SCYNEXIS, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in thousands unless otherwise noted.
Business context
SCYNEXIS is a pharmaceutical company developing anti-infectives and providing contract research and development services. Its lead candidate, SCY-078, is in development for invasive fungal infections. The company reported no product sales and relied primarily on contract services for revenue.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $4.380 million | $4.163 million | $13.727 million | $13.184 million |
| Gross profit | $0.720 million | $0.177 million | $1.927 million | $0.653 million |
| Gross margin | 16.4% | 4.3% | 14.0% | 5.0% |
| Research and development | $2.478 million | $1.050 million | $5.621 million | $3.203 million |
| Selling, general and administrative | $2.046 million | $1.141 million | $5.507 million | $3.150 million |
| Operating loss | $(3.804) million | $(2.012) million | $(9.036) million | $(4.712) million |
| Net loss | $(3.804) million | $(3.960) million | $(1.159) million | $(8.732) million |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $(7.751) million | $(2.979) million |
- At September 30, 2014, cash and cash equivalents were $34.036 million, versus $1.402 million at December 31, 2013. Current assets were $36.798 million and current liabilities $3.197 million.
- The company had no outstanding debt at quarter-end. It repaid $15.0 million of credit-facility principal, plus accrued interest, with IPO proceeds in May.
- Nine-month financing cash flow was $40.801 million, including $62.0 million gross IPO proceeds, offset by debt repayment and offering-related payments. Net IPO proceeds were approximately $54.6 million.
- Q3 basic and diluted loss per share were both $0.45. Nine-month basic loss per share was $0.59 and diluted loss per share was $2.59; share counts changed substantially following the IPO and preferred-stock conversion.
Material changes versus comparable periods
- Nine-month revenue increased 4.1%; Q3 revenue increased 5.2%. Higher animal-health services revenue, including work for Elanco, was partly offset by lower discovery and drug metabolism services.
- Gross margin improved in both periods, reflecting lower cost of revenue, including cost savings and the reclassification of personnel costs to SCY-078 research and development.
- R&D expense rose 75.5% for the nine months, principally from SCY-078 clinical and preclinical development and additional personnel. Management said it expects R&D spending to increase as development proceeds.
- Nine-month net loss improved substantially, but chiefly because of a noncash $10.080 million derivative fair-value gain. The company still recorded a $9.036 million operating loss. The 2014 period also included a $1.389 million debt-extinguishment loss.
- Operating cash use increased to $7.751 million from $2.979 million, reflecting higher SCY-078 development and public-company costs and the prior-year receipt of an R-Pharm upfront payment.
Outlook, developments and risks
- Management estimated that existing cash would fund operating expenses and capital needs into the first quarter of 2016, based on assumptions that could prove wrong. It expects losses for several years and anticipates needing substantial additional capital.
- SCY-078 Phase 2 screening had begun; management expected the first patient enrollment before the end of 2014. It anticipated starting Phase 1 studies of an IV formulation in 2015. A clinical research organization agreement projected approximately $6.2 million in fees and expenses.
- After quarter-end, SCYNEXIS licensed SCY-635 to Waterstone. The agreement provided for a $1.0 million upfront payment expected in November 2014, a possible additional $0.5 million option payment, a $4.0 million development milestone upon first product registration, and potential mid-single-digit royalties. These future and contingent amounts are not assured.
- Revenue concentration is a material risk: related-party revenue from a Sanofi subsidiary represented 42% of Q3 revenue and 40% of nine-month revenue. The Merial services agreement, identified as a significant revenue source, was scheduled to expire December 31, 2014.
- Other key risks include clinical-trial, regulatory and product-safety uncertainty; dependence on CROs and other third parties; potential need for further financing; competition and reimbursement uncertainty; and the possibility of SCY-078 failing to achieve approval or commercial acceptance.
- The filing reports that disclosure controls were effective at a reasonable-assurance level, while also noting previously identified material weaknesses in internal control over financial reporting and ongoing remediation. Additional control activities were being implemented during Q3.
Important facts for investors to verify
- Whether SCY-078 Phase 2 enrollment and development milestones occurred as expected, and the status, cost and timing of the IV formulation program.
- Actual cash burn and remaining runway compared with management’s estimate through Q1 2016, including the need and terms for additional financing.
- Whether the Merial agreement was extended or replaced, and the resulting effect on service revenue and customer concentration.
- Whether Waterstone made the stated upfront payment, exercised its option, and progressed development; distinguish received cash from contingent milestones and royalties.
- The nature and remediation status of the previously identified internal-control material weaknesses.
- The source and sustainability of reported earnings improvement: nine-month net loss included a large noncash derivative gain, while operating loss and operating cash use increased.