SCYNEXIS, Inc.
SCYNEXIS INC (Form: 10-Q, Received: 11/13/2014 10:27:14)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  
 
  FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
Commission File Number 001-36365
 
SCYNEXIS, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
56-2181648
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
3501 C Tricenter Boulevard
Durham, North Carolina
 
27713
(Address of principal executive offices)
 
(Zip Code)
(919) 544-8600
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
  
Smaller reporting company
 
ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
As of November 3, 2014 , there were 8,512,103 shares of the registrant’s Common Stock outstanding.
 



Table of Contents


SCYNEXIS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014
TABLE OF CONTENTS
 
 
 
 
 
 
Page
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1A.
Item 2.
Item 5.
Item 6.
 
 
 



Table of Contents


PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
SCYNEXIS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
 
September 30, 2014
 
December 31, 2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
34,036

 
$
1,402

Accounts receivable, net of allowance for bad debts of $0 and $163 as of September 30, 2014, and December 31, 2013, respectively
999

 
719

Unbilled services
390

 
343

Prepaid expenses and other current assets
1,373

 
489

Total current assets
36,798

 
2,953

Property and equipment, net of accumulated depreciation
5,060

 
5,401

Deferred financing costs

 
2,144

Other assets
106

 
114

Deferred offering costs

 
1,775

Total assets
$
41,964

 
$
12,387

Liabilities, convertible preferred stock, and stockholders’ equity (deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
640

 
$
1,932

Accrued expenses
2,021

 
1,058

Deferred revenue, current portion
536

 
487

Current portion of long-term debt

 
15,000

Total current liabilities
3,197

 
18,477

Deferred revenue, net of current portion
1,241

 
1,144

Derivative liability

 
12,237

Deferred rent
1,384

 
1,481

Total liabilities
5,822

 
33,339

Commitments and contingencies (Note 5)

 

Series A convertible preferred stock, $0.001 par value, authorized 0 and 31,410 shares as of September 30, 2014, and December 31, 2013; 0 and 31,407 shares issued and outstanding as of September 30, 2014, and December 31, 2013

 
250

Series B convertible preferred stock, $0.001 par value, authorized 0 and 711,987 shares as of September 30, 2014, and December 31, 2013; 0 and 467,814 shares issued and outstanding as of September 30, 2014, and December 31, 2013

 
4,215

Series C convertible preferred stock, $0.001 par value, authorized 0 and 2,967,678 shares as of September 30, 2014, and December 31, 2013; 0 and 2,770,633 shares issued and outstanding as of September 30, 2014, and December 31, 2013

 
28,121

Series C-2 convertible preferred stock, $0.001 par value, authorized 0 and 2,347,826 shares as of September 30, 2014, and December 31, 2013; 0 and 2,347,826 shares issued and outstanding as of September 30, 2014, and December 31, 2013

 
13,500

Series D-1 convertible preferred stock, $0.001 par value, authorized 0 and 10,000,000 shares as of September 30, 2014, and December 31, 2013; 0 and 6,054,255 shares issued and outstanding as of September 30, 2014, and December 31, 2013

 
16,952

Series D-2 convertible preferred stock, $0.001 par value, authorized 0 and 10,000,000 shares as of September 30, 2014, and December 31, 2013; 0 and 5,742,697 shares issued and outstanding as of September 30, 2014, and December 31, 2013

 
24,119

Stockholders’ deficit:
 
 
 
Common stock, $0.001 par value, authorized 125,000,000 and 70,000,000 shares as of September 30, 2014, and December 31, 2013; 8,512,103 and 334,068 shares issued and outstanding as of September 30, 2014, and December 31, 2013
8

 

Additional paid-in capital
150,570

 
5,168

Accumulated deficit
(114,436
)
 
(113,277
)
Total stockholders’ equity (deficit)
36,142

 
(108,109
)
Total liabilities, convertible preferred stock, and stockholders’ equity (deficit)
$
41,964

 
$
12,387

The accompanying notes are an integral part of the financial statements.

1





SCYNEXIS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue — related party
$
1,822

 
$
1,822

 
$
5,466

 
$
5,466

Revenue
2,558

 
2,341

 
8,261

 
7,718

Total revenue
4,380

 
4,163

 
13,727

 
13,184

Cost of revenue
3,660

 
3,986

 
11,800

 
12,531

Gross profit
720

 
177

 
1,927

 
653

Operating expenses:
 
 
 
 
 
 
 
Research and development
2,478

 
1,050

 
5,621

 
3,203

Selling, general and administrative
2,046

 
1,141

 
5,507

 
3,150

Gain on insurance recovery

 

 
(165
)
 

Gain on sale of asset

 
(2
)
 

 
(988
)
Total operating expenses
4,524

 
2,189

 
10,963

 
5,365

Loss from operations
(3,804
)
 
(2,012
)
 
(9,036
)
 
(4,712
)
Other (income) expense:
 
 
 
 
 
 
 
Amortization of deferred financing costs and debt discount

 
982

 
755

 
2,504

Loss on extinguishment of debt

 

 
1,389

 

Interest expense — related party

 
249

 

 
703

Interest expense

 
46

 
49

 
142

Derivative fair value adjustment

 
671

 
(10,080
)
 
671

Other expense

 

 
10

 

Total other (income) expense:

 
1,948

 
(7,877
)
 
4,020

Net loss
$
(3,804
)
 
$
(3,960
)
 
$
(1,159
)
 
$
(8,732
)
Deemed dividend for beneficial conversion feature on Series D-2 preferred stock

 

 
(909
)
 

Deemed dividend for antidilution adjustments to convertible preferred stock

 

 
(214
)
 

Accretion of convertible preferred stock

 

 
(510
)
 

Net loss attributable to common stockholders
$
(3,804
)
 
$
(3,960
)
 
$
(2,792
)
 
$
(8,732
)
Net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
(0.45
)
 
$
(11.79
)
 
$
(0.59
)
 
$
(25.99
)
Diluted
$
(0.45
)
 
$
(11.79
)
 
$
(2.59
)
 
$
(25.99
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
8,504,785

 
335,938

 
4,703,278

 
335,930

Diluted
8,504,785

 
335,938

 
4,976,965

 
335,930

The accompanying notes are an integral part of the financial statements.


2




SCYNEXIS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Nine months ended 
 September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net loss
$
(1,159
)
 
$
(8,732
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Gain on insurance recovery
(165
)
 

Gain on sale of asset, net of transaction expenses

 
(988
)
Loss on extinguishment of debt
1,389

 

Recovery of bad debt
(75
)
 
(10
)
Depreciation
918

 
1,012

Stock-based compensation expense
837

 
109

Amortization of deferred financing costs and debt discount
755

 
2,504

Change in fair value of derivative liability
(10,080
)
 
671

Changes in deferred rent
(97
)
 
(38
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable and unbilled services
(252
)
 
337

Prepaid expenses, other assets, and deferred costs
(876
)
 
(307
)
Accounts payable and accrued expenses
907

 
180

Interest payable — related party

 
703

Deferred revenue
147

 
1,580

Net cash used in operating activities
(7,751
)
 
(2,979
)
Cash flows from investing activities:
 
 
 
Proceeds from insurance recovery
216

 

Proceeds from sale of asset, net of transaction expenses

 
988

Purchases of property and equipment
(632
)
 
(370
)
Net cash (used in) provided by investing activities
(416
)
 
618

Cash flows from financing activities:
 
 
 
Proceeds from initial public offering
62,000

 

Proceeds from issuance of convertible notes

 
899

Proceeds from sale of preferred stock
544

 

Repayment of debt
(15,000
)
 

Payments of deferred offering costs and underwriting discounts and commissions
(6,875
)
 

Proceeds from employee stock purchase plan issuance
68

 

Proceeds from exercise of stock warrants
55

 

Proceeds from exercise of stock options
9

 
3

Net cash provided by financing activities
40,801

 
902

Net increase (decrease) in cash and cash equivalents
32,634

 
(1,459
)
Cash and cash equivalents, beginning of period
1,402

 
2,385

Cash and cash equivalents, end of period
$
34,036

 
$
926

Supplemental cash flow information:
 
 
 
Cash paid for interest
$
49

 
$
148

Noncash financing and investing activities:
 
 
 
Beneficial conversion feature on sale of Series D-2 preferred stock
$
909

 
$

Beneficial conversion feature for antidilution adjustment
$
214

 
$

Adjustment of preferred stock to redemption value
$
510

 
$

Deemed contribution of a loan guarantee
$

 
$
3,930

Equipment purchase in accounts payable and accrued expenses
$
11

 
$

Impairment of fixed asset
$
51

 
$

Deferred offering costs reclassified to additional paid-in capital
$
4,127

 
$

Warrant derivative liability reclassified to additional paid-in capital
$
2,701

 
$

Conversion of convertible preferred stock to common stock
$
88,788

 
$

The accompanying notes are an integral part of the financial statements.

3




SCYNEXIS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(unaudited)
(in thousands, except percentage, share and per share data)
 
1.
Description of Business and Basis of Preparation
Organization
SCYNEXIS, Inc. (“SCYNEXIS” or the “Company”) is a Delaware corporation formed on November 4, 1999 . SCYNEXIS is a pharmaceutical company, headquartered in Durham, North Carolina, committed to the discovery, development and commercialization of novel anti-infectives to address significant unmet therapeutic needs. The Company also offers its services in drug discovery and development, primarily in the form of integrated research teams consisting of medicinal, computational, analytical, and process scientists working on a collaborative basis with its customers on research projects.
Unaudited Interim Financial Information
The accompanying unaudited financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States, or US GAAP, as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) for interim financial information. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, and cash flows. The results of operations for the three and nine months ended September 30, 2014 , are not necessarily indicative of the results for the full year or the results for any future periods. These financial statements should be read in conjunction with the financial statements and notes set forth in the Company’s registration statement on Form S-1 under the Securities Act of 1933, as amended, filed with and declared effective by the Securities and Exchange Commission (“SEC") on May 2, 2014.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include: the accounts receivable allowance; the valuation of the related-party deemed contribution; the fair value of the Company’s common stock used to measure stock-based compensation for options granted to employees and nonemployees and to determine the fair value of common stock warrants; the fair value of convertible preferred stock; the fair value of the Company’s derivative liability; and the estimated useful lives of property and equipment.
Reverse Stock-split
On March 17, 2014, the Company amended its amended and restated certificate of incorporation to implement a 1-for-4 reverse stock split of its common stock. The reverse stock split did not cause an adjustment to the par value or the authorized shares of the common stock. As a result of the reverse stock split, the Company adjusted the share amounts under its employee incentive plans, outstanding options and common stock warrant agreements with third parties.
On April 25, 2014, the Company amended its amended and restated certificate of incorporation to implement an additional 1-for-5.1 reverse stock split of its common stock. The reverse stock split did not cause an adjustment to the par value or the authorized shares of the common stock. As a result of the reverse stock split, the Company further adjusted the share amounts under its employee incentive plans, outstanding options and common stock warrant agreements with third parties.
All disclosures of common shares and per common share data in the accompanying interim financial statements and related notes reflect these two reverse stock splits for all periods presented.
Initial Public Offering
On May 7, 2014, the Company completed an initial public offering (“IPO”) of its common stock. The Company sold an aggregate of 6,200,000 shares of common stock under the registration statement on Form S-1 declared effective by the SEC on May 2, 2014, at a public offering price of $10.00 per share. Net proceeds were $54,583 , after deducting underwriting discounts and commissions of $3,290 and offering expenses of $4,127 . Upon the completion of the IPO, all outstanding shares of the Company’s convertible preferred stock were automatically converted into 1,691,884 shares of common stock and certain

4



outstanding warrants were exercised for an additional 275,687 shares of common stock. In connection with the consummation of the IPO, the Company repaid outstanding debt with a principal balance of $15,000 , plus all accrued interest, to the holder of such debt, which was outstanding pursuant to a credit agreement referred to herein as the 2013 Credit Agreement. The significant increase in the shares outstanding beginning in May 2014 has impacted the comparability of the Company's net loss per share calculations between 2013 and 2014 periods.
 
