SCYNEXIS, Inc.
SCYNEXIS INC (Form: 10-Q, Received: 08/19/2015 16:15:52)
 
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 JUNE 30, 2015
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.)
 
101 Hudson Street
Suite 3610
Jersey City, New Jersey
 
07302-6548
(Address of principal executive offices)
 
(Zip Code)
(919) 544-8636
(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 August 1, 2015 , there were 13,903,832 shares of the registrant’s Common Stock outstanding.
 



Table of Contents


SCYNEXIS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015

TABLE OF CONTENTS
 
 
 
 
 
 
Page
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1A.
Item 2.
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)
 
June 30, 2015
 
December 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
57,057

 
$
32,243

Prepaid expenses and other current assets
1,502

 
703

Assets held for sale, net (Note 14)
6,086

 
6,701

Total current assets
64,645

 
39,647

Other assets
33

 
25

Total assets
$
64,678

 
$
39,672

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
477

 
$
426

Accrued expenses
2,835

 
2,245

Accrued severance and retention costs, current portion (Note 13)
1,408

 

Deferred revenue, current portion
232

 
257

Liabilities related to assets held for sale (Note 14)
2,099

 
2,420

Total current liabilities
7,051

 
5,348

Deferred revenue, net of current portion
764

 
893

Accrued severance and retention costs, net of current portion (Note 13)
91

 

Total liabilities
7,906

 
6,241

Commitments and contingencies (Note 5)

 

Stockholders’ equity:
 
 
 
Common stock, $0.001 par value, 125,000,000 shares authorized as of June 30, 2015, and December 31, 2014; 13,903,832 and 8,512,103 shares issued and outstanding as of June 30, 2015, and December 31, 2014, respectively
14

 
8

Additional paid-in capital
190,150

 
150,934

Accumulated deficit
(133,392
)
 
(117,511
)
Total stockholders’ equity
56,772

 
33,431

Total liabilities and stockholders’ equity
$
64,678

 
$
39,672

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

1


Table of Contents



SCYNEXIS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Total revenue and gross profit
$
64

 
$
65

 
$
129

 
$
130

Operating expenses:
 
 
 
 
 
 
 
Research and development
3,282

 
1,823

 
7,069

 
3,143

Selling, general and administrative
3,275

 
2,255

 
5,485

 
3,461

Total operating expenses
6,557

 
4,078

 
12,554

 
6,604

Loss from operations
(6,493
)
 
(4,013
)
 
(12,425
)
 
(6,474
)
Other (income) expense:
 
 
 
 
 
 
 
Amortization of deferred financing costs and debt discount

 
219

 

 
755

Loss on extinguishment of debt

 
1,389

 

 
1,389

Interest (income) expense
(1
)
 
5

 
(2
)
 
49

Derivative fair value adjustment

 
(7,297
)
 

 
(10,080
)
Other expense

 

 

 
10

Total other (income) expense
(1
)
 
(5,684
)
 
(2
)
 
(7,877
)
(Loss) income from continuing operations
(6,492
)
 
1,671

 
(12,423
)
 
1,403

Discontinued operations (Note 14):
 
 
 
 
 
 
 
(Loss) income from discontinued operations, including $1,350 impairment charge on classification as held for sale for the three and six months ended June 30, 2015
(3,005
)
 
562

 
(3,458
)
 
1,242

Net (loss) income
(9,497
)
 
2,233

 
(15,881
)
 
2,645

Deemed dividends, accretion, and allocation of net income to convertible preferred stockholders (Note 10)

 
(262
)
 

 
(1,936
)
Net (loss) income attributable to common stockholders - basic
(9,497
)
 
1,971

 
(15,881
)
 
709

Derivative fair value adjustment

 
(7,297
)
 

 
(10,080
)
Net loss attributable to common stockholders - diluted
$
(9,497
)
 
$
(5,326
)
 
$
(15,881
)
 
$
(9,371
)
(Loss) income per share attributable to common stockholders - basic
 
 
 
 
 
 
 
Continuing operations
$
(0.53
)
 
$
0.27

 
$
(1.20
)
 
$
(0.19
)
Discontinued operations
(0.25
)
 
0.11

 
(0.33
)
 
0.45

Net (loss) income per share - basic
$
(0.78
)
 
$
0.38

 
$
(1.53
)
 
$
0.26

(Loss) income per share attributable to common stockholders - diluted
 
 
 
 
 
 
 
Continuing operations
$
(0.53
)
 
$
(1.08
)
 
$
(1.20
)
 
$
(3.49
)
Discontinued operations
(0.25
)
 
0.10

 
(0.33
)
 
0.41

Net loss per share - diluted
$
(0.78
)
 
$
(0.98
)
 
$
(1.53
)
 
$
(3.08
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
12,249,487

 
5,181,174

 
10,393,289

 
2,771,020

Diluted
12,249,487

 
5,454,371

 
10,393,289

 
3,044,729

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

2


Table of Contents


SCYNEXIS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Six months ended 
 June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(15,881
)
 
$
2,645

Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Impairment loss on classification of assets as held for sale
1,350

 

Gain on insurance recovery

 
(165
)
Loss on extinguishment of debt

 
1,389

Recovery of bad debt

 
(75
)
Depreciation
447

 
615

Stock-based compensation expense
1,115

 
382

Amortization of deferred financing costs and debt discount

 
755

Change in fair value of derivative liability

 
(10,080
)
Changes in deferred rent
(122
)
 
(56
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable and unbilled services
(214
)
 
(394
)
Prepaid expenses, other assets, and deferred costs
(1,262
)
 
(351
)
Accounts payable and accrued expenses
467

 
557

Accrued severance and retention cost obligations
1,499

 
389

Deferred revenue
(218
)
 
321

Net cash used in operating activities
(12,819
)
 
(4,068
)
Cash flows from investing activities:
 
 
 
Proceeds from insurance recovery

 
216

Purchases of property and equipment
(527
)
 
(323
)
Net cash used in investing activities
(527
)
 
(107
)
Cash flows from financing activities:
 
 
 
Proceeds from public offerings
41,400

 
62,000

Proceeds from sale of preferred stock

 
544

Repayment of debt

 
(15,000
)
Payments of deferred offering costs and underwriting discounts and commissions
(3,335
)
 
(6,410
)
Proceeds from employee stock purchase plan issuance
95

 

Proceeds from exercise of stock warrants

 
55

Proceeds from exercise of stock options

 
9

Net cash provided by financing activities
38,160

 
41,198

Net increase in cash and cash equivalents
24,814

 
37,023

Cash and cash equivalents, beginning of period
32,243

 
1,402

Cash and cash equivalents, end of period
$
57,057

 
$
38,425

Supplemental cash flow information:
 
 
 
Cash paid for interest
$

 
$
49

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

Deferred offering costs included in accounts payable and accrued expenses
$
53

 
$
465

Equipment purchases in accounts payable and accrued expenses
$
20

 
$
6

Impairment of fixed asset
$

 
$
51

Deferred offering costs reclassified to additional paid-in capital
$
3,388

 
$
4,127

Warrant derivative liability reclassified to additional paid-in capital
$

 
$
2,701

Conversion of convertible preferred stock to common stock
$

 
$
88,790

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

3


Table of Contents


SCYNEXIS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except 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.
Historically, and through the interim period ended June 30, 2015 , the Company also offered 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. These services were provided by the Company's contract research and development services business (the "Services Business") asset group. On July 21, 2015, the Company completed the sale of the Services Business asset group pursuant to an Asset Purchase Agreement (the "Agreement"), with an effective date of July 17, 2015, with Accuratus Lab Services, Inc. ("Accuratus"), a private-equity backed process chemistry, formulation, manufacturing and analytical development services provider. The material terms of the Services Business sale transaction are described in Note 15.
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 six month periods ended June 30, 2015 , are not necessarily indicative of the results for the full year or the results for any future periods. These interim financial statements should be read in conjunction with the financial statements and notes set forth in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC") on March 30, 2015.
Discontinued Operations
As described in Note 14, the Company met the relevant criteria for reporting the Services Business as held for sale and in discontinued operations in the accompanying unaudited interim financial statements as of and for the three and six month periods ended June 30, 2015, and 2014, pursuant to FASB Topic 205-20, Presentation of Financial Statements--Discontinued Operations , and FASB Topic 360, Property, Plant, and Equipment .
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 periods. Actual results could differ from those estimates. Significant estimates include: the accounts receivable allowances; the other receivable allowances; 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 Services Business asset group's fair value less costs to sell, which was used to assess the Services Business asset group for impairment; the fair value of convertible preferred stock; the fair value of the Company’s derivative liability; the estimate of services and effort expended by third-party research and development service providers used to recognize research and development expense; 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.

4




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 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 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 income (loss) per share calculations between interim 2015 and 2014 periods.
April 2015 Follow-on Public Offering
On April 28, 2015, the Company completed a follow-on public offering (the "April 2015 Offering") of its common stock. The Company sold an aggregate of 5,376,622 shares of common stock at a public offering price of $7.70 per share. Net proceeds were approximately $38,012 , after deducting underwriting discounts and commissions and offering expenses of approximately $3,388 . The significant increase in the shares outstanding beginning in April 2015 is expected to impact the year-over-year comparability of the Company’s net (loss) income per share calculations for the next twelve months.
 
