts receivable, net, primarily arise from product sales. They are generally stated at the invoiced amount and do not bear interest. Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from wholesaler rebates chargebacks, prompt pay discounts,

co-pay

assistance and distribution fees.

The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in the customers’ credit profiles. Of the first quarter 2020 sales, 96% were generated from three major industry wholesalers.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable, net from customers and cash, cash equivalent and investments held at financial institutions. For the quarter ended March 31, 2020, the majority of the Company’s accounts receivable, net arose from product sales in the U.S. and all customers have standard payment terms which generally require payment within 90 days. NaN

individual customers accounted for approximately 61.4%, 18% and 17% of product sales for the quarter ended March 31, 2020. As of March 31, 2020, the Company believes that such customers are of high credit quality.

Cash equivalents are held with major financial institutions in the United States. Certificates of deposit, cash and cash equivalents held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.

~~Accounts Receivable~~Restricted Cash

~~Accounts receivable that management has~~Restricted cash is collateral used under the ~~intent and ability to collect are reported in~~letter of credit arrangement for the ~~balance sheets at outstanding amounts, less an allowance for doubtful accounts.~~vehicle lease agreement. The Company ~~writes off uncollectible receivables when~~adopted ASU No.

2016-18,

Restricted Cash (“ASU

2016-18”)

and now includes restricted cash balances within the ~~likelihood~~cash, cash equivalents and restricted cash balance on the statement of ~~collection is not probable.~~cash flows.

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, 2019 and December 31, 2018, as the Company has a history of collecting on all its accounts including from government agencies and collaborations funding its research. As of September 30, 2019 and December 31, 2018, the Company did not have accounts receivable.

9

11

Table of Contents

Inventory

The Company values its inventories at the lower of cost or estimated net realizable value. The Company determines the cost of its inventories, which includes amounts related to materials and manufacturing overhead, on a

first-in,

first-out

(“FIFO”) basis. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and it writes down any excess and obsolete inventories to their estimated net realizable value in the period in which the impairment is first identified. Such impairment charges, if they occur, are recorded within cost of product sales.

The Company capitalizes inventory costs associated with the Company’s products after regulatory approval when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. Inventory acquired and manufactured prior to receipt of regulatory approval of a product candidate is expensed as research and development expense as incurred. Inventory that can be used in either the production of clinical or commercial product is expensed as research and development expense when selected for use in a clinical manufacturing campaign.

Shipping and handling costs for product shipments to customers are recorded as incurred in cost of product sales along with costs associated with manufacturing the product, and any inventory write-downs. Royalties due to Bristol-Myers Squibb Company (“BMS”) under the Company’s licensing agreement are included in cost of product sales.

Property and Equipment

Property and equipment is stated at cost and depreciated on a straight-line basis over estimated useful lives ranging from three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the assets or the term of the related lease. Expenditures for maintenance and repairs are charged to operations as incurred.

When indicators of possible impairment are identified, the Company evaluates the recoverability of the carrying value of its long-lived assets based on the criteria established in ASC Topic 360,

Property, Plant and Equipment

. The Company considers historical performance and anticipated future results in its evaluation of potential impairment. The Company evaluates the carrying value of those assets in relation to the operating performance of the business and undiscounted cash flows expected to result from the use of those assets. Impairment losses are recognized when carrying value exceeds the undiscounted cash flows, in which case management must determine the fair value of the underlying asset. NaN such impairment losses have been recognized to date.

Cost of Product Sales

Our cost of product sales relates to sales of CAPLYTA. Cost of product sales primarily includes product royalty fees, overhead, and direct costs (inclusive of material, shipping, and manufacturing costs). Cost of product sales were approximately $69,000 and $0 for the three months ended March 31, 2020, and March 31, 2019, respectively

,

as there were no sales in 2019.

For the product royalty fees, the Company entered into an exclusive License Agreement with Bristol-Myers Squibb Company (“BMS”), for which the Company is obliged to make tiered single digit percentage royalty payments ranging between 5 – 9% on sales of licensed products. The related royalties are recorded within cost of product sales on the statement of operations.

Prior to FDA approval of CAPLYTA, the Company recorded $17.5 million of costs associated with the manufacturing of lumateperone as part of research and development expenses

between

2017

a

nd 2019. From December 20, 2019, the date of approval of CAPLYTA, through December 31, 2019 there was 0 production and 0 inventory costs were incurred.

Therefore, at December 31, 2019, no inventory costs had been capitalized. The cost of product sales in the three months ended March 31, 2020 are lower than incurred because of previously expensed inventory.

Research and Development, Including Clinical Trial Expenses

Except for payments made in advance of services, the Company expenses its research and development costs as incurred. For payments made in advance, the Company recognizes research and development expense as the services are rendered. Research and development costs primarily consist of salaries and related expenses for personnel and resources and the costs of clinical trials. Other research and development expenses include preclinical analytical testing, manufacturing of drug product, outside ~~service~~services, providers, materials and consulting fees.

Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or information provided to the Company by its vendors with respect to their actual costs ~~incurred.~~incurred, among other factors. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued research and development expense, as the case may be.

12

Table of Contents

As part of the process of preparing its financial statements, the Company is required to estimate its expenses resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. The Company’s objective is to reflect the appropriate clinical trial expenses in its financial statements by matching those expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses according to the progress of the clinical trial as measured by subject progression and the timing of various aspects of the trial. The Company determines accrual estimates through financial models taking into account various clinical information provided by vendors and discussion with applicable personnel and external service providers as to the progress ~~toward~~ or state of ~~completion~~consummation of trials, or the services completed. During the course of a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations, clinical sites and other third-party vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in it reporting amounts that are too high or too low for any particular period. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ there were no material adjustments to the Company’s prior ~~period~~year estimates of accrued expenses for clinical trials.

Income Taxes

Income taxes are accounted for using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. The Company accounts for uncertain tax positions pursuant to

ASC Topic ~~740.~~

740

(previously included in FASB Interpretation No.

48

,

Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109

). Financial statement recognition of a tax position taken or expected to be taken in a tax return is determined based on a

more-likely-than-not

threshold of that position being sustained. If the tax position meets this threshold, the benefit to be recognized is measured as the tax benefit having the highest likelihood of being realized upon ultimate settlement with the taxing authority. The Company recognizes interest accrued related to unrecognized tax benefits and penalties in the provision for income taxes.

10

~~Table of Contents~~

On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (“TCJA”) that significantly reforms the Internal Revenue Code of 1986, as amended (the “Code”). The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and net operating loss carryforwards, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. In addition, the TCJA repealed the alternative minimum tax (“AMT”) and provides for a refund of taxes paid between 2018 and 2021. With the passing of the TCJA, the Company will receive refunds in future periods for AMT paid in prior years. The Company therefore recognized a benefit of approximately $1.1 million for these taxes for the year ended December 31, 2017. We received approximately $529,000 in the third quarter of 2019. As of September 30, 2019

,

approximately $264,600 is classified as current within prepaid expenses and other current assets and approximately $264,600 is classified as long term within deferred tax assets, net. As of December 31, 2018, approximately $529,000 was classified as current within prepaid expenses and other current assets and approximately $529,000 was classified as long term within deferred tax assets, net.

The Company’s effective tax rate for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ was approximately 0% ~~for both periods, respectively. The Company’s annual~~.

This effective tax rate ~~of approximately 0%~~ is substantially lower than the U.S. statutory rate of 21% due to valuation allowances recorded on current year losses where the Company is not at more-likely than not to recognize a future tax benefit.

On March 27, 2020, the United States enacted The

Coronavirus

Aid, Relief and Economic Security (CARES) Act which includes several significant business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (NOL) and allow businesses the option to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years; accelerate refunds of previously generated corporate Alternative Minimum Tax (AMT) credits; generally loosen the business interest limitation under section 163(j) from 30 percent to 50 percent for years 2019 and 2020; and fix the “retail glitch” for qualified improvement property in the 2017 tax code overhaul known informally as the Tax Cuts and Jobs Act (TCJA, P.L.

115-97).

Other technical corrections are also included in these tax provisions. The measure also adds an employee retention credit to encourage employers to maintain headcounts even if employees cannot report to work because of issues related to the

coronavirus

, a temporary provision allowing companies to defer remitting to the government the employee share of some payroll taxes, among other things. The Company reviewed the provisions and does not expect there to be a material tax impact on our financial statements for the period ending Mach 31, 2020. In particular, the Company reclassified its deferred tax asset related to the AMT tax credit

carryforward

of $265,000 to a current tax receivable as it anticipates receiving the refund upon the filing of its tax return for year ended December 31, 2019 as opposed to over the next few calendar years.

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Table of Contents

Comprehensive Income (Loss)

All components of comprehensive income (loss), including net income (loss), are reported in the financial statements in the period in which they are incurred. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from

non-owner

sources. In accordance with accounting guidance, the Company presents the impact of any unrealized gains or (losses) on its investment securities in a separate statement of comprehensive income (loss) for each period.

Share-Based Compensation

Share-based payments are accounted for in accordance with the provisions of ASC Topic 718,

Compensation—Stock Compensation

. The fair value of share-based payments is estimated, on the date of grant, using the Black-Scholes-Merton option-pricing model (the “Black-Scholes model”). The resulting fair value is recognized ratably over the requisite service period, which is generally the vesting period of the option.

For all awards granted with time based vesting conditions, expense is amortized using the straight-line attribution method. Share-based compensation expense recognized in the statements of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018 is based on share-based awards ultimately expected to vest.~~accounts for forfeitures as they occur.

The Company utilizes the Black-Scholes model for estimating fair value of its stock options granted. Option valuation models, including the Black-Scholes model, require the input of subjective assumptions, and changes in the assumptions used can materially affect the grant date fair value of an award. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility and the expected life of the award.

Expected volatility rates ~~are~~for quarterly periods prior to December 31, 2019 were based on a combination of the historical volatility of the common stock of comparable publicly traded entities and the limited historical information about the Company’s common stock. In the fourth quarter of 2019, expected volatility rates are based entirely on the historical volatility of the Company’s common stock. The expected life of stock options is the period of time for which the stock options are expected to be outstanding. Given the limited historical exercise data, the expected life is determined using the “simplified method,” which defines expected life as the midpoint between the vesting date and the end of the contractual term.

The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The Company has not paid dividends to its stockholders since its inception and does not plan to pay cash dividends in the foreseeable future. Therefore, the Company has assumed an expected dividend rate of 0. For stock options granted, the exercise price was determined by using the closing market price of the Company’s common stock on the date of grant. ~~The Company recognizes the effect of forfeitures when they occur.~~

A restricted stock unit (“RSU”) is a ~~stock-based~~stock award that entitles the holder to receive shares of the Company’s common stock as the award vests. The fair value of each RSU is based on the fair market value of the Company’s common stock on the date of grant. The Company has granted RSUs that vest in three equal annual installments provided that the

~~grantee~~

employee remains

inemployed with the ~~service of~~

~~the Company on the applicable vesting date.~~Company.

In the first quarter of each fiscal year beginning in 2016, the Company granted time based RSUs that vest in three equal annual installments. In the first quarter of 2017,

the Company granted performance-based RSUs, which vest based on the achievement of certain milestones that include (i) the submission of a new drug application (“NDA”) ~~with~~to the ~~U.S. Food and Drug Administration (the~~FDA for

11

~~Table~~lumateperone for the treatment of ~~Contents~~

~~“FDA”),~~schizophrenia, (ii) the approval of the NDA by the FDA (together, the “Milestone RSUs”) and (iii) the achievement of certain comparative shareholder returns against the Company’s peers (the “TSR RSUs”). The Milestone RSUs ~~were valued at the closing price on March 8, 2017. The Milestone RSUs~~ related to the NDA submission ~~have~~has been fully amortized through December 31, 2018. The NDA submission milestone was achieved in the third quarter of 2018, so the Milestone RSUs related to the NDA submission vested on December 31, 2018. The Milestone RSU’s related to the NDA approval was achieved in the fourth quarter of 2019, so the RSU’s vested on December 31, 2019. The amortization of the expenses for Milestone RSUs related to the approval of the NDA ~~will commence if and when the NDA submission has been approved through the last day of the calendar year in which the milestone is achieved and expires~~was fully amortized on December 31, ~~2019 if not achieved.~~2019. The TSR RSUs were valued using the Monte Carlo Simulation method and were amortized over the life of the RSUs based on the agreements which vested on January 24, 2020.

In the first quarter of 2020, the Company granted 86,000 shares performance-based RSUs, which vest based on the achievement of certain milestones that include (i) the approval of a planned NDA by the FDA and (ii) the achievement of certain comparative shareholder returns against the Company’s peers (the “2020 TSR RSUs”). The 2020 TSR RSUs were valued using the Monte Carlo Simulation method and will be amortized over the life of the ~~RSU agreements which ends December 31, 2019. The Milestone~~ RSUs ~~and TSR RSUs are target~~ based ~~and the ultimate awards, if attained, could be the target amount or higher or lower than the target amount, depending~~ on the ~~timing or achievement of the goal.~~agreements.