2.
Summary of Significant Accounting Policies
Deferred Financing Costs
Deferred financing costs were transaction costs associated with issuing debt as well as costs related to a deemed contribution for a guarantee from a related party. The Company recognized these costs in the balance sheet as noncurrent assets. Deferred financing costs were amortized over the life of the related debt.
Deferred Offering Costs
Deferred offering costs were expenses directly related to the IPO. These costs consisted of legal, accounting, printing, and filing fees that the Company capitalized, including fees incurred by the independent registered public accounting firm directly related to the offering. The deferred offering costs were offset against the IPO proceeds in May 2014 and were reclassified to additional paid-in capital upon completion of the IPO.
Revenue Recognition and Deferred Revenue
The Company derives the majority of its revenue from providing contract research and development services under fee for service arrangements. The Company also has entered into collaboration arrangements in exchange for non-refundable upfront payments and consideration as services are performed. These arrangements include multiple elements, such as the sale of licenses and the provision of services. Under these arrangements, the Company also is entitled to receive development milestone payments and royalties in the form of a designated percentage of product sales.
Revenue is recognized when all of the following conditions are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) fees are fixed or determinable, and (iv) collection of fees is reasonably assured.
When entering into an arrangement, the Company first determines whether the arrangement includes multiple deliverables and is subject to accounting guidance in ASC subtopic 605-25, Multiple-Element Arrangements . If the Company determines that an arrangement includes multiple elements, it determines whether the arrangement should be divided into separate units of accounting and how the arrangement consideration should be measured and allocated among the separate units of accounting.
An element qualifies as a separate unit of accounting when the delivered element has standalone value to the customer. The Company’s arrangements do not include a general right of return relative to delivered elements. Any delivered elements that do not qualify as separate units of accounting are combined with other undelivered elements within the arrangement as a single unit of accounting. If the arrangement constitutes a single combined unit of accounting, the Company determines the revenue recognition method for the combined unit of accounting and recognizes the revenue over the period from inception through the date the last deliverable within the single unit of accounting is delivered.
The Company’s contract research and development services revenue is recognized in the period in which the services are performed. The Company historically has recognized milestone payments received on a straight-line basis over the remaining service period. No milestone payments were received in the periods presented in the accompanying statements of operations. In arrangements that include license rights and other non-contingent deliverables, such as participation in a steering committee, these deliverables do not have standalone value because the non-contingent deliverables are dependent on the license rights. That is, the non-contingent deliverables would not have value without the license rights, and only the Company can perform the related services. Upfront license rights and non-contingent deliverables, such as participation in a steering committee, do not have standalone value as they are not sold separately and they cannot be resold. In addition, when non-contingent deliverables are sold with upfront license rights, the license rights do not represent the culmination of a separate earnings process. As such, the Company accounts for the license and the non-contingent deliverables as a single combined unit of accounting. Therefore, license revenue in the form of non-refundable upfront payments is deferred and recognized over the applicable relationship period, which historically has been the estimated period of the Company’s substantive performance obligations or the period the rights granted are in effect. The Company recognizes contingent event-based payments under license agreements when the payments are received. The Company recognized an immaterial amount of license revenue from

5



the receipt of upfront payments in the accompanying statement of operations. The Company has not received any royalty payments to date.
The Company will recognize a milestone payment when earned if it is substantive and the Company has no ongoing performance obligations related to the milestone. A milestone payment is considered substantive if it: 1) is commensurate with either the Company’s performance to achieve the milestone or the enhanced value of the delivered item as a result of a specific outcome from the Company’s performance to achieve the milestone; 2) relates solely to past performance; and 3) is reasonable relative to all of the deliverables and payment terms, including other potential milestone consideration, within the arrangement.
Amounts received prior to satisfying all revenue recognition criteria are recorded as deferred revenue in the accompanying balance sheets.
The Company’s deferred revenue comprises upfront payments received and is recognized over the estimated relationship period. The Company received upfront payments of $313 , $1,500 and $500 in August 2012, August 2013 and January 2014, respectively, which are recognized over periods of six months, 70 months and 48 months, respectively. The Company recognized revenue from these upfront payments of $93 and $282 for the three and nine months ended September 30, 2014 , respectively, and $29 and $91 for the three and nine months ended September 30, 2013 , respectively.
Research and Development
Major components of research and development costs include clinical trial activities and services, including related drug formulation, manufacturing, and other development, preclinical studies, cash compensation, stock-based compensation, fees paid to consultants and other entities that conduct certain research and development activities on the Company’s behalf, materials and supplies, legal services, and regulatory compliance.
Amortization of Deferred Financing Costs and Debt Discount
Amortization of deferred financing costs and debt discount includes the amortization of debt discount related to the warrants issued with the convertible notes (Note 4), the amortization of issuance costs related to the convertible notes, and amortization of the deferred financing costs related to a deemed contribution for a guarantee from a related party.
Effect of Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09,  Revenue from Contracts with Customers: Topic 606,  or ASU 2014-09. ASU 2014-09 establishes the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, which is effective for the Company for the year ending December 31, 2017. The Company is currently evaluating the impact that the implementation of ASU 2014-09 will have on the Company’s financial statements.

In August 2014, the FASB issued ASU No. 2014-15,  Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , or ASU 2014-15. ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. Earlier adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-15.

6




3.
Property and Equipment
Property and equipment consists of the following:
 
 
September 30,
2014
 
December 31,
2013
Equipment
$
9,936

 
$
9,577

Furniture and fixtures
378

 
378

Leasehold improvements
13,193

 
13,115

Total property and equipment
23,507

 
23,070

Less accumulated depreciation
18,447

 
17,669

Property and equipment, net
$
5,060

 
$
5,401


Depreciation expense was $303 and $918 for the three and nine months ended September 30, 2014 , respectively, and $321 and $1,012 for the three and nine months ended September 30, 2013 , respectively.
In the quarter ended June 30, 2014, the Company’s insurance carrier remitted proceeds for the replacement cost of a fixed asset that was damaged by severe weather. The asset’s net book value was reduced upon occurrence of the damage. The proceeds received from the insurance recovery exceeded the net book value of the asset by $165 , which was recognized as a gain during the quarter ended June 30, 2014. The replacement asset was delivered, installed and placed in service during the quarter ended September 30, 2014.
 
4.
Debt Obligations
Credit Facility Agreement
In April 2010, the Company entered into a $15,000 credit facility agreement with HSBC Bank (the “2010 Credit Agreement”). The agreement comprised a $5,000 term loan and a $10,000 revolving credit facility. Borrowings under the 2010 Credit Agreement carried interest at a rate of London InterBank Offered Rate plus 0.95%  per annum. The 2010 Credit Agreement required interest-only payments through March 2013 and was guaranteed by a related party that has an investment in the Company. All outstanding borrowings under the agreement were originally due on March 11, 2013. The 2010 Credit Agreement contained no financial covenants.
On March 8, 2013, the Company entered into an agreement to amend the 2010 Credit Agreement with HSBC Bank (the “2013 Credit Agreement”). The 2013 Credit Agreement required interest-only payments through December 2014 when all outstanding borrowings were due. Other significant terms of the 2010 Credit Agreement remained the same, which included the guarantee made by a related party that has an investment in the Company. The 2013 Credit Agreement represented a new loan, and the Company determined the value of the extended guarantee under the 2013 Credit Agreement to be $3,930 , which was amortized over the term of the 2013 Credit Agreement. As of December 31, 2013 , both the $5,000 term loan and the $10,000 revolving credit facility were outstanding under the 2013 Credit Agreement.
Pursuant to an addendum dated April 29, 2014, upon completion of the IPO on May 7, 2014, the entire outstanding balance of the 2013 Credit Agreement, amounting to $15,000 plus accrued interest, was paid in full using the proceeds from the IPO. The payment on May 7, 2014, released the related party guarantor from all obligations, under and in relation to the 2013 Credit Agreement. The Company recorded a loss on the extinguishment of debt of $1,389 in the three month period ended June 30, 2014 as the remaining deferred financing costs associated with the 2013 Credit Agreement were written off. The Company had no outstanding debt as of September 30, 2014 .
Amortization of deferred financing costs associated with the 2010 Credit Agreement and 2013 Credit Agreement was $0 and $755 for the three and nine months ended September 30, 2014 , respectively, and $552 and $1,795 for the three and nine months ended September 30, 2013 , respectively.
The weighted-average interest rate was 0.00% and 1.19% for the three and nine months ended September 30, 2014 , and 1.22% for both the three and nine months ended September 30, 2013 , respectively. Interest expense was $0 and $49 for the three and nine months ended September 30, 2014 , respectively, and $46 and $142 for the three and nine months ended September 30, 2013 , respectively.
Note and Warrant Purchase Agreements

7



In December 2011, the Company executed a Note and Warrant Purchase Agreement (the “December 2011 Note and Warrant Agreement”) to issue convertible notes in an aggregate amount not to exceed $15,000 . In 2011 and 2012, under the December 2011 Note and Warrant Agreement, the Company issued convertible notes (the “2011-2012 Notes”) with a total principal amount of $11,444 to related parties that held investments in the Company. The 2011-2012 Notes included warrants to purchase 26,000 shares of the Company’s common stock at $0.20 per share. The 2011-2012 Notes were convertible into shares of the Company’s stock under various methods as stipulated in the agreement.
In June 2013, the Company executed another Note and Warrant Purchase Agreement (the “June 2013 Note and Warrant Agreement”) with certain existing lenders. Under the June 2013 Note and Warrant Agreement, the lenders agreed to loan to the Company up to $1,500 in exchange for convertible notes (the “June 2013 Notes”). The Company issued June 2013 Notes for an aggregate amount of $899 . In addition, the Company agreed to issue warrants to purchase shares of the Company’s common stock upon the request of a majority of the noteholders. The June 2013 Notes were convertible into shares of the Company’s stock using methods described in the agreement. In addition, the June 2013 Notes included conversion of the entire outstanding principal and interest balance into equity securities upon the closing of any equity financing at the option of the noteholders.
The 2011-2012 Notes and June 2013 Notes carried interest at a rate of 8%  per annum and contained no financial covenants. The outstanding principal amount and unpaid accrued interest on the convertible notes issued under the December 2011 Note and Warrant Agreement and the June 2013 Note and Warrant Agreement were originally due on December 31, 2012 and December 31, 2013, respectively, contingent upon (i) the prior written consent of holders of at least 70% of the outstanding aggregated principal amount of the convertible notes issued under the same agreement, and (ii) the prior written consent of HSBC Bank for so long as any of the principal and interest related to the 2010 Credit Agreement or the 2013 Credit Agreement remained outstanding.
On the date of issuance, the fair value of warrants issued in the year ended December 31, 2012 under the December 2011 Note and Warrant Agreement was $328 . The fair value of these warrants was accounted for as debt discount and amortized to expense over the stated term of the 2011-2012 Notes. The fair value of the obligation to issue warrants in connection with the June 2013 Notes was $1,168 . The fair value of the obligation to issue warrants was $269 above the face value of the June 2013 Notes and this excess was expensed at issuance. The $899 remaining amount of the fair value of the obligation to issue warrants was accounted for as a debt discount and was amortized to expense over the term of the June 2013 Notes. The amount of the discount related to the 2011-2012 Notes’ warrants and the June 2013 Notes’ obligation to issue warrants that was amortized to expense was $0 for the three and nine months ended   September 30, 2014 , and $430 and $440 for the three and nine months ended September 30, 2013 .
On December 11, 2013, the noteholders elected to convert the June 2013 Notes into shares of Series D-2 convertible preferred stock. Also on December 11, 2013, the noteholders elected to convert the 2011-2012 Notes into shares of Series D-1 and Series D-2 convertible preferred stock. There was no outstanding principal or accrued interest associated with the 2011-2012 Notes and June 2013 Notes as of December 31, 2013 and as of September 30, 2014.
 
5.
Commitments and Contingencies
Leases
The Company leases its facilities and certain office equipment under long-term non-cancelable operating leases. The Company’s lease for its primary North Carolina facility expires in 2019 . The lease agreement includes a renewal option to extend the lease through March 31, 2024 .
Rent expense was approximately $235 and $702 for the three and nine months ended September 30, 2014 , respectively, and $237 and $687 for the three and nine months ended September 30, 2013 , respectively. Future minimum lease payments for all operating leases as of September 30, 2014 are as follows:

8



 
 
2014
$
264

2015
1,075

2016
1,104

2017
1,123

2018
1,156

Thereafter
291

Total
$
5,013

License Arrangement with Potential Future Expenditures
As of September 30, 2014 , the Company had a license arrangement with Merck Sharp & Dohme Corp., or Merck, that involves potential future expenditures. Under the license arrangement, the Company exclusively licensed from Merck its rights to SCY-078 in the field of human health. SCY-078 is the Company's lead product candidate. Pursuant to the terms of the license agreement, Merck is eligible to receive milestone payments from the Company that could total $19,000 upon occurrence of specific events, including initiation of phase 2 and 3 clinical studies, new drug application, and marketing approvals in each of the U.S., major European markets and Japan. In addition, Merck is eligible to receive tiered royalties from the Company based on a percentage of worldwide net sales of SCY-078. The aggregate royalties are mid- to high-single digits.
The Company has two additional licensing agreements for other compounds that could require it to make payments of up to $2,300 upon achievement of certain milestones by the Company.
Clinical Development Arrangement
In June 2014, the Company entered into an agreement with a third-party clinical research organization to conduct a Phase 2 clinical trial for SCY-078. The total fees and expenses under the agreement are currently projected to be approximately $6,200 during the term of the agreement. The Company had no such commitments as of December 31, 2013 . The scope of the services under the agreement can be modified at any time, and the agreement can be terminated by either party 30 days after receipt of written notice.
 
6.
Convertible Preferred Stock

The Company issued multiple series of convertible preferred stock between 2000 and January 2014. In March 2014, the Company amended its amended and restated certificate of incorporation to require the automatic conversion of all series of convertible preferred stock into common stock upon the completion of a public offering of common stock with gross proceeds of at least $20,000 . There were no other changes in significant terms of the convertible preferred stock during the nine  months ended September 30, 2014 . In May 2014, upon completion of the IPO, all outstanding shares of convertible preferred stock were converted into an aggregate of 1,691,884 shares of common stock at their conversion prices.
Warrants Associated with Preferred Stock Issuances
In July 2006, the Company issued warrants to purchase 196,923  shares of Series C-1 Convertible Preferred Stock ("Series C-1 Preferred") in conjunction with a loan financing agreement with an exercise price of $3.25 per share of Series C-1 Preferred. As of September 30, 2014 , these warrants are equivalent to warrants to purchase 14,033 shares of common stock at an exercise price of $45.61 per share of common stock. These warrants remain outstanding as of September 30, 2014 and will expire on July 14, 2016 . The fair value at the date of grant for these instruments was $459 , which was recorded as a debt discount. The debt discount related to these warrants was fully amortized as of December 31, 2010. The Company determined that the warrants should be recorded as a derivative liability and stated at fair value at each reporting period. The Company recorded other income associated with the fair value adjustment for these warrants of $0 and $37 for the three and nine months ended September 30, 2014 , respectively, and $99 for both the three and nine months ended September 30, 2013 , respectively.
On December 11, 2013, the Company entered into an agreement to sell 1,785,712 shares of Series D-2 Convertible Preferred Stock ("Series D-2 Preferred") at $1.40 per share for an aggregate price of $2,500 (the “Series D-2 Purchase Agreement”), less issuance costs of $95 . The Series D-2 Purchase Agreement included warrants to purchase 87,532 shares of the Company’s common stock at $0.20 per share. The fair value of the warrants on the date of issuance was $4,214 , which was recorded as a discount to the Series D-2 Preferred. The fair value of the warrants was $1,714 above the face amount of the Series D-2 Preferred and this excess was expensed to derivative fair value adjustment at issuance. As described in Note 7, the

