Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: March 31, 2017

o         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: 001-35268

SYNERGY PHARMACEUTICALS INC.
(Exact name of registrant as specified in its charter)
Delaware
 
33-0505269
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)

420 Lexington Avenue, Suite 2012, New York, New York 10170
(Address of principal executive offices) (Zip Code)

(212) 297-0020
(Registrant’s telephone number)

(Former Name, Former Address and Former Fiscal Year, if changed since last report)

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 x  No o

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 x  No o

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes o No x


The number of the registrant’s shares of common stock outstanding was 224,949,941 as of May 10, 2017.
 

SYNERGY PHARMACEUTICALS INC.

FORM 10-Q

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for Synergy Pharmaceuticals Inc. may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are characterized by future or conditional verbs such as “may,” “will,” “expect,” “plan” “intend,” “anticipate,” believe,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. Such statements are only predictions and our actual results may differ materially from those anticipated in these forward-looking statements. We do not assume any obligation to update forward-looking statements as circumstances change and thus you should not unduly rely on these statements, which speak only as of the date of this Quarterly Report on Form 10-Q.

We believe that it is important to communicate future expectations to readers. However, there may be events in the future that we are not able to accurately predict or control. Risk factors that may cause such differences between predicted and actual results include, but are not limited to, those discussed in our Form 10-K for the year ended December 31, 2016 filed on March 1, 2017 and other periodic reports filed with the Securities and Exchange Commission.

These risk factors include the uncertainties associated with product development, the risk that products that appeared promising in early clinical trials do not demonstrate safety and efficacy in larger-scale clinical trials, the risk that we will not obtain approval to market our products, the risks associated with dependence upon key personnel and the need for additional financing.


2

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1.    FINANCIAL STATEMENTS

SYNERGY PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

 
March 31, 2017
(unaudited)
 
December 31, 2016
 
 
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
139,262

 
$
82,387

Accounts receivable
6,319

 

Inventories
9,647

 
5,640

Prepaid expenses and other current assets
8,038

 
889

Total Current Assets
163,266

 
88,916

Property and equipment, net
568

 
593

Security deposits
408

 
343

Total Assets
$
164,242

 
$
89,852

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
28,445

 
$
15,584

Accrued expenses
10,203

 
13,552

Interest payable on senior convertible notes
581

 
294

Deferred revenues, net
4,260

 

Total Current Liabilities
43,489

 
29,430

Senior convertible notes, net
16,771

 
22,665

Derivative financial instruments, at estimated fair value-warrants
94

 
216

Total Liabilities
60,354

 
52,311

Commitments and contingencies


 


Stockholders’ Equity
 
 
 
Preferred stock, Authorized 20,000,000 shares and none outstanding, at March 31, 2017 and December 31, 2016

 

Common stock, par value of $.0001, 350,000,000 shares authorized at March 31, 2017 and December 31, 2016. Issued and outstanding 224,944,941 shares and 202,737,860 shares at March 31, 2017 and December 31, 2016, respectively.
23

 
20

Additional paid-in capital
751,461

 
620,513

Accumulated deficit
(647,596
)
 
(582,992
)
Total Stockholders’ Equity
103,888

 
37,541

Total Liabilities and Stockholders’ Equity
$
164,242

 
$
89,852


The accompanying notes are an integral part of these condensed consolidated financial statements.


3

Table of Contents

SYNERGY PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)

 
Three Months Ended March 31,
 
2017
 
2016
Net sales
$
98

 
$

Cost of goods sold
1,805

 

Gross profit
(1,707
)
 

 
 
 
 
Costs and expenses:
 
 
 
Research and development
19,129

 
21,175

Selling, general and administrative
41,891

 
6,375

Loss from operations
(62,727
)
 
(27,550
)
Other expenses
 
 
 
Interest and investment expense, net
(790
)
 
(7,036
)
Debt conversion expense
(1,209
)
 
(25,615
)
Change in fair value of derivative instruments-warrants
122

 
260

Total other expenses
(1,877
)
 
(32,391
)
Net loss
$
(64,604
)
 
$
(59,941
)
 
 
 
 
Weighted Average Common Shares Outstanding
 
 
 
Basic and Diluted
215,484,670

 
117,626,669

 
 
 
 
Net Loss per Common Share, Basic and Diluted
 
 
 
Net Loss per Common Share, Basic and Diluted
$
(0.30
)
 
$
(0.51
)

The accompanying notes are an integral part of these condensed consolidated financial statements.


4

Table of Contents

SYNERGY PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share amounts)

 
Common
Shares
 
Common
Stock,
Par Value
 
Additional
Paid in
Capital
 
Deficit
Accumulated
 
Total
Stockholders’ Equity
Balance, December 31, 2016
202,737,860

 
$
20

 
$
620,513

 
$
(582,992
)
 
$
37,541

Notes conversions
1,579,099

 
1

 
4,911

 

 
4,912

Debt conversion expense
212,800

 

 
1,209

 

 
1,209

Common stock issued in connection with exercise of stock options
89,978

 

 
329

 

 
329

Common stock issued in registered direct offering
20,325,204

 
2

 
121,949

 

 
121,951

Fees related to registered direct offering

 

 
(347
)
 

 
(347
)
Stock based compensation expense

 

 
2,897

 

 
2,897

Net loss for the period

 

 

 
(64,604
)
 
(64,604
)
Balance, March 31, 2017
224,944,941

 
$
23

 
$
751,461

 
$
(647,596
)
 
$
103,888


The accompanying notes are an integral part of these condensed consolidated financial statements.