Under ASC Topic 718, the cumulative amount of compensation cost recognized for instruments classified as equity that ordinarily would result in a future tax deduction under existing tax law ~~shall be~~is considered to be a deductible difference in applying ASC Topic 740,

Income Taxes

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

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4

Table of Contents

Since the Company had net operating loss carryforwards as of ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, 0~~no excess tax benefits for the tax deductions related to share-based awards were recognized in the condensed consolidated statements of operations.

Equity instruments issued to

non-employees

for services are accounted for under the provisions of ASC Topic 718 and ASC Topic

505-50,

Equity/Equity-Based Payments to Non-Employees

. Accordingly, the estimated fair value of the equity instrument is recorded on the earlier of the performance commitment date or the date the required services are completed and are marked to market during the service period.

In June 2018, the Company’s stockholders approved the Company’s 2018 Equity Incentive Plan pursuant to which 4,750,000 additional shares of common stock were reserved for future equity grants.

In December 2019, the Company adopted the Intra-Cellular Therapies, Inc. 2019 Inducement Award Plan (the “2019 Inducement Plan”) without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. Pursuant to the 2019 Inducement Plan, the Company may grant stock options, RSUs, stock awards and other stock-based awards for up to a total of 1,000,000 shares of common stock to new employees of the Company. As of March 31, 2020, stock options and RSUs for 314,138 shares have been granted under the 2019 Inducement Plan.

Loss Per Share

Basic net loss per common share is determined by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common stock equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of the Company’s stock option grants and RSUs.

The following common stock equivalents were excluded in the calculation of diluted loss per share because their effect ~~would~~could be anti-dilutive as applied to the loss from operations for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Stock options		283,129		872,246		305,810		871,844
Stock Options										6,408,389		6,012,069
RSUs		459,946		387,953		512,749		372,744		1,695,397		1,296,634
TSR RSUs		79,182		75,143		89,139		75,143		86,044		269,129

Recently Issued Accounting Standards

~~In May 2014, the FASB issued ASC Update No.~~

~~2014-09,~~

Revenue from Contracts with Customers (Topic 606), which has been subsequently updated (as updated, “ASC Topic 606”). The purpose of ASC Topic 606 is to provide enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies using GAAP and International Financial Reporting Standards. The core principle requires entities to recognize revenue in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services. ASC Topic 606 became effective for annual periods beginning after December 15, 2017.

The Company adopted this standard using the “modified retrospective method,” which did not result in an impact to its financial statements as the Company has not had product sales to date. Upon commercializing a product or executing any revenue generating contracts, the Company will provide additional disclosures in the notes to the consolidated financial statements related to the relevant aspects of any revenue generating contracts that the Company has

~~entered~~

~~or into which the Company expects to enter.~~

~~In February 2016, the FASB issued ASU No.~~

~~2016-02,~~

~~Leases (“ASU~~

~~2016-02”).~~

~~ASU~~

~~2016-02~~

requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. ASU

~~2016-02~~

is effective for annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company adopted the standard on January 1, 2019 using the simplified transition method, allowing the Company to not restate comparative periods and apply ASC 842 on a prospective basis, resulting in a balance sheet presentation that is not comparable to the prior period in the first year of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which

,

among other things, allowed the Company to carry forward the historical lease classification. The Company has not elected the hindsight practical expedient. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. The Company recognizes those lease payments in the consolidated statements of operations on a straight-line basis over the lease term.

12

~~Table of Contents~~

The adoption of the standard resulted in recognition of additional net lease assets and lease liabilities of approximately $20.2 million and $23.4 million, respectively, as of January 1, 2019. The difference between these amounts represents the net deferred rent as of January 1, 2019 with no impact on the accumulated deficit. The adoption of the new lease standard was a

~~non-cash~~

~~transaction. The Company concluded the new standard did not have a material impact on its liquidity and income tax position.~~

~~In February 2018, the FASB issued ASU~~

~~2018-02,~~

Income Statement-Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to address a specific consequence of the TCJA by allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA’s reduction of the U.S. federal corporate income tax rate. ASU

~~2018-02~~

is effective for all entities for fiscal years beginning after December 15, 2018, with early adoption permitted, and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. The Company does not have any stranded tax effects to which this ASU would apply. Therefore, there is no impact to the Company’s consolidated financial statements.

~~In August 2018, the SEC issued a final rule Release No.~~

~~33-10532,~~

“Disclosure Update and Simplification,” to amend certain disclosure requirements now seen as redundant, duplicative, overlapping, outdated or superseded in the wake of recent accounting pronouncements. The amended rules became effective November 5, 2018. We analyzed the release in preparation of our Form

~~10-Q~~

during the first interim period in 2019, which resulted in the additional disclosure of changes to stockholders’ equity during interim periods, as presented within the condensed consolidated statements of stockholders’ equity. We note that many of the amended requirements under this Release are not applicable to the Company, as we do not make dividend payments to stockholders, currently report our activities under a single business segment, and already provided all other significant disclosure requirements.

In June 2016, the FASB issued ASU No.

2016-13,

“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU

2016-13”).

This guidance applies to all entities and impacts how entities account for credit losses for most financial assets and other instruments. For

available-for-sale

debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. For trade receivables, loans and

held-to-maturity

debt securities, entities will be required to estimate lifetime expected credit losses. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018 and interim periods therein. The Company ~~elected not to early adopt the standard, and therefore, will adopt the~~adopted this standard on January 1, 2020. The Company ~~is considering~~evaluated the implications of ~~adopting~~ the new standard, ~~including~~inclusive of the applicable financial statement disclosures required, ~~by the new guidance. The Company is assessing any potential impacts on~~as well as to its internal controls, business processes, and accounting policies, ~~related~~noting there was no significant impact to ~~both~~ the ~~implementation~~financial statements as of January 1, 2020 and ~~ongoing compliance with,~~for the ~~new guidance.~~three-month period ended March 31, 2020.

3. Revenue

On December 20, 2019, the FDA approved CAPLYTA for the treatment of schizophrenia in adults. Subsequent to receiving FDA approval, the Company entered into its initial contracts with a limited number of Customers to distribute CAPLYTA. These contracts will be accounted for under ASC Topic 606, which was adopted in a prior period. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to be entitled in exchange for those goods or services.

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5

Table of Contents

To date, the Company’s only source of product sales has been from the U.S. sales of CAPLYTA, which it began shipping to Customers in March 2020. The product sales, net for the quarter ended March 31, 2020

were $

882,516

.

4. Inventory

Inventory consists of the following:


	March 31, 2020
Raw materials	$	—
Work in process		1,250,025
Finished goods		141,099

Total inventories	$	1,391,124

Inventory acquired prior to receipt of the FDA approval on December 20, 2019 for CAPLYTA was expensed as research and development expense as incurred. No inventory was produced from the FDA approval date through the end of 2019; therefore, no inventory was capitalized on the consolidated balance sheet as of December 31, 2019.

5. Property and Equipment

Property and equipment consist of the following:


	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Computer equipment	$	60,377		$	44,427		$	243,532		$	243,532
Furniture and fixtures		423,097			341,582			423,097			423,097
Scientific equipment		3,849,747			3,658,209			3,883,276			3,861,227
Leasehold improvements		1,208,543			149,470			1,240,315			1,240,315

		5,541,764			4,193,688		5,790,220			5,768,171
Less accumulated depreciation		(3,366,771	)		(3,033,922	)		(3,657,233	)		(3,508,431	)

	$	2,174,993		$	1,159,766		$	2,132,987		$	2,259,740

Depreciation expense for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 was $148,802 and ~~2018 was $335,461 and $273,206,~~$101,353, respectively.

4.6. Right Ofof Use Assets and Lease Liabilities

Real Estate Leases

In 2014, the Company entered into a long-term lease with a related party which, as amended, provided for a lease of ~~16,753 square feet of~~ useable laboratory and office space located ~~at 430 East 29th Street,~~in New York, New ~~York 10016.~~York. A member of the Company’s board of directors is the Executive Chairman of the parent company to the landlord under this lease. Concurrent with this lease, the Company entered into a license agreement to occupy certain vivarium related space in the same facility for the same term and rent escalation provisions as the lease. This license has the primary characteristics of a lease and is characterized as a lease in accordance with ASU

2016-02

for accounting purposes. In September 2018, the Company

1

3

~~Table of Contents~~

further amended the lease to obtain an additional

~~15,534 square feet of~~ office space beginning October 1, 2018 and to extend the term of the lease for previously acquired space. The lease, as amended, has a term of 14.3 years ending in May 2029. ~~The Company expects that its facility related costs will increase significantly as a result of leasing this additional space.~~ In February 2019, the Company entered into a long-term lease for ~~3,164 square feet of~~ office space in Towson, Maryland beginning March 1, 2019. The lease has a term of 3.2 years ending in April 2022 and includes limited rent abatement and escalation provisions. ~~The Company has no other significant leases. In addition, no identified leases require allocations between lease and~~

~~non-lease~~

~~components.~~

In adopting ASU

2016-02

as of January 1, 2019, the Company elected the package of practical expedients, which permit the Company not to reassess under the new standard the historical lease classification. The Company ~~has not elected the hindsight practical expedient. The Company~~ made an accounting policy election to keep leases with an initial term of 12 months or less off of the condensed consolidated balance ~~sheet.~~sheets. The Company also elected the lessee component election, allowing the Company to account for the lease and

non-lease

components as a single lease component. In determining whether a contract contains a lease, asset and service agreements are assessed at onset and upon modification for criteria of specifically identified assets, control and economic benefit. The Company recognized those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The Company uses the rate implicit in the contract whenever possible when determining the applicable discount rate. As the majority of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. On the lease commencement dates, the Company estimated the lease liabilities and the right of use assets at present value using its applicable incremental borrowing rates of its two ~~long term~~long-term leases of ~~7.21%~~7.2% for the Company’s

16

Table of Contents

Maryland lease of 3.2 years and 9.1% for the Company’s New York leases of 14.3 years. On January 1, 2019, upon adoption of ASU

2016-02,

the Company recorded right of use assets of approximately $20.2 million, lease liabilities of $23.4 million and eliminated deferred rent of $3.2 million. At the execution of the Maryland lease in 2019, the Company recorded a right of use asset and a lease liability of $0.2 million, which represented a

non-cash

transaction.

Maturity analysis under the lease agreements are as follows:


Nine months ending December 31, 2020	$	2,515,636
Year ending December 31, 2021		3,448,323
Year ending December 31, 2022		3,491,166
Year ending December 31, 2023		3,566,466
Year ending December 31, 2024		3,675,196
Thereafter		17,627,041

Total		34,323,828
Less: Present value discount		(11,488,613	)

Total Lease liability	$	22,835,215

Less: Current portion		(3,211,234	)

Long-term lease liabilities	$	19,623,981

Lease expense for the three months ended March 31, 2020 and 2019 was approximately $818,000 and $830,000, respectively.

Vehicle Fleet Lease

On May 17, 2019, the Company entered into an agreement (the “Vehicle Lease”) with a company (the Lessor) to acquire motor vehicles for certain employees. The Vehicle Lease provides for individual leases for the vehicles, which at each lease Commencement was determined to qualify for operating lease treatment. The Company began leasing vehicles under the Vehicle Lease in March 2020.

The contractual period of each lease is 12 months, followed by

month-to-month

renewal periods. The Company estimates the lease term for each vehicle to be 30 months based on industry standards. The lease permits either party to terminate the lease at any time via written notice to the other party. The Company neither acquires ownership, nor has the option to purchase the vehicles

at

any time. The Company is required to maintain an irrevocable $1.4 million letter of credit that the Lessor may draw upon in the event the Company defaults on the Vehicle Lease. The $1.4 million was recorded as restricted cash on the condensed consolidated balance sheet.

The nature of the lease is one commonly referred to as “TRAC” lease, as it contains a terminal rental adjustment clause, or “TRAC” clause.” The TRAC clause limits lessee

exposure, or likelihood of having a variable lease payment

due at lease termination. This variable lease payment amount would be any difference between the vehicle stipulated (capitalized) cost and the sum of the reserve and net proceeds from disposal as described in the Vehicle Lease. Further, the Lessor guarantees that the net proceeds will not be less than 20% of the vehicle capitalized cost in the first 12 months, and 30% of the vehicle capitalized cost at the beginning of subsequent

12-month

period increments.