2.
Summary of Significant Accounting Policies
Assets Held for Sale
The Company generally considers assets to be held for sale (i) when the transaction has been approved by the board of directors or management vested with authority to approve the transaction, (ii) t he assets are available for immediate sale in their present condition, (iii) the Company has initiated an active program to locate a buyer and other actions required to complete the plan to sell the assets, (iv) consummation of the transaction is probable, (v) the assets are being actively marketed for sale at a price that is reasonable in relation to their current fair value, and (vi) the transaction is expected to qualify for recognition as a completed sale, within one year. Following the classification of property and equipment as held for sale, the Company discontinues depreciating the asset and writes down the asset to the lower of carrying value or fair market value, if needed. As described in Note 14, on May 4, 2015, actions taken by the Company's board of directors caused the Company to meet the relevant criteria for reporting the Services Business as held for sale.
Concentration of Credit Risk
Financial instruments, which potentially expose the Company to concentrations of credit risk consist principally of cash on deposit with a bank, which exceeds the FDIC insurance limits, as well as accounts receivable and unbilled services. Ongoing credit evaluations of the bank and customers' financial condition and independent ratings are reviewed by the Company. Collateralization of deposits has not been required.
Deferred Offering Costs
Deferred offering costs are expenses directly related to the IPO or the April 2015 Offering. These costs consist of legal, accounting, printing, and filing fees that the Company has capitalized, including fees incurred by the independent registered public accounting firm directly related to the offerings. The IPO 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. Deferred costs associated with the April 2015 Offering were offset against the proceeds from the April 2015 Offering and were reclassified to additional paid-in capital upon completion of the April 2015 Offering.
Revenue Recognition and Deferred Revenue
The Company historically derived the majority of its revenue from providing contract research and development services under fee for service arrangements, which were provided by the Company's Services Business that was sold in July 2015 (see

5




Notes 1 and 15). 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. The Company classifies non-refundable upfront payments, milestone payments and royalties received under collaboration and licensing agreements as revenues within its statements of operations because the Company views such activities as being central to its business operations.
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. The Company’s contract research and development services revenue was recognized in the period in which the services were performed.
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.
Non-refundable upfront license fees are recorded as deferred revenue and recognized into revenue on a straight-line basis over the estimated period of the Company’s substantive performance obligations. If the Company does not have substantive performance obligations, the Company recognizes non-refundable upfront fees into revenue through the date the deliverable is satisfied. Analyzing the arrangement to identify deliverables requires the use of judgment and each deliverable may be an obligation to deliver services, a right or license to use an asset, or another performance obligation. 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. In such instances, the 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 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 includes non-refundable upfront payments received under certain licensing and collaboration arrangements that contain substantive performance obligations that the Company is providing over respective defined service or estimated relationship periods. Such non-refundable upfront payments are recognized over these defined service or estimated relationship periods. The Company received a non-refundable upfront payment of $1,500 from R-Pharm in August 2013 which is being recognized over a period of 70 months. The Company recognized revenue in continuing operations from this upfront payment of $64 and $129 for the three and six months ended June 30, 2015 , respectively, and $65 and $130 for the three and six months ended June 30, 2014 , respectively. The Company received a non-refundable upfront payment of $500 in January 2014 under a research services agreement supported by the Company's Services Business, which was being recognized over a period of 48 months. The Company recognized revenue in discontinued operations from this upfront

6




payment of $31 and $63 for the three and six months ended June 30, 2015 , respectively, and $31 and $59 for the three and six months ended June 30, 2014 , respectively.
Collaboration Arrangements
The Company assesses its contractual arrangements, and presents costs incurred and payments received under contractual arrangements, in accordance with FASB ASC 808, Collaborative Arrangements (Topic 808), when the Company determines that the contractual arrangement includes a joint operating activity, has active participation by both parties, and both parties are subject to significant risks and rewards under the arrangement. When reimbursement payments are due to the Company under a collaborative arrangement within the scope of Topic 808, the Company determines the appropriate classification for each specific reimbursement payment in the statements of operations by considering (i) the nature of the arrangement, (ii) the nature of the Company’s business operations, and (iii) the contractual terms of the arrangement.
The Company's August 2013 development, license, and supply agreement with R-Pharm, CJSC (“R-Pharm”), combined with the supplemental arrangement in November 2014, is a collaborative arrangement pursuant to Topic 808 and the Company’s previously described accounting policy. The reimbursements due from R-Pharm for specified research and development costs incurred by the Company are classified as a reduction to research and development expense in the accompanying statements of operations. The reimbursements due to the Company are recorded as a reduction of expense when (i) the reimbursable expenses have been incurred by the Company, (ii) persuasive evidence of a cost reimbursement arrangement exists, (iii) reimbursable costs are fixed or determinable, and (iv) the collection of the reimbursement payment is reasonably assured. The Company recorded receivables for unpaid reimbursement amounts due from R-Pharm of $777 and $226 as of June 30, 2015 and December 31, 2014, respectively, which are presented as other current assets in the accompanying balance sheets.
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.
The Company is required to estimate its expenses resulting from its obligations under contracts with clinical research organizations, clinical site agreements, vendors, and consultants in connection with conducting SCY-078 clinical trials and preclinical development. The financial terms of these contracts are subject to negotiations which vary from contract to contract, and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts. The Company’s objective is to reflect the appropriate development and trial expenses in its financial statements by matching those expenses with the period in which the services and efforts are expended. For clinical trials, the Company accounts for these expenses according to the progress of the trial as measured by actual hours expended by CRO personnel, investigator performance or completion of specific tasks, patient progression, or timing of various aspects of the trial. For preclinical development services performed by outside service providers, the Company determines accrual estimates through financial models, taking into account development progress data received from outside service providers and discussions with applicable Company and service provider personnel.
Reimbursements of certain research and development costs by parties under collaborative arrangements have been recorded as a reduction of research and development expense presented within the statement of operations. Such reimbursements were recognized under the collaboration arrangement with R-Pharm during the three and six months ended June 30, 2015 . Information about the Company’s research and development expenses and reimbursements due under collaboration arrangements for the three and six months ended June 30, 2015 and 2014, is presented as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Research and development expense, gross
 
$
3,820

 
$
1,823

 
7,801

 
3,143

Less: Reimbursement of research and development expense
 
538

 

 
732

 

Research and development expense, net of reimbursements
 
$
3,282

 
$
1,823

 
7,069

 
3,143


Effect of Recent Accounting Pronouncements

7




In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity , or ASU 2014-08. Under ASU 2014-08, only disposals representing a strategic shift in operations that have a major effect on the Company’s operations and financial results should be presented as discontinued operations. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in ASU 2014-08 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The Company adopted this guidance in the first quarter of 2015 and has applied it in the accompanying interim financial statements for presentation and disclosure of the Services Business as discontinued operations (see Note 14). The Company will also apply, as applicable, the guidance to future dispositions or classifications as held for sale.
In May 2014, the 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 most current revenue recognition guidance, including industry-specific guidance. In applying the new revenue recognition model to contracts with customers, an entity: (1) identifies the contract(s) with a customer; (2) identifies the performance obligations in the contract(s); (3) determines the transaction price; (4) allocates the transaction price to the performance obligations in the contract(s); and (5) recognizes revenue when (or as) the entity satisfies a performance obligation. The accounting standards update applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The accounting standards update also requires significantly expanded quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. 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 FASB delayed in the effective date of the accounting standards update to fiscal years and interim periods within those years beginning on or after December 15, 2017, which is pending approval. 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 not early adopting ASU 2014-15. The Company is currently evaluating the impact that the implementation of ASU 2014-15 will have on the Company’s financial statements, and the actual impact will be dependent upon the Company’s liquidity and the nature or significance of future events or conditions that exist upon adopting the updated standard.
In January 2015, the FASB issued ASU No. 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, or ASU 2015-01. ASU 2015-01 eliminates from GAAP the concept of extraordinary items. ASU 2015-01 is effective for fiscal years and interim periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect that the adoption of ASU 2015-01 will have a material impact on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,  Simplifying the Presentation of Debt Issuance Costs , or ASU 2015-03. Under ASU 2015-03, the costs of issuing debt will no longer be recorded as an intangible asset, except when incurred before receipt of the funding from the associated debt liability. Rather, debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The costs will continue to be amortized to interest expense using the effective interest method. ASU 2015-03 is effective for fiscal years and interim periods beginning after December 15, 2015, with early adoption permitted. ASU 2015-03 requires retrospective application to all prior periods presented in the financial statements. The Company does not expect that the adoption of ASU 2015-03 will have a material any impact on its consolidated financial statements. 
In April 2015, the FASB issued ASU No. 2015-05,  Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” , or ASU 2015-05 ASU 2015-05 provides guidance to entities about whether a cloud computing arrangement includes a software license. Under ASU 2015-05, if a software cloud computing arrangement contains a software license, entities should account for the license element of the arrangement in a manner consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, entities should account for the arrangement as a service contract. ASU 2015-05 also removes the requirement to analogize to ASC 840-10, to determine the asset acquired in a software licensing arrangement. For public companies, ASU 2015-05 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The Company does not expect that the adoption of ASU 2015-05 will have a material impact on its consolidated financial statements.


8




3.
Property and Equipment
Property and equipment consists of the following:
 
June 30,
2015
 
December 31,
2014
Equipment
$
9,046

 
$
8,552

Furniture and fixtures
375

 
375

Leasehold improvements
13,212

 
13,193

Total property and equipment
22,633

 
22,120

Less accumulated depreciation
17,732

 
17,285

Property and equipment, net of accumulated depreciation
4,901

 
4,835

Less impairment charge on classification of property and equipment as assets held for sale
1,350

 

Property and equipment, net of accumulated depreciation and impairment charge
3,551

 
4,835

Property and equipment reclassified to assets held for sale, net
(3,551
)
 
(4,835
)
Property and equipment, net of assets classified as held for sale
$

 
$

Depreciation expense was $124 and $447 for the three and six months ended June 30, 2015 , respectively, and $307 and $615 for the three and six months ended June 30, 2014 , respectively. As discussed in Note 14, the Company met the relevant criteria for reporting the Service Business as held for sale on May 4, 2015, and as a result, the Company stopped recording depreciation expense on that date and assessed the property and equipment assets for impairment pursuant to FASB Topic 360, Property, Plant, and Equipment .

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.
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 June 30, 2015 and as of December 31, 2014.
Amortization of deferred financing costs associated with the 2010 Credit Agreement and 2013 Credit Agreement was $0 for both the three and six months ended June 30, 2015 , and $219 and $755 for the three and six months ended June 30, 2014 , respectively.
Note and Warrant Purchase Agreements
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

9




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.
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 June 30, 2015 and as of December 31, 2014.
 