9



warrants were classified as a derivative liability and were stated at fair value at each reporting period end date prior to being exercised in May 2014 (in conjunction with the Company’s IPO).
On January 31, 2014, the Company sold 388,641  shares of Series D-2 Preferred to related parties under the Series D-2 Purchase Agreement at $1.40 per share, for an aggregate price of $544 . The sale also included warrants to purchase 19,048  shares of the Company’s common stock at $0.20 per share. The fair value of the warrants on the date of issuance was $906 . The fair value of the warrants was $362 above the face amount of the Series D-2 Preferred and this excess was expensed to derivative fair value adjustment at issuance. As described in Note 7, the warrants were classified as a derivative liability and were stated at fair value at each reporting period end date prior to being exercised in May 2014 (in conjunction with the Company’s IPO).
Authorized, Issued, and Outstanding Convertible Preferred Shares Prior to IPO
The following table summarizes authorized, issued and outstanding preferred shares as of May 7, 2014, immediately prior to the automatic conversion to shares of common stock:
 
Authorized
 
Issued and
Outstanding
Series A Preferred
31,410

 
31,407

Series B Preferred
711,987

 
467,814

Series C Preferred
2,967,678

 
2,770,633

Series C-1 Preferred
3,076,923

 

Series C-2 Preferred
2,347,826

 
2,347,826

Series D-1 Preferred
10,000,000

 
6,054,255

Series D-2 Preferred
10,000,000

 
6,131,338

Total
29,135,824

 
17,803,273

Convertible Preferred Stock Activity
The following table summarizes convertible preferred stock activity for the nine months ended September 30, 2014 :
 
 
Shares of
 
Series A
Convertible
Preferred
Stock
 
Series B
Convertible
Preferred
Stock
 
Series C
Convertible
Preferred
Stock
 
Series C-1
Convertible
Preferred
Stock
 
Series C-2
Convertible
Preferred
Stock
 
Series D-1
Convertible
Preferred
Stock
 
Series D-2
Convertible
Preferred
Stock
Balance, December 31, 2013
31,407

 
467,814

 
2,770,633

 

 
2,347,826

 
6,054,255

 
5,742,697

Issuance of Series D-2 Preferred

 

 

 

 

 

 
388,641

Automatic conversion to common stock
(31,407
)
 
(467,814
)
 
(2,770,633
)
 

 
(2,347,826
)
 
(6,054,255
)
 
(6,131,338
)
Balance, September 30, 2014

 

 

 

 

 

 

 
7.
Common Stock
Authorized, Issued, and Outstanding Common Shares
The Company’s common stock has a par value of $0.001 per share and consists of 125,000,000 authorized shares and 70,000,000 authorized shares at September 30, 2014 , and December 31, 2013 , respectively; 8,512,103 and 334,068 shares were issued and outstanding at September 30, 2014 , and December 31, 2013 , respectively. The following table summarizes common stock share activity for the nine months ended September 30, 2014 :
 

10



 
Shares of
Common Stock
Balance, December 31, 2013
334,068

Exercise of stock options
416

Conversion of preferred stock
1,691,884

Exercise of common stock warrants
275,687

Common stock issued through IPO
6,200,000

Common stock issued through employee stock purchase plan
10,048

Balance, September 30, 2014
8,512,103

Shares Reserved for Future Issuance
The Company had reserved shares of common stock for future issuance as follows:
 
 
As of
 
As of
 
September 30,
2014
 
December 31,
2013
For conversion of Series A Preferred, Series B Preferred, Series C Preferred, Series C-2 Preferred, Series D-1 Preferred, and Series D-2 Preferred and exercise of warrants to purchase Series C-1 Preferred and subsequent conversion of the shares purchased

 
1,675,812

Outstanding stock options
625,627

 
137,610

Outstanding common stock warrants

 
257,242

Outstanding Series C-1 convertible preferred stock warrants
14,033

 
13,879

For possible future issuance under stock option plan
170,305

 
49,734

For possible future issuance under employee stock purchase plan
37,746

 

Total common shares reserved for future issuance
847,711

 
2,134,277

Common Stock Warrants
The Company had outstanding common stock warrants issued in connection with the Note and Warrant Purchase Agreements (Note 4) and in connection with certain convertible preferred stock agreements (Note 6).
The December 2011 Note and Warrant Purchase Agreement included warrants to purchase 26,000 shares of the Company’s common stock at $0.20 per share. The warrants could be exercised for shares of common stock, in accordance with their terms. The number of shares of common stock that could be purchased by exercising the warrants would vary based on the event that occurred and would be calculated in accordance with the December 2011 Note and Warrant Purchase Agreements (Note 4).
On December 11, 2013, holders of the June 2013 Notes exercised their rights under the June 2013 Note and Warrant Agreement to receive warrants to purchase shares of the Company’s common stock. As a result of this exercise, the Company issued warrants to purchase 88,987  shares of the Company’s common stock to the holders of the June 2013 Notes at an exercise price of $0.20 per share. These warrants were exercisable until June 28, 2018 , and would terminate unless exercised prior to an IPO.
On December 11, 2013, in connection with the Series D-2 Convertible Preferred Stock offering, the Company issued warrants to purchase 87,532 shares of the Company’s common stock at an exercise price of $0.20 per share. These warrants were exercisable until December 11, 2018 , and would terminate unless exercised prior to an IPO. In addition, as a result of the conversion of the principal and interest outstanding on the 2011-2012 Notes into Series D-1 Preferred and Series D-2 Preferred (Note 4), in accordance with the amended terms of the agreement, the number of common shares underlying the warrants issued in connection with the 2011-2012 Notes was increased by 54,120 to a total of 80,120 .
In connection with the consummation of the IPO in May 2014, substantially all outstanding common stock warrants were exercised at an exercise price of $0.20 per share and the holders received 275,687 shares of common stock.

11



All previously described warrants met the definition of a derivative financial instrument and were accounted for as derivatives. The combined fair value of the common stock warrant derivative liabilities, including warrants issued with the sale of Series D-2 Preferred, was $2,701 as of May 2, 2014, and this amount was settled to additional paid in capital on that date. The combined fair value of the common stock warrant derivative liabilities was $12,200 as of December 31, 2013 , which was recorded as a long-term derivative liability in the accompanying balance sheet. The fair value adjustment of the long-term derivative liability was recorded as other income in the amounts of $0 and $10,442 for the three and nine months ended September 30, 2014 , respectively, and as other loss of $770 for both the three and nine months ended September 30, 2013 , respectively. As discussed in Note 6, the fair value of the warrants issued in connection with the Company’s Series D-2 Preferred offering in January 2014 was $362 above the face amount of the Series D-2 Preferred. This excess was expensed in the nine months ended September 30, 2014 , and, as a result, the net fair value adjustment presented in the accompanying statements of operations for the nine months ended September 30, 2014 was $10,080 .
 
8.
Stock-based Compensation
2009 Stock Option Plan
The Company had a share-based compensation plan (the “2009 Stock Option Plan”) under which the Company granted options to purchase shares of common stock to employees, directors, and consultants as either incentive stock options or nonqualified stock options. Incentive stock options could be granted with exercise prices not less than 100% to 110% of the fair market value of the common stock. Options granted under the plan generally vest over three to four years and expire in 10 years from the date of grant.
2014 Equity Incentive Plan
In February 2014, the Company’s board of directors adopted the 2014 Equity Incentive Plan, or the 2014 Plan, which was subsequently ratified by its stockholders and became effective on May 2, 2014 (the “Effective Date”). The 2014 Plan is the successor to and continuation of the 2009 Stock Option Plan. As of the Effective Date, no additional awards will be granted under the 2009 Stock Option Plan, but all stock awards granted under the 2009 Stock Option Plan prior to the Effective Date will remain subject to the terms of the 2009 Stock Option Plan. All awards granted on and after the Effective Date will be subject to the terms of the 2014 Plan. The 2014 Plan provides for the grant of the following awards: (i) incentive stock options, (ii) nonstatutory stock options, (iii) stock appreciation rights, (iv) restricted stock awards, (v) restricted stock unit awards, and (vi) other stock awards. Employees, directors, and consultants are eligible to receive awards.
Under the 2014 Plan, the aggregate number of shares of common stock that could be issued from and after the Effective Date (the “share reserve”) could not exceed the sum of (i) 257,352 new shares, (ii) the shares that represented the 2009 Stock Option Plan’s available reserve on the Effective Date, and (iii) any returning shares from the 2009 Stock Option Plan. Under the 2014 Plan, the share reserve will automatically increase on January 1 st of each year, for a period of not more than 10 years, commencing on January 1, 2015 and ending on January 1, 2024, in an amount equal to 4.0% of the total number of shares of capital stock outstanding on December 31 st of the preceding calendar year. The Board of Directors may act prior to January 1 st of a given year to provide that there will be no increase in the share reserve or that the increase will be a lesser number of shares than would otherwise occur.
On June 18, 2014, the Company’s Board of Directors and Compensation Committee approved an amendment of the 2014 Plan, subject to stockholder approval, to increase the aggregate number of shares of the Company’s common stock that may be issued under the 2014 Plan by an additional 351,653 shares. All other material terms of the 2014 Plan remained unchanged. The Company’s stockholders approved the 2014 Plan amendment on September 11, 2014.
As of September 30, 2014 , there were 170,305 shares of common stock available for future issuance under the 2014 Plan.
Option Grants
On June 18, 2014, the Company’s Board of Directors approved the grant of options to purchase 396,573 shares of common stock at a per share exercise price of $9.64 to certain of the Company’s executive officers and employees. No compensation cost associated with these option grants was recognized during the three month period ended June 30, 2014 because the grants were subject to and contingent upon stockholder approval of the previously described June 18, 2014 amendment to the 2014 Plan. The Company did not believe stockholder approval was perfunctory. The Company’s stockholders approved the 2014 Plan amendment on September 11, 2014, which was considered to be the measurement date for the determination of stock compensation expense. The fair value of each option grant award was estimated using the Black-

12



Scholes option-pricing model, consistent with and in accordance with the Company’s existing accounting policy for stock compensation. Using the Black-Scholes option-pricing model, the fair value of all September 11, 2014 option grants was $3.76 per option. The aggregate fair value of options granted on September 11, 2014 was determined to be $1,490 , which is being recognized as expense, after adjusting for estimated pre-vesting forfeitures, over a 48 month vesting period.
Option Amendments
During the nine months ended September 30, 2014 , the Company's Board of Directors approved the following with respect to the 2009 Stock Option Plan:
 
On April 29, 2014, the exercise price per share of certain options to purchase 53,404 shares of common stock under the 2009 Stock Option Plan was lowered to an amount equal to $10.00 per share. The original exercise prices of such options ranged from $20.40 to $61.20 per share, with a weighted average exercise price of $54.87 per share.
On June 18, 2014, the exercise price per share of all outstanding options to purchase shares of common stock under the 2009 Stock Option Plan was lowered to an amount equal to $9.64 per share, the closing stock price on June 18, 2014. This modification lowered the exercise price of outstanding options to purchase 110,346 shares of common stock, including those options to purchase common stock that were previously modified on April 29, 2014. These outstanding stock options had exercise prices that ranged from $20.40 to $61.20 per share, with a weighted average exercise price of $41.87 per share.
Also on June 18, 2014, the contractual term of all outstanding options to purchase shares of common stock under the 2009 Stock Option Plan was extended to June 17, 2024.
The Company determined the additional compensation cost associated with the previously described modifications pursuant to applicable guidance in FASB ASC Topic 718, Compensation—Stock Compensation . The additional compensation cost was determined by calculating the difference between (a) the estimated fair value of each option award immediately prior to the modifications and (b) the estimated fair value of each option award immediately after the modifications. The fair value of each option award immediately prior to and immediately after modification was estimated using the Black-Scholes option-pricing model, consistent with and in accordance with the Company’s existing accounting policy for stock compensation. Using the Black-Scholes option-pricing model, the weighted-average fair value of outstanding 2009 Stock Option Plan option awards was $3.08 per option immediately prior to modification on June 18, 2014 and was $5.87 per option immediately after modification. The additional compensation cost was determined to be $293 , of which $130 was associated with services previously performed and, therefore, was expensed in the quarter ended June 30, 2014. The remaining additional compensation cost is being recognized as remaining services are performed.
Also on June 18, 2014, the Board of Directors approved modifications to the exercise price and contractual term of all outstanding option awards under the Company’s Stock Option Plan previously adopted by the Company in 1999 (the “1999 Stock Option Plan”). The modifications to the exercise price and contractual term are consistent with those previously described for outstanding options under the 2009 Stock Option Plan. In addition, the 1999 Stock Option Plan option awards were modified to provide that the holder may exercise vested shares under the option for the contractual term of the option even in the event the holder terminates services with the Company other than for cause. The modifications lowered the exercise price of outstanding options to purchase 73,087 shares of common stock, which had exercise prices that ranged from $20.40 to $25.50 per share, with a weighted average exercise price of $21.50 per share.
Pursuant to the terms of the 1999 Stock Option Plan, any amendments that modify the terms of the options awards require approval or consent of the Company’s shareholders. No additional compensation cost associated with the options under the 1999 Stock Option Plan was recognized during the quarter ended June 30, 2014 because the amendments were subject to and contingent upon stockholder approval. The Company did not believe stockholder approval was perfunctory. The Company’s stockholders approved the 1999 Stock Option Plan modifications on September 11, 2014, which was considered to be the measurement date for the determination of additional stock compensation expense. Consistent with the accounting guidance and methodology previously described for the 2009 Plan amendment, the Company determined the additional compensation cost associated with the 1999 Stock Option Plan modifications pursuant to FASB ASC Topic 718. The weighted-average fair value of outstanding 1999 Stock Option Plan option awards was $0.78 per option immediately prior to modification on September 11, 2014 and was $3.78 per option immediately after modification. The additional compensation cost was determined to be $225 , all of which was associated with services previously performed and, therefore, was fully expensed in the quarter ended September 30, 2014.
2014 Employee Stock Purchase Plan