Right of use asset and lease liability for the vehicle fleet lease were approximately $94,042 and $94,042, respectively, as of March 31, 2020 which represented a

non-cash

transaction. The operating cash outflows related to vehicle fleet operating lease obligations for the quarter ended March 31, 2020 were $3,335.

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Table of Contents

The following table presents the Vehicle Lease balances within the condensed consolidated balance sheet, weighted average remaining fleet lease term, and the weighted average discount rates related to the Vehicle Lease as of March 31, 2020:


Lease Assets and Liabilities – Fleet	Classification	March 31, 2020
Assets
Right of use assets, net	Operating lease right of use assets	$	94,042

		$	94,042
Liabilities
Current
Lease liabilities, short-term	Operating lease liabilities	$	—
Non-Current
Lease liabilities	Non-current operating lease liabilities		94,042

Total lease liabilities		$	94,042
Weighted average remaining lease term			2.4 years
Weighted average discount rate			1.80	%

The following table presents the maturity of the Company’s fleet lease liability as of March 31, 2020:


Nine months ending December 31, 2020	$	20,555
Year ending December 31, 2021		27,407
Year ending December 31, 2022		49,797
Year ending December 31, 2023		—
Year ending December 31, 2024		—
Thereafter		—

Total		97,759
Less: Present value discount		(3,717	)

Total operating lease liabilities	$	94,042

Less: Current portion		—

Long-term lease liabilities	$	94,042

Right of use assets and lease liabilities for operating leases were ~~$18.5~~approximately $18.1 million and ~~$22.6 million as of September 30, 2019, respectively.~~

~~Maturity analysis under the lease agreements are as follows:~~

Three
months
ending
December 31, 2019
$
(56,130
)
Year end
ing
December 31, 2020

3,346,376

Year end
ing
December 31, 2021

3,448,323

Year end
ing
December 31, 2022

3,491,166

Year end
ing
December 31, 2023

3,566,466

Thereafter

21,302,235

Total

35,098,436

Less: Present value discount

(12,541,905
)

Total Lease liability
$
22,556,531

Less: current portion

(2,286,885
)

Long-term lease liabilities
$
20,269,646

~~In the three months ending December 31, 2019 the Company expects to receive approximately $~~

~~880,000~~

~~of reimbursements for previously paid leasehold improvements.~~

~~When~~

~~collected,~~

~~this reimbursement will~~

~~incre~~

~~ase~~

~~the liability under our lease liability accounting.~~

~~Lease expense for the three and nine months ended September 30, 2019 was approximately $818,000 and $2.5~~$22.9 million, respectively, as ~~compared to approximately $361,000 and $1.1~~

~~million~~

~~for the three-and nine-month period ended September 30, 2018~~

,

~~respectively.~~

of March 31, 2020.

5.7. Share-Based Compensation

On June 18, 2018, the Company’s stockholders approved the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the granting of stock-based awards, such as stock options, restricted common stock, RSUs and stock appreciation rights to employees, directors and consultants as determined by the Board of Directors. The 2018 Plan replaced the Company’s Amended and Restated 2013 Equity Incentive Plan (the “2013 Plan”). The Company will grant no further stock options or other awards under the 2013 Plan. Any options or other awards outstanding under the 2013 Plan remain outstanding in accordance with their terms and the terms of the 2013 Plan. In December 2019, the Company adopted the 2019 Inducement Plan for the grant of equity awards of up to 1,000,000 shares of common stock to newly hired employees.

As of December 31, ~~2018,~~2019, the total number of shares reserved under all equity plans was ~~10,287,390~~11,287,390 and the Company had ~~4,807,323 shares~~2,208,317shares available for future issuance under the 2018 Plan and the 2019 Inducement Plan. Stock options granted under the 2018 Plan and the 2019 Inducement Plan may be either incentive stock options (“ISOs”) as defined by the Code, or

non-qualified

stock options. The Board of Directors determines who will receive options, the vesting periods (which are generally one to three years) and the exercise prices of such options. Options have a maximum term of 10 years. The exercise price of ISOs granted under the 2018 Plan and the 2019 Inducement Plan must be at least equal to the fair market value of the common stock on the date of ~~grant~~grant.

.

18

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Table of Contents

Total stock-based compensation expense related to all of the Company’s share-based awards, including stock options and RSUs to employees, directors and consultants, recognized during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ was comprised of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Inventoriable costs									$	293,384	$	—
Research and development	$	2,023,700	$	1,819,375	$	6,785,280	$	5,614,641		2,006,855		2,407,644
General and administrative		2,783,068		2,554,313		8,064,129		7,356,855		3,204,058		2,647,573

Total share-based compensation expense	$	4,806,768	$	4,373,688	$	14,849,409	$	12,971,496	$	5,504,297	$	5,055,217

The following table describes the weighted-average assumptions used for calculating the value of options granted during the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019:


	2020			2019
Dividend yield		0	%		0	%
Expected volatility		91.6-92.5	%		85.7	%
Weighted-average risk-free interest rate		1.42	%		2.52	%
Expected term (in years)		6.0			6.0

Information regarding stock option awards under the 2019 Inducement Plan, including with respect to grants to employees as of March 31, 2020, and ~~2018:~~changes during the three-month period then ended, are summarized as follows:

2019

2018

Dividend yield

0%

0%

Expected volatility

83.7%-85.7
%

85.2%-85.8
%

Weighted-average risk-free interest rate

2.32%

2.4%

Expected term (in years)

6.0

6.0


	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Contractual Life
Outstanding at December 31, 2019		—	$	—
Options granted in 2020		39,728	$	17.18		10.0 years

Outstanding at March 31, 2020		39,728	$	17.18		10.0 years

Vested or expected to vest at March 31, 2020		39,728	$	17.18

Exercisable at March 31, 2020		—	$	—

Information regarding RSU awards under the 2019 Inducement Plan time and changes during the three-month period ended March 31, 2020 are summarized as follows:


	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Contractual Life
Outstanding at December 31, 2019		—	$	—
Time based RSUs granted in 2020		274,410	$	16.01		10.0 years

Outstanding at March 31, 2020		274,410	$	16.01		10.0 years

Vested or expected to vest at March 31, 2020		274,410	$	16.01

Exercisable at March 31, 2020		—	$	—

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Table of Contents

As of March 31, 2020, the Company issued options and time based RSUs totaling 314,138 shares in the 2019 Inducement Award Plan.

Information regarding the stock options activity, including with respect to grants to employees, directors and consultants as of ~~September 30, 2019,~~March 31, 2020, and changes during the ~~nine-month~~three-month period then ended, are summarized as follows:

Number of
Shares

Weighted-
Average
Exercise
Price

Weighted-
Average
Contractual
Life

Outstanding at December 31, 2018

4,748,391
$
18.75

7.0 years

Options granted

1,821,258
$
12.84

9.4 years

Options exercised

(85,650
) $
5.17

3.7 years

Options canceled or expired

(153,085
) $
19.55

7.7 years

Outstanding at September 30, 2019

6,330,914
$
16.85

7.2 years

Vested or expected to vest at September 30, 2019

6,330,914
$
16.85

Exercisable at September 30, 2019

3,403,319
$
19.66

5.6 years


	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Contractual Life
Outstanding at December 31, 2019		6,039,945		$	16.81		7.0 years
Options granted		656,433		$	23.94		9.9 years
Options exercised		(211,961	)	$	7.81		4.0 years
Options canceled or expired		(115,756	)	$	16.01		8.8 years

Outstanding at March 31, 2020		6,368,661		$	17.86		7.1 years

Vested or expected to vest at March 31, 2020		6,368,661		$	17.86

Exercisable at March 31, 2020		3,869,771		$	18.95		6.0 years

The fair value of the time based RSUs and the Milestone RSUs is based on the closing price of the Company’s common stock on the date of grant. The fair value of the TSR RSUs was determined using the Monte Carlo simulation method.

Information regarding the time based RSU activity and changes during the ~~nine-month~~three-month period ended ~~September 30, 2019~~March 31, 2020 are summarized as follows:

Number of
Shares

Weighted-Average
Grant Date
Fair Value Per Share

Outstanding at December 31, 2018

647,411
$
18.16

Time based RSUs
granted
in 2019

950,449
$
12.79

Time based RSUs

vested in 2019

(253,695
) $
21.80

Time based RSUs
cancelled in 2019

(48,934
) $
14.31

Outstanding at September 30, 2019

1,295,231
$
13.65


	Number of Shares			Weighted-Average Grant Date Fair Value Per Share		Weighted- Average Contractual Life
Outstanding at December 31, 2019		1,268,679		$	13.60		1.7 years
Time based RSUs granted in 2020		698,336		$	23.94		2.9 years
Time based RSUs vested in 2020		(466,657	)	$	13.82		1.3 years
Time based RSUs cancelled in 2020		(79,371	)	$	16.25		1.9 years

Outstanding at March 31, 2020		1,420,987		$	18.46		2.4 years

15

~~Table of Contents~~

Information related to the Company’s Milestone RSUs and TSR RSUs during the ~~nine-month~~three-month period ended ~~September 30, 2019~~March 31, 2020 are summarized as follows:

Number of
Shares

Weighted-Average
Grant Date
Fair Value Per Share

Outstanding at December 31, 2018

278,592
$
15.64

Milestone RSUs and TSR RSUs

granted in 2019

—
$
—

Milestone RSUs and TSR RSUs
cancelled in 2019

(14,194
) $
15.64

Outstanding at September 30, 2019

264,398
$
15.64


	Number of Shares			Weighted-Average Grant Date Fair Value Per Share		Weighted- Average Contractual Life
Outstanding at December 31, 2019		67,080		$	17.08		0.2 years
Milestone RSUs and TSR RSUs granted in 2020		86,044		$	33.47		2.9 years
Milestone RSUs and TSR RSUs vested in 2020		(67,080	)	$	17.08		0.2 years

Outstanding at March 31, 2020		86,044		$	33.47		2.9 years

The weighted average estimated fair value per share of the TSR RSUs granted in 2017 was $17.08, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of the awards granted include an expected dividend yield of 0%, a risk free rate of 1.6%, and expected volatility of 95.4%. The TSR RSUs granted in 2017 will entitle the grantee to receive a number of shares of the Company’s common stock determined over a three-year performance period ending and vesting on December 31, 2019, provided the grantee ~~remains~~remained in the service of the Company on the settlement date. The Company ~~expenses~~expensed the cost of these awards ratably over the requisite service period. The number of shares for which the TSR RSUs ~~will be~~was settled ~~will be~~was a percentage of shares for which the award is targeted and ~~will depend~~depended on the Company’s total shareholder return (as defined below),

20

Table of Contents

expressed as a percentile ranking of the Company’s total shareholder return as compared to the Company’s peer group (as defined below). The number of shares for which the TSR RSUs ~~will~~were be settled ~~vary~~varied depending on the level of achievement of the goal. Total shareholder return iswas determined by dividing the average share value of the Company’s common stock over the 30 trading days preceding January 1, 2020 by the average share value of the Company’s common stock over the 30 trading days beginning on January 1, 2017, with a deemed reinvestment of any dividends declared during the performance period. The Company’s peer group ~~include~~

d

included 223 companies at December 31, 2018 which comprise the Nasdaq Biotechnology Index, which was selected by the Compensation Committee of the Company’s Board of Directors and includes a range of biotechnology companies operating in several business segments.

The Company recognized

non-cash

stock-based compensation expense related to time based RSU’s for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 of approximately ~~$1.7~~$2.4 million and ~~$5.6~~$1.9 million, ~~respectively, as compared to $1.2 million and $3.5 million for the three and nine months ended September 30, 2018,~~ respectively. Total expense for all RSUs, including the time based and performance based RSUs, is ~~$1.9~~$2.5 million and ~~$6.1~~$2.1 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~respectively, as compared to $1.6 million and $4.6 million for the three and nine months ended September 30, 2018,~~ respectively. As of ~~September 30, 2019,~~March 31, 2020, there was ~~$12.5~~$28.0 million of unrecognized compensation costs related to unvested time based RSUs. As of ~~September 30, 2019,~~March 31, 2020, there was ~~$1.8 million and $0.2~~$1.3 million of unrecognized compensation costs related to unvested Milestone RSUs and TSR ~~RSUs, respectively.~~RSUs.

6.

8. Collaborations and License Agreements

The Bristol-Myers Squibb License Agreement

On May 31, 2005, the Company entered into a worldwide, 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 lumateperone 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 lumateperone 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 agreement 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.