5.
Commitments and Contingencies
Leases
During the period covered by this quarterly report on Form 10-Q, the Company leased its facilities and certain office equipment under long-term non-cancelable operating leases.
Rent expense was approximately $219 and $437 for the three and six months ended June 30, 2015 , respectively, and $236 and $467 for the three and six months ended June 30, 2014 , respectively. Future minimum lease payments for all operating leases as of June 30, 2015 are as follows:
 
 
2015
$
550

2016
1,122

2017
1,140

2018
1,161

2019
291

Thereafter

Total
$
4,264

As a condition to the execution of the Asset Purchase Agreement (the "Agreement"), Accuratus is assuming the Company’s post-closing obligation under its facility lease in Durham, North Carolina and the Company is being released from any post-closing liability under the facility operating lease (see Note 14), including the future minimum lease payments included within the table immediately above. The Company and its retained employees will continue to operate from the Durham facility immediately after the closing for a period of up to six months pursuant to a facility license agreement between the Company and Accuratus dated July 17, 2015. At the same time, the Company is in the process of relocating its corporate headquarters and operating activities to Jersey City, New Jersey, where in July 2015 it subleased a premises located at 101 Hudson Street, Jersey City, New Jersey. The material terms of the Jersey City, New Jersey sublease are described in Note 15.
License Arrangement with Potential Future Expenditures
As of June 30, 2015 , 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 a phase 3 clinical study, 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.
In December 2014, the Company and Merck entered into an amendment to the license agreement that deferred the remittance of a milestone payment due to Merck, such that no amount would be due upon initiation of the first phase 2 clinical trial of a product containing the SCY-078 compound (the "Deferred Milestone"). The amendment also increased, in an amount

10




equal to the Deferred Milestone, the milestone payment that would be due upon initiation of the first Phase 3 clinical trial of a product containing the SCY-078 compound. Except as described above, all other terms and provisions of the license agreement remain in full force and effect.
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
The Company has entered into, and expects to continue to enter into, contracts in the normal course of business with various third parties who support its clinical trials, preclinical research studies, and other services related to its development activities. The Company's most significant agreement, entered into i n June 2014, is with a third-party clinical research organization to conduct a Phase 2 clinical trial for SCY-078. 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.
Other Arrangements
The Company entered into an agreement with a third party firm to assist the Company in exploring the divestiture of its Services Business (see Note 14). Pursuant to the terms of the agreement, in the event that the Company was able to complete a divestiture of its contract research and development services business to a third-party, the Company was obligated to pay a success fee to the third party firm for the greater of $500 or 4% of the transaction consideration. As described in Note 15, the Company completed the sale of the Company’s Services Business pursuant to an Asset Purchase Agreement, dated July 17, 2015. The Company paid and expensed an initial retainer of $50 prior to the closing of the Service Business sale transaction. In July 2015, the Company paid the $450 remaining success fee to the third-party firm in connection with the closing of the sale transaction.
Compensatory Arrangements with Employees and Officers
The Company has entered into certain compensatory arrangements and commitments with employees and officers, the material terms of which are described in Note 13 and Note 15.

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 . 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 respective 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, which converted into the right to purchase 14,033 shares of our common stock in connection with our IPO, however, we refer to these warrants as our Series C-1 Preferred warrants. The Series C-1 Preferred warrants were issued in conjunction with a loan financing agreement with an original exercise price of $3.25 per share of Series C-1 Preferred, which converted into an exercise price of $45.61 per share of common stock in connection with our IPO. These warrants remain outstanding as of June 30, 2015 and will expire on May 7, 2019 , which is the five year anniversary of the Company's IPO. 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 for both the three and six months ended June 30, 2015 , and $0 and $37 for the three and six months ended June 30, 2014 , 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 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.

11




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.
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 as of June 30, 2015 , and December 31, 2014 ; 13,903,832 and 8,512,103 shares were issued and outstanding at June 30, 2015 , and December 31, 2014 , respectively. The following table summarizes common stock share activity for the six months ended June 30, 2015 :  
 
Shares of
Common Stock
Balance, December 31, 2014
8,512,103

Common stock issued through April 2015 Offering
5,376,622

Common stock issued through employee stock purchase plan
15,107

Balance, June 30, 2015
13,903,832

Shares Reserved for Future Issuance
The Company had reserved shares of common stock for future issuance as follows:
 
 
As of
 
As of
 
June 30,
2015
 
December 31,
2014
Outstanding stock options
1,153,369

 
615,322

Outstanding Series C-1 Preferred warrants
14,033

 
14,033

For possible future issuance under 2014 Equity Incentive Plan (Note 8)
618,773

 
180,610

For possible future issuance under Employee Stock Purchase Plan (Note 8)
52,050

 
37,746

For possible future issuance under 2015 Inducement Plan (Note 8)
325,000

 

Total common shares reserved for future issuance
2,163,225

 
847,711

Common Stock Warrants
The Company had outstanding common stock warrants issued in connection with the Note and Warrant Purchase Agreements (see Note 4) and in connection with certain convertible preferred stock agreements (see 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 (see 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 were exercised in connection with the 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 were exercised in connection with the IPO. In addition, as a result of the

12




conversion of the principal and interest outstanding on the 2011-2012 Notes into Series D-1 Preferred and Series D-2 Preferred (see 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, the 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.
All previously described warrants met the definition of a derivative financial instrument and were accounted for as derivatives. The warrants 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. The combined fair value of the common stock warrant derivative liabilities, including warrants issued with the sale of Series D-2 Preferred, was $12,200 as of December 31, 2013, and then decreased to $9,998 as of March 31, 2014. The combined fair value of the common stock warrant derivative liabilities continued to decrease in the second quarter of 2014 to $2,701 as of May 2, 2014, and this amount was settled to additional paid in capital on that date as the warrants were exercised in conjunction with the Company's IPO. The fair value adjustment of the long-term derivative liability was recorded as other income in the amounts of $0 for both the three and six months ended June 30, 2015 , respectively, and $7,297 and $10,405 for the three and six months ended June 30, 2014 , respectively.

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.
Pursuant to the terms of the 2014 Plan, on January 1, 2015, the Company automatically added 340,484 shares to the total number of shares of common stock available for future issuance under the 2014 Plan.
On February 25, 2015, the Company's board of directors approved an amendment of the 2014 Plan, subject to stockholder approval, to increase the aggregate number of shares of common stock that may be issued pursuant to awards under the 2014 Plan by an additional 510,726 shares. The Company's stockholders approved the 2014 Plan amendment on June 4, 2015. All other material terms of the 2014 Plan otherwise remain unchanged.

13




April 2015 Stock Option Grants
On April 1, 2015, the Company granted options to purchase 425,967 shares of common stock to officers and other key employees, including an award to Dr. Marco Taglietti, the Company's new Chief Executive Officer, to purchase 330,000 shares of the Company's common stock. All options granted on April 1, 2015, have a 10 -year term. For Dr. Taglietti's grant, one-fourth of the shares subject to the option shall vest on the one-year anniversary of the date of grant with the remainder vesting in equal monthly installments for thirty-six months thereafter, provided Dr. Taglietti continues to provide service to the Company. For all other April 1, 2015 officer and key employee grants, the shares subject to the options vest in equal monthly installments for forty-eight months as measured from the date of grant.
As of June 30, 2015 , there were 618,773 shares of common stock available for future issuance under the 2014 Plan.
Option Amendments
During the quarter ended June 30, 2015, the following events resulted in the amendment to terms of outstanding stock option awards:
On June 4, 2015, the Company's board of directors approved an extension to the existing 90 -day post-employment option exercise period to a period ranging from 36 to 48 months for three directors who resigned from the board effective June 4, 2015. The directors held outstanding options to purchase 48,283 shares of the Company's common stock at a weighted average exercise price of $9.01 per share. All outstanding options were fully vested prior to June 4, 2015.
In connection with the Company's sale of its Services Business (Note 13), the Company designed a compensatory plan to promote the retention of services of non-executive employees supporting that business (the "Services Business Plan"). The complete terms of the Service Business Plan are described in Note 13. The Company terminated certain employees in June 2015 (the "June 2015 terminated employees") who became eligible for severance benefits pursuant to the terms of the Services Business Plan. The outstanding stock options held by the June 2015 terminated employees were modified to provide: (i) accelerated vesting of all unvested stock options as of the closing of the sale transaction and (ii) an extension to the existing 90-day post-employment option exercise period, which varies for each employee based upon years of service, with a maximum exercise period of 48 months. As of June 30, 2015, the June 2015 terminated employees held outstanding options to purchase 17,715 shares of the Company's common stock at a weighted average exercise price of $9.64 per share, including aggregate unvested options to purchase 8,331 shares at a weighted average exercise price of $9.64 per share.
As described in Note 13, Charles F. Osborne, Jr., the Company’s former chief financial officer, resigned from the Company effective June 30, 2015. The Company's compensation committee of the board of directors approved the following modifications to Mr. Osborne's outstanding options to purchase the Company's common stock: (i) accelerated vesting of all unvested stock options as of June 30, 2015, and (ii) an extension to the existing 90-day post-employment option exercise period to 36 months. As of June 30, 2015, Mr. Osborne held outstanding options to purchase an aggregate of 74,490 shares of the Company's common stock at a weighted average exercise price of $9.53 per share, including unvested options to purchase 50,814 shares at a weighted average exercise price of $9.49 per share.
As described in Note 13, the Company designed a compensatory plan for its non-executive employees in connection with the relocation of its operations to Jersey City, New Jersey (the "Retention Plan"). Pursuant to the terms of the Retention Plan, all stock options held by non-executive employees eligible under the Retention Plan were modified to provide: (i) accelerated vesting of all unvested stock options as of December 31, 2015, and (ii) an extension to the existing 90-day post-employment option exercise period, which varies for each employee based upon years of service, with a maximum exercise period of 48 months. As of June 30, 2015, the retained employees eligible for participation in the Retention Plan held outstanding options to purchase 121,550 shares of the Company's common stock at a weighted average exercise price of $9.13 per share, including aggregate unvested options to purchase 85,990 shares at a weighted average exercise price of $8.95 per share.
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 to determine an incremental fair value, consistent with and in accordance with the Company’s existing accounting policy for stock compensation (see Note 1). Using the Black-Scholes option-pricing model, the weighted-average incremental fair value of outstanding modified option awards was $3.54 per option share. The total additional compensation cost associated with the previously described modifications was determined to be $819 , of which $466 was associated with