13



In February 2014, the Company’s board of directors adopted the 2014 Employee Stock Purchase Plan (“ESPP”), which was subsequently ratified by the Company’s stockholders and became effective on May 2, 2014 . The purpose of the ESPP is to provide means by which eligible employees of the Company and of certain designated related corporations may be given an opportunity to purchase shares of the Company’s common stock, and to seek and retain services of new and existing employees and to provide incentives for such persons to exert maximum efforts for the success of the Company. Common stock that may be issued under the ESPP will not exceed 47,794 shares, plus the number of shares of common stock that are automatically added on January 1 st of each year for a period of ten years, commencing on January 1, 2015 and ending on January 1, 2024, in an amount equal to the lesser of (i)  0.8% of the total number of shares of outstanding common stock on December 31 of the preceding calendar year, and (ii)  29,411 shares of common stock. Similar to the 2014 Plan, the board of directors may act prior to January 1 st of a given year to provide that there will be no increase in the share reserve or that the increase will be a lesser number of shares than would otherwise occur. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code.
In September 2014, the Company issued 10,048 shares of common stock under the ESPP. As of September 30, 2014, there were 37,746 shares of common stock available for future issuance under the ESPP.
Compensation Cost
The compensation cost that has been charged against income for stock awards under the 2009 Stock Option Plan, the 2014 Plan, and the ESPP was $455 and $837 for the three and nine months ended September 30, 2014 , respectively, and $26 and $109 for the three and nine months ended September 30, 2013 , respectively. The total income tax benefit recognized in the statements of operations for share-based compensation arrangements was $0 for the three and nine months ended September 30, 2014 and 2013 . Cash received from options exercised was $0 and $9 for the three and nine months ended September 30, 2014 , respectively, and $0 and $3 for the three and nine months ended September 30, 2013 .
Stock-based compensation expense related to stock options is included in the following line items in the accompanying statements of operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Cost of revenue
$
89

 
$
5

 
$
139

 
$
27

Research and development
110

 
2

 
272

 
16

Selling, general and administrative
256

 
19

 
426

 
66

 
$
455

 
$
26

 
$
837

 
$
109

 
9.
Income Taxes
The Company did not record a federal or state income tax benefit for the three and nine months ended September 30, 2014 and 2013 due to its conclusion that a full valuation allowance is required against the Company’s deferred tax assets.
 
10.
Net Loss Per Share
The Company uses the two-class method to compute net loss per share because the Company has issued securities, other than common stock, that contractually entitle the holders to participate in dividends and earnings of the Company. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings. Holders of each series of the Company’s convertible preferred stock were entitled to participate in dividends, when and if declared by the board of directors, that were made to common stockholders, and as a result were considered participating securities.
Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current year earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the year’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses. Diluted net loss per common share is computed under the two-class method by using the weighted average number of shares of common stock outstanding, plus, for

14



periods with net income attributable to common stockholders, the potential dilutive effects of stock options and warrants. In addition, the Company analyzes the potential dilutive effect of the outstanding participating securities when calculating diluted earnings per share. Under the “treasury stock” method, it is assumed that the warrants and options were exercised at the beginning of the period and that the funds obtained from the exercise were used to reacquire the Company’s common stock at the average market price for the period and includes those securities when they are dilutive. Under the “if-converted” method, it is assumed that the outstanding participating securities convert into common stock at the beginning of the period. The Company reports the more dilutive of the approaches as its diluted net income or net loss per share during the period.
The following table summarizes the computation of basic and diluted net loss per share attributable to the Company’s common stockholders:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(3,804
)
 
$
(3,960
)
 
$
(1,159
)
 
$
(8,732
)
Deemed dividend for beneficial conversion feature on Series D-2 Preferred

 

 
(909
)
 

Deemed dividend for antidilution adjustments to convertible preferred stock

 

 
(214
)
 

Accretion of convertible preferred stock

 

 
(510
)
 

Net loss attributable to common stock - basic
$
(3,804
)
 
$
(3,960
)
 
$
(2,792
)
 
$
(8,732
)
Derivative fair value adjustment

 

 
(10,080
)
 

Net loss attributable to common stock - diluted
$
(3,804
)
 
$
(3,960
)
 
$
(12,872
)
 
$
(8,732
)
Weighted-average common shares outstanding - basic
8,504,785

 
335,938

 
4,703,278

 
335,930

Incremental shares from assumed exercise of common stock warrants

 

 
273,687

 

Weighted-average of outstanding common stock - diluted
8,504,785

 
335,938

 
4,976,965

 
335,930

Net loss per share
 
 
 
 
 
 
 
Basic
$
(0.45
)
 
$
(11.79
)
 
$
(0.59
)
 
$
(25.99
)
Diluted
$
(0.45
)
 
$
(11.79
)
 
$
(2.59
)
 
$
(25.99
)

The following securities, presented on a common stock equivalent basis, have been excluded from the calculation of weighted average common shares outstanding because their effect is anti-dilutive. As discussed in Note 6, in May 2014, upon completion of the IPO, all outstanding shares of the convertible preferred stock were converted into shares of common stock at their conversion prices. Therefore, in the three-month period ended September 30, 2014, the convertible preferred stock securities were no longer outstanding and will have no impact on net income or net loss per share.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Convertible preferred stock:
 
 
 
 
 
 
 
Series A Preferred

 
6,149

 
6,149

 
6,149

Series B Preferred

 
93,566

 
131,685

 
93,566

Series C Preferred

 
554,174

 
783,515

 
554,174

Series C-2 Preferred

 
119,958

 
173,213

 
119,958

Series D-1 Preferred

 

 
296,773

 

Series D-2 Preferred

 

 
300,549

 

Warrants to purchase Series C-1 Preferred
14,033

 
9,846

 
14,033

 
9,846

Warrants to purchase common stock

 
84,459

 

 
84,459

Stock options
625,627

 
145,547

 
625,627

 
145,547

ESPP
59,203

 

 
59,203

 

Convertible notes

 
157,114

 

 
157,114

 

15



11.
Related-Party Transactions
The Company had transactions with related parties as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
1,822

 
$
1,822

 
$
5,466

 
$
5,466

Selling, general and administrative expense

 

 
500

 

Sanofi owns 100% of a subsidiary that is a customer of the Company. Both Sanofi and the subsidiary have an investment in the Company. The Company’s related-party revenue with the subsidiary composed 42% and 40% of total revenue for the three and nine months ended September 30, 2014 , respectively, and composed 44% and 41% of total revenue for the three and nine months ended September 30, 2013 , respectively.
In May 2013, the Company entered into an engagement letter with Burrill Securities, an affiliate of Burrill Biotechnology Capital Fund, L.P., a holder of the Company’s capital stock. Pursuant to the letter, Burrill Securities assisted the Company with the identification of certain strategic alternatives. Under the letter, the Company would have owed Burrill Securities a success fee of 5% of the transaction value of any strategic transaction or financing transaction resulting from the engagement and that closed during the term of the letter or within twelve months after the end of the term of the letter. The term of the letter expired on November 17, 2013. In December 2013, the Company entered into an amendment to the engagement letter that provided that notwithstanding anything to the contrary in the engagement letter, in the event the Company consummated a public offering of its common stock prior to November 17, 2014, the Company would pay Burrill Securities a success fee of $500 as payment in full for all its obligations under the engagement letter. In May 2014, the Company paid the $500 success fee to Burrill Securities pursuant to the engagement letter, as amended, and the fee was recognized as general and administrative expense in the accompanying statements of operations.
 
12.
Fair Value Measurements
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, unbilled services, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate their respective fair values due to the short-term nature of such instruments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made.
As of September 30, 2014 , there were no assets or liabilities measured at fair value on a recurring basis.
The following table summarizes the conclusions reached as of December 31, 2013 :
 
Balance as of
December 31, 2013
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Derivative liability — Series C-1 warrants
$
37

 
$

 
$

 
$
37

Derivative liability — common stock warrants
12,200

 

 

 
12,200

Total derivative liability
$
12,237

 
$

 
$

 
$
12,237

The Company’s derivative liabilities were the only balance sheet amounts that were measured at fair value on a recurring basis. The fair value of these warrant derivatives was based on a valuation of the Company’s common stock. In order to determine the fair value of the Company’s common stock, the Company used a probability-weighted expected return method, or PWERM. Significant inputs for the PWERM included an estimate of the Company’s equity value, a weighted average cost of capital and an estimated probability and timing for each valuation scenario.
A reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:

16



 
 
Three months ended
 
Nine months ended September 30,
 
 
September 30, 2013
 
2014
 
2013
Balance at beginning of period
 
$
1,851

 
$
12,237

 
$
683

Issuance of warrants
 

 
544

 
899

Excess of fair value of warrants over proceeds
 

 
362

 
269

Adjustment to fair value
 
671

 
(10,442
)
 
671

Reclassification to additional paid-in capital upon exercise of warrants
 

 
(2,701
)
 

Balance at end of period
 
$
2,522

 
$

 
$
2,522

 
13.
Severance Costs

In June 2014, the Company reduced its workforce in an effort to reduce operating costs. Employee severance costs associated with this action were $379 , which were expensed in the quarter ended June 30, 2014. The severance costs are being paid out through the Company's normal payroll disbursements on a monthly basis from July 2014 to January 2015. As of September 30, 2014 , $216 had been paid out and the remaining costs of $163 are included in accrued expenses in the accompanying balance sheets.

14.
Subsequent Events
Licensing Agreement
On October 29, 2014, the Company entered into a license agreement with Waterstone Pharmaceutical (HK Limited), or Waterstone, under which the Company granted Waterstone an exclusive, worldwide license to develop and commercialize SCY-635 for the treatment of viral diseases in humans. In addition, under the same agreement, the Company granted Waterstone an option for an exclusive, worldwide license to develop and commercialize two additional compounds of the Company, SCY-575 and SCY-116, for the treatment of viral diseases in humans. The option is exercisable for a period of 18 months from the date of the agreement. In addition, the Company agreed that during the term of the agreement, it would not develop or commercialize, or grant any right or license to any third party to develop or commercialize, in Asia (excluding Japan), any cyclophilin inhibitor for treatment of viral diseases in humans.
The agreement expires upon Waterstone’s last royalty payment, which is the later of ten years from the last registration of the product, or the last to expire of the patents. Either party may terminate the agreement if the other party breaches and fails to remedy the breach after receiving notice from the nonbreaching party. Specifically, the Company has the ability to terminate the agreement if the Company determines that Waterstone failed to make reasonable progress in the development and commercialization of SCY-635 or the optioned compounds. If the Company gives Waterstone notice of failure to make reasonable progress, Waterstone will have the opportunity to correct the deficiencies. If Waterstone fails to do so, the Company has the right to terminate the license.
The Company will receive an upfront license fee payment of $1,000 in November 2014 for SCY-635, and may receive an additional upfront payment of $500 if Waterstone exercises its option for the two additional compounds. The Company is also entitled to receive certain payments on contingent future events, including 1) a development milestone payment of $4,000 upon the first registration of a product, and 2) royalties based on a specified percentage of net sales (which percentage is in the mid-single digits), varying based on whether the product contains SCY-635 or one of the two additional compounds.


17




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operating results for the three and nine months ended September 30, 2014 , are not necessarily indicative of results that may occur in future interim periods or for the full fiscal year.
This Quarterly Report on Form 10-Q contains statements indicating expectations about future performance and other forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, that involve risks and uncertainties. We usually use words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” or the negative of these terms or similar expressions to identify these forward-looking statements. These statements appear throughout this Quarterly Report on Form 10-Q and are statements regarding our current expectation, belief or intent, primarily with respect to our operations and related industry developments. Examples of these statements include, but are not limited to, statements regarding the following: our business and scientific strategies; the progress of our and our collaborators’ product development programs, including clinical testing, and the timing of results thereof; our corporate collaborations and revenues that may be received from our collaborations and the timing of those potential payments; our expectations with respect to regulatory submissions and approvals; our drug discovery technologies; our research and development expenses; protection of our intellectual property; sufficiency of our cash and capital resources and the need for additional capital; and our operations and legal risks. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including as a result of the risks and uncertainties discussed under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Overview
We are a pharmaceutical company committed to the discovery, development and commercialization of novel anti-infectives to address significant unmet therapeutic needs. We are developing our lead product candidate, SCY-078, as a novel oral and intravenous (IV) drug for the treatment of serious and life-threatening invasive fungal infections in humans. SCY-078 has been shown to be effective in vitro and in vivo in animal models against a broad range of Candida and Aspergillus fungal species, including drug resistant strains. These important pathogens account for approximately 85% of invasive fungal infections in the United States and Europe. SCY-078 was shown to be sufficiently safe and well-tolerated in multiple Phase 1 studies to support progression to Phase 2 studies. We anticipate that the first patient will be enrolled in the fourth quarter of 2014 in a Phase 2 study with an oral formulation of SCY-078 for the treatment of invasive Candida infection, a common and often fatal invasive fungal infection, and anticipate beginning Phase 1 studies with an IV formulation of SCY-078 in 2015 . In addition to pursuing the development of SCY-078, we have additional enfumafungin derivatives and expertise that we may use to expand our antifungal portfolio.
As a spinout from Aventis S.A., or Aventis in 2000, we began as a chemistry and animal health services company, providing contract research services to third parties. Through the provision of these contract research and development services, we built significant expertise in parasitic infections and drug discovery. Since our formation, we have expanded our animal health capabilities and have discovered a number of proprietary compounds, including SCY-635, our cyclophilin inhibitor compound. As described in more detail within the recent developments section below, we recently identified a partner for SCY-635 by entering into an exclusive, worldwide license for the development and commercialization of SCY-635 and, at the option of the partner, two additional compounds.
In 2013, we exclusively licensed SCY-078 from Merck Sharp & Dohme, or Merck, in the field of human health, and Merck transferred to us the investigational new drug application pending with the U.S. Food and Drug Administration, or the FDA, as well as all data Merck had developed for the compound, plus active pharmaceutical ingredient and tablets. In 2014, Merck assigned the patents to us related to SCY-078 that it had exclusively licensed to us. We are focusing our resources on the development of SCY-078.
We are an emerging growth company. Under the Jumpstart Our Business Startups Act of 2012, or JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time of those standards apply to private companies. We have irrevocably elected not to adopt this exemption from new or revised accounting standards, and therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