Under the agreement, the Company made an upfront payment of $1.0 million to BMS, a milestone payment of $1.25 million in December 2013, and a milestone payment of $1.5 million in December 2014 following the initiation of the Company’s first Phase 3 clinical trial for lumateperone for patients with exacerbated schizophrenia. Upon FDA acceptance ~~for review~~ of an NDA ~~submission~~filing for lumateperone, the Company was obligated to pay BMS a $2.0 million milestone payment. ~~This milestone was~~The Company achieved the acceptance in the third quarter of ~~2018. The Company~~2018 and has therefore accrued the $2.0 million milestone ~~payment obligation in 2018 and~~liability, which was paid it in January 2019. The FDA approved the NDA filing on December 23, 2019 and as a result the Company accrued an additional milestone liability of $5.0 million in the fourth quarter of 2019 which was paid in January 2020. Possible milestone payments remaining total ~~$10.0 million, including a~~ $5.0 ~~million milestone payment payable upon an NDA approval.~~million. Under the agreement, the Company may be obliged to make other milestone payments to BMS for each licensed product of up to an aggregate of approximately $14.75 million. The Company is also obliged to make tiered single digit percentage royalty payments ranging between 5 – 9% 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.

16

~~Table of Contents~~

The agreement extends, and royalties are payable, on a

country-by-country

and

product-by-product

basis, through the later of 10 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.

In September 2016, the Company transferred certain of its rights under the BMS agreement to its wholly owned subsidiary, ITI Limited. In connection with the transfer, the Company guaranteed ITI Limited’s performance of its obligations under the BMS agreement. With the initial recognition of product sales revenue in the first quarter of 2020, the Company accrued approximately $44,000 in royalties to satisfy its obligation under the BMS agreement.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto that appear elsewhere in this Quarterly Report on Form

10-Q

and the audited consolidated financial statements and notes thereto and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form

10-K

filed on ~~February 27, 2019.~~March 2, 2020. In addition to historical information, the following discussion and analysis includes forward-looking information that involves risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” in our Annual Report on Form

10-K

filed on ~~February 27, 2019,~~March 2, 2020, as updated from time to time in our subsequent periodic and current reports filed with the SEC.

2

1

Table of Contents

Overview

We are a biopharmaceutical company focused on the discovery, ~~and~~ clinical development and commercialization of innovative, small molecule drugs that address underserved medical needs primarily in neuropsychiatric and neurological disorders by targeting intracellular signaling mechanisms within the central nervous system, or CNS. ~~Lumateperone (also known as~~

~~ITI-007)~~

~~is our lead product candidate with mechanisms of action that, we believe, may represent an effective treatment across multiple therapeutic indications.~~ In ~~our preclinical and clinical trials to date, lumateperone combines potent serotonin~~

~~5-HT2A~~

~~receptor antagonism, dopamine receptor phosphoprotein modulation, or DPPM, glutamatergic modulation, and serotonin reuptake inhibition into a single drug candidate~~December 2019 CAPLYTA (lumateperone) was approved by the FDA for the treatment of ~~acute~~schizophrenia in adults (42mg/day) and ~~residual schizophrenia and~~we initiated the commercial launch of CAPLYTA

in late March of 2020. In support of our commercialization efforts, we hired a national sales force consisting of approximately 240 sales representatives. The launch price for CAPLYTA is in line with other currently marketed branded antipsychotics indicated for the treatment of ~~bipolar disorder, including bipolar depression. At dopamine D2 receptors,~~schizophrenia. As used in this report, “CAPLYTA” refers to lumateperone ~~has been demonstrated to have dual properties and to act as both a~~

~~pre-synaptic~~

partial agonist and a post-synaptic antagonist. Lumateperone has also been demonstrated to have affinity for dopamine D1 receptors and indirectly stimulate phosphorylation of glutamatergic NMDA GluN2B receptors in a mesolimbic specific manner. We believe that this regional selectivity in brain areas thought to mediateapproved by the efficacy of antipsychotic drugs, together with serotonergic, glutamatergic, and dopaminergic interactions, may result in efficacy for a broad array of symptoms associated with schizophrenia and bipolar disorder with improved psychosocial function. The serotonin reuptake inhibition potentially allows for antidepressant activity in the treatment of schizoaffective disorder, other disorders with

~~co-morbid~~

~~depression, and/or as a stand-alone treatment for major depressive disorder, or MDD. We believe lumateperone may also be useful~~FDA for the treatment of ~~other psychiatric~~schizophrenia in adults, and neurodegenerative disorders, particularly behavioral disturbances associated with dementia, autism, and other CNS diseases. In the fourth quarter of 2018, the FDA accepted for review our new drug application, or NDA, for“lumateperone” refers to, where applicable, CAPLYTA as well as lumateperone for the treatment of ~~schizophrenia, and assigned a Prescription Drug User Fee Act, or PDUFA, goal date of September 27, 2019, which has been extended to December 27, 2019~~

to provide time for the FDA to review information related to toxicology findings in previous animal studies. Subject to successfully concluding the ongoing review process with the FDA and receiving timely FDA approval of the NDA, we expect to commence our commercial launch

~~in the first quarter of 2020~~

.

indications beyond schizophrenia.

Lumateperone is also in Phase

3

clinical development as a novel treatment for bipolar depression.

Our lumateperone bipolar depression Phase 3 clinical program currently consists of ~~two~~three monotherapy studies and one adjunctive study. In the first quarter of 2020 we initiated our third monotherapy Phase 3 study, Study 403, evaluating lumateperone as monotherapy in the treatment of major depressive episodes associated with Bipolar I or Bipolar II disorder. While patient enrollment in Study 403 in the U.S. has been impacted by the coronavirus (COVID-19) pandemic, country regulatory review processes and other preparatory activities outside the U.S. continue to progress. Subject to patient enrollment rates returning to our projected levels within our expected timelines, we anticipate reporting topline results from Study 403 in the second half of 2021. On July 8, 2019, we announced ~~top-line~~topline results from our first monotherapy study, Study 401, conducted in the U.S., and our second monotherapy study, Study 404, conducted globally, evaluating lumateperone as monotherapy in the treatment of major depressive episodes associated with Bipolar I or Bipolar II disorder. In Study 404, lumateperone 42 mg met the primary endpoint for improvement in depression as measured by change from baseline versus placebo on the MADRS total score (p<~~0.001;~~0.0001; effect size = 0.56). Study 401 tested two doses of lumateperone, 42 mg and ~~28 mg~~28mg along with placebo. In this trial, neither dose of lumateperone met the primary endpoint of statistical separation from placebo as measured by change from baseline on the MADRS total score. There was a high placebo response in this trial. ~~Consistent with previous studies in schizophrenia, lumateperone~~Lumateperone was generally well-tolerated in both bipolar depression studies, with a favorable safety profile. The rates of discontinuation due to treatment emergent adverse events for both doses of lumateperone were low.

We ~~are currently evaluating our strategy with regards to submitting our NDA to the FDA for regulatory approval for bipolar depression. Our~~completed patient enrollment in

o

ur global study evaluating adjunctive lumateperone in bipolar depression, ~~(Study 402) is ongoing~~Study 402, and we anticipate reporting topline results from this study in

mid-2020.

InSubject to the ~~second quarter~~results of ~~2016,~~Study 402 and our interactions with the FDA regarding our bipolar depression program, in late 2020 we ~~initiated Phase 3 development~~expect to submit a supplemental new drug application, or sNDA, to the FDA for potential regulatory approval of lumateperone for the treatment of ~~agitation in patients with dementia, including Alzheimer’s disease, or AD. Our~~

~~ITI-007-201~~bipolar depression.

trial was a Phase 3 multi-center, randomized, double-blind, placebo-controlled clinical trial in patients with a clinical diagnosis of probable AD and clinically significant symptoms of agitation. In the fourth quarter of 2018, an independent data monitoring committee, or DMC, completed a

~~pre-specified~~

~~interim analysis of the~~

17

~~Table of Contents~~

~~ITI-007-201~~

trial, and concluded that the trial was not likely to meet its primary endpoint upon completion and therefore recommended the study should be stopped for futility. As a result, we determined to discontinue the

~~ITI-007-201~~

~~trial. Lumateperone was generally well tolerated in the~~

~~ITI-007-201~~

trial and the decision to discontinue the study was not related to safety. We are analyzing the data set from this trial and will determine the next steps in our program following completion of this analysis. We do not expect that these results will impact any of our other ongoing development programs.

We are also pursuing clinical development of lumateperone for the treatment of additional CNS diseases and disorders. ~~At the lowest doses, lumateperone has been demonstrated to act primarily as a potent~~

~~5-HT2A~~

serotonin receptor antagonist. As the dose is increased, additional benefits are derived from the engagement of additional drug targets, including modest dopamine receptor modulation and modest inhibition of serotonin transporters. We believe ~~that combined interactions at these receptors~~lumateperone may ~~provide additional benefits above and beyond selective~~

~~5-HT2A~~

~~antagonism~~have utility for treating agitation, aggression and sleep disturbances in diseases that include dementia, Alzheimer’s disease, or AD, Huntington’s disease and autism spectrum disorders, while avoiding many of the side effects associated with more robust dopamine receptor antagonism. As the dose of lumateperone is further increased, leading to moderate dopamine receptor modulation, inhibition of serotonin transporters, and indirect glutamate modulation, these actions complement the complete blockade of

~~5-HT2A~~

~~serotonin receptors.~~disorders. At a dose of 6042 mg,

~~ITI-007~~

lumateperone has been shown effective in treating the symptoms associated with schizophrenia, and we believe this ~~higher~~ dose ~~range will be useful~~may merit further investigation for the treatment of bipolar disorder, depressive disorders and other neuropsychiatric diseases.

Within the

~~ITI-007~~

lumateperone portfolio, we are also developing a long-acting injectable formulation to provide more treatment options to patients suffering from mental illness. We have completed the preclinical development of a long-acting injectable formulation and plan to initiate a Phase 1 clinical trial in 2020. Given the encouraging tolerability data to date with oral lumateperone, we believe that a long-acting injectable option, in particular, may lend itself to being an important formulation choice for patients.

~~Given the potential utility for lumateperone and~~

~~follow-on~~

~~compounds to treat these additional indications, we~~We may investigate the use of lumateperone, either on our own or with a partner, as a treatment for agitation, aggression and sleep disturbances in additional diseases that include autism spectrum disorders, depressive disorder, intermittent explosive disorder,

non-motor

symptoms and motor complications associated with Parkinson’s disease, and post-traumatic stress disorder. We hold exclusive, worldwide commercialization rights to lumateperone and a family of compounds from Bristol-Myers Squibb Company pursuant to an exclusive license.

We have a second major program called

ITI-002

that has yielded a portfolio of compounds that selectively

inhibit the enzyme phosphodiesterase type 1, or PDE1. PDE1 enzymes are highly active in multiple disease states and our PDE1 inhibitors are designed to reestablish normal function in these disease states. Abnormal PDE1 activity is associated with cellular proliferation and activation of inflammatory cells. Our PDE1 inhibitors ameliorate both of these effects in animal models. We intend to pursue the development of our phosphodiesterase, or PDE, program, for the treatment of several CNS and

non-CNS

conditions with a focus on diseases where excessive PDE1 activity has been demonstrated and increased inflammation is an important contributor to disease pathogenesis. Our potential disease targets include heart failure, immune system regulation, neurodegenerative diseases, and other

non-CNS

~~other non-CNS~~ disorders.

ITI-214

is our lead compound in this program. We believe

ITI-214

is the first compound in its class to successfully advance into Phase

1

clinical trials.

Following the ~~positive~~favorable safety and tolerability results in our Phase

1

program, we initiated our development program for

ITI-214

for Parkinson’s disease and commenced patient enrollment in the third quarter of

2017

in a Phase

1/2

clinical trial of

ITI

-

~~ITI-214~~

22

Table of Contents

214 in patients with Parkinson’s disease to evaluate safety and tolerability in this patient population, as well as motor and

non-motor

exploratory endpoints. In the fourth quarter of

2018,

, we announced that the Phase

1/2

clinical trial of

ITI-214

has been completed and topline results demonstrated

ITI-214

was generally well-tolerated with a favorable safety profile and clinical signs consistent with improvements in motor symptoms and dyskinesias. In addition, in the first quarter of

2018,

, the investigational new drug application, or IND, went into effect for

ITI-214

for the treatment of heart failure.

C

~~linical conduct of the~~ The first clinical study in this program, is a randomized, double-blind, placebo-controlled Phase 1/2 study of escalating single doses of

ITI-214

to

evaluate safety and hemodynamic effects in patients with systolic heart failure ~~is ongoing~~ and we anticipate reporting topline results from this study in the first half of 2020.

Our pipeline also includes preclinical programs that are focused on advancing drugs for the treatment of schizophrenia, Parkinson’s disease, AD and other neuropsychiatric and neurodegenerative disorders. We are also investigating the development of treatments for disease modification of neurodegenerative disorders and

non-CNS

diseases, including our

ITI-333

development program.

