SCYNEXIS, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unless noted otherwise, financial amounts below are in millions of dollars. SCYNEXIS is developing anti-infective medicines, led by SCY-078 for invasive fungal infections, and also provides contract research and development services, which generated substantially all current revenue. The company had no products approved for sale.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $4.642 | $4.226 | $9.347 | $9.021 |
| Gross profit (margin) | $0.462 (10.0%) | $(0.171) (-4.0%) | $1.207 (12.9%) | $0.476 (5.3%) |
| Research and development | $1.823 | $0.999 | $3.143 | $2.153 |
| Selling, general and administrative | $2.255 | $0.918 | $3.461 | $2.009 |
| Operating loss | $(3.451) | $(1.616) | $(5.232) | $(2.700) |
| Net income (loss) | $2.233 | $(2.703) | $2.645 | $(4.772) |
- Revenue rose 9.8% in Q2 and 3.6% for the first half. The first-half increase reflected higher animal-health services revenue, partly offset by lower discovery and drug-metabolism services revenue.
- Reported net income does not indicate profitable operations: it was driven by noncash derivative fair-value gains of $7.3 million in Q2 and $10.1 million for the first half. The company continued to report operating losses. Basic EPS was $0.38 for Q2 and $0.26 for the first half; diluted EPS was $(0.98) and $(3.08), respectively, reflecting the filing’s diluted-share calculation and adjustment for derivative gains.
- Cash and cash equivalents were $38.425 million at June 30, versus $1.402 million at year-end 2013. First-half operating cash use was $4.068 million, compared with $2.833 million in 2013; investing cash use was $0.107 million. Financing provided $41.198 million, principally from the IPO.
- Total assets were $45.959 million, current liabilities $3.781 million, and total liabilities $6.536 million. The $15 million credit facility was repaid with IPO proceeds; the company reported no debt at quarter-end.
Material changes and unusual items
- SCYNEXIS completed its May 7 IPO, selling 6.2 million shares at $10 per share for $62 million gross proceeds and approximately $54.6 million net proceeds. Preferred stock converted to common stock, and substantially all outstanding common-stock warrants were exercised.
- The company recorded a $1.389 million loss on debt extinguishment when it repaid the credit facility, writing off remaining deferred financing costs. The first-half results also included a $0.165 million insurance-recovery gain and no 2013-comparable software-sale gain (which was $0.986 million in the first half of 2013).
- Operating expenses increased as SCYNEXIS expanded SCY-078 development and incurred public-company, professional-services, compensation and severance costs. June workforce reductions generated $0.379 million of severance expense.
- Related-party revenue was $1.822 million in Q2 and $3.644 million for the first half, representing 39% of revenue in both periods. The company also recognized a $0.5 million related-party advisory fee in SG&A.
Outlook, risks and commitments
- Management estimated that existing cash would fund operating expenses and capital expenditures through March 31, 2016, based on its current plan and assumptions. It expects continued losses and increased R&D and SG&A spending, and anticipates needing substantial additional funding to complete development and pursue commercialization.
- Management expected first patient enrollment in an oral SCY-078 Phase 2 trial in the second half of 2014; the protocol was finalized in July. An IV formulation Phase 1 study was anticipated in 2015. The company cautioned that trial timing, cost, regulatory outcomes and financing needs are uncertain.
- A June 2014 CRO agreement for the SCY-078 Phase 2 trial projected fees and expenses of approximately $6.2 million; either party may terminate on 30 days’ notice. Merck may receive up to $19 million in SCY-078 milestones plus mid- to high-single-digit royalties; other licensing agreements also carry potential milestone obligations.
- Merial-related work was a significant revenue source, and the Merial services contract was due to expire December 31, 2014. Failure to extend or replace it could materially impair service revenue. Cash held at financial institutions exceeded federally insured limits.
- The filing describes substantial clinical, regulatory, product-safety, competition, intellectual-property, third-party collaboration and future-financing risks. The company disclosed previously identified material weaknesses in internal control over financial reporting and ongoing remediation, while management concluded disclosure controls were effective at a reasonable-assurance level as of June 30.
- No formal financial guidance was provided. The filing states that results may fluctuate and that current cash-runway estimates could prove wrong.
Important facts for investors to verify
- Whether SCY-078 Phase 2 enrollment began on the expected schedule, and whether the CRO trial scope, timing and approximately $6.2 million cost changed.
- Whether SCYNEXIS renewed or replaced the Merial contract after its December 2014 expiration and how that affected revenue concentration.
- Whether actual cash use and development spending remained consistent with management’s estimated runway through March 31, 2016, and what additional financing became necessary.
- Whether stockholders approved the proposed equity-plan and option amendments described in the filing, and the resulting dilution and compensation expense.
- Progress in remediating the disclosed material weaknesses and any subsequent changes in controls or reporting reliability.