5

Table of Contents

SYNERGY PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

 
Three Months Ended
March 31, 2017
 
Three Months Ended
March 31, 2016
Cash Flows From Operating Activities:
 
 
 
Net loss
$
(64,604
)
 
$
(59,941
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
41

 
38

Amortization of deferred debt costs
608

 
4,153

Stock-based compensation expense
2,897

 
1,202

Change in fair value of derivative instruments—warrants
(122
)
 
(260
)
Common stock issued for interest on Notes

 
2,445

Debt conversion expense
1,209

 
25,615

Transaction fees on Note conversions

 
(435
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(6,319
)
 

Inventories
(4,007
)
 

Security deposit
(65
)
 

Prepaid expenses and other current assets
(7,149
)
 
(56
)
Accounts payable and accrued expenses
9,512

 
(800
)
Deferred revenues, net
4,260

 

Accrued interest expense on senior convertible notes
287

 
487

Total Adjustments
1,152

 
32,389

Net Cash used in Operating Activities
(63,452
)
 
(27,552
)
Cash Flows From Investing Activities:
 
 
 
Net sales of available-for-sale securities

 
50,097

Additions to property and equipment
(15
)
 
(43
)
Net Cash used in (provided by) Investing Activities
(15
)
 
50,054

Cash Flows From Financing Activities:
 
 
 
Proceeds of sale of common stock
121,951

 

Payment for deferred financing costs
(1,591
)
 

Fees and expenses — sale of common stock
(347
)
 

Proceeds from exercise of stock options
329

 

Net Cash provided by Financing Activities
120,342

 

Net increase in cash and cash equivalents
56,875

 
22,502

Cash and cash equivalents at beginning of period
82,387

 
61,653

Cash and cash equivalents at end of period
$
139,262

 
$
84,155

Supplementary disclosure of cash flow information:
 
 
 
Cash paid for taxes
$
44

 
$
45

Supplementary disclosure of non-cash investing and financing activities:
 
 
 
Conversion of senior convertible notes to Synergy Common Stock
$
4,912

 
$
82,274


The accompanying notes are an integral part of these condensed consolidated financial statements.


6

Table of Contents

SYNERGY PHARMACEUTICALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Business Overview

Synergy Pharmaceuticals Inc. ("the Company" or "Synergy") is a biopharmaceutical company focused on the development and commercialization of novel gastrointestinal (GI) therapies. The Company pioneered the discovery, research and development efforts around analogs of uroguanylin, a naturally occurring and endogenous human GI peptide, for the treatment of GI diseases and disorders. Synergy discovered, is developing, and controls 100% worldwide rights to its proprietary uroguanylin based GI platform.

Net cash used in operating activities was approximately $63.5 million for the three months ended March 31, 2017. As of March 31, 2017, Synergy had approximately $139.3 million of cash and cash equivalents. During the three months ended March 31, 2017, Synergy incurred losses from operations of approximately $62.7 million. As of March 31, 2017, Synergy had working capital of approximately $119.8 million.

Recent Developments

On January 31, 2017, Synergy entered into an underwriting agreement with Cantor Fitzgerald & Co., as representative of the several underwriters, to issue and sell 20,325,204 shares of common stock of the Company in an underwritten public
offering pursuant to a Registration Statement on Form S-3 (File No. 333-205484) and a related prospectus supplement filed with the Securities and Exchange Commission (the “Offering”). The public offering price was $6.15 per share of Common Stock. The Offering closed on February 6, 2017, yielding net proceeds of approximately $121.6 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

On February 28, 2017, Synergy received consents from certain holders of its Notes to enter into a Supplemental Indenture which eliminates certain restrictive covenants from the Indenture related to the Notes. The restrictive covenants eliminated from the Indenture are Limitation on Indebtedness, Future Financing Rights for Certain Investors and Licensing Limitations. On February 28, 2017, Synergy entered into the Supplemental Indenture with Wells Fargo, N.A., as trustee and paid an aggregate of approximately $1.6 million to such holders for the consent. These fees associated with the debt modification were accounted for under Accounting Standards Codification ("ASC") 470-50 and amortized using the effective interest method over the remaining term of the debt.
    
In March 2017, Synergy exchanged approximately $4.9 million aggregate principal amount of the Notes for approximately 1.8 million shares of our common stock, with approximately 1.6 million shares representing the conversion price of $3.11 pursuant to the existing terms of the Notes. As of March 31, 2017, approximately $18.6 million of the Notes remain outstanding. The Company recognized a debt conversion expense of $1.2 million representing 0.2 million shares for the quarter ended March 31, 2017.