ITI-333

is designed as a potential treatment for substance use disorders, pain and psychiatric comorbidities including depression and anxiety. There is a pressing need to develop new drugs to treat opioid addiction and safe, effective,

non-addictive

treatments to manage pain. ~~We believe the potential exists for~~

~~ITI-333~~

~~to address these challenges.~~ Preclinical safety studies with

ITI-333

are currently ongoing and we expect to initiate a clinical program

~~the first half~~

of

in 2020.

We have assembled a management team with significant industry experience to lead the discovery, development and commercialization of our product candidates. We complement our management team with a group of scientific and clinical advisors that includes recognized experts in the fields of schizophrenia and other CNS disorders.

Results of Operations

The following discussion summarizes the key factors our management believes are necessary for an understanding of our financial statements.

18

~~Table of Contents~~

Revenues

Net revenues from product sales consist of sales of CAPLYTA, which was approved by the FDA on December 2019. We ~~have not~~initiated the commercial launch of CAPLYTA in late March 2020 and generated ~~any~~approximately $882,500 in net revenue from product sales ~~to date and~~in the quarter ended March 31, 2020. In addition, we ~~do not expect to generate revenues from product sales until at least~~

in

~~the first quarter~~had approximately $201,000 of ~~2020, if ever. We had no~~grant revenues for the three ~~and nine~~ months ended ~~September 30, 2019 and 2018, respectively.~~March 31, 2020 compared to no grant revenue for the three months ended March 31, 2019. We have received and may continue to receive grants from U.S. government agencies and foundations.

We do not expect any revenues that we may generate in the next several years to be significant enough to fund our operations.

Expenses

The process of researching, developing and ~~developing~~commercializing drugs for human use is lengthy, unpredictable and subject to many risks. We are unable with certainty to estimate either the costs or the timelines in which those costs will be incurred. The costs associated with the commercialization of CAPLYTA will be substantial and will be incurred prior to our generating sufficient revenue to offset these costs. Costs for the clinical development of lumateperone ~~for the treatment of schizophrenia and~~ for the treatment of bipolar depression consumes and, together with our anticipated clinical development programs ~~of lumateperone~~ for depressive disorders and of

ITI-214,

will continue to consume a large portion of our current, as well as projected, ~~resources. Preparations for the commercial launch of products and the expansion of infrastructure required to support ongoing commercialization will also~~

co

~~ntinue to~~

~~consume a significant portion of our~~ resources. We intend to pursue other disease indications that lumateperone may address, but there are significant costs associated with pursuing FDA approval for those indications, which would include the cost of additional clinical trials.

Our

ITI-002

program has a compound,

ITI-214,

in Phase 1/2 development. We intend to pursue the development of our ~~phosphodiesterase, or~~ PDE program, including

ITI-214

for the treatment of several CNS and

non-CNS

conditions, ~~with a focus on diseases where excessive PDE1 activity has been demonstrated and increased inflammation is an important contributor to disease pathogenesis. Our~~including cardiovascular disease. We have initiated our development program for

ITI-214

for Parkinson’s ~~disease is ongoing.~~disease. In addition, in the first quarter of 2018, the IND went into effect for

ITI-214

for the treatment of heart ~~failure. Clinical conduct of the first~~failure and our clinical ~~study in~~development program for this ~~program, a randomized, double-blind, placebo-controlled study of escalating single doses of~~

~~ITI-214~~

~~to evaluate safety and hemodynamic effects in patients with systolic heart failure,~~indication is ongoing. Our other projects are still in the preclinical stages, and will require extensive funding not only to complete preclinical testing, but to commence and complete clinical trials. Expenditures that we incur on these projects will be subject to availability of funding in addition to the funding required for the advancement of lumateperone. Any failure or delay in the advancement of lumateperone could require us to

re-allocate

resources from our other projects to the advancement of lumateperone, which could have a material adverse impact on the advancement of these other projects and on our results of operations. Our operating expenses are comprised of (i) costs of product sales; (ii) research and development ~~expenses and (ii)~~expenses; (iii) general and administrative and (iv) selling expenses. ~~Our research~~

Costs of product sales are comprised of:

Direct costs of formulating, manufacturing and packaging drug product

23

Table of Contents

Overhead costs consisting of labor, customs, stock based compensation, shipping, outside inventory management and other miscellaneous operating costs; and

Royalty payments on product sales.

Research and development costs are comprised of:

internal recurring costs, such as costs relating to labor and fringe benefits, materials, supplies, facilities and maintenance; and

fees paid to external parties who provide us with contract services, such as

pre-clinical

testing, manufacturing and related testing, clinical trial activities and license milestone payments.

General and administrative expenses are incurred in three major categories:

salaries and related benefit costs;

patent, legal, and professional costs; and

~~patent, legal, professional and~~

~~pre-commercialization~~

~~costs; and~~

office and facilities overhead.

Selling expenses are incurred in three major categories:

salaries and related benefit costs of a dedicated sales force;

sales operation costs; and

marketing and promotion expenses.

Product sold through March 31, 2020 generally consisted of drug product that was previously charged to research and development expense prior to FDA approval of CAPLYTA. Because the Company previously expensed drug product the cost of drug product sold is lower than it would have been and has a positive impact on our cost of product sales and related product gross margins for the three months ended March 31, 2020. The Company’s reported cost of product sales as a percentage of product sales, net was 7.9% or approximately $69,000 for the three months ended March 31, 2020. Had direct and overhead costs not been previously recognized into research and development expense, the percentage would have been 14.7% or approximately $130,000.

We will continue to have these favorable results until our sales of CAPLYTA include drug product that is manufactured after the FDA approval. We are currently unable to estimate how long it will be until we begin selling product manufactured post FDA approval.

We expect that research and development expenses will increase moderately as we ~~complete~~proceed with our ~~ongoing~~ Phase

3

clinical ~~trial~~trials of lumateperone for the treatment of bipolar ~~disorder as an adjunctive therapy with lithium or valproate~~depression and ~~proceed with our program for the treatment of~~ depressive disorders, ~~and as we proceed with~~other clinical trials, increased manufacturing of drug product for clinical trials and

pre-clinical

~~pre-commercialization~~

~~testing.~~development activities. We also expect that our general and administrative costs will increase ~~significantly~~ from prior periods primarily due to ~~costs to perform~~

~~pre-product~~

~~commercialization activities and the increased~~ costs associated with building infrastructure to support the anticipated commercial sales of ~~lumateperone~~

,

~~if approved,~~CAPLYTA, which

~~we expect~~ will

include hiring additional personnel and the cost of additional facility space. On September

28,

,

2018,

, we signed a lease with a related party to acquire

15,534

square feet of additional office space in our current headquarters facility. We granted options to purchase

~~1,175,187~~

1,833,102 shares of our common stock in

~~2018~~

2019 and have granted options to purchase an additional

~~1,821,258~~

696,161 shares of our common stock in the ~~nine months ended September~~

30

,

~~2019~~

.first quarter of 2020. We also granted time based restricted stock units, or RSUs, for

~~544,542~~

950,449 of our common stock in

~~2018~~

2019 and time based RSUs for

~~950,449~~

972,746 shares of our common stock in the ~~nine months ended September~~

30

,

~~2019~~

.first quarter of 2020. We will recognize expense associated with these RSUs and options over ~~the next~~ three years in both research and development expenses and general and administrative expenses. In the first quarter of

2017,

, we also granted performance based RSUs, which vest

based on the achievement of certain milestones that include (i) the submission of an NDA with the FDA for lumateperone for the treatment of schizophrenia, (ii) the approval of the NDA by the FDA, or the Milestone RSUs, and (iii) the achievement of certain comparative shareholder returns against our peers, or the TSR RSUs. The Milestone RSUs were valued at the closing price on

t

~~he grant date,~~

March

8, 2017.

The RSUs related to the NDA submission were amortized through December 31, 2018 based on the probable vesting date. The NDA submission milestone was achieved in the third quarter of 2018. The Milestone RSUs related to the NDA submission vested on December 31, 2018. The ~~amortization~~NDA approval milestone was achieved in the fourth quarter of ~~the expenses~~

19

~~Table of Contents~~

~~of the~~2019. The Milestone RSUs related to the NDA approval ~~of the NDA will commence if and when the filing has been approved through the last day of the calendar year in which the milestone is achieved and expires~~vested on December 31, ~~2019 if not achieved.~~2019. The TSR RSUs were valued using the Monte Carlo simulation method and ~~will be~~were amortized over the life of the ~~RSU agreements~~RSU’s which ~~ends December 31, 2019. The~~vested on January 24, 2020. In the first quarter of 2020, we also granted performance based RSUs, which vest based on the achievement of certain milestones that include (i) the approval of a planned NDA by the FDA, or the 2020 Milestone RSUs, and (ii) the achievement of certain comparative shareholder returns against our peers, or the 2020 TSR RSUs. The 2020 Milestone RSUs were valued at the closing price on February 18, 2020. The 2020 TSR RSUs ~~are target based and~~were valued using the ~~ultimate awards, if attained, could be the target amount or higher or lower than the target amount, depending on the timing or achievement of the goal.~~Monte Carlo simulation method. We expect to continue to grant stock options and other stock-based awards in the future, which with our growing employee base will increase our stock-based compensation expense in future periods.

24

Table of Contents

The following table sets forth our revenues, operating expenses, interest income and income tax expense for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,						For the Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
	(Unaudited)						(Unaudited)						(Unaudited)
Revenues	$	—		$	—		$	—		$	—
Product sales, net													$	882		$	—
Grant revenue														201			—

Total revenues, net														1,083			—
Expenses
Cost of product sales														69			—
Research and development		21,340			35,419			70,059			98,561			16,003			24,991
General and administrative		15,036			7,972			42,184			21,082			34,097			11,705

Total costs and expenses		36,376			43,391			112,243			119,643			50,169			36,696

Loss from operations		(36,376	)		(43,391	)		(112,243	)		(119,643	)		(49,086	)		(36,696	)
Interest income		1,514			1,868			5,106			5,266			1,678			1,860
Income tax expense		—			—			(2	)		(2	)		(3	)		—

Net loss	$	(34,862	)	$	(41,523	)	$	(107,139	)	$	(114,379	)	$	(47,411	)	$	(34,836	)

Comparison of ~~Three- and Nine-Month~~Three-Month Periods Ended ~~September 30,~~March 31, 2020 and March 31, 2019 ~~and September 30, 2018~~

Revenues

Revenues for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 were $1,083,479 and zero, respectively. Net product sales were approximately $882,500 for the three months ended March 31, 2020 and were comprised of sales of CAPYLTA, which was approved by the FDA on December 20, 2019 and ~~2018~~became available to wholesalers in March 2020. No similar net product sales were ~~zero.~~recognized during the three months ended March 31, 2019. In addition, revenue from a government grant was approximately $201,000 for the three months ended March 31, 2020.

Cost of Product Sales

Cost of product sales was approximately $69,000 for the three months ended March 31, 2020. Cost of product sales consisted primarily of product royalty fees, overhead and minimal direct costs. Product sold during the three months ended March 31, 2020 generally consisted of drug product that was previously charged to research and development expense prior to FDA approval of CAPLYTA. This minimal cost drug product had a positive impact on our cost of product sales and related product gross margins for the three months ended March 31, 2020. We will continue to have a lower cost of product sales that excludes the cost of the drug product that was incurred prior to FDA approval until our sales of CAPLYTA include drug product that is manufactured after the FDA approval. We expect that this will be the case for the near-term and as a result, our cost of product sales will be less than we anticipate it will be in future periods. No similar cost of product sales was recognized during the three months ended March 31, 2019.