14




services previously performed and, therefore, was expensed in the quarter ended June 30, 2015. The remaining additional compensation cost is associated with future service periods and will be recognized as those services are performed.
See Note 15 for certain events occurring after June 30, 2015, that resulted in additional amendments to outstanding stock option awards.
2015 Inducement Plan
On March 26, 2015, the Company's board of directors adopted the 2015 Inducement Plan, or the 2015 Plan. The 2015 Plan provides for the grant of nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and other forms of equity compensation (collectively, stock awards), all of which may be granted to persons not previously employees or directors of the Company, or following a bona fide period of non-employment, as an inducement material to the individuals’ entering into employment with the Company within the meaning of NASDAQ Listing Rule 5635(c)(4). The 2015 Plan has a share reserve covering 450,000 shares of common stock. During the quarter ended June 30, 2015, the Company granted an option to purchase 125,000 shares of the Company's common stock under to the 2015 Inducement Plan. As of June 30, 2015 , there were 325,000 shares of common stock available for future issuance under the 2015 Plan.
2014 Employee Stock Purchase Plan
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 the quarterly period ended March 31, 2015, the number of shares of common stock available for issuance under the ESPP was automatically increased by 29,411 shares pursuant to the terms of the ESPP and the Company issued 15,107 shares of common stock under the ESPP. There was no activity under the ESPP during the quarterly period ended June 30, 2015. As of June 30, 2015 , there were 52,050 shares of common stock available for future issuance under the ESPP.
In connection with the sale of the Services Business, each of the Company’s non-executive officer employees principally providing services to the Services Business has accepted continued employment with the buyer, Accuratus, or has been terminated by July 17, 2015, the effective date of the transaction (see Note 14). As of June 30, 2015, the Company has $59 in employee withholdings under the ESPP that it will return to employees that are no longer employed by the Company because of the sale of the Services Business. These employee withholdings are included in accrued expenses in the accompanying balance sheets.
Compensation Cost
The compensation cost that has been charged against income for stock awards under the 2009 Stock Option Plan, the 2014 Plan, the 2015 Plan, and the ESPP was $819 and $1,115 for the three and six months ended June 30, 2015 , respectively, and $272 and $382 for the three and six months ended June 30, 2014 , respectively. The total income tax benefit recognized in the statements of operations for share-based compensation arrangements was $0 for the three and six months ended June 30, 2015 and 2014 . Cash received from options exercised was $0 for both the three and six months ended June 30, 2015 , and $4 and $9 for the three and six months ended June 30, 2014 .
Stock-based compensation expense related to stock options is included in the following line items in the accompanying statements of operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Research and development
62

 
100

 
114

 
162

Selling, general and administrative
689

 
135

 
900

 
170

Discontinued operations
68

 
37

 
101

 
50

 
$
819

 
$
272

 
$
1,115

 
$
382


15




 
9.
Income Taxes
The Company did not record a federal or state income tax benefit for the three and six months ended June 30, 2015 and 2014 , 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 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.

16





The following table summarizes the computation of basic and diluted net loss per share attributable to the Company’s common stockholders:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Income (loss) attributable to common stock - basic:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(6,492
)
 
$
1,671

 
$
(12,423
)
 
$
1,403

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
)
Allocation of net income to convertible preferred stockholders

 
(262
)
 

 
(303
)
Income (loss) from continuing operations attributable to common stock - basic
(6,492
)
 
1,409

 
(12,423
)
 
(533
)
Income (loss) from discontinued operations attributable to common stock - basic
(3,005
)
 
562

 
(3,458
)
 
1,242

Net income (loss) attributable to common stock - basic
$
(9,497
)
 
$
1,971

 
$
(15,881
)
 
$
709

 
 
 
 
 
 
 
 
Income (loss) attributable to common stock - diluted:
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common stock - basic
$
(6,492
)
 
$
1,409

 
$
(12,423
)
 
$
(533
)
Derivative fair value adjustment

 
(7,297
)
 

 
(10,080
)
Loss from continuing operations attributable to common stock - diluted
(6,492
)
 
(5,888
)
 
(12,423
)
 
(10,613
)
Loss from discontinued operations attributable to common stock - diluted
(3,005
)
 
562

 
(3,458
)
 
1,242

Net income (loss) attributable to common stock - diluted
$
(9,497
)
 
$
(5,326
)
 
$
(15,881
)
 
$
(9,371
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
12,249,487

 
5,181,174

 
10,393,289

 
2,771,020

Allocation of common stock warrants as participating securities

 
273,197

 

 
273,709

Weighted-average common shares outstanding - diluted
12,249,487

 
5,454,371

 
10,393,289

 
3,044,729

 
 
 
 
 
 
 
 
Income (loss) per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
(0.53
)
 
$
0.27

 
$
(1.20
)
 
$
(0.19
)
Discontinued operations
(0.25
)
 
0.11

 
(0.33
)
 
0.45

Net income (loss) per share - basic
$
(0.78
)
 
$
0.38

 
$
(1.53
)
 
$
0.26

Income (loss) per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
(0.53
)
 
$
(1.08
)
 
$
(1.20
)
 
$
(3.49
)
Discontinued operations
(0.25
)
 
0.10

 
(0.33
)
 
0.41

Net income (loss) per share - diluted
$
(0.78
)
 
$
(0.98
)
 
$
(1.53
)
 
$
(3.08
)

17





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.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Convertible preferred stock:
 
 
 
 
 
 
 
Series A Preferred

 
6,149

 

 
6,149

Series B Preferred

 
131,685

 

 
131,685

Series C Preferred

 
783,515

 

 
783,515

Series C-2 Preferred

 
173,213

 

 
173,213

Series D-1 Preferred

 
296,773

 

 
296,773

Series D-2 Preferred

 
300,549

 

 
300,549

Series C-1 Preferred warrants
14,033

 
14,033

 
14,033

 
14,033

Stock options
1,153,369

 
215,467

 
1,153,369

 
215,467

ESPP
7,298

 

 
7,298

 

 
11.
Related-Party Transactions
The Company had transactions with related parties as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
988

 
$
1,822

 
$
1,975

 
$
3,644

Selling, general and administrative expense
$

 
$
500

 
$

 
$
500

Sanofi owns 100% of a subsidiary that is a customer of the Company's Services Business, which is presented in discontinued operations in the accompanying statements of operations (Note 14). Both Sanofi and the subsidiary have an investment in the Company. The Company’s related-party revenue with the subsidiary composed 27% and 29% total revenue in discontinued operations for the three and six months ended June 30, 2015 , respectively, and 40% and 40% of total revenue in discontinued operations for the three and six months ended June 30, 2014 , respectively.
In May 2014, the Company paid a $500 IPO success fee to Burrill Securities, an affiliate of Burrill Biotechnology Capital Fund, L.P., a holder of the Company’s capital stock, pursuant to the engagement letter, as amended. 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 Non-Recurring Basis
As discussed in Note 14, the Company met the relevant criteria for reporting the Service Business as held for sale on May 4, 2015 (the "Measurement Date"), and as a result, assessed the asset group for impairment pursuant to FASB Topic 360, Property, Plant, and Equipment . The net carrying value of the Services Business asset group was compared to its fair value as of May 4, 2015. The Company determined that the selling price paid by Accuratus to acquire the Services Business asset group was the best estimate of fair value, which the Company concluded was a Level 2 input. The Company determined that the Services Business asset group's net carrying value exceeded its fair value by $572 on the Measurement Date. The Company also estimated selling costs directly attributable to the sale of the Services Business to be $778 . As a result, the Company recorded a $1,350 impairment charge on property and equipment assets classified as held for sale in the quarterly period ended June 30, 2015.

18




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 June 30, 2015 , and December 31, 2014 , there were no assets or liabilities measured at fair value on a recurring basis.
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:
 
 
Three months ended
 
Six months ended
 
 
June 30, 2014
 
June 30, 2014
Balance at beginning of period
 
$
9,998

 
$
12,237

Issuance of warrants
 

 
544

Excess of fair value of warrants over proceeds
 

 
362

Adjustment to fair value
 
(7,297
)
 
(10,442
)
Reclassification to additional paid-in capital upon exercise of warrants
 
(2,701
)
 
(2,701
)
Balance at end of period
 
$

 
$

    
13.
Compensatory Plan Obligations
Compensatory Plan with Services Business Employees
In connection with the Company's sale of its Services Business, which is more fully described in Note 15, the Company designed a compensatory plan to promote the retention of services of its non-executive employees supporting that business (the "Services Business Plan"). The Company's board of directors adopted, and the Company communicated, the material terms of the Services Business Plan prior to June 30, 2015, to all non-executive employees of the Services Business. The Services Business Plan terms provide for certain cash compensation payments, as well as modifications to the terms of currently outstanding stock options held by such non-executive employees, as more completely described below, upon the successful closing of the sale of the Services Business. The sale closed in July 2015 (see Note 15). The Services Business Plan meets the definition of an exit and disposal activity pursuant to FASB ASC 420-- Exit and Disposal Cost Obligations and all related expenses incurred will be presented in discontinued operations in the statements of operations in the period incurred.
The Services Business Plan provided that in the event a non-executive employee of the Services Business was not offered a comparable position by Accuratus, the Company would provide severance payments to such employees. The Company terminated certain employees in June 2015 (the "June 2015 terminated employees") who became eligible for severance benefits totaling approximately $999 pursuant to the terms of the Services Business Plan, of which $908 is included in accrued severance and retention liabilities, current portion, and $91 is included in accrued severance and retention liabilities, net of current portion, in the accompanying balance sheet. The Services Business Plan also provided for certain amendments to the terms of the outstanding stock option awards held by the June 2015 terminated employees, which are described in Note 8.
In July 2015, pursuant to the Services Business Plan, the Company paid cash totaling approximately $215 to certain non-executive employees of the Services Business representing an incentive payment upon the closing of the sale of the Services Business. In addition, all non-executive employees of the Services Business will be eligible to receive a cash retention compensation payment from the Company on the earlier of (i) the six month anniversary of the closing of the sale transaction, provided that they remain employed by Accuratus as of such date, or (ii) the date of termination of such employee by Accuratus without good cause. Maximum cash retention compensation payments could total approximately $814 under the Services Business Plan, if all service business employees remain eligible pursuant to the terms of the Services Business Plan. The Company incurred these obligations on the date of the sale of the Services Business in July 2015; therefore, the compensation expense associated with these will be recognized during the quarterly period ended September 30, 2015.