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Recent Developments
SCY-078 Development
In June 2014, we entered into an agreement with a third-party clinical research organization to conduct a Phase 2 clinical trial for SCY-078. The total fees and expenses under the agreement are projected to be approximately $6.2 million during the term of the agreement. The scope of the services under the agreement can be modified at any time, and the agreement can be terminated by either party 30 days after receipt of written notice.
Following the transfer by Merck to us of ownership and responsibility for the clinical development and IND related to SCY-078, we assessed the regulatory history and initiated discussions with the FDA to obtain clarity on several open questions regarding the clinical development plan for SCY-078. We finalized the Phase 2 protocol in July 2014.
We have initiated patient screening for enrollment in our Phase 2 clinical trial of SCY-078. We expect to enroll the first patient before the end of 2014.
Cyclophilin Inhibitor Platform
In October 2014, we entered into a license agreement with Waterstone Pharmaceutical (HK Limited), or Waterstone, granting exclusive, worldwide rights to develop and commercialize SCY-635 for the treatment of viral diseases in humans. In addition, under the same agreement, we granted Waterstone an option for an exclusive, worldwide license to develop and commercialize two of our additional compounds, SCY-575 and SCY-116, for the treatment of viral diseases in humans. The option is exercisable for a period of 18 months from the date of the agreement. In addition, we agreed that during the term of the agreement, we would not develop or commercialize, or grant any right or license to any third party to develop or commercialize, in Asia (excluding Japan), any cyclophilin inhibitor for treatment of viral diseases in humans.
The agreement expires upon Waterstone’s last royalty payment, which is the later of ten years from the last registration of the product, or the last to expire of the patents. Either party may terminate the agreement if the other party breaches and fails to remedy the breach after receiving notice from the nonbreaching party. Specifically, we have the ability to terminate the agreement if we determine that Waterstone failed to make reasonable progress in the development and commercialization of SCY-635 or the optioned compounds. If we give Waterstone notice of failure to make reasonable progress, Waterstone will have the opportunity to correct the deficiencies. If Waterstone fails to do so, we have the right to terminate the license.
We will receive an upfront license fee payment of $1.0 million in November 2014 for SCY-635, and we may receive an additional upfront payment of $0.5 million if Waterstone exercises its option for the two additional compounds. We are also entitled to receive certain payments on contingent future events, including 1) a development milestone payment of $4.0 million upon the first registration of a product, and 2) royalties based on a specified percentage of net sales (which percentage is in the mid-single digits), varying based on whether the product contains SCY-635 or one of the two additional compounds.
Initial Public Offering
On May 7, 2014, we completed our IPO, whereby we sold a total of 6,200,000 shares of our common stock at $10 per share for net proceeds of $54.6 million (after underwriting discounts, commissions, and offering costs). A related party who guaranteed our 2013 Credit Agreement invested $15.0 million during the IPO.
On May 7, 2014, $15.0 million of the proceeds from the IPO was used to pay in full the outstanding principal and all accrued interest under the 2013 Credit Agreement.
On May 7, 2014, upon completion of our IPO, all outstanding shares of our redeemable convertible preferred stock were converted into 1,691,884 shares of common stock. Also upon completion of our IPO, substantially all outstanding warrants to purchase common stock were exercised with respect to 275,687 shares of our common stock in which we received proceeds of $0.1 million in connection with such exercise.
Equity Compensation Plan Amendments and Awards
On June 18, 2014, our Board of Directors approved the following:
 

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an amendment of options to purchase shares of our common stock held by our employees, consultants, and directors, previously granted under our 1999 Stock Option Plan and our 2009 Stock Option Plan. As a result of the amendments, the exercise price of each outstanding option award as of June 18, 2014, was lowered to $9.64 per share and the term of each outstanding option award was extended until June 17, 2024. In addition, the 1999 Stock Option Plan option awards were further amended to provide that the holder may exercise vested shares under the option for the term of the option even in the event the holder terminates services with the Company (other than for cause). No other terms of the outstanding option awards were changed. The amendments to the 1999 Stock Option Plan, and therefore the modifications of the options granted under that plan, were subject to stockholder approval.
an amendment of our 2014 Equity Incentive Plan, or the 2014 Plan, subject to stockholder approval, to increase the aggregate number of shares of our common stock that may be issued pursuant to awards under the 2014 Plan by an additional 351,653 shares. All other material terms of the 2014 Plan remained unchanged.
a grant of options to purchase 396,573 shares of common stock at a per share exercise price of $9.64 to certain of our employees, contingent upon stockholder approval of the additional 351,653 shares to be added to the share reserve under the 2014 Plan.
On September 11, 2014, during a special meeting of stockholders, our stockholders approved each of the previously described amendments to the 1999 Stock Option Plan and 2014 Equity Incentive Plan, which had been approved by the Board of Directors on June 18, 2014.
Collaborations and Licensing Agreements
We have signed a number of licensing and collaboration agreements with partners in human and animal health, including: (1) Merck, a pharmaceutical company, under which we exclusively licensed from Merck its rights to SCY-078 in the field of human health, and agreed to pay Merck milestones upon the occurrence of specified events and will pay tiered royalties based on worldwide sales of SCY-078 when and if it is approved (in 2014, Merck assigned the patents to us related to SCY-078 that it had exclusively licensed to us and, as contemplated by the agreement, we will continue to pay milestones and royalties); (2) Merial Limited, a wholly owned subsidiary of Sanofi, under which we provide animal health research services on a fee for service basis and, with respect to certain product candidates, we may receive potential milestone and royalty payments from Merial; (3) R-Pharm, CJSC, a leading supplier of hospital drugs in Russia, granting them exclusive rights in the field of human health to develop and commercialize SCY-078 in Russia and several smaller non-core markets, under which we are entitled to receive potential milestones and royalties; (4) Dechra Ltd., or Dechra, a UK listed international veterinary pharmaceutical business, granting Dechra rights to SCY-641 in the field of animal health, including dog dry eye, under which we are entitled to receive potential milestones and royalties; and (5) Waterstone, an international pharmaceutical business, granting Waterstone exclusive worldwide rights to development and commercialization of SCY-635, and two additional compounds at Waterstone's option, for the treatment of viral diseases in humans, under which we are entitled to receive potential milestones and royalties.
Components of Operating Results
Revenue
To date, we have derived substantially all of our revenue from the provision of our contract research and development services. In addition, we have received upfront and milestone payments in connection with our collaboration and licensing agreements. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the variability in the amount of our contract research and development services provided, the achievement of collaboration milestones, and the consummation of new licensing arrangements. We do not expect to generate revenue from product sales for at least the next several years. If we or our collaborators fail to complete the development of product candidates in a timely manner or obtain their regulatory approval, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.
Revenue is recognized when all of the following conditions are met: (1) persuasive evidence of an arrangement exists, (2) rendering of services is complete, (3) fees are fixed or determinable, and (4) collection of fees is reasonably assured.
Cost of Revenue

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Cost of revenue primarily consists of salaries and personnel-related costs, including employee benefits and any stock-based compensation. Additional expenses include facilities and equipment costs directly associated with generating revenue, allocated overhead, materials, contracted consultants and other direct costs.
We allocate expenses associated with our facilities, information technology costs, and depreciation and amortization, between cost of revenue and operating expenses. Allocations are based on employee headcount or facility square footage utilization, and are determined by the nature of work performed.
Research and Development Expense
Research and development expense consists of expenses incurred while performing research and development activities to discover, develop, or improve potential product candidates we seek to develop. This includes conducting preclinical studies and clinical trials, manufacturing and other development efforts, and activities related to regulatory filings for product candidates. We recognize research and development expenses as they are incurred. Our research and development expense primarily consists of:
 
costs related to executing preclinical and clinical trials, including related drug formulation, manufacturing and other development;
salaries and personnel-related costs, including benefits and any stock-based compensation for personnel in research and development functions;
fees paid to consultants and other third parties who support our product candidate development and intellectual property protection;
other costs in seeking regulatory approval of our products; and
allocated overhead.
The table below summarizes the total costs incurred for each of our key research and development projects during the periods presented:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(dollars in thousands)
 
(dollars in thousands)
SCY-078
$
2,383

 
$
511

 
$
4,422

 
$
914

Cyclophilin Inhibitor Platform
95

 
539

 
1,199

 
2,289

Total Research and Development
$
2,478

 
$
1,050

 
$
5,621

 
$
3,203

Our SCY-078 and cyclophilin inhibitor platform projects were the only key research and development projects during the periods presented. We plan to increase our research and development expense for the foreseeable future as we continue our effort to develop SCY-078 and to potentially develop our other product candidates, subject to the availability of additional funding. We do not expect to incur any substantial research and development expenses related to our cyclophilin inhibitor platform in the foreseeable future.
The successful development of product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs required to complete the remaining development of any product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of salaries and personnel-related costs, including employee benefits and any stock-based compensation. This includes personnel in executive, finance, sales, human resources and administrative support functions. Other expenses include facility-related costs not otherwise allocated to cost of revenue or research and development expense, professional fees for accounting, auditing, tax and legal services, consulting costs for general and administrative purposes, information systems maintenance and marketing efforts.
We expect that our selling, general and administrative expense will continue to increase as we operate as a public reporting company and develop and commercialize SCY-078. These anticipated increased costs include director and officer

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liability insurance, costs related to the hiring of additional personnel, and increased fees for outside consultants, lawyers and accountants. We also expect to continue to incur increased costs to comply with corporate governance, internal controls, investor relations, disclosure and similar requirements applicable to public reporting companies.
Gain on Insurance Recovery
In the quarter ended June 30, 2014, our insurance carrier reimbursed us for the replacement cost of a fixed asset that was damaged by severe weather. The asset’s net book value was reduced upon occurrence of the damage. The proceeds received from the insurance recovery exceeded the net book value of the asset in the amount of $0.2 million, which we recognized as a gain during the quarter ended June 30, 2014.
Gain on Sale of Asset
In May 2012, we sold the rights to internally developed research software to a third-party for $4.5 million. We received an initial payment of $3.5 million in May 2012, and two subsequent payments of $0.5 million each in February and May of 2013, which completed the sale transaction. We recorded these payments as a gain on sale of asset within total operating expenses in the period payment was received, net of transaction expenses.
Other (Income) Expense
Substantially all of our other (income) expense consists of costs associated with:
 
a related party guarantee of our outstanding credit facility;
interest on related party convertible debt;
fair value adjustments to our derivative liability for warrants issued in conjunction with the related party convertible debt; and
a loss on the extinguishment of debt.
Interest paid on our outstanding bank debt composed substantially all of the remaining other (income) expense.
In April 2010, we entered into a $15.0 million credit facility agreement with HSBC Bank USA, National Association, or HSBC, which we refer to as the 2010 Credit Agreement. This 2010 Credit Agreement was guaranteed by a related party. We concluded that the guarantee represented a deemed contribution and recognized the value of the guarantee as deferred financing costs. The value of the guarantee was determined based on the difference between the 2010 Credit Agreement’s stated interest rate and the interest rate that would apply if there had been no guarantee from the related party. The value was determined to be $6.3 million at the time the 2010 Credit Agreement was established and was amortized over the life of the 2010 Credit Agreement. On March 8, 2013, the 2010 Credit Agreement and related party guarantee were extended through 2014, under an amendment referred to as the 2013 Credit Agreement. At the time of the extension, we concluded that the value of the new guarantee was $3.9 million. This amount was recorded as deferred financing costs and was being amortized through the year 2014.
Upon completion of our IPO on May 7, 2014, the entire outstanding balance of the 2013 Credit Agreement, amounting to $15.0 million plus accrued interest, was paid in full using the proceeds from the IPO. We recorded a loss on the extinguishment of debt of $1.4 million in the three month period ended June 30, 2014, as the remaining deferred financing costs associated with the 2013 Credit Agreement were written off. We had no outstanding debt as of September 30, 2014 .
From December 2011 through June 2013, we issued convertible promissory notes totaling $12.3 million to related parties. These notes accrued interest at a rate of 8% per year. The purchasers of the convertible notes also received warrants to purchase common stock. The promissory notes, and accrued interest, were converted into preferred stock in December 2013. The warrant fair values were accounted for as a debt discount and amortized over the stated term of the convertibles notes. We concluded that the warrants qualified as a derivative liability and the fair value of the warrants should be adjusted at each reporting period. The amortization of the debt discount was recorded in amortization of deferred financing costs and debt discount and the change in the derivative liability was recorded in derivative fair value adjustment.
The warrants to purchase common stock accounted for as derivatives were exercised in connection with the IPO. The combined fair values of the common stock warrant derivative liabilities was $2.7 million as of May 2, 2014, and this amount was reclassified to additional paid-in capital.

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Income Tax (Expense) Benefit
Income tax expense consists of U.S. federal and state income taxes. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.