Research and Development Expenses

The following tables set forth our research and development expenses for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018

External costs

14,372

29,690

48,302

82,813

Internal costs

6,968

5,729

21,757

15,748

Total research and development expenses
$
21,340
$
35,419
$
70,059
$
98,561

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018

Lumateperone costs

1
0
,
515

22,653

32
,
282

60,819

Manufacturing costs

3,061

4,905

14,920

17,543

Stock based compensation

2,024

1,819

6,785

5,615

Other projects and overhead

5
,
740

6,042

16
,
072

14,584

Total research and development expenses
$
21,340
$
35,419
$
70,059
$
98,561


	Three Months Ended March 31,
	2020		2019
External costs	$	9,007	$	17,809
Internal costs		6,996		7,182

Total research and development expenses	$	16,003	$	24,991

20

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	Three Months Ended March 31,
	2020		2019
Lumateperone costs	$	7,046	$	14,489
Manufacturing costs		2,673		5,860
Stock based compensation		2,300		2,408
Other projects and overhead		3,984		2,234

Total research and development expenses	$	16,003	$	24,991

Research and development expenses decreased to ~~$21.3 million for the three-month period ended September 30, 2019 as compared to $35.4~~$16.0 million for the three month period ended ~~September 30, 2018,~~March 31, 2020 as compared to $25.0 million for the three month period ended March 31, 2019, representing a decrease of approximately ~~40% as we have completed clinical trials of lumateperone during the period.~~36%. This decrease is due primarily to a decrease of approximately ~~$10.7~~$4.6 million of costs ~~associated with lumateperone clinical trial costs, a decrease of approximately $1.4 million of costs for lumateperone~~

~~non-clinical~~

~~efforts, a decrease of approximately $1.8 million of manufacturing costs and a decrease of approximately $300,000 of~~

~~non-lumateperone~~

~~projects and overhead expenses and is offset by an increase of approximately $200,000 of costs in stock compensation expense.~~

Research and development expenses decreased to $70.1 million for the nine-month period ended September 30, 2019 as compared to $98.6 million for the nine month period ended September 30, 2018, representing a decrease of approximately 29% as we have completed clinical trials of lumateperone during the period. This decrease is due primarily to a decrease of approximately $29.1 million associated with lumateperone clinical costs, a decrease of approximately ~~$2.6~~$3.2 million in manufacturing expense, ~~and is~~a decrease of $2.8 million of costs associated with lumateperone

non-clinical

costs, a decrease of approximately $0.1 million for stock compensation expense, all of which are partially offset by an increase of approximately ~~$1.5~~$1.7 million of non

~~non-lumateperone~~lumateperone

~~projects and overhead expenses, and an increase of approximately $565,000 of costs for lumateperone~~

~~non-clinical~~

~~efforts and an increase of approximately $1.2 million in stock compensation expense.~~

related projects.

As development of ~~the~~ lumateperone ~~program~~ progresses, we anticipate costs for lumateperone to increase ~~from current levels~~ due primarily to ongoing and planned clinical trials relating to our lumateperone programs in the next several years as we conduct Phase 3 and other clinical trials. We are also required to complete

non-clinical

testing to obtain FDA approval and manufacture material needed for clinical trial use, which includes

non-clinical

testing of the drug product and the creation of an inventory of drug product in anticipation of possible FDA ~~approvals~~approval. We received FDA approval on December 20, 2019 for ~~different indications.~~lumateperone as a treatment for schizophrenia.

We currently have several projects, in addition to lumateperone, that are in the research and development stages, including in the areas of cognitive dysfunction and the treatment of neurodegenerative diseases, including AD, among others. We have used internal resources and incurred expenses not only in relation to the development of lumateperone, but also in connection with these additional projects as well, including our PDE program. We have not, however, reported these costs on a ~~project by project~~

project-by-project

basis, as these costs are broadly spread among these projects. The external costs for these projects have been modest and are reflected in the amounts discussed in this section “—Research and Development Expenses.”

The research and development process necessary to develop a pharmaceutical product for commercialization is subject to extensive regulation by numerous governmental authorities in the United States and other countries. This process typically takes years to complete and requires the expenditure of substantial resources. The steps required before a drug may be marketed in the United States generally include the following:

completion of extensive

pre-clinical

laboratory tests, animal studies, and formulation studies in accordance with the FDA’s Good Laboratory Practice, or GLP, regulations;

submission to the FDA of an Investigational New Drug application, or IND, for human clinical testing, which must become effective before human clinical trials may begin;

performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for each proposed indication;

submission to the FDA of a New Drug Application, or NDA, after completion of all clinical trials;

satisfactory completion of an FDA

pre-approval

inspection of the manufacturing facility or facilities at which the active pharmaceutical ingredient, or API, and finished drug product are produced and tested to assess compliance with current Good Manufacturing Practices, or cGMPs;

satisfactory completion of FDA inspections of clinical trial sites to assure that data supporting the safety and effectiveness of product candidates has been generated in compliance with Good Clinical Practices; and

FDA review and approval of the NDA prior to any commercial marketing or sale of the drug in the United States.

The successful development of our product candidates and the approval process requires substantial time, effort and financial resources, and is uncertain and subject to a number of risks. We cannot be certain that any of our product candidates will prove to be safe and effective, will meet all of the applicable regulatory requirements needed to receive and maintain marketing approval, or will

26

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be granted marketing approval on a timely basis, if at all. Data from

pre-clinical

studies and clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval or could result in label warnings related to or recalls of approved products. We, the FDA, or other regulatory authorities may suspend clinical trials at any time if we or they believe that the subjects participating in such trials are being exposed to unacceptable risks or if such regulatory agencies find deficiencies in the conduct of the trials or other problems with our product candidates. Other risks associated with our product candidates are described in the section entitled “Risk Factors” in our Annual Report on Form

10-K

~~filed with~~for the ~~SEC on February 27,~~year ended December 31, 2019, as updated by the section entitled “Risk Factors” in this Quarterly Report on Form

10-Q

and from time to time in our other periodic and current reports filed with the SEC.

21

~~Table of Contents~~

Selling, General and Administrative Expenses

~~General~~

Selling, general and administrative ~~expenses increased by $7.1 million~~costs for the three-month period ended ~~September 30, 2019~~March 31, 2020 were $34.1 million as compared to $11.7 million in the three-month period ended ~~September 30, 2018, representing~~March 31, 2019 which represents an increase of ~~approximately 89%~~191%. ~~The~~Below is a breakout of these expenses into selling and general administrative costs for the periods.

General and administrative expenses were $13.3 million in 2020 as compared to $6.5 million for the same period in 2019, an increase of 103%. This increase is ~~primarily the result~~due to increased professional fees of ~~an increase in~~

~~pre-commercialization~~

~~costs~~$2.1 million, labor and bonus expense of ~~approximately $3.8~~$1.5 million, ~~an increase in labor costs~~information technology services of ~~approximately $1.9~~$1.5 million, ~~an increase in~~ stock compensation expense of approximately ~~$229,000, an increase in professional fees of approximately $236,000~~$0.6 million, and ~~an increase in~~the remainder on insurance, lease expense, and ~~rent expense of approximately $350,000.~~other administrative expenses. Salaries, bonuses and related benefit costs for our ~~executive, finance~~general and administrative functions for the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ constituted approximately ~~44%~~47% and ~~55%~~64%, respectively, of our ~~total~~ general and administrative costs. ~~We had 35 general and administrative employees at September 30, 2019~~

Selling costs were $20.8 million for the three-month period ended March 31, 2020 as compared to ~~17 general and administrative employees at September 30, 2018.~~

General and administrative expenses increased by $21.1 million for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018, representing an increase of approximately 100.1%. The increase is primarily the result of an increase in

pre-commercialization

costs of ~~approximately $12.7~~$5.2 million in the same period in 2019, or an increase of 304%. This increase is primarily due to an increase in sales related labor costs of ~~approximately $4.9~~$9.9 million ~~an increase in stock compensation expense~~and commercialization costs of approximately $707,000, an increase in professional fees of approximately $560,000 and an increase in lease and rent expense of approximately $1.1 million due primarily to leasing additional office space at our corporate headquarters in New York, NY.$5.8 million. Salaries, bonuses and related benefit costs for our ~~executive, finance~~sales and ~~administrative~~marketing functions for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ constituted approximately ~~42%~~53% and ~~58%~~23%, respectively, of our ~~total general and administrative~~selling costs.

We expect selling, general and administrative costs to increase significantly from the first quarter 2020 as ~~we hire additional employees and expand~~the onboarding of our ~~operations, in particular, the addition of a~~ sales force was completed during the three months ended March 31, 2020 and ~~related commercial~~we are expanding post approval marketing and ~~other infrastructure~~market access efforts as ~~we prepare for potential commercial activities.~~well as our administrative infrastructure.

Liquidity and Capital Resources

Through ~~September 30, 2019,~~March 31, 2020, we provided funds for our operations by obtaining a total of approximately ~~$880.7 million~~$1.2 billion of cash primarily through public and private offerings of our common stock and other securities, grants from government agencies and foundations and payments received under a terminated license and collaboration agreement. We do not believe that grant revenue will be a significant source of funding in the near future.

On ~~October 2, 2017,~~January 10, 2020, we completed a public offering of ~~9,677,419~~10,000,000 shares of our common stock for aggregate gross proceeds of approximately $150 million and net proceeds of approximately $140.6 million. On October 5, 2017, the underwriters exercised in full their option to purchase an additional 1,451,613 shares.stock. All of the shares in the offering were sold by the Company, with gross proceeds to the Company of ~~approximately $172~~$295.0 million ~~from the offering of an aggregate of 11,129,032 shares~~ and net proceeds of approximately ~~$162~~$277.0 million, after deducting underwriting discounts, commissions and ~~estimated~~ offering expenses.

As of ~~September 30, 2019,~~March 31, 2020, we had a total of approximately ~~$255.4~~$450.4 million in cash and cash equivalents, ~~and~~

available-for-sale

investment securities, restricted cash and approximately ~~$33.4~~$31.1 million of short-term liabilities consisting entirely of liabilities from operations, including approximately ~~$2.3~~$3.2 million of short-term lease obligations. In the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we spent approximately ~~$99.4~~$52.9 million in cash for operations and equipment, not including ~~$5.1~~an offset of $1.7 million of interest income. We reduced working capital by approximately ~~$93.1~~$41.2 million for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. The use of cash was primarily for selling and marketing costs in connection with our commercial launch of CAPLYTA, conducting clinical trials and

non-clinical

testing, ~~including~~product manufacturing, ~~related activities, precommercial activities,~~ and funding recurring operating expenses.

~~For the remainder of the year 2019, subject to clinical trial conduct, regulatory activities, precommercial spending, including marketing costs, manufacturing, and other development activities,~~Based on our current operating plans, we expect that our existing cash, cash equivalents and marketable securities will enable us to ~~spend up to $45 million. We~~fund our operating expenses and capital expenditure requirements for at least the next 12 months from the filing date of this quarterly report. During that time, we expect ~~these expenditures to be~~that our expenses will increase substantially due primarily to ~~the~~

~~pre-commercialization~~

our commercialization activities and related infrastructure expansion in connection with the ~~potential~~ commercialization of ~~lumateperone~~CAPLYTA for the treatment of schizophrenia; the development of lumateperone in our late stage clinical programs; the development of our other product candidates, including

~~ITI-214~~

~~and~~

~~ITI-333;~~ITI-214;

the continuation of manufacturing activities for anticipated future sales of product and in connection with the development of lumateperone; and general operations. We

27

Table of Contents

For the remainder of the year 2020, we expect ~~that~~to spend up to $230 million primarily related to the marketing and commercialization of CAPLYTA, lumateperone clinical development including clinical trial conduct, regulatory activities, manufacturing, expansion of our ~~existing cash~~administrative infrastructure and ~~cash equivalents~~other development activities. Our other development activities will include efforts related to the

ITI-214

and

ITI-333

programs, among others. However, the

COVID-19

pandemic may negatively impact our commercialization of CAPLYTA, our ability to complete our ongoing or planned preclinical and ~~investments will be sufficient~~clinical trials, our ability to ~~fund~~obtain approval of any product candidates from the FDA or other regulatory authorities, and our ~~operating expenses~~workforce and ~~capital expenditure requirements into~~therefore our research, development and commercialization activities. This may ultimately have a material adverse effect on our liquidity, although we are unable to make any prediction with certainty given the

~~mid-fourth~~

~~quarter~~ rapidly changing nature of ~~2020.~~the pandemic and governmental and other responses to it.

We will require significant additional financing in the future to continue to fund our operations. We believe that we have the funding in place to ~~complete the additional clinical and~~

~~non-clinical~~

~~trials, manufacturing and~~

~~pre-commercialization~~

~~activities needed for potential regulatory approval and initial commercialization of lumateperone~~commercialize CAPLYTA in patients with schizophrenia. With our existing cash, cash equivalents and

available-for-sale

investment securities, we believe that we have the funds to complete our ongoing clinical ~~trial~~trials of lumateperone in bipolar disorder as a monotherapy and as an adjunctive therapy with lithium or valproate. We also plan to fund additional clinical trials of lumateperone for the treatment of behavioral disturbances in dementia and depressive disorders; preclinical and clinical development of our

ITI-007

long acting injectable development program; additional clinical trials of lumateperone; continued clinical development of our PDE program, including

ITI-214;

research and preclinical development of our other product candidates; and the

22

~~Table of Contents~~

continuation of manufacturing activities in connection with the development of lumateperone. We anticipate requiring additional funds ~~for further development of lumateperone in patients with dementia, including AD,~~ for further development of lumateperone in patients with bipolar disorder, depressive disorders and other indications, and for development of our other product candidates. We have incurred losses in every year since inception with the exception of 2011, when we received an

up-front

fee and a milestone payment related to a ~~licensing agreement.~~license agreement that has been terminated. These losses have resulted in significant cash used in operations. For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we used net cash in operating activities and purchases of equipment of approximately ~~$99.4~~$52.9 million. This total does not include an offset for ~~$5.1~~$1.7 million of interest income received. While we have several research and development programs underway, the lumateperone program has advanced the furthest and will continue to consume increasing amounts of cash for conducting clinical trials

~~non-clinical~~

and the testing and manufacturing of product material. As we continue to conduct the activities necessary to pursue FDA approval of lumateperone beyond schizophrenia and our other product candidates, ~~we expect that our expenditures will increase. If we receive FDA approval of lumateperone for the treatment of schizophrenia by the end of 2019 or shortly thereafter,~~as well as commercialization efforts, we expect the ~~level~~amount of ~~expenditures and~~ cash ~~requirements~~to be used to fund operations to increase ~~significantly as we intend to hire a national sales force, complete~~over the ~~required infrastructure activities and engage third parties to support our efforts to market and sell our product.~~next several years.