19




The Services Business Plan also includes certain amendments to the terms of the eligible employees' outstanding stock option awards, which are described in Notes 8 and 15.
Compensatory Arrangement with Employees of the Company's Continuing Operations
In connection with the Company's planned relocation of its continuing operations to Jersey City, New Jersey, the Company designed a compensatory plan to promote the retention of services of non-executive employees supporting its continuing operations (the "Retention Plan"). The Company's board of directors adopted, and the Company communicated, the material terms of the Retention Plan prior to June 30, 2015, to all non-executive employees supporting the Company's continuing operations. The Retention Plan terms provide for certain cash compensation payments and severance payments, as well as modifications to the terms of currently outstanding stock options held by such non-executive employees, as more completely described below. The Company has concluded that the Retention Plan meets the definition of an exit and disposal activity pursuant to FASB ASC 420-- Exit and Disposal Cost Obligations as of June 30, 2015, and all related expenses incurred have been and will be presented in continuing operations in the statements of operations.
The Retention Plan provides that non-executive employees are eligible to receive cash bonuses, severance payments and related benefit premiums that could total a maximum of approximately $1,161 , provided that all employees remain employed through December 31, 2015 and are not terminated for cause. The Retention Plan also provides that if the Company and an employee agree upon a services termination date earlier than December 31, 2015 (the "Release Date"), the employee will remain eligible for all terms of the Retention Plan. The Company will accrue this obligation over the remaining future service period required by the employees through the earlier of the Release Date or December 31, 2015. As of June 30, 2015, the Company recognized expense of $165 , which is included in research and development and selling, general, and administrative expenses in the accompanying statement of operations. The corresponding liability is included in accrued severance and retention obligations, current portion, in the accompanying balance sheet.
The Retention Plan also includes certain amendments to the terms of the eligible employees' outstanding stock option awards, which are described in Note 8.
Compensatory Arrangement with Executive Officer
Charles F. Osborne, Jr., the Company’s former chief financial officer, resigned from the Company effective June 30, 2015. The Company's compensation committee of the board of directors approved a compensatory arrangement for Mr. Osborne that provided for certain payments and benefits, including: (i) a cash payment of approximately $ 138 upon his resignation on June 30, 2015; (ii) cash severance payments totaling approximately $179 , which is equal to seven months of Mr. Osborne’s current base salary, paid over seven months commencing with the first payroll period following the resignation date; (iii) a payment representing a contribution Mr. Osborne can use towards continuing COBRA premiums for medical, dental, and vision group health coverage for a period up to seven months after the resignation date; and (iv) certain amendments to the terms of Mr. Osborne's outstanding stock option awards (see Note 8). The cash severance payments and related benefit premiums and payroll taxes totaled approximately $335 as of June 30, 2015, which is included in accrued severance and retention liabilities, current portion, in the accompanying balance sheet.

14.
Discontinued Operations, Assets Held for Sale, Impairment Charges
As part of the Company's strategic objective to focus its resources on the development of SCY-078, the Company's board of directors directed the Company's management to explore the divestiture of the Company's Services Business. The Company engaged a third-party firm to assist in the evaluation of several divestiture options (i.e., a third-party sale, spin-off, management buy-out or shut-down process). On May 4, 2015, the Company's board of directors completed its evaluation of the various divestiture options and directed management to pursue a plan to sell the Service Business to Accuratus, representing a strategic shift in the Company's operations. The Company met the relevant criteria for reporting the service business as held for sale and in discontinued operations in the accompanying unaudited interim financial statements as of and for the three and six month periods ended June 30, 2015, and 2014, pursuant to FASB Topic 205-20, Presentation of Financial Statements--Discontinued Operations , and FASB Topic 360, Property, Plant, and Equipment . The Company assessed the Services Business net asset group for impairment pursuant to FASB Topic 360 and recorded a $1,350 impairment charge on classification of property and equipment assets as held for sale in the quarterly period ended June 30, 2015. The fair value measurement used to determine the impairment charge has been described in Note 12.
On July 21, 2015, the Company completed the sale of the Services Business to Accuratus pursuant to the Agreement, with an effective date of July 17, 2015 (see Note 15).
As a condition to the execution of the Agreement, Accuratus assumed the Company’s post-closing obligation under its facility lease in Durham, North Carolina (see Note 5). The Company and its retained employees will continue to operate from

20




the Durham facility immediately after the closing for a period of up to six months pursuant to a facility license agreement. In addition, under a Transition Services Agreement, Accuratus will provide accounting, IT, payroll, personnel and human resources support, and equity compensation plan administration support services to the Company at rates ranging from one hundred to two hundred dollars per hour for a period of time not to extend beyond December 31, 2015.
The Company and Accuratus also entered into a Commitment to Services Agreement (the "Services Agreement") pursuant to which Accuratus will provide the Company with certain contract research and development services for 18 months (the "Initial Term") following the closing of the sale of the Services Business for a minimum purchase obligation of at least $3,300 due from the Company over the Initial Term of the Services Agreement. The purpose of the Services Agreement is to replace services that were previously provided internally by employees of the Company prior to the sale of the Services Business. The employees performing these services became employees of Accuratus in connection with this sale transaction.
The following table presents a reconciliation of the carrying amounts of assets and liabilities of the Services Business to assets held for sale, net in the balance sheets:
 
 
June 30, 2015
 
December 31, 2014
Carrying amounts of assets included as part of discontinued operations:
 
 
 
 
Accounts and unbilled receivables, net
 
$
1,715

 
$
1,501

Prepaid expenses and other current assets
 
761

 
289

Property and equipment, net
 
4,901

 
4,835

Other assets
 
59

 
76

Disposal loss recognized on classification as held for sale
 
(1,350
)
 

Assets held for sale, net
 
$
6,086

 
$
6,701

 
 
 
 
 
Carrying amounts of liabilities included as part of discontinued operations:
 
 
 
 
Accounts payable and accrued expenses
 
$
546

 
$
681

Deferred revenue
 
381

 
445

Deferred rent
 
1,172

 
1,294

Liabilities related to assets held for sale
 
$
2,099

 
$
2,420

The following table presents revenue, (expenses), gains, and (losses) attributable to discontinued operations:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Major line items constituting income (loss) of discontinued operations:
 
 
 
 
 
 
 
 
Total revenue
 
$
3,617

 
$
4,577

 
$
6,849

 
$
9,217

Cost of revenue
 
(3,599
)
 
(4,180
)
 
(6,830
)
 
(8,140
)
Research and development
 
(422
)
 

 
(853
)
 

Selling, general and administrative
 
(198
)
 

 
(221
)
 

Gain on insurance recovery
 

 
165

 

 
165

Severance and exit costs (Note 13)
 
(1,053
)
 

 
(1,053
)
 

Impairment charge from classification of assets as held for sale
 
(1,350
)
 

 
(1,350
)
 

Income (loss) from discontinued operations
 
$
(3,005
)
 
$
562

 
$
(3,458
)
 
$
1,242


21




The following table presents depreciation, capital expenditures, and significant operating and investing non-cash items related to the discontinued operations:
 
Six months ended June 30,
 
2015
 
2014
Depreciation expense
$
391

 
$
562

Purchases of property and equipment
(527
)
 
(323
)
Stock-based compensation
101

 
50

Changes in deferred rent
(122
)
 
(56
)
Equipment purchases in accounts payable and accrued expenses
20

 
6


15.
Subsequent Events
Sale of the Services Business
On July 21, 2015, the Company completed the sale of the Company’s Services Business pursuant to an Asset Purchase Agreement, with an effective date of July 17, 2015, with Accuratus Lab Services, Inc. a private-equity backed process chemistry, formulation, manufacturing and analytical development services provider, for an aggregate purchase price of $3,875 , subject to a working capital adjustment of $824 , which reduced the proceeds at closing. In addition, a portion of the consideration payable at closing equal to $500 was withheld and is subject to an escrow for a period of 12 months from the date of closing to satisfy indemnification obligations of the Company in connection with breaches of any representation and warranties and other customary obligations under the terms of the Agreement. The net cash consideration received by us upon closing in July 2015 was $2,549 , after adjusting for the items described above and a nominal escrow fee.
As a condition to the execution of the Agreement, Accuratus is assuming the Company’s post-closing obligation under its facility lease in Durham, North Carolina (see Note 5). The Company and its retained employees will continue to operate from the Durham facility immediately after the closing for a period of up to six months pursuant to a facility license and a transition services agreement. In addition, under a Transition Services Agreement, Accuratus will provide accounting, IT, payroll, personnel and human resources support, and equity compensation plan administration support services to the Company at rates ranging from one hundred to two hundred dollars per hour for a period of time not to extend beyond December 31, 2015.
In connection with the sale of the Services Business, each of the Company’s non-executive officer employees principally providing services to the Services Business have either accepted continued employment with Accuratus or has terminated in connection with the transaction contemplated by the Agreement. Pursuant to the Services Business Plan described in Note 13, the Company paid cash totaling approximately $215 to certain non-executive employees of the Services Business as an incentive payment upon the closing of the sale transaction in July 2015. In addition, all non-executive employees of the Services Business will be eligible to receive a cash retention compensation payment from the Company on the earlier of (i) the six month anniversary of the closing of the sale transaction, provided that they remain employed by Accuratus as of such date, or (ii) the date of termination of such employee by Accuratus without good cause. Maximum cash retention compensation payments could total approximately $814 under the Services Business Plan, if all service business employees remain eligible pursuant to the terms of the Services Business Plan. The Company incurred these obligations on the date of the sale of the Services Business in July 2015; therefore, the compensation expense associated with these will be recognized during the quarterly period ended September 30, 2015.
In addition, the stock options held by each non-executive employee of the Services Business were modified immediately prior to the closing of the sale transaction in July 2015 to provide: (i) accelerated vesting of all unvested stock options as of the closing of the sale transaction and (ii) an extension to the existing 90-day post-employment option exercise period, which varies for each employee based upon years of service, with a maximum exercise period of 48 months. As of June 30, 2015, the non-executive employees of the Services Business held outstanding options to purchase 37,517 shares of the Company's common stock at a weighted average exercise price of $9.62 per share, including unvested options to purchase 23,052 shares at a weighted average exercise price of $9.61 per share. The incremental stock compensation expense associated with these modifications will be recognized during the quarterly period ended September 30, 2015.
The Company entered into an agreement with a third party firm to assist the Company in exploring the divestiture of its Services Business. Pursuant to the terms of the agreement, in the event that the Company was able to complete a divestiture of the Services Business to a third-party, the Company was obligated to pay a success fee to the third party firm for the greater of $500 or 4% of the transaction consideration. The Company paid and expensed an initial retainer prior to the closing of the

22




Service Business sale transaction, and then paid a $450 remaining success fee due to the third party firm in July 2015 in connection with the closing of the sale transaction.
Commitment to Services Agreement
On July 17, 2015, the Company and Accuratus also entered into the Services Agreement pursuant to which Accuratus will provide the Company with certain contract research and development services for 18 months (the "Initial Term") following the closing of the sale of the Services Business for a minimum purchase obligation on the part of the Company of at least $3,300 over the Initial Term of the Services Agreement. The purpose of the Services Agreement is to replace services that were previously provided internally by employees of the Company prior to the sale of the Services Business. The employees performing these services became employees of Accuratus in connection with this sale transaction.
New Facilities Lease
On July 13, 2015, the Company entered into a sublease (the "Sublease") that became effective July 22, 2015, to sublet certain premises consisting of 10,141 square feet of space (the "Subleased Premises") located at 101 Hudson Street, Jersey City, New Jersey from Optimer Pharmaceutical, Inc. The term of the Sublease commences on August 1, 2015 (the "Commencement Date") and is scheduled to expire on July 30, 2018. No base rent is due under the Sublease until one month after the Commencement Date. Under the Sublease, the Company is obligated to pay monthly base rent of approximately $25 per month, which amount increases by 3% annually on each anniversary of the Commencement Date. In addition, the Company was required to fund a security deposit with the sublandlord in the amount of $74 .
Compensatory Arrangement with Executive Officer
On July 21, 2015, Yves J. Ribeill, Ph.D., President and a member of the Company’s board of directors, resigned as President. Dr. Ribeill will continue to serve on the board of directors. The Company and Dr. Ribeill entered into an agreement, effective July 21, 2015, for certain payments and benefits (the “Separation Agreement”), pursuant to which Dr. Ribeill will receive: (i) a cash payment of approximately $100 upon the effective date of his resignation; (ii) cash severance payments totaling approximately $900 , paid over 12 months commencing with the first payroll period following the resignation date; (iii) a payment representing a contribution Dr. Ribeill can use towards continuing COBRA premiums for medical, dental, and vision group health coverage after the resignation date, and (iv) the vesting and exercisability of all outstanding options held by Dr. Ribeill will be accelerated in full on the effective date of resignation, with the exception of options granted pursuant to the 1999 Plan, and the post-employment option exercise period will be extended from 90 -days to 48 months. As of July 23, 2015, Dr. Ribeill held 84,613 vested options and 183,268 unvested options to purchase shares of the Company’s common stock at a weighted average exercise price of $9.61 and $9.41 per share, respectively.