Results of Operations for the Nine Months Ended September 30, 2014 and 2013
The following table summarizes our results of operations for the nine months ended September 30, 2014 and 2013 , together with the changes in those items in dollars and percentage (dollars in thousands):
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
Period-to-Period
Change
 
Amount
 
Percentage of
Revenue
 
Amount
 
Percentage of
Revenue
 
Amount
 
Percentage
Total revenue
$
13,727

 
100.0
 %
 
$
13,184

 
100.0
 %
 
$
543

 
4.1
 %
Cost of revenue
11,800

 
86.0
 %
 
12,531

 
95.0
 %
 
(731
)
 
(5.8
)%
Gross Margin
1,927

 
14.0
 %
 
653

 
5.0
 %
 
1,274

 
195.1
 %
Operating expenses:
 
 
 
 
 
 
 
 

 

Research and development
5,621

 
40.9
 %
 
3,203

 
24.3
 %
 
2,418

 
75.5
 %
Selling, general and administrative
5,507

 
40.1
 %
 
3,150

 
23.9
 %
 
2,357

 
74.8
 %
Gain on insurance recovery
(165
)
 
(1.2
)%
 

 

 
(165
)
 
*

Gain on sale of asset

 

 
(988
)
 
(7.5
)%
 
988

 
(100.0
)%
Total operating expenses
10,963

 
79.9
 %
 
5,365

 
40.7
 %
 
5,598

 
104.3
 %
Loss from operations
(9,036
)
 
(65.8
)%
 
(4,712
)
 
(35.7
)%
 
(4,324
)
 
91.8
 %
Other (income) expense:
 
 

 
 
 

 

 

Amortization of deferred financing costs and debt discount
755

 
5.5
 %
 
2,504

 
19.0
 %
 
(1,749
)
 
(69.8
)%
Loss on extinguishment of debt
1,389

 
10.1
 %
 

 

 
1,389

 
*

Interest expense — related party

 

 
703

 
5.3
 %
 
(703
)
 
(100.0
)%
Interest expense
49

 

 
142

 
1.1
 %
 
(93
)
 
(65.5
)%
Derivative fair value adjustment
(10,080
)
 
(73.4
)%
 
671

 

 
(10,751
)
 
(1,602.2
)%
Other expense
10

 
0.1
 %
 

 

 
10

 
*

Total other (income) expense
(7,877
)
 
(57.4
)%
 
4,020

 
30.5
 %
 
(11,897
)
 
(295.9
)%
Net Loss
$
(1,159
)
 
(8.4
)%
 
$
(8,732
)
 
(66.2
)%
 
$
7,573

 
(86.7
)%
*
Not applicable or meaningful
Revenue. For the nine months ended September 30, 2014 , revenue of $13.7 million increased slightly from the $13.2 million of revenue for the nine months ended September 30, 2013 . The increase of $0.5 million , or 4.1% , was the result of a $1.3 million increase in animal health services, a $0.2 million increase associated with revenue from licensing agreement upfront payments, and a $0.2 million increase in materials revenue. These increases were partially offset by a $1.2 million decrease in discovery and drug metabolism and pharmacokinetics (DMPK) services revenue. The animal health services revenue increase was primarily related to services performed for Elanco Animal Health, or Elanco, beginning in January 2014, under a licensing and research services agreement executed in December 2013.
Cost of Revenue. For the nine months ended September 30, 2014 , cost of revenue decreased to $11.8 million compared to $12.5 million for the nine months ended September 30, 2013 . The decrease of $0.7 million , or 5.8% , was primarily the result of a $0.5 million decrease due to operating cost saving measures taken in 2014, a $0.3 million decrease in laboratory materials and third-party scientific contract labor services, and a $0.4 million decrease due to scientific personnel devoting more time to

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SCY-078 development in 2014, which results in the associated salaries and personnel-related costs for this effort being included in research and development expense in 2014, rather than cost of revenue. These decreases were partially offset by a $0.5 million increase in employee compensation expense, which was primarily due to an accrual of estimated annual employee bonus compensation in 2014.
Research and Development. For the nine months ended September 30, 2014 , research and development expenses increased to $5.6 million from $3.2 million for the nine months ended September 30, 2013 . The increase of $2.4 million , or 75.5% , was primarily the result of a $1.3 million increase in employee compensation expense and a $1.1 million increase in third-party development services related to the SCY-078 Phase 2 clinical trial and the preclinical development of intravenous SCY-078. The increase in employee compensation was due to new research and development personnel hired in 2014 to manage and support the development of SCY-078, an accrual of estimated annual employee bonus compensation in 2014, an accrual of employee severance costs associated with workforce reduction activities in June 2014, and scientific services personnel devoting more time and effort to SCY-078 development in 2014, which results in the associated salaries and personnel-related costs for this effort being included in research and development expense in 2014, rather than cost of revenue.
Selling, General & Administrative . For the nine months ended September 30, 2014 , selling, general and administrative expenses increased to $5.5 million from $3.2 million for the nine months ended September 30, 2013 . The increase of $2.4 million , or 74.8% , was a result of a $0.5 million payment to a related party advisor who assisted us in evaluating potential strategic financing alternatives to an IPO, a $0.2 million increase in other professional services expenses indirectly associated with our IPO, a $0.6 million increase in professional services expenses directly associated with our continuing operations as a regulated, publicly traded company, a $0.8 million increase in employee compensation, and a $0.3 million increase in other general and administrative expenses. The increase in employee compensation was due to stock compensation expense associated with an option award modification and additional option grants, an accrual of estimated annual employee bonus compensation in 2014, an increase in officer and employee salaries that became effective in June 2014, and an accrual of employee severance costs associated with workforce reduction activities in June 2014.
Gain on Insurance Recovery . For the nine months ended September 30, 2014 , we recognized a $0.2 million gain on insurance recovery as our insurance carrier reimbursed us for the replacement cost of a damaged fixed asset. The insurance proceeds of $0.2 million exceeded the carrying value of the damaged asset.
Gain on Sale of Assets . For the nine months ended September 30, 2014 , gain on sale of asset decreased to zero compared to $1.0 million in the nine months ended September 30, 2013 . The amount recorded during the 2013 period represents the final two payments received on the 2012 sale of proprietary software.
Amortization of Deferred Financing Costs and Debt Discount. For the nine months ended September 30, 2014 , amortization of deferred financing costs decreased to $0.8 million compared to $2.5 million in the nine months ended September 30, 2013 . The decrease of $1.7 million , or 69.8% , was primarily associated with the conversion of our convertible promissory notes in December 2013 and the repayment of our 2013 Credit Agreement in May 2014. During the nine month period ended September 30, 2013 , we amortized debt discounts associated with our convertible promissory notes issued from December 2011 through June 2013 and deferred financing costs associated with our 2013 Credit Agreement. All of our convertible promissory notes were converted into preferred stock in December 2013 and, therefore, no amortization of promissory notes debt discount was incurred in 2014. Upon completion of our IPO in May 2014, the entire outstanding balance of the 2013 Credit Agreement amounting to $15.0 million plus accrued interest was paid in full using the proceeds from the IPO. The remaining unamortized balance of the deferred financing costs on the debt settlement date of $1.4 million was immediately recognized as a loss on the extinguishment of debt in the nine month period ended September 30, 2014 . This loss on extinguishment of debt is presented separately in the accompanying statements of operations.
Loss on Extinguishment of Debt. For the nine months ended September 30, 2014 , loss on extinguishment of debt was $1.4 million compared to zero for the nine months ended September 30, 2013 . Upon completion of our IPO in May 2014, the entire outstanding balance of the 2013 Credit Agreement amounting to $15.0 million plus accrued interest was paid in full using the proceeds from the IPO. The remaining unamortized balance of the deferred financing costs on the debt settlement date of $1.4 million was immediately recognized as a loss on the extinguishment of debt in the nine month period ended September 30, 2014 .
Interest Expense — Related Party. For the nine months ended September 30, 2014 , interest expense — related party was zero compared to $0.7 million in the nine months ended September 30, 2013 . As of September 30, 2014 and 2013 , the convertible promissory notes issued and outstanding were $0 and $12.3 million, respectively. There was no interest expense — related party recognized in the nine months ended September 30, 2014 , since the outstanding principal and interest of all convertible promissory notes issued to related parties were converted into Series D Preferred stock in December 2013.

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Derivative Fair Value Adjustment . For the nine months ended September 30, 2014 , derivative fair value adjustment was a $10.1 million gain compared to a $0.7 million loss in the nine months ended September 30, 2013 . The gain was due to the decrease in the fair value of our common stock, from an estimate of $47.74 per share as of December 31, 2013, to the estimated fair value of $10.00 per share as of May 2, 2014. The loss in the nine months ended September 30, 2013 was due to the increase in the fair value of our common stock, from an estimate of $20.40 per share as of December 31, 2012, to an estimate of $28.56 per share as of September 30, 2013.

Results of Operations for the Three Months Ended September 30, 2014 and 2013
The following table summarizes our results of operations for the three months ended September 30, 2014 and 2013 , together with the changes in those items in dollars and percentage (dollars in thousands):
 
Three Months Ended
 
September 30, 2014
 
September 30, 2013
 
Period-to-Period
Change
 
Amount
 
Percentage of
Revenue
 
Amount
 
Percentage of
Revenue
 
Amount
 
Percentage
Total revenue
$
4,380

 
100.0
 %
 
$
4,163

 
100.0
 %
 
$
217

 
5.2
 %
Cost of revenue
3,660

 
83.6
 %
 
3,986

 
95.7
 %
 
(326
)
 
(8.2
)%
Gross Margin
720

 
16.4
 %
 
177

 
4.3
 %
 
543

 
306.8
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
2,478

 
56.6
 %
 
1,050

 
25.2
 %
 
1,428

 
136.0
 %
Selling, general and administrative
2,046

 
46.7
 %
 
1,141

 
27.4
 %
 
905

 
79.3
 %
Gain on insurance recovery

 

 

 

 

 
*

Gain on sale of asset

 

 
(2
)
 

 
2

 
(100.0
)%
Total operating expenses
4,524

 
103.3
 %
 
2,189

 
52.6
 %
 
2,335

 
106.7
 %
Loss from operations
(3,804
)
 
(86.8
)%
 
(2,012
)
 
(48.3
)%
 
(1,792
)
 
89.1
 %
Other (income) expense:
 
 
 
 
 
 
 
 
 
 
 
Amortization of deferred financing costs and debt discount

 

 
982

 
23.6
 %
 
(982
)
 
(100.0
)%
Loss on extinguishment of debt

 

 

 

 

 
*

Interest expense — related party

 

 
249

 
6.0
 %
 
(249
)
 
(100.0
)%
Interest expense

 

 
46

 
1.1
 %
 
(46
)
 
(100.0
)%
Derivative fair value adjustment

 

 
671

 

 
(671
)
 
(100.0
)%
Other expense

 

 

 

 

 
*

Total other (income) expense

 
 %
 
1,948

 
46.8
 %
 
(1,948
)
 
(100.0
)%
Net Loss
$
(3,804
)
 
(86.8
)%
 
$
(3,960
)
 
(95.1
)%
 
$
156

 
(3.9
)%
*
Not applicable or meaningful
Revenue. For the three months ended September 30, 2014 , revenue increased to $4.4 million from $4.2 million for three months ended September 30, 2013 . The increase of $0.2 million , or 5.2% , was the result of a $0.4 million increase in animal health services revenue, a $0.1 million increase in materials revenue, and a $0.1 million increase in other revenues. These increases were partially offset by a $0.4 million decrease in discovery and DMPK services revenue. The animal health services revenue increase was primarily related to services performed for Elanco beginning in January 2014, under a licensing and research services agreement executed in December 2013.
Cost of Revenue. For the three months ended September 30, 2014 , cost of revenue decreased to $3.7 million from $4.0 million for the three months ended September 30, 2013 . The decrease of $0.3 million , or 8.2% , was primarily the result of a $0.2

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million decrease due to operating cost saving measures taken in 2014, and a $0.2 million decrease due to scientific personnel devoting more time to SCY-078 development in 2014, which results in the associated salaries and personnel-related costs for this effort being included in research and development expense in 2014, rather than cost of revenue. These decreases were partially offset by a $0.1 million increase in employee compensation expense, which included stock compensation expense associated with an option award modification and new option grants, and an increase in employee salaries that became effective in June 2014.
Research and Development. For the three months ended September 30, 2014 , research and development expenses increased to $2.5 million from $1.1 million for the three months ended September 30, 2013 . The increase of $1.4 million , or 136.0% , was primarily the result of a $0.9 million increase in third-party service expenses related to the SCY-078 Phase 2 clinical trial and the preclinical development of intravenous SCY-078, and a $0.7 million increase in employee compensation expense. The increase in employee compensation expense was due to new research and development personnel hired in 2014 to manage and support the development of SCY-078, an accrual of estimated annual employee bonus compensation in 2014, stock compensation expense associated with an option award modification and new option grants, and scientific services personnel devoting more time and effort to SCY-078 development in 2014, which results in the associated salaries and personnel-related costs for this effort being included in research and development expense in 2014, rather than cost of revenue. These increases were partially offset by a $0.1 million decrease in other research and development costs.
Selling, General & Administrative . For the three months ended September 30, 2014 , selling, general and administrative expenses increased to $2.0 million from $1.1 million for the three months ended September 30, 2013 . The increase of $0.9 million , or 79.3% , was the result of a $0.3 million increase in professional services expenses directly associated with our continuing operations as a regulated, publicly traded company, a $0.5 million increase in employee compensation expense, and a $0.1 million increase in other general and administrative expenses. The increase in employee compensation expense was due to stock compensation expense associated with an option award modification and new option grants, an accrual of estimated annual employee bonus compensation in 2014, and an increase in officer and employee salaries that became effective in June 2014.
Amortization of Deferred Financing Costs and Debt Discount. For the three months ended September 30, 2014 , amortization of deferred financing costs decreased to zero compared to $1.0 million in the three months ended September 30, 2013 . The $1.0 million of amortization recognized in the three months ended September 30, 2013 was associated with the June 2013 Notes debt discount and the 2013 Credit Agreement deferred financing costs. There was no amortization in the three months ended September 30, 2014 because the June 2013 Notes were converted into convertible preferred stock in December 2013 and the 2013 Credit Agreement was repaid in full in May 2014.
Interest Expense — Related Party. For the three months ended September 30, 2014 , interest expense — related party was zero compared to $0.2 million in the three months ended September 30, 2013 . As of September 30, 2014 and 2013 , the convertible promissory notes issued and outstanding were $0 and $12.3 million, respectively. There was no interest expense — related party recognized in the three months ended September 30, 2014 , since the outstanding principal and interest of all convertible promissory notes issued to related parties were converted into Series D Preferred stock in December 2013.
Derivative Fair Value Adjustment . For the three months ended September 30, 2014 , derivative fair value adjustment was zero compared to $0.7 million in the three months ended September 30, 2013 . The loss in the three months ended September 30, 2013 was due to the increase in the fair value of our common stock, from an estimate of $20.40 per share as of June 30, 2013, to an estimate of $28.56 per share as of September 30, 2013. The warrants to purchase common stock accounted for as derivatives were exercised in May 2014 in conjunction with the IPO, and therefore the remaining derivative liability was reclassified to additional paid in capital and no gain or loss was incurred during the three months ended September 30, 2014 .
Liquidity and Capital Resources
Sources of Liquidity
Through September 30, 2014 , we have funded our operations through revenue from the provision of contract research and development services and from debt and equity issuances. As of September 30, 2014 , we had cash and cash equivalents of approximately $34.0 million , compared to $1.4 million as of December 31, 2013 . The increase in our cash and cash equivalents was primarily due to our recently completed IPO in May 2014.
We have incurred net losses since our inception, including the nine months ended September 30, 2014 . As of September 30, 2014 , our accumulated deficit was $114.4 million . We anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and selling, general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may obtain through one