We intend to pursue the development of our PDE1 program, including

ITI-214

for the treatment of several CNS and

non-CNS

conditions. We anticipate a moderate increase in our operating expenses related to our PDE development programs. Following the positive safety and tolerability results in our Phase 1 program, we initiated our development program for

ITI-214

for Parkinson’s disease and commenced patient enrollment in the third quarter of 2017 in a Phase 1/2 clinical trial of

ITI-214

in patients with Parkinson’s disease to evaluate safety and tolerability in this patient population, as well as motor and

non-motor

exploratory endpoints. ~~In the fourth quarter of 2018, we announced that the Phase 1/2 clinical trial of~~

~~ITI-214~~

~~has been completed and topline results demonstrated~~

~~ITI-214~~

~~was generally well-tolerated with a favorable safety profile and clinical signs consistent with improvements in motor symptoms and dyskinesias.~~ In addition, in the first quarter of 2018, the IND went into effect for

ITI-214

for the treatment of heart failure. Clinical conduct of the first clinical study in this program, a randomized, double-blind, placebo-controlled study of escalating single doses of

ITI-214

to evaluate safety and hemodynamic effects in patients with systolic heart failure, is ongoing. We expect these expenses to increase in the next several years.

We seek to balance the level of cash, cash equivalents and investments on hand with our projected needs and to allow us to withstand periods of uncertainty relative to the availability of funding on favorable terms. Until we can generate significant revenues from operations, we will need to satisfy our future cash needs through public or private sales of our equity securities, sales of debt securities, incurrence of debt from commercial lenders, strategic collaborations, licensing a portion or all of our product candidates and technology and, to a lesser extent, grant funding. On August 30, 2019, we filed a universal shelf registration statement on Form

S-3,

which was declared effective by the SEC on September 12, 2019, on which we registered for sale up to $350 million of any combination of our common stock, preferred stock, debt securities, warrants, rights and/or units from time to time and at prices and on terms that we may determine, which includes up to $75 million of common stock that we may issue and sell from time to time, through SVB Leerink LLC acting as our sales agent, pursuant to the sale agreement that we entered into with SVB Leerink ~~LLC~~ on August 29, 2019 for our

“at-the-market”

equity program. AsIn addition, on January 6, 2020, we filed an automatic shelf registration statement on Form

S-3

with the SEC, which became effective upon filing, on which we registered for sale an unlimited amount of ~~November 4, 2019,~~any combination of its common stock, preferred stock, debt securities, warrants, rights, and/or units from time to time and at prices and on terms that we ~~have not sold any shares~~may determine, so long as we continue to satisfy the requirements of a “well-known seasoned issuer” under ~~our sales agreement with SVB Leerink LLC.~~SEC rules. These registration statements will remain in effect for up to three years from the respective dates they became effective.

We cannot be sure that future funding will be available to us when we need it on terms that are acceptable to us, or at all. We sell securities and incur debt when the terms of such transactions are deemed favorable to us and as necessary to fund our current and projected cash needs. The amount of funding we raise through sales of our common stock or other securities depends on many factors,

28

Table of Contents

including, but not limited to, the magnitude of sales of CAPLYTA, the status and progress of our product development programs, projected cash needs, availability of funding from other sources, our stock price and the status of the capital markets. Due to the volatile nature of the financial markets, equity and debt financing may be difficult to obtain. Additionally, the continued spread of

COVID-19

and uncertain market conditions may limit our ability to access any financing. In addition, any unfavorable results in the commercialization of CAPLYTA and unfavorable development or delay in the progress of our lumateperone program ~~including potential FDA approval,~~ could have a material adverse impact on our ability to raise additional capital.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

If adequate funds are not available to us on a timely basis, we may be required to: (1) delay, limit, reduce or terminate

pre-clinical

studies, clinical trials or other clinical development activities for one or more of our product candidates, including our lead product candidate lumateperone,

ITI-214,

and our other product candidates; (2) delay, limit, reduce or terminate our discovery research or

pre-clinical

development activities; ~~(3) delay~~ or ~~reduce the planned sales and marketing efforts of lumateperone, if approved; or (4)~~(3) enter into licenses or other arrangements with third parties on terms that may be unfavorable to us or sell, license or relinquish rights to develop or commercialize our product candidates, technologies or intellectual property at an earlier stage of development and on less favorable terms than we would otherwise agree.

23

~~Table of Contents~~

Our cash is maintained in checking accounts, money market accounts, money market mutual funds, U.S. government agency securities, certificates of deposit, commercial paper, corporate notes and corporate bonds at major financial institutions. Due to the current low interest rates available for these instruments, we are earning limited interest income. We do not expect interest income to be a significant source of funding over the next several quarters. Our investment portfolio has not been adversely impacted by the problems in the credit markets that have existed over the last several years, but there can be no assurance that our investment portfolio will not be adversely affected in the future.

In 2014, we entered into a long-term lease with a related party which, as amended, provided for a lease of 16,753 square feet of useable laboratory and office space located at 430 East 29th Street, New York, New York 10016. Concurrent with this lease, we entered into a license agreement to occupy certain vivarium related space in the same facility for the same term, rent and escalation provisions as the lease. This license has the primary characteristics of a lease and is characterized as a lease in accordance with ASU

2016-02

for accounting purposes. In September 2018, we further amended the lease to obtain an additional 15,534 square feet of office space beginning October 1, 2018 and to extend the term of the lease for previously acquired space. The lease, as amended, has a term of 14.3 years ending in May 2029. ~~We expect that our facility related costs will increase significantly as a result of leasing this additional space.~~ In February 2019, we entered into a long-term lease for 3,164 square feet of office space in Towson, Maryland beginning March 1, 2019. The lease has a term of 3.2 years ending in April 2022. We anticipate acquiring additional space in 2020 to accommodate our commercial and infrastructure expansion which could result in a moderate increase in facility costs. On May 17, 2019, we entered into a vehicle fleet lease with a company to acquire motor vehicles for certain employees. The vehicle fleet lease provides for individual leases for the vehicles, which at each lease commencement was determined to qualify for operating lease treatment. We began leasing vehicles under the vehicle fleet lease in March 2020.

Off-Balance

Sheet Arrangements

We do not have any

off-balance

sheet arrangements.

Critical Accounting Policies and Estimates

Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our consolidated financial statements. We evaluate our estimates, judgments, and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Part II, Item 7, of our Annual Report on Form

10-K

for the year ended December 31, ~~2018~~2019 and Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form

10-Q.

There have been no material changes to our critical accounting policies during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. With the launch of product sales this quarter, the accounting policy for revenue recognition, which was previously developed, was implemented.

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses for the periods presented. Judgments must

29

Table of Contents

also be made about the disclosure of contingent liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management makes estimates and exercises judgment in ~~revenue recognition, stock-based compensation~~research and development, including clinical trial accruals. Actual results may differ from those estimates and under different assumptions or conditions.

Recently Issued Accounting Pronouncements

We review new accounting standards to determine the expected financial impact, if any, that the adoption of each such standard will have. For the recently issued accounting standards that we believe may have an impact on our financial statements, see “Recently Issued Accounting Standards” in Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form

10-Q,

and “Recently Issued Accounting Standards” in Note 2 to our audited consolidated financial statements and “Recently Issued Accounting Pronouncements” in our Annual Report on Form

10-K

for the year ended December 31, ~~2018~~2019 filed on ~~February 27, 2019.~~March 2, 2020.

Certain Factors That May Affect Future Results of Operations

The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form

10-Q

contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other important factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about: the accuracy of our estimates regarding expenses, future revenues, uses of cash, cash equivalents and investment securities, capital requirements and the need for additional financing; our expectations regarding our commercialization of CAPLYTA, including the impact of

COVID-19

on the commercialization of CAPLYTA and our ability to adapt our approach as appropriate; the supply and availability of and demand for our product, the initiation, cost, timing, progress and results of our development activities,

non-clinical

studies and clinical trials; the timing of and our ability to obtain and maintain regulatory approval, or submit an application for regulatory approval, of lumateperone and our other existing product candidates,

24

~~Table of Contents~~

any product candidates that we may develop, and any related restrictions, limitations, and/or warnings in the label of any approved product candidates;

whether, during the FDA’s review of our applications for regulatory approval of our product candidates, we will be able to provide in a timely manner all information requested by the FDA and whether the FDA will determine information we submit in the course of such review is satisfactory;

our plans to research, develop and commercialize lumateperone and our other current and future product candidates; the election by any collaborator to pursue research, development and commercialization activities; our ability to obtain future reimbursement and/or milestone payments from our collaborators; our ability to attract collaborators with development, regulatory and commercialization expertise; our ability to obtain and maintain intellectual property protection for our product candidates; our ability to successfully commercialize lumateperone and our other product candidates; the performance of our third-party suppliers and manufacturers and our ability to obtain alternative sources of raw materials; our ability to obtain additional financing; our use of the proceeds from our securities offerings; our exposure to investment risk, interest rate risk and capital market risk; and our ability to attract and retain key scientific or management personnel.

Words such as “may,” “anticipate,” “estimate,” “expect,” “may,” “project,” “intend,” “plan,” “believe,” “potential,” “predict,” “project,” “likely,” “will,” “would,” “could,” “should,” “continue” and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward-looking statements. All forward-looking statements are management’s present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially and adversely from those described in the forward-looking statements. These risks include, but are not limited to, ~~those set forth~~the following: there are no guarantees that CAPLYTA will be commercially successful; we may encounter issues, delays or other challenges in launching or commercializing CAPLYTA; the

COVID-19

pandemic may negatively impact our commercial plans and sales for CAPLYTA; the

COVID-19

pandemic may negatively impact the conduct of, and the timing of enrollment, completion and reporting with respect to, our clinical trials, whether CAPLYTA receives adequate reimbursement from third-party payers; the degree to which CAPLYTA receives acceptance from patients and physicians for its approved indication; challenges associated with execution of our sales activities, which in each case could limit the potential of our product; results achieved in CAPLYTA in the treatment of schizophrenia following commercialization may be different than observed in clinical trials, and may vary among patients; any other impacts on our business as a result of or related to the

COVID-19

pandemic; risks associated with our current and planned clinical trials; we may encounter unexpected safety or tolerability issues with CAPLYTA for the treatment of schizophrenia or in ongoing or future trials and other development activities; our other product candidates may not be successful or may take longer and be more costly than anticipated; product candidates that appeared promising in earlier research and clinical trials may not demonstrate safety and/or efficacy in larger-scale or later clinical trials; our proposals with respect to the regulatory path for our product candidates may not be acceptable to the FDA; our reliance on collaborative partners and other third parties for development of our product candidates; and the other risk factors detailed under the heading “Risk Factors” in our most recent Annual Report on Form

10-K,

as updated under the heading “Risk Factors” from time to time in our subsequent periodic and current reports filed with the SEC.

30

Table of Contents

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Quarterly Report on Form

10-Q

or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form

10-Q.

We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to the Company or to any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity.

As of ~~September 30, 2019,~~March 31, 2020, we had cash, cash equivalents, ~~and~~ marketable securities and restricted cash of approximately ~~$255.4~~$450.4 million consisting of cash deposited in a highly rated financial institution in the United States, in a short-term U.S. Treasury money market fund, and in high-grade corporate bonds and commercial paper. The primary objective of our investment activities is to preserve our capital for the purpose of funding operations. We do not enter into investments for trading or speculative purposes. We believe that we do not have material exposure to high-risk investments such as mortgage-backed securities, auction rate securities or other special investment vehicles within our money-market fund investments. We believe that we do not have any material exposure to changes in fair value as a result of the recent changes in interest rates ~~although~~or through potential changes in the credit worthiness of the issuers of our

available-for-sale

securities. The recent ~~change in interest rates has~~changes the market place resulted in ~~our~~an unrealized loss of approximately $145,000 for the three months ended March 31, 2020, compared to an unrealized gain ~~(loss) on investments as of September 30, 2019~~ of approximately ~~$199,000 and~~$128,000 for the year

ended of December 31, ~~2018 of approximately $(668,000), respectively. Since we~~2019. We have the ability and plan to hold these investments to ~~maturity, no recognition of impairment is required.~~maturity. Declines in interest rates, however, would reduce future investment income.