23





Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operating results for the three and six months ended June 30, 2015 , are not necessarily indicative of results that may occur in future interim periods or future fiscal years. Some of the statements under in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. These forward-looking statements are based on management’s beliefs and assumptions and on information currently available to our management and involve significant elements of subjective judgment and analysis. Words such as “expects,” “will,” “anticipate,” “target,” “goal,” “intend,” “plan,” “believe,” “seek,” “estimate,” “potential,” “should,” “could,” variations of such words, and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. These and many other factors could affect our future financial and operating results. We undertake no obligation to update any forward-looking statement to reflect events after the date of this Quarterly Report on Form 10-Q.
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 are currently conducting a multicenter Phase 2 study with primary endpoints of safety, tolerability, and pharmacokinetics of the oral formulation of SCY-078 as step-down treatment in patients initially treated with echinocandin therapy for invasive Candida infections, which are serious and life threatening infections. The enrollment into the study continues but has been slower than anticipated. New investigational sites have been opened and the study protocol has been amended to facilitate enrollment. We are planning to open additional investigational sites in the US, we intend to open sites outside of the US and we are evaluating subsequent amendments to the protocol. These measures are expected to increase enrollment into the study. In addition, as we collect data on the enrolled patients, we will continue to assess the actual number of patients required to achieve the study objectives. We expect to complete the study and to report top line data in the first half of 2016. The first Phase 1 study of an IV formulation of SCY-078 is planned to start in the fourth quarter of 2015.
In addition, we are planning to investigate the potential clinical utility of SCY-078 in other areas of unmet medical need such as genital infections caused by Candida  spp. (vulvovaginal candidiasis, VVC). VVC is a highly prevalent condition with limited therapeutic options for infections caused by azole-resistant  Candida  spp. We are planning to commence a Phase 2 study evaluating the safety and efficacy of orally administered SCY-078 in this indication during the fourth quarter of 2015. Top line results are expected in the first half of 2016. The data from this study is also expected to provide a confirmation of the potential therapeutic effect of orally administered SCY-078 in a clinical condition caused by  Candida  spp. and, along with the other clinical and nonclinical data from ongoing and planned activities, will contribute to the package of information that will support subsequent phases of development.
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, including expanded animal health capabilities. This contract research and development services business, which we refer to as our services business, generated substantially all of our revenues until we completed the sale of the services business to Accuratus Lab Services, Inc. in July 2015, as described further in the “Recent Developments” section below. Since our formation, we have discovered a number of proprietary compounds, primarily within our cyclophilin inhibitor platform. Our two lead compounds from our cyclophilin inhibitor platform include SCY-641, a compound licensed to Dechra Ltd. in 2012 for clinical development for the treatment of dog dry eye, and SCY-635, a compound licensed to Waterstone in October 2014 for the treatment of viral diseases in humans. The successful sale of our services business, as well as the successful monetization of the two lead compounds from our cyclophilin inhibitor platform, allows us to focus our resources on the development of SCY-078.
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 on file 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 all the patents related to SCY-078 to us.

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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.”

Recent Developments
April 2015 Follow-On Public Offering
On April 28, 2015, we completed a follow-on public offering (the "April 2015 Offering") of our common stock. We sold an aggregate of 5,376,622 shares of common stock at a public offering price of $7.70 per share. Net proceeds were approximately $38.0 million , after deducting underwriting discounts and commissions and offering expenses of approximately $3.4 million .
SCY-078 Development
We are currently conducting a multicenter Phase 2 study with primary endpoints of safety, tolerability, and pharmacokinetics of the oral formulation of SCY-078 as step-down treatment in patients initially treated with echinocandin therapy for invasive  Candida  infections. The enrollment into the study continues but has been slower than anticipated. New investigational sites have been opened and the study protocol has been amended to facilitate enrollment. We are planning to open additional investigational sites in the US, we intend to open sites outside of the US and we are evaluating subsequent amendments to the protocol. These measures are expected to increase enrollment into the study. In addition, as we collect data on the enrolled patients, we will continue to assess the actual number of patients required to achieve the study objectives. We expect to complete the study and to report top line data in the first half of 2016.
We are currently developing an IV formulation of SCY-078. Following a pre-submission meeting with the FDA, we are planning to submit the data package, including data from our IND-enabling studies, and to start the first Phase 1 study with the IV formulation in the fourth quarter of 2015.
The oral formulation of SCY-078 has been granted QIDP designation and fast track designation by the FDA. We expect to apply for QIDP designation for the IV formulation of SCY-078 in the first half of 2016 and we expect to apply for fast track designation in the second half of 2016. The fast track designation, coupled with the QIDP designation, allows for a potentially accelerated path to approval and underscores the FDA's understanding of the critical need for new and varied treatments for life-threatening invasive fungal infections.
We are also planning to investigate the potential clinical utility of SCY-078 in other areas of unmet medical need such as genital infections caused by Candida  spp. (vulvovaginal candidiasis, VVC). VVC is a highly prevalent condition with limited therapeutic options for infections caused by azole-resistant  Candida  spp. We are planning to commence a Phase 2 study evaluating the safety and efficacy of orally administered SCY-078 in this indication during the fourth quarter of 2015. Top line results are expected in the first half of 2016. The data from this study is also expected to provide a confirmation of the potential therapeutic effect of orally administered SCY-078 in a clinical condition caused by  Candida  spp. and, along with the other clinical and nonclinical data from ongoing and planned activities, will contribute to the package of information that will support subsequent phases of development.
Sale of Our Contract Research and Development Services Business
As part of our strategic objective to focus our resources on the development of SCY-078, our board of directors directed our management to explore the divestiture of our contract research and development services business (the “Services Business”) which was no longer strategic to our business and did not provide any meaningful results of operations or operating capital to fund our core strategic objective in 2015. We engaged a third party firm which assisted us in evaluating several divestiture options (i.e. a third-party sale, spin-off, management buy-out transaction, or shut-down process). On May 4, 2015, our board of directors completed its evaluation of the various divestiture options and directed management to pursue a plan to sell the Services Business to Accuratus Lab Services, Inc., a private-equity backed process chemistry, formulation, manufacturing and analytical development services provider. In connection with this action, we met the relevant criteria for reporting the Services Business as held for sale and in discontinued operations in the accompanying unaudited interim financial statements as of and for the three and six month periods ending June 30, 2015, and 2014.
On July 21, 2015, we completed the sale of the Services Business to Accuratus pursuant to an Asset Purchase Agreement with an effective date of July 17, 2015, for an aggregate purchase price of $3.9 million with an estimated net proceeds of $1.1 million, after adjusting for estimated selling costs and the estimated cash costs of severance, incentive and retention compensation pursuant to our Services Business Plan described in Note 13 of the accompanying unaudited interim financial

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statements in Item 1 of this Form 10-Q that have been or are expected to be paid out, as illustrated in the following table (dollars in millions):
Aggregate purchase price of Services Business sale transaction 1
 
$
3.9

Less: Estimated selling costs 2
 
0.8

Estimated net proceeds
 
3.1

Estimated incremental cash compensation costs:
 
 
Cash severance benefit costs 3
 
1.0

Incentive compensation payments at closing 4
 
0.2

Maximum cash retention compensation payments 5
 
0.8

Total estimated cash compensation costs
 
2.0

 
 
 
Estimated net proceeds, less estimated incremental cash compensation
 
$
1.1

 
 
 
1 Includes $0.5 million paid into escrow at closing and is subject to escrow for a period of 12 months.
2  Includes a success fee due to a third party firm, estimated legal fees, and other estimated fees directly related to the sale transaction.
3  Relates to cash severance benefits to be paid to the June 2015 Terminated Employees (described below) pursuant to the Services Business Plan.
4  Relates to cash incentive payments made to non-executive employees of the Services Business upon closing of the sale transaction, pursuant to the Services Business Plan. This amount will be recognized during the quarterly period ended September 30, 2015.
5  Represents maximum cash retention compensation payments that may be paid to non-executive employees of the Services Business, pursuant to the Services Business Plan. This amount will be recognized during the quarterly period ended September 30, 2015.
For additional information pertaining to the sale of the Services Business and our adoption of the Services Business Plan, including an impairment charge and other non-cash charges, see Notes 12, 13 and 14 of the accompanying unaudited interim financial statements in Item 1 of this Form 10-Q as well as other related disclosures made within our Form 8-K filed with the SEC on July 23, 2015. For information regarding the Commitment to Services Agreement (the “Services Agreement”) that we also entered into with Accuratus, see the section directly below entitled “Commitment to Services Agreement”.
As a condition to the execution of the Agreement, Accuratus is assuming our post-closing obligation under our facility lease in Durham, North Carolina.
In connection with the adoption of the Services Business Plan described in Note 13 of the accompanying unaudited interim financial statements in Item 1 of this Form 10-Q, we terminated certain employees in June 2015 (the "June 2015 Terminated Employees") who became eligible for severance benefits totaling approximately $1.0 million, of which $0.9 million is included in accrued severance and retention liabilities, current portion, and $0.1 million is included in accrued severance and retention liabilities, net of current portion, in the accompanying balance sheet. We incurred these severance benefit obligations in the quarterly period ended June 30, 2015 and, therefore, we recognized the expense in the quarter ended June 30, 2015, in discontinued operations in the accompanying unaudited interim statements of operations. The Services Business Plan also provided for certain amendments to the terms of the outstanding stock option awards held by the June 2015 Terminated Employees, which are described in Note 8 of the accompanying unaudited interim financial statements in Item 1 of this Form 10-Q.
Also in connection with the Services Business Plan, we paid cash totaling approximately $0.2 million to certain non-executive employees of the Services Business as an incentive payment upon the closing of the sale of the Services Business in July 2015. In addition, cash retention compensation payments of up to approximately $0.8 million will be paid by us, if all Service Business employees remain eligible pursuant to the terms of the Services Business Plan. We incurred these obligations on the date of the sale of the Services Business in July 2015; therefore, the compensation expense associated with these will be recognized during the quarterly period ended September 30, 2015.
We expect the sale of our Services Business will have a minimal impact on our reported loss from continuing operations in 2015 and will not have a significant effect on our cash forecast.
Commitment to Services Agreement
On July 17, 2015, we entered into the Services Agreement with Accuratus, described in Note 14 of the accompanying unaudited interim financial statements in Item 1 of this Form 10-Q, pursuant to which Accuratus will provide us with certain contract research and development services for 18 months (the "Initial Term") following the closing of the sale of the Services Business for a minimum purchase obligation of at least $3.3 million due from us over the Initial Term of the Services Agreement. The purpose of the Services Agreement is to replace necessary development services that were previously provided