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or more of equity offerings, debt financings, or other third-party funding, strategic alliances and licensing or collaboration arrangements.
As described in Note 4 to our financial statements, our 2013 Credit Agreement comprised a $5.0 million term loan and a $10.0 million revolving credit facility, provided for interest-only payments through December 31, 2014, and required repayment of the loan on December 31, 2014. The 2013 Credit Agreement was guaranteed by a related party that had an investment in our company. The full amounts of both the $5.0 million term loan and the $10.0 million revolving credit facility were outstanding as of December 31, 2013 . There was no outstanding balance under the 2013 Credit Agreement as of September 30, 2014 , as all principal and accrued interest was repaid on May 7, 2014 using proceeds from our IPO. The weighted-average interest rate was 0.00% and 1.19% for the three and nine months ended September 30, 2014 , respectively, and 1.22% for both the three and nine months ended September 30, 2013 , respectively.
In January 2014, we issued shares of our convertible Series D-2 Preferred Stock and warrants to purchase shares of our common stock to existing investors in our company and received net proceeds of $0.5 million.
On May 7, 2014, we completed our IPO of our common stock pursuant to a registration statement that was declared effective on May 2, 2014. We sold 6,200,000 shares of our common stock at a price of $10.00 per share. As a result of the IPO, we raised a total of $54.6 million in net proceeds after deducting underwriting discounts and commissions of $3.3 million and offering expenses of $4.1 million. A related party who guaranteed our 2013 Credit Agreement invested $15.0 million during the IPO. Costs directly associated with our IPO were capitalized and recorded as deferred offering costs prior to the completion of the IPO. These costs were recorded as a reduction of the proceeds received in arriving at the amount to be recorded in additional paid-in capital. Upon completion of the IPO, all outstanding shares of our preferred stock were converted into 1,691,884 shares of our common stock. In addition, we issued 275,687 shares of common stock in relation to the warrants to purchase our common stock that were exercised.
On May 7, 2014, $15.0 million of the proceeds received from the IPO was used to pay in full the outstanding principal and all accrued interest under the 2013 Credit Agreement. This payment fully settled our obligations, and released the related party guarantor from all obligations, under and in relation to the 2013 Credit Agreement.
Cash Flows
The following table sets forth the significant sources and uses of cash for the nine months ended September 30, 2014 and 2013 :
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
(unaudited; dollars in thousands)
Net cash used in operating activities
$
(7,751
)
 
$
(2,979
)
Net cash (used in) provided by investing activities
(416
)
 
618

Net cash provided by financing activities
40,801

 
902

Net increase (decrease) in cash and cash equivalents
$
32,634

 
$
(1,459
)
Operating Activities
Net cash used in operating activities of $7.8 million for the nine months ended September 30, 2014 , primarily consisted of the $9.0 million loss from operations, which was adjusted for non-cash charges that included depreciation of $0.9 million and stock-based compensation expense of $0.8 million . Net cash used in operating activities of $3.0 million for the nine months ended September 30, 2013 , primarily consisted of a $4.7 million loss from operations, offset in part by a favorable change in operating assets and liabilities of $2.5 million , an adjustment for a non-cash charge for depreciation of $1.0 million and an adjustment for a gain on sale of asset of $1.0 million. The losses from operations in both the 2014 and 2013 periods exclude certain non-cash other income and expense items that have been described in the components of operating results section above.
The $4.8 million increase in net cash used in operating activities for the nine months ended September 30, 2014 , as compared to the nine months ended September 30, 2013 , was primarily due to increases in costs associated with SCY-078 development efforts and public reporting company operations. We expect that the increases in these costs will continue as we continue to operate as a public reporting company and focus our efforts on the development of SCY-078. In addition, a portion

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of the increase in net cash used in operating activities was due to the receipt of a $1.5 million upfront payment from R-Pharm in August 2013, which reduced net cash used in operating activities for the nine months ended September 30, 2013 .
Investing Activities
Net cash used in investing activities of $0.4 million for the nine months ended September 30, 2014 , primarily consisted of purchases of property and equipment of $0.6 million , offset partially by the proceeds from an insurance recovery of $0.2 million .
Net cash provided by investing activities of $0.6 million for the nine months ended September 30, 2013 primarily consisted of proceeds of $1.0 million from the sale of proprietary software assets, offset partially by purchases of property and equipment of $0.4 million .
Financing Activities
Net cash provided by financing activities of $40.8 million for the nine months ended September 30, 2014 , consisted of $62.0 million of gross proceeds received from our IPO in May 2014 and $0.5 million in proceeds raised from the issuance of shares of our D-2 preferred stock in January 2014, offset partially by a $15.0 million payment to settle all outstanding borrowings under our 2013 Credit Agreement and $6.9 million of payments for deferred offering costs and underwriting discounts and commissions.
Net cash provided by financing activities of $0.9 million for the nine months ended September 30, 2013 , primarily consisted of proceeds from the issuance of our June 2013 Notes.
Future Funding Requirements
To date, we have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize SCY-078. We do not expect our contract research and development services to support our funding needs associated with the development of SCY-078. In addition, we expect our expenses to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, product candidates. We anticipate that we will need substantial additional funding in connection with our continuing operations.
Based upon our current operating plan, we believe that our existing cash and cash equivalents, which include the net proceeds from our recently completed IPO, will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2016 . We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of product candidates.
Our future capital requirements will depend on many factors, including:
 
the progress, costs, and the clinical development of SCY-078;
the outcome, costs and timing of seeking and obtaining FDA and any other regulatory approvals;
the ability of product candidates to progress through clinical development successfully;
our need to expand our research and development activities;
the costs associated with our continuing to support our ability to provide contract research and development services;
the costs associated with securing, establishing and maintaining commercialization and manufacturing capabilities;
our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;
our need and ability to hire additional management and scientific and medical personnel;

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our need to implement additional internal systems and infrastructure, including financial and reporting systems; and
the economic and other terms, timing and success of our existing licensing arrangements and any collaboration, licensing or other arrangements into which we may enter in the future.
Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our cash needs through a combination of equity offerings, debt financings, or other third-party funding, cash generated from the provision of contract research and development services, marketing and distribution arrangements, or other collaborations, strategic alliances or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through 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.
Contractual Obligations, Commitments and Contingencies
There have been no material changes in our contractual obligations, commitments or contingencies since December 31, 2013 , except as follows:
 
The full $15.0 million outstanding principal and all accrued interest outstanding under our 2013 Credit Agreement was repaid to the lender on May 7, 2014.
In June 2014, we entered into an agreement with a third-party clinical research organization to conduct a Phase 2 clinical trial for SCY-078. The total fees and expenses under the agreement are projected to be approximately $6.2 million during the term of the agreement. The scope of the services under the agreement can be modified at any time, and the agreement can be terminated by either party 30 days after receipt of written notice.
Off-Balance Sheet Arrangements
During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements, as well as the reported revenues and expenses during the reported periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies have not changed materially from those described in our Registration Statement under the Securities Act of 1933, as amended, filed with and declared effective by the SEC on May 2, 2014.

Item 3.
Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Sensitivity
Our cash and cash equivalents as of September 30, 2014 , consisted of cash maintained in accounts at one or more financial institutions that are in excess of federally insured limits. Our primary exposure to market risk for our cash and cash equivalents is interest income sensitivity, which is affected by changes in the general level of U.S interest rates. However, we

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do not believe a sudden change in the interest rates would have a material impact on our financial condition or results of operations. Further, we do not believe that our cash and cash equivalents have significant risk of default or illiquidity. While we believe our cash and cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value.
During the nine months ended September 30, 2014 , we were subject to interest rate risk in connection with borrowing under our 2013 Credit Agreement, which comprised a $5.0 million term loan and a $10.0 million revolving credit facility outstanding through May 7, 2014, when all outstanding principal and accrued interest were repaid in full. The principal outstanding under the 2013 Credit Agreement carried interest at a rate of LIBOR plus 0.95% per annum and, as a result, increases in market interest rates would generally result in increased interest expense. As of September 30, 2014 , we had no outstanding principal amount outstanding under the 2013 Credit Agreement.
 
Item 4.
Controls and Procedures

Management’s Evaluation of our Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
As of September 30, 2014 , our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of September 30, 2014 , our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
Except as described below, during the quarter ended September 30, 2014 , there have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Securities Exchange Act of 1934, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In the third quarter of 2014, we designed, and are in the process of implementing, certain additional control activities that are intended to mitigate risks of material misstatement in certain accounting and disclosure identification processes.

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PART II. OTHER INFORMATION
 
Item 1A.
Risk Factors
In evaluating our business, you should carefully consider the following risks, as well as the other information contained in this Quarterly Report on Form 10-Q. These risk factors could cause our actual results to differ materially from those contained in forward-looking statements we have made in this Quarterly Report on Form 10-Q and those we may make from time to time. If any of the following risks actually occurs, our business, financial condition and operating results could be harmed. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business. The risks facing our business have not changed substantively from those discussed in our final prospectus as filed with the SEC on May 2, 2014, except for those risk factors below designated by an asterisk (*).
Risks Relating to Our Financial Condition and Need for Additional Capital
We have never been profitable, we have no products approved for commercial sale, and to date we have not generated any revenue from product sales. As a result, our ability to curtail our losses and reach profitability is unproven, and we may never achieve or sustain profitability.*
We are not profitable and do not expect to be profitable in the foreseeable future. We have incurred net losses in each year since our inception, including net losses of approximately $30.5 million for the year ended December 31, 2013 . We had a net loss of $3.8 million for the three months ended September 30, 2014 and expect to incur a net loss for the year ended December 31, 2014 . As of September 30, 2014 , we had an accumulated deficit of approximately $114.4 million . Although we have generated revenues through our contract research and development services, these revenues have not been sufficient to support our business, and so in addition we have financed our operations through the sale of convertible preferred stock, convertible debt, and common stock. We intend to devote a majority of our financial resources to the development of SCY-078, our lead product candidate. We have not generated any revenue from product sales. Although we successfully completed an IPO and have repaid all of our debt, there can be no assurances that we will be able to continue our operations on a long-term basis. The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2013 , as filed with our registration statement on Form S-1/A, which was declared effective on May 2, 2014, included an explanatory paragraph relating to our ability to continue as a going concern. We have suffered substantial losses from operations and may require additional financing.
We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially as we:
 
continue the development of SCY-078;
initiate clinical trials for SCY-078;
seek marketing approvals for SCY-078;
establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;
maintain, expand and protect our intellectual property portfolio;
hire additional clinical, quality control and scientific personnel; and
create additional infrastructure to support our operations as a public company.
In addition, our expenses could increase if we are required by the U.S. Food and Drug Administration, or the FDA, to perform studies in addition to, or that are larger than, those that we currently expect.
As a result of the foregoing, we expect to experience net losses and negative cash flows for the foreseeable future, and we are unable to predict when, or if, we will be able to achieve profitability. Our losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity, financial position and working capital.
We expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.

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Our financial condition and operating results have varied significantly in the past and will continue to fluctuate from quarter to quarter or year to year due to a variety of factors, many of which are beyond our control. The following factors relating to our business, as well as factors described elsewhere in this quarterly report, may contribute to these fluctuations:
 
the costs associated with developing SCY-078, which are difficult for us to predict;
any delays in regulatory review and approval of SCY-078;
delays in the timing of filing of a new drug application, or NDA, as well as commencement, enrollment and the timing of clinical testing, of SCY-078 or any other product candidates we may seek to develop;
our ability to commercialize product candidates, both in the United States and overseas, if we are able to obtain regulatory approval to do so;
the costs associated with obtaining and maintaining regulatory approval and ongoing company compliance and product compliance for SCY-078;
the success of our providing contract research and development services;
market acceptance of SCY-078 and any future product candidates we may seek to develop;
changes in regulations and regulatory policies;
competition from existing products or new products that may emerge;
the ability of patients or healthcare providers to obtain coverage of, or sufficient reimbursement for, any products we are able to develop;
our ability to establish or maintain collaborations, licensing or other arrangements;
costs related to, and outcomes of, potential litigation;
potential product liability claims; and
potential liabilities associated with hazardous materials.
Due to the various factors mentioned above, and others, the results of any quarterly or annual periods should not be relied upon as indications of future operating performance.
We may continue to require substantial additional capital, and if we are unable to raise capital when needed we would be forced to delay, reduce or eliminate our development program for SCY-078.*
Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. If the FDA requires that we perform additional studies beyond those that we currently expect, our expenses could increase beyond what we currently anticipate, the timing of the submission of the NDA could be delayed, and any potential product approval could be delayed. In May 2014, we raised net proceeds of approximately $54.6 in connection with our IPO after deducting underwriting discounts and commissions of $3.3 million and offering expenses payable by us of $4.1 million. In addition, we paid off $15 million in principal and all accrued interest on our credit facility with HSBC Bank on May 7, 2014. We believe that the net proceeds from our IPO will be sufficient to meet our anticipated operating requirements into the first quarter of 2016 ; provided, however, that changing circumstances may cause us to consume capital more rapidly than we currently anticipate. We may need to raise additional funds from the issuance of equity and/or debt securities or otherwise obtain funding through strategic alliances or collaborations with third parties. In any event, we will require additional capital to complete development of, to seek regulatory approval for and, if approval is obtained, to commercialize SCY-078 and any future product candidates we may seek to develop. Raising funds in the current economic environment, when the capital markets have been affected by the global recession, may present additional challenges.
When we are required to secure additional financing, the additional fundraising efforts may divert our management from our day-to-day activities, which may adversely affect our ability to develop and commercialize SCY-078 and any future product candidates we may seek to develop. In addition, we cannot guarantee that financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:
 
significantly delay, scale back or discontinue the development or commercialization of SCY-078 and any future product candidates we may seek to develop;
seek strategic alliances for research and development programs at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or
relinquish or license on unfavorable terms our rights to any product candidates that we otherwise would seek to develop or commercialize ourselves.