Capital Market Risk.

We currently have nolimited product revenues and depend on funds raised through other sources. One possible source of funding is through further equity offerings. Our ability to raise funds in this manner depends upon capital market forces affecting our stock price.

Item 4.

CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures

. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules

13a-15(e)

and

15d-15(e))

as of the end of the period covered by this Form

10-Q,

have concluded that, based on such evaluation, our disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

(b)

Changes in Internal Controls

. Beginning January 1, ~~2019,~~2020, we implemented ASU No.

~~2016-02,~~ 2016-13,

“~~Leases~~Financial Instruments – Credit Losses (Topic ~~842)~~326): Measurement of Credit Losses on Financial Instruments” (“ASU

2016-13”).”

Although the adoption of the new accounting standard did not materially impact our condensed consolidated balance sheet, statements of operations and ~~had no impact on our consolidated~~ cash flows as of and for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we did implement new internal control procedures ~~in the first quarter of 2019~~ to support the new accounting and reporting processes associated with adopting the guidance. ~~These procedures included performing a comprehensive lease scoping analysis~~Prior to ~~identify, disaggregate~~the launch of product sales this quarter, we implemented internal controls and ~~evaluate each of our leases.~~business processes around revenue recognition and inventory. There were no other changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the three months ended ~~September 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

25

~~Table of Contents~~

PART II: OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.

Item 1A.

RISK FACTORS

~~There~~Except as set forth below, there have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form

10-K

for the year ended December 31, ~~2018,~~2019, filed with the Securities and Exchange Commission on ~~February 27, 2019.~~March 2, 2020.

The outbreak of the novel strain of coronavirus,

SARS-CoV-2,

or similar public health crises, could have a material adverse impact on our business, financial condition and results of operations, including our commercial operations and sales, clinical trials and preclinical studies.

31

Table of Contents

Public health crises, such as pandemics or similar outbreaks, could adversely impact our business. In December 2019, a novel strain of coronavirus,

SARS-CoV-2,

which causes coronavirus disease 2019

(COVID-19),

surfaced in Wuhan, China. Since then,

SARS-CoV-2

and

COVID-19

have spread to multiple countries, including the United States. The

COVID-19

pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures. In response to the spread of

SARS-CoV-2

and

COVID-19,

we have instructed the majority of our office-based employees to work from home. Our increased reliance on personnel working from home may negatively impact productivity, or disrupt, delay, or otherwise adversely impact our business. In addition, this could increase our cyber security risk, create data accessibility concerns, and make us more susceptible to communication disruptions, any of which could adversely impact our business operations or delay necessary interactions with local and federal regulators, ethics committees, manufacturing sites, research or clinical trial sites and other important agencies and contractors. In connection with our commercial launch of CAPLYTA, which is approved by U.S. Food and Drug Administration for the treatment of schizophrenia in adults, our commercial organization and sales force and medical organization are having significantly reduced personal interactions with physicians and customers and increasingly conduct promotional activities virtually, and we have elected to cease

in-person

interactions with physicians and customers entirely for some period of time in the interest of employee and community safety. As a result of the

COVID-19

outbreak, or similar pandemics, we may experience disruptions that could severely impact our business, including our ability to successfully commercialize our only commercial product, CAPLYTA, in the U.S., and these disruptions could negatively impact our sales of CAPLYTA. Business interruptions from the current or future pandemics may also adversely impact the third parties we rely on to sufficiently manufacture CAPYLTA and to produce our product candidates in quantities we require, which may impair the commercialization and our research and development activities.

We are currently conducting clinical trials for our product candidates in many countries, including the United States, Europe and Russia and may expand to other geographies. Timely enrollment of, completion of and reporting on our clinical trials is dependent upon these global clinical trial sites which are, or in the future may be, adversely affected by the

COVID-19

outbreak or other pandemics. Some factors from the

COVID-19

outbreak that may adversely affect the timing and conduct of our clinical trials and adversely impact our business generally, include but are not limited to delays or difficulties in clinical site initiation, diversion of healthcare resources away from clinical trials to pandemic concerns, limitations on travel, regulatory delays and supply chain disruptions.

The

COVID-19

outbreak continues to rapidly evolve, and the extent to which the outbreak impacts our business, including our commercial results, clinical trials, and preclinical studies will depend on future developments, which are highly uncertain.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

Not applicable.

Issuer Purchases of Equity Securities

We did not repurchase any of our equity securities during the quarter ended ~~September 30, 2019.~~March 31, 2020.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4.

MINE SAFETY DISCLOSURES

Not applicable.

Item 5.

OTHER INFORMATION

Not applicable.

2632

Table of Contents

Item 6.

EXHIBITS

Exhibit
Number

Exhibit Description

Filed

Herewith

Incorporated by
Reference herein

from Form or
Schedule

Filing Date

SEC File/

Reg. Number

10.1

~~Sales Agreement, dated~~Non-Employee Director Compensation Policy, as ~~of August 29, 2019, by and between the Registrant and SVB Leerink LLC~~amended.*

X

Form

~~S-3~~10-K

(Exhibit ~~1.2)~~10.28)

~~8/30/2019~~3/2/2020

~~333-233537~~001-36274

31.1

Certification of the Registrant’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

X

31.2

Certification of the Registrant’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

X

32

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

X

101

The following materials from the Registrant’s Quarterly Report on Form

10-Q

for the quarter ended ~~September 30, 2019,~~March 31, 2020, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of ~~September 30, 2019~~March 31, 2020 (unaudited) and December 31, ~~2018~~2019 (audited), (ii) Condensed Consolidated Statements of Operations (unaudited) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ (iii) Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ (iv) Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ (v) Condensed Consolidated Statements of Cash Flows (unaudited) for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ and (vi) Notes to Condensed Consolidated Financial Statements (unaudited).

X

104

Cover Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101).

X

*	Management contract or compensatory plan or arrangement.

27

33

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	INTRA-CELLULAR THERAPIES, INC.

Date: ~~November 5, 2019~~May 7, 2020	By:	/s/ Sharon Mates, Ph.D.
		Sharon Mates, Ph.D.
		Chairman, President and Chief Executive Officer

Date: ~~November 5, 2019~~May 7, 2020	By:	/s/ Lawrence J. Hineline
		Lawrence J. Hineline
		Senior Vice President of Finance and Chief Financial Officer

34

28


Delaware		36-4742850
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

430 East 29th Street New York, New York		10016
(Address of principal executive offices)		(Zip Code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	ITCI	The Nasdaq Global Select Market


	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	102,162,982		$	54,947,502		$	179,593,032		$	107,636,849
Investment securities, available-for-sale		153,270,596			292,583,046			269,360,926			116,373,335
Restricted cash								1,400,000			—
Accounts receivable, net								1,351,013			—
Inventory								1,391,124			—
Prepaid expenses and other current assets		4,023,348			7,908,133			7,876,405			6,313,785

Total current assets		259,456,926			355,438,681			460,972,500			230,323,969
Property and equipment, net		2,174,993			1,159,766			2,132,987			2,259,740
Right of use assets, net		18,540,418			—			18,051,146			18,252,074
Deferred tax asset, net		264,609			529,218			—			264,609
Other assets		86,084			78,833			86,084			86,084

Total assets	$	280,523,030		$	357,206,498		$	481,242,717		$	251,186,476

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	6,230,923		$	13,961,060		$	10,994,082		$	7,425,024
Accrued and other current liabilities		17,323,632			20,044,866			10,667,765			16,138,909
Lease liabilities, short-term		2,286,885			—			3,211,234			3,187,435
Accrued employee benefits		7,531,659			2,293,259			6,203,283			9,472,651

Total current liabilities		33,373,099			36,299,185			31,076,364			36,224,019
Deferred rent		—			3,192,432
Lease liabilities		20,269,646			—			19,718,023			19,955,186

Total liabilities		53,642,745			39,491,617			50,794,387			56,179,205
Stockholders’ equity:
Common stock, $0.0001 par value: 100,000,000 shares authorized; 55,247,579 and 54,895,295 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		5,525			5,490
Common stock, $0.0001 par value: 100,000,000 shares authorized; 66,200,761 and 55,507,497 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively								6,620			5,551
Additional paid-in capital		896,191,230			880,753,339			1,188,095,880			904,971,772
Accumulated deficit		(669,515,518	)		(562,376,191	)		(757,508,971	)		(710,098,369	)
Accumulated comprehensive gain/(loss)		199,048			(667,757	)
Accumulated comprehensive (loss) gain								(145,199	)		128,317

Total stockholders’ equity		226,880,285			317,714,881			430,448,330			195,007,271

Total liabilities and stockholders’ equity	$	280,523,030		$	357,206,498		$	481,242,717		$	251,186,476


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
Revenues	$	—		$	—		$	—		$	—
Costs and expenses:
Product sales, net													$	882,516		$	—
Grant revenue														200,963			—

Total revenues														1,083,479			—
Operating expenses:
Cost of product sales														69,311			—
Research and development		21,339,792			35,419,016			70,059,113			98,561,284			16,003,326			24,990,856
General and administrative		15,036,444			7,972,329			42,184,078			21,082,544
Selling, general and administrative														34,096,366			11,704,984

Total costs and expenses		36,376,236			43,391,345			112,243,191			119,643,828
Total operating expenses														50,169,003			36,695,840

Loss from operations		(36,376,236	)		(43,391,345	)		(112,243,191	)		(119,643,828	)		(49,085,524	)		(36,695,840	)
Interest income		1,513,837			1,868,431			5,105,464			5,266,053			1,678,203			1,860,077

Loss before provision for income taxes		(34,862,399	)		(41,522,914	)		(107,137,727	)		(114,377,775	)		(47,407,321	)		(34,835,763	)
Income tax expense		—			—			1,600			1,600			3,281			—

Net loss	$	(34,862,399	)	$	(41,522,914	)	$	(107,139,327	)	$	(114,379,375	)	$	(47,410,602	)	$	(34,835,763	)

Net loss per common share:
Basic & Diluted	$	(0.63	)	$	(0.76	)	$	(1.94	)	$	(2.09	)	$	(0.73	)	$	(0.63	)
Weighted average number of common shares:
Basic & Diluted		55,207,400			54,708,065			55,155,854			54,693,827			65,106,103			55,113,226


PART I: FINANCIAL INFORMATION		1

Item 1.	FINANCIAL STATEMENTS	1

	Condensed Consolidated Balance Sheets as of ~~September 30, 2019~~March 31, 2020 (unaudited) and December 31, ~~2018~~2019	1

	Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	2

	Condensed Consolidated Statements of Comprehensive Loss for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	3

	Condensed Consolidated Statements of Stockholders’ Equity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17 21

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25 31

Item 4.	CONTROLS AND PROCEDURES	25 31

PART II: OTHER INFORMATION		26 31

Item 1.	LEGAL PROCEEDINGS	26 31

Item 1A.	RISK FACTORS	26 31

Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	26 32

Item 3.	DEFAULTS UPON SENIOR SECURITIES	26 32

Item 4.	MINE SAFETY DISCLOSURES	26 32

Item 5.	OTHER INFORMATION	26 32

Item 6.	EXHIBITS	27 33

SIGNATURES		28 34


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

Balance at March 31, 2019		55,131,125	$	5,513	$	885,888,318	$	(597,211,954	)	$	(67,450	)	$	288,614,427


	March 31,
	2020		2019
Cash and cash equivalents	$	179,593,032	$	64,091,080
Restricted cash		1,400,000		—

Total cash, cash equivalents and restricted cash	$	180,993,032	$	64,091,080


Three months ending December 31, 2019	$	(56,130	)
Year end ing December 31, 2020		3,346,376
Year end ing December 31, 2021		3,448,323
Year end ing December 31, 2022		3,491,166
Year end ing December 31, 2023		3,566,466
Thereafter		21,302,235

Total		35,098,436
Less: Present value discount		(12,541,905	)

Total Lease liability	$	22,556,531

Less: current portion		(2,286,885	)

Long-term lease liabilities	$	20,269,646


	Number of Shares			Weighted-Average Grant Date Fair Value Per Share
Outstanding at December 31, 2018		647,411		$	18.16
Time based RSUs granted in 2019		950,449		$	12.79
Time based RSUs vested in 2019		(253,695	)	$	21.80
Time based RSUs cancelled in 2019		(48,934	)	$	14.31

Outstanding at September 30, 2019		1,295,231		$	13.65

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company