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internally by our employees prior to the sale of the Services Business. The employees performing these services became employees of Accuratus in connection with this sale transaction.
Relocation of Headquarters and Operations, New Facilities Lease, Compensatory Arrangements with Employees
In connection with the sale of the Services Business, we intend to relocate our corporate headquarters and operating activities to Jersey City, New Jersey. On July 13, 2015, we entered into a sublease (the "Sublease") that became effective July 22, 2015, to sublet certain premises consisting of 10,141 square feet of space (the Subleased Premises) located at 101 Hudson Street, Jersey City, New Jersey from Optimer Pharmaceutical, Inc. The term of the Sublease commences on August 1, 2015 (the Commencement Date) and is scheduled to expire on July 30, 2018. No base rent is due under the Sublease until one month after the Commencement Date. Under the Sublease, we are obligated to pay monthly base rent of approximately $25,000 per month, which amount increases by 3% annually on each anniversary of the Commencement Date. In addition, we were required to fund a security deposit with the sublandlord in the amount of $74,000.
In connection with our planned relocation, we designed a compensatory plan to promote the retention of services of non-executive employees supporting our continuing operations (the "Retention Plan"). The Retention Plan terms provide for certain cash compensation payments and severance payments, as well as modifications to the terms of currently outstanding stock options held by such non-executive employees. The Retention Plan provides that non-executive employees are eligible to receive cash bonuses, severance payments and related benefit premiums that could total a maximum of approximately $1.2 million , provided that all employees remain employed through December 31, 2015 and are not terminated for cause. The Retention Plan also provides that if we and an employee agree upon a services termination date earlier than December 31, 2015 (the "Release Date"), the employee will remain eligible for all terms of the Retention Plan. We will accrue this obligation over the remaining future service period required by the employees through the earlier of the Release Date or December 31, 2015. As of June 30, 2015, we recognized expense of $0.2 million , which is included in research and development and selling, general, and administrative expenses in the accompanying statement of operations. The corresponding liability is included in accrued severance and retention obligations, current portion, in the accompanying balance sheet. The Retention Plan also includes certain amendments to the terms of the eligible employees' outstanding stock option awards, which are described in Note 8 of the interim financial statements included in Item 1.
Departure of Chief Financial Officer
Charles F. Osborne, Jr., our former chief financial officer, resigned effective June 30, 2015. Our compensation committee of the board of directors approved a compensatory arrangement for Mr. Osborne that provided for certain payments and benefits, including (i) a cash payment of approximately $0.1 million upon his resignation on June 30, 2015; (ii) cash severance payments totaling approximately $0.2 million , which is equal to seven months of Mr. Osborne’s current base salary, paid over seven months commencing with the first payroll period following the resignation date; (iii) a payment representing a contribution Mr. Osborne can use towards continuing COBRA premiums for medical, dental, and vision group health coverage for a period up to seven months after the resignation date; and (iv) certain amendments to the terms of Mr. Osborne's outstanding stock option awards described more fully in Note 8 to the accompanying interim financial statements in Item 1. The cash severance payments and related benefit premiums and payroll taxes totaled approximately $0.3 million as of June 30, 2015, which is included in accrued severance and retention liabilities, current portion, in the accompanying balance sheet.
Compensatory Arrangement with Executive Officer
On July 21, 2015, Yves J. Ribeill, Ph.D., President and a member of our board of directors, resigned as President. Dr. Ribeill will continue to serve on the board of directors. We entered into an agreement for certain payments and benefits with Dr. Ribeill (the “Separation Agreement”), effective July 21, 2015, pursuant to which Dr. Ribeill will receive: (i) a cash payment of approximately $0.1 million upon the effective date of his resignation; (ii) cash severance payments totaling approximately $0.9 million , paid over 12 months commencing with the first payroll period following the resignation date; (iii) a payment representing a contribution Dr. Ribeill can use towards continuing COBRA premiums for medical, dental, and vision group health coverage after the resignation date, and (iv) the vesting and exercisability of all outstanding options held by Dr. Ribeill accelerating in full on the effective date of resignation, with the exception of options granted pursuant to the 1999 Plan, and the post-employment option exercise period extending from 90 -days to 48 months. As of July 23, 2015, Dr. Ribeill held 84,613 vested options and 183,268 unvested options to purchase shares of our common stock at a weighted average exercise price of $9.61 and $9.41 per share, respectively.
Equity Compensation Plan Activity
Our board of directors recently took certain actions that affected the number of outstanding stock options and options available for grant under the 2014 Equity Incentive Plan, or the 2014 Plan, as follows:
On April 1, 2015, we granted options to purchase 425,967 shares of common stock to officers and other key employees, including an award to Dr. Marco Taglietti, our new Chief Executive Officer, to purchase 330,000

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shares of our common stock. All options granted on April 1, 2015, have a ten-year term. For Dr. Taglietti's grant, one-fourth of the shares subject to the option vest on the one-year anniversary of the date of grant with the remainder vesting in equal monthly installments for thirty-six months thereafter, provided Dr. Taglietti continues to provide service to us. For all other April 1, 2015 officer and key employee grants, the shares subject to the options vest in equal monthly installments for forty-eight months as measured from the date of grant.
On June 4, 2015, our stockholders approved an amendment of the 2014 Plan to increase the aggregate number of shares of common stock that may be issued pursuant to awards under the 2014 Plan by an additional 510,726 shares. All other material terms of the 2014 Plan otherwise remain unchanged.
On June 4, 2015, we granted options to purchase 125,000 shares of common stock to Dr. David Angulo, our new Chief Medical Officer, under our 2015 Inducement Plan. The options have a ten-year term, with one-fourth of the shares subject to the option vesting on the one-year anniversary of the date of grant and the remainder vesting in equal monthly installments for thirty-six months thereafter, provided Dr. Angulo continues to provide service to us.

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 provided contract research and screening services in the field of animal health on a fee for service basis prior to the sale of our Services Business; (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 and reimbursement for certain development costs incurred by us; (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.
In connection with the sale of our Services Business in July 2015, as described above in the "Recent Developments" section, we assigned the research services agreement described above with Merial Limited, as well as our research services agreement with Elanco Animal Health and all other contracts directly associated with the Services Business, to Accuratus. All other licensing and collaboration agreements described above are part of our continuing operations and were not associated with or assigned in connection with the sale of the Services Business.
Components of Operating Results
Revenue
Historically, and through the interim period ended June 30, 2015, we have derived substantially all of our revenue from the provision of our contract research and development services, which were provided by our Services Business that we divested through a sale transaction in July 2015 (see "Recent Developments" above). The revenue generated from our Services Business has been presented in discontinued operations in the accompanying statements of operations and will result in a significant decrease in our reported revenues. In addition to our contract research and development services revenue, we have received upfront and milestone payments in connection with our collaboration and licensing agreements that are associated with our continuing operations. Further, we expect that any revenue we generate will fluctuate from quarter to quarter as a result of the variability in 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.
Our revenue recognition policy is described within Note 2 to our unaudited interim financial statements in Item 1 of this quarterly report.

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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 June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(dollars in thousands)
 
(dollars in thousands)
SCY-078
$
3,233

 
$
1,198

 
$
6,928

 
$
2,039

Cyclophilin Inhibitor Platform
49

 
625

 
141

 
1,104

Total research and development
$
3,282

 
$
1,823

 
$
7,069

 
$
3,143

Our SCY-078 project was the only significant research and development project 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 near 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.
Other (Income) Expense
Substantially all of our other (income) expense recognized in the quarterly period ended June 30, 2014 , consists of costs associated with:  
a related party guarantee of our outstanding credit facility;
fair value adjustments to our derivative liability for warrants issued in conjunction with the related party convertible debt; and
a loss on extinguishment of debt.
Interest paid on our outstanding bank debt composed substantially all of the remaining other (income) expense in the quarterly period ended June 30, 2014 . A nominal amount of interest income has been earned on our cash and cash equivalents in the quarterly period ended June 30, 2015 .