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If we are required to conduct additional fundraising activities and we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects.
Risks Relating to the Development, Regulatory Approval and Commercialization
of Our Product Candidates For Human Use
Historically we have been primarily a contract research and development services company devoting a majority of our resources and efforts to providing research and development services to other companies, and we are only now shifting our focus to developing our own drug candidate SCY-078.
We were spun out from Aventis in 2000 as a chemistry and animal health services company, providing contract research services to third parties. Since then, we have derived substantially all of our revenue from providing these services to human and animal health companies to assist them in developing their own drug candidates. In the course of providing these services, we have leveraged the expertise to develop our own proprietary compounds, including a platform of cyclophilin inhibitors, among them SCY-635, which we exclusively licensed to Waterstone in October 2014. In 2013, under our contract with Merck Sharp & Dohme Corp., or Merck, a subsidiary of Merck & Co., Inc., Merck exclusively licensed SCY-078 to us in the field of human health and in conjunction with that license transferred to us the investigational new drug application pending with the FDA and related regulatory responsibilities, as well as all data Merck had developed for the compound, plus active pharmaceutical ingredients and tablets. In 2014, Merck assigned the patents to us related to SCY-078 that it had exclusively licensed to us.
Although we have conducted Phase 1 and Phase 2 studies of SCY-635, our cyclophilin inhibitor that we exclusively licensed to Waterstone in October 2014, we only acquired the rights to develop SCY-078, our lead drug candidate for the treatment of invasive fungal infections, in May 2013. We do not have a significant history of developing our own drug candidates, and we have not brought any drug candidates to market, which makes it difficult to assess our ability to develop and commercialize SCY-078 and any future product candidates we may seek to develop or commercialize.
We cannot be certain that SCY-078 will receive regulatory approval, and without regulatory approval we will not be able to market SCY-078. Regulatory approval is a lengthy, expensive and uncertain process.
Our ability to generate significant revenue related to SCY-078 sales will depend on the successful development and regulatory approval of SCY-078. We expect that the earliest that we could obtain regulatory approval of SCY-078 and commence commercialization of SCY-078 will be several years from now, if at all.
We currently have no products approved for sale and we cannot guarantee that we will ever have marketable products. The development and commercialization of a product candidate, including preclinical and clinical testing, manufacturing, quality systems, labeling, approval, record-keeping, selling, promotion, marketing and distribution of products, is subject to extensive regulation by the FDA in the United States and regulatory authorities in other countries, with regulations differing from country to country. We are not permitted to market product candidates in the United States until and unless we receive approval of an NDA from the FDA. We have not submitted an NDA for SCY-078. Obtaining approval of an NDA is a lengthy, expensive and uncertain process. An NDA must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each indication. The approval application must also include significant information regarding the chemistry, manufacturing and controls for the product. The product development and regulatory review process typically takes years to complete, involves numerous uncertainties and the potential for concerns to emerge late in the development process, and approval is never guaranteed. Even if a product is approved, the FDA may limit the indications for which the product may be used, include extensive warnings on the product labeling or require costly ongoing requirements for post-marketing clinical studies and surveillance or other risk management measures to monitor the safety or efficacy of the product candidate. Markets outside of the United States also have requirements for approval of drug candidates with which we must comply prior to marketing. Obtaining regulatory approval for marketing of a product candidate in one country does not ensure we will be able to obtain regulatory approval in other countries, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. Also, any regulatory approval of a product candidate, once obtained, may be withdrawn. If SCY-078 or any of our other wholly-owned or partnered product candidates do not receive regulatory approval, we may not be able to generate sufficient revenue to become profitable or to continue our operations. Moreover, the filing of our NDA or the receipt of regulatory approval does not assure commercial success of any approved product.

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Although the oral form of SCY-078 has been granted Qualified Infectious Disease Product status, this does not guarantee that the length of the FDA review process will be significantly shorter than otherwise, or that SCY-078 will ultimately be approved by the FDA.
We applied to the FDA for, and received, the designation of the oral form of SCY-078 as a Qualified Infectious Disease Product, or QIDP, under the Generating Antibiotic Incentive Now Act, or GAIN Act. We will be submitting an additional application to have the IV form of SCY-078 designated as a QIDP. There is no guarantee that the IV form of SCY-078 will be granted QIDP status. We anticipate that the QIDP designation will provide, among other benefits, an overall increased level of communication with the FDA during the development process as a fast track product, priority review once a NDA is submitted, and, if SCY-078 is approved for its proposed use and awarded five years of exclusivity as a new chemical entity, or NCE, SCY-078 will be eligible for a ten year period of data exclusivity, comprising five years of NCE exclusivity plus an additional five years as a designated QIDP. This exclusivity period should protect SCY-078 from being referenced in an abbreviated new drug application, or ANDA, in support of a generic drug, or a 505(b)(2) new drug application for a follow-on product until the expiration of the exclusivity period (which may be shortened by one year if an ANDA or 505(b)(2) applicant seeks to challenge any of the patents that claim SCY-078). However, the primary framework of the GAIN Act became effective July 9, 2012, and as a relatively new law there is limited precedent for the way in which it will be implemented. Receipt of QIDP designation in practice may not result in a faster development process, review or approval compared to drugs considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA or related exclusivity benefits.
Delays in the commencement, enrollment and completion of clinical trials could result in increased costs to us and delay or limit our ability to obtain regulatory approval for SCY-078 or any future product candidates.
We do not know whether clinical trials of SCY-078 or any future product candidates we may seek to develop will be allowed to commence or, if commenced, will be completed on schedule or at all. The commencement, enrollment and completion of clinical trials can be delayed for a variety of reasons, including:
 
inability to reach agreements on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
difficulty identifying and engaging qualified clinical investigators;
regulatory objections to commencing a clinical trial or proceeding to the next phase of investigation, including inability to reach agreement with the FDA or non-U.S. regulators regarding the scope or design of our clinical trials or for other reasons such as safety concerns that might be identified during preclinical development or early stage clinical trials;
inability to identify and maintain a sufficient number of eligible trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication as our product candidates;
withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care;
inability to obtain institutional review board (or ethics review committee) approval to conduct a clinical trial at prospective sites;
difficulty recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including meeting the enrollment criteria for our study and competition from other clinical trial programs for the same indication as product candidates we seek to commercialize;
inability to retain patients in clinical trials due to the treatment protocol, personal issues, side effects from the therapy or lack of efficacy; and
inability to obtain sufficient funding to commence a clinical trial.
In addition, a clinical trial may be suspended or terminated by us, our current or any future partners, the FDA or other regulatory authorities due to a number of factors, including:
 
failure by us, CROs or clinical investigators to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
failed inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities;
unforeseen safety or efficacy issues or any determination that a clinical trial presents unacceptable health risks; or

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lack of adequate funding to continue the clinical trial due to unforeseen costs resulting from enrollment delays, requirements to conduct additional trials and studies, increased expenses associated with the services of our CROs and other third parties, or other reasons.
If we are required to conduct additional clinical trials or other testing of SCY-078 or any future product candidates we may seek to develop, we may be delayed in obtaining, or may not be able to obtain, marketing approval for these product candidates.
In addition, if our current or any future partners have rights to and responsibility for development of SCY-078 or any future product candidates, they may fail to meet their obligations to develop and commercialize the product candidates, including clinical trials for these product candidates.
Changes in regulatory requirements and guidance may occur and we or any of our partners may be required by appropriate regulatory authorities to amend clinical trial protocols to reflect these changes. Amendments may require us or any of our partners to resubmit clinical trial protocols to independent review boards for re-examination, which may impact the costs, timing or successful completion of a clinical trial. If we or any of our partners experience delays in the completion of, or if we or our partners terminate, clinical trials, the commercial prospects for SCY-078 and any future product candidates we may seek to develop will be harmed, and our ability to generate revenue from sales of these product candidates will be prevented or delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.
Clinical failure can occur at any stage of clinical development. Because the results of earlier clinical trials are not necessarily predictive of future results, any product candidate we or our current or potential future partners advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.
Clinical failure can occur at any stage of clinical development. Clinical trials may produce negative or inconclusive results, and we or our partners may decide, or regulators may require us, to conduct additional clinical or preclinical testing. In addition, data obtained from tests are susceptible to varying interpretations, and regulators may not interpret data as favorably as we do, which may delay, limit or prevent regulatory approval. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will generate the same results or otherwise provide adequate data to demonstrate the efficacy and safety of a product candidate. Frequently, product candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later clinical trials. In addition, the design of a clinical trial can determine whether its results will support approval of a product application, or approval of a supplemental application to add a new indication or other changes and flaws or shortcomings in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support regulatory approval, or approval of supplemental applications for new indications or other changes. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts. If SCY-078 or any future product candidates are found to be unsafe or lack efficacy, we or our collaborators will not be able to obtain regulatory approval for them and our business would be harmed. For example, if the results of our planned Phase 2 and Phase 3 clinical trials of SCY-078 do not achieve, to the satisfaction of regulators, the primary efficacy endpoints and demonstrate an acceptable level of safety, the prospects for approval of SCY-078 would be materially and adversely affected. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in Phase 2 and Phase 3 clinical trials, even after seeing promising results in earlier clinical trials.
In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including differences in trial protocols and design, differences in size and type of the patient populations, adherence to the dosing regimen and the rate of dropout among clinical trial participants. Further, the patients taking SCY-078 often have other significant medical issues, such as organ transplants, cancer or other conditions in which their immune systems are depressed, which makes it difficult to measure the effect of SCY-078 in the presence of these medical issues. We do not know whether any Phase 2, Phase 3 or other clinical trials we or any partners may conduct will demonstrate consistent and/or adequate efficacy and safety to obtain regulatory approval to market SCY-078 and any future product candidates we may seek to develop.
We have limited experience in conducting clinical trials and have never submitted an NDA before, and we may be unable to do so for SCY-078 or any future product candidate we may seek to develop.*
Merck completed seven Phase 1 clinical trials of SCY-078, and we are planning to conduct Phase 1, Phase 2, and Phase 3 clinical trials of SCY-078. The conduct of successful Phase 2 and Phase 3 clinical trials is essential in obtaining regulatory approval, and the submission of a successful NDA is a complicated process. We have limited experience in

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preparing and submitting regulatory filings, have previously only sponsored one Phase 2 clinical trial, and have not previously sponsored any Phase 3 clinical trials nor have we ever submitted an NDA before. Consequently, we may be unable to successfully and efficiently execute and complete these planned clinical trials in a way that is acceptable to the FDA and leads to an NDA submission, acceptance and approval of SCY-078 or any future product candidate we may seek to develop. We may require more time and incur greater costs than our competitors and may not succeed in obtaining regulatory approvals of product candidates that we may seek to develop. In addition, failure to commence or complete, or delays in, our planned clinical trials would prevent us from or delay us in commercializing SCY-078 or any future product candidate we may develop.
The environment in which our regulatory submissions may be reviewed changes over time, which may make it more difficult to obtain regulatory approval of any of our product candidates we may seek to develop or commercialize.
The environment in which regulatory submissions are reviewed changes over time. For example, average review times at the FDA for NDAs have fluctuated over the last ten years, and we cannot predict the review time for any submission with any regulatory authorities. Review times can be affected by a variety of factors, including budget and funding levels and statutory, regulatory and policy changes. Moreover, in light of widely publicized events concerning the safety risk of certain drug products, regulatory authority, members of Congress, the Government Accountability Office, medical professionals and the general public have raised concerns about potential drug safety issues. These events have resulted in the withdrawal of drug products, revisions to drug labeling that further limit use of the drug products and establishment of risk evaluation and mitigation strategies that may, for instance, restrict distribution of drug products. The increased attention to drug safety issues may result in a more cautious approach by the FDA to clinical trials. Data from preclinical studies and clinical trials may receive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate clinical trials before completion, or require longer or additional clinical trials that may result in substantial additional expense, a delay or failure in obtaining approval or approval for a more limited indication than originally sought.
In addition, data obtained from preclinical studies and clinical trials are subject to different interpretations, which could delay, limit or prevent regulatory review or approval of product candidates. Changes in FDA personnel responsible for review of our submissions could also impact the manner in which our data are viewed. Furthermore, regulatory attitudes towards the data and results required to demonstrate safety and efficacy can change over time and can be affected by many factors, such as the emergence of new information, including on other products, policy changes and agency funding, staffing and leadership. We do not know whether future changes to the regulatory environment will be favorable or unfavorable to our business prospects.
If SCY-078 or any other future product candidates for which we receive regulatory approval do not achieve broad market acceptance, the revenue that is generated from their sales will be limited.
The commercial success of SCY-078 or any other product candidates we may seek to develop will depend upon the acceptance of these products candidates among physicians, patients, the medical community and healthcare payors. The degree of market acceptance of product candidates will depend on a number of factors, including:
 
limitations or warnings contained in the FDA-approved labeling;
changes in the standard of care for the targeted indications;
limitations in the approved indications;
availability of alternative therapies with potentially advantageous results, or other products with similar results at similar or lower cost, including generics and over-the-counter products;
lower demonstrated clinical safety or efficacy compared to other products;
occurrence of significant adverse side effects;
ineffective sales, marketing and distribution support;
lack of availability of reimbursement from managed care plans and other third-party payors;
timing of market introduction and perceived effectiveness of competitive products;
lack of cost-effectiveness;
adverse publicity about our product candidates or favorable publicity about competitive products;