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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 June 30, 2015 .
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.
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.
Discontinued Operations
Discontinued operations comprises revenues, costs, gains and losses directly attributable to our Services Business, which we divested through a sale transaction that closed in July 2015.
Revenue included in discontinued operations comprises revenue from the provision of our contract research and development services, which were provided by our Services Business. Our revenue recognition policy is described within Note 2 to our unaudited interim financial statements in Item 1 of this quarterly report.
Cost of revenue included in discontinued operations primarily consists of salaries and personnel-related costs, including employee benefits and any stock-based compensation, incurred to generate our contract research and development services revenues. 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 included in discontinued operations consists of expenses incurred under an animal health research and development project being conducted by our Services Business to advance and secure intellectual property protection for certain existing proprietary technology in the field of animal health. Research and development expense incurred under this project totaled $ 0.4 million and $ 0.9 million for the three and six months ended June 30, 2015, respectively, and zero for both the three and six months ended June 30, 2014. The nature of and accounting for research and development expenses included in discontinued operations is consistent with the research and development expenses included in continuing operations, as described above.
Gain on insurance recovery included in discontinued operations relates to a reimbursement received from our insurance carrier in the quarter ended June 30, 2014, 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

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million, which we recognized as a gain during the period ended June 30, 2014. This asset was directly associated with our Services Business and, as a result, the gain was included in discontinued operations.
Severance costs included in discontinued operations are exit and disposal costs directly attributable to the sale of the Services Business. As described in "Recent Developments" above, we terminated certain Service Business employees in June 2015 who became eligible for severance benefits pursuant to the terms of the Service Business Plan.
Impairment charge from classification of assets as held for sale included in discontinued operations relates to the carrying value of Services Business property and equipment, net that was in excess of fair value less cost to sell. As described in Note 14 to our unaudited interim financial statements in Item 1, we met the relevant criteria for reporting the Services Business as held for sale and in discontinued operations as of June 30, 2015, pursuant to FASB Topic 205-20, Presentation of Financial Statements--Discontinued Operations , and FASB Topic 360, Property, Plant, and Equipment . As a result, we were required to assess the Services Business asset group for impairment pursuant to FASB Topic 360, which identified an impairment charge of $1.4 million for the three and six months ending June 30, 2015. To determine the impairment charge, pursuant to FASB Topic 360, the net carrying value of the Services Business asset group was compared to its fair value as of May 4, 2015. We determined that the selling price paid by Accuratus to acquire the Services Business asset group was the best estimate of fair value. Our valuation methodology is described further in Note 12 of the accompanying unaudited interim financial statements in Item I.
Results of Operations for the Six Months Ended June 30, 2015 and 2014
The following table summarizes our results of operations for the six months ended June 30, 2015 and 2014 , together with the changes in those items in dollars and percentage (dollars in thousands):
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
Period-to-Period
Change
 
Amount
 
Percentage of
Revenue
 
Amount
 
Percentage of
Revenue
 
Amount
 
Percentage
Total revenue and gross profit
$
129

 
100.0
 %
 
$
130

 
100.0
 %
 
$
(1
)
 
(0.8
)%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
7,069

 
5,479.8
 %
 
3,143

 
2,417.7
 %
 
3,926

 
124.9
 %
Selling, general and administrative
5,485

 
4,251.9
 %
 
3,461

 
2,662.3
 %
 
2,024

 
58.5
 %
Total operating expenses
12,554

 
9,731.8
 %
 
6,604

 
5,080.0
 %
 
5,950

 
90.1
 %
Loss from operations
(12,425
)
 
(9,631.8
)%
 
(6,474
)
 
(4,980.0
)%
 
(5,951
)
 
91.9
 %
Other (income) expense:
 
 
 
 
 
 
 
 
 
 
 
Amortization of deferred financing costs and debt discount

 

 
755

 
580.8
 %
 
(755
)
 
(100.0
)%
Loss on extinguishment of debt

 

 
1,389

 

 
(1,389
)
 
(100.0
)%
Interest (income) expense
(2
)
 

 
49

 
37.7
 %
 
(51
)
 
(104.1
)%
Derivative fair value adjustment

 

 
(10,080
)
 

 
10,080

 
(100.0
)%
Other expense

 

 
10

 

 
(10
)
 
(100.0
)%
Total other (income) expense
(2
)
 
(1.6
)%
 
(7,877
)
 
(6,059.2
)%
 
7,875

 
(100.0
)%
(Loss) income from continuing operations
(12,423
)
 
(9,630.2
)%
 
1,403

 
1,079.2
 %
 
(13,826
)
 
(985.5
)%
(Loss) income from discontinued operations
(3,458
)
 
(2,680.6
)%
 
1,242

 
955.4
 %
 
(4,700
)
 
(378.4
)%
Net (loss) income
$
(15,881
)
 
(12,310.9
)%
 
$
2,645

 
2,034.6
 %
 
$
(18,526
)
 
(700.4
)%

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Table of Contents


Revenue. For the six months ended June 30, 2015 , revenue remained consistent when compared to the six months ended June 30, 2014 . Revenue in both periods consisted of the continued amortization of a non-refundable upfront payment received under our collaboration arrangement with R-Pharm.
Research and Development. For the six months ended June 30, 2015 , research and development expenses increased to $7.1 million from $3.1 million for the six months ended June 30, 2014 . The increase of $4.0 million, or 124.9% , was primarily the result of a $3.9 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 $0.4 million increase in employee compensation expense. These increases were partially offset by a $0.3 million decrease in other administrative support costs. The increase in employee compensation expense was due to an increase of $0.6 million related to Services Business personnel devoting more time and effort to SCY-078 development in 2015, partially offset by a $0.2 million decrease in research and development employee severance costs related to workforce reduction activities occurring in June 2014 that did not recur in 2015. When scientific personnel devote time to a research and development project, the associated salaries and personnel-related costs for this effort are included in research and development expense, rather than in costs of revenues, which is included in discontinued operations.
Selling, General & Administrative . For the six months ended June 30, 2015 , selling, general and administrative expenses increased to $5.5 million from $3.5 million for the six months ended June 30, 2014 . The increase of $2.0 million , or 58.5% , was primarily the result of a $0.6 million increase in professional services expenses directly associated with our continuing operations as a regulated, publicly traded company, including a $0.2 million increase in director and officer insurance policy premium expenses, and a $1.4 million increase in employee compensation expense. The increase in employee compensation expense was primarily due to an increase in accrued bonus, severance and retention compensation costs totaling $0.7 million and an increase in stock compensation expense of $0.7 million. The increase in stock compensation expense is associated with option grants awarded subsequent to the second quarter of 2014 and incremental compensation expense associated with stock option modifications made in the second quarter of 2015.
Amortization of Deferred Financing Costs and Debt Discount. Amortization of deferred financing costs was $0.8 million in the six months ended June 30, 2014 , which was associated with the 2013 Credit Agreement deferred financing costs. We amortized these deferred financing costs until May 2014, when we repaid the entire outstanding balance of the 2013 Credit Agreement totaling $15.0 million plus accrued interest using the proceeds from the IPO. There was no amortization in the six months ended June 30, 2015 , because the 2013 Credit Agreement was repaid in full in May 2014.
Loss on Extinguishment of Debt. Loss on extinguishment of debt was $1.4 million in the six months ended June 30, 2014 . As described in the preceding paragraph, the entire outstanding balance of the 2013 Credit Agreement was repaid in May 2014. 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  six months ended June 30, 2014 . There was no loss incurred in the six months ended June 30, 2015 , because the 2013 Credit Agreement was repaid in full in May 2014.
Derivative Fair Value Adjustment . For the six months ended June 30, 2015 , derivative fair value adjustment was zero compared to $10.1 million in the six months ended June 30, 2014 . The derivative fair value adjustment was a gain in the six months ended June 30, 2014 and was due to the decrease in the estimated fair value of our common stock, from $47.74 per share as of December 31, 2013, to $10.00 per share as of May 2, 2014. 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 at that time. Therefore, no gain or loss was incurred during the six months ended June 30, 2015 .
Discontinued Operations . For the six months ended June 30, 2015 , we incurred a loss from discontinued operations of $3.5 million compared to income from discontinued operations of $1.2 million in the six months ended June 30, 2014 . The loss from discontinued operations in the six months ended June 30, 2015 resulted from revenue of $6.9 million, operating costs of $7.9 million , and non-recurring 2015 costs that included severance charges of $1.1 million associated with the termination of employees in connection with the exit and disposal of the Services Business and an impairment charge on classification of assets as held for sale of $1.4 million . The income from discontinued operations in the six months ended June 30, 2014 resulted from revenue of $9.2 million , operating costs of $8.1 million , and a gain on insurance recovery of $0.2 million .
The decrease in revenue in discontinued operations between the two periods was primarily due to a $1.7 million decrease in animal health services revenue, a $0.4 million decrease in integrated pharmaceutical services (IPS) revenues, a decrease of $0.2 million in discovery and drug metabolism and pharmacokinetics (DMPK) services revenue, and a $0.1 million decrease in materials revenue. The decrease in animal health services revenue was primarily related to a reduction in the scope of services provided under our research services agreement with Merial beginning in January 2015, which resulted in a $1.6

32


Table of Contents


million decrease in revenue under this agreement for the six months ended June 30, 2015. Our IPS revenues decreased because we provided certain discrete services that generated revenues of $0.4 million in the six months ended June 30, 2014, which did not recur in 2015. We did not provide similar services in 2015 because we utilized certain IPS personnel to support our development of SCY-078 in 2015, rather than utilizing such personnel to provide services to third-party customers. The IPS personnel supporting our development of SCY-078 became employees of Accuratus in connection with the Services Business sale transaction described in the "Recent Developments" section above. Our discovery and DMPK services revenue decrease occurred because we made the strategic decision to stop actively pursuing business development efforts related to discovery and DMPK services. Our materials revenue decrease was due to a reduced demand for and utilization of materials necessary to support our third-party service projects in 2015.

33


Table of Contents


Results of Operations for the Three Months Ended June 30, 2015 and 2014
The following table summarizes our results of operations for the three months ended June 30, 2015 and 2014 , together with the changes in those items in dollars and percentage (dollars in thousands):
 
Three Months Ended
 
June 30, 2015
 
June 30, 2014
 
Period-to-Period
Change
 
Amount
 
Percentage of
Revenue
 
Amount
 
Percentage of
Revenue
 
Amount
 
Percentage
Total revenue and gross profit
$
64

 
100.0
 %
 
$
65

 
100.0
 %
 
$
(1
)
 
(1.5
)%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
3,282

 
5,128.1
 %
 
1,823

 
2,804.6
 %
 
1,459

 
80.0
 %
Selling, general and administrative
3,275

 
5,117.2
 %
 
2,255

 
3,469.2
 %
 
1,020

 
45.2
 %
Total operating expenses
6,557

 
10,245.3
 %
 
4,078

 
6,273.8
 %
 
2,479

 
60.8
 %
Loss from operations
(6,493
)
 
(10,145.3
)%
 
(4,013
)
 
(6,173.8
)%
 
(2,480
)
 
61.8
 %
Other (income) expense:
 
 
 
 
 
 
 
 
 
 
 
Amortization of deferred financing costs and debt discount

 

 
219

 
336.9
 %
 
(219
)
 
(100.0
)%
Loss on extinguishment of debt

 

 
1,389

 

 
(1,389
)
 
(100.0
)%
Interest (income) expense
(1
)
 

 
5

 
7.7
 %
 
(6
)