2. Basis of Presentation, Accounting Policies and Going Concern

These unaudited condensed consolidated financial statements include Synergy and its wholly-owned subsidiaries:  (1) Synergy Advanced Pharmaceuticals, Inc., and (2) IgX, Ltd (Ireland—inactive). These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission (“SEC”) and United States generally accepted accounting principles (“GAAP”) for interim reporting. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary to present fairly Synergy’s interim financial information. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2016 contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2017. All intercompany balances and transactions have been eliminated.

Notwithstanding the Company's recent equity financing, Synergy will be required to raise additional capital within the next year to continue the development and commercialization of current product candidates and to continue to fund operations at the current cash expenditure levels. Synergy cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that Synergy raises additional funds by issuing equity securities, Synergy’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact Synergy’s ability to conduct business. If Synergy is unable to raise additional capital when required or on acceptable terms, Synergy may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more product candidates;

7

Table of Contents

(ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that Synergy would otherwise seek to develop or commercialize ourselves on unfavorable terms.
Synergy's consolidated financial statements as of December 31, 2016 and its unaudited condensed consolidated financial statements as of March 31, 2017 have been prepared under the assumption that the Company will continue as a going concern for the next twelve months. Synergy's independent registered public accounting firm has issued a report as of December 31, 2016 that includes an explanatory paragraph referring to the Company's recurring and continuing losses from operations and expressing substantial doubt in the Company's ability to continue as a going concern without additional capital becoming available. Synergy's ability to continue as a going concern is dependent upon its ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. Synergy's consolidated financial statements as of December 31, 2016 and its unaudited condensed consolidated financial statements as of and for the period ended March 31, 2017 do not include any adjustments that might result from the unfavorable outcome of this uncertainty.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Changes in
estimates and assumptions are reflected in reported results in the period in which they become known. Actual results could
differ from those estimates.

Accounts Receivable

The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not specifically reviewed. The Company’s receivables primarily related to amounts due from 3rd party customers for the sale of TRULANCE. The Company believes that credit risks associated with these customers are not significant. To date, the Company has not had any write-offs of bad debt, and the Company did not have an allowance for doubtful accounts as of March 31, 2017.

Inventories

Inventories primarily consist of raw materials and are stated at the lower of cost or net realizable value with cost determined under the first-in, first-out basis. Synergy capitalizes inventories manufactured in preparation for initiating sales of a product candidate when the related product candidate is considered to have a high likelihood of regulatory approval and the related costs are expected to be recoverable through sales of the inventories. In determining whether or not to capitalize such inventories, Synergy evaluates, among other factors, information regarding the product candidate's safety and efficacy, the status of regulatory submissions and communications with regulatory authorities and the outlook for commercial sales. In addition, Synergy evaluates risks associated with manufacturing the product candidate and the remaining shelf life of the inventories.

Costs associated with developmental products prior to satisfying the inventory capitalization criteria are charged to
research and development expense as incurred. There is a risk inherent in these judgments and any changes in these judgments may have a material impact on our financial results in future periods.

In July 2015, the FASB issued an accounting standard update (ASU No. 2015-11) intended to simplify the measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value.  Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation, etc.  The Company adopted this standard as of January 1, 2017, which had no impact on our consolidated financial statements.

Revenue recognition

Synergy recognizes net product revenue from sales of TRULANCE in accordance with Accounting Standards Codification ASC 605, Revenue Recognition which considers the following two factors, (a) Being realized or realizable. Revenue and gains generally are not recognized until realized or realizable, namely when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. These revenue and gains are realizable when related assets received or held are

8

Table of Contents

readily convertible to known amounts of cash or claims to cash and (b) revenues should be recognized only once they have been earned. An entity's revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. Therefore, for gains that commonly result from transactions and other events that involve no earning process, and for recognizing gains, being earned is generally less significant than being realized or realizable.

The first units of TRULANCE were shipped to distributors in March 2017. Due to the early stage of the product launch, Synergy is not able to reliably make certain estimates, including returns, necessary to recognize product revenue upon shipment to distributors. As a result, Synergy deferred revenue recognition until TRULANCE prescriptions are dispensed to patients, based on third party prescription sales IMS data.  Synergy's estimates used to determine certain gross-to-net (GTN) sales adjustments rely on third party data, and certain third party information is itself an estimate. Synergy will continue to evaluate historical activity and visibility into the distribution channel, in order to reasonably make all estimates required under ASC 605 to recognize revenue upon shipment to the distributor.

Synergy's net product revenues and related net deferred revenues for TRULANCE therefore represent total revenues less estimated customer credits, including returns, rebates, and other discounts. These allowances are recorded for consideration given by a commercial or government payor to a patient, or by Synergy to a distributor, and presumed to be a reduction of the selling price of our product and, therefore, characterized as a reduction of revenue or deferred revenue.

Cost of Goods Sold

Cost of goods sold (“COGS”) includes (i) direct cost of manufacturing and packaging drug product and (ii) technical operations overhead costs which are generally more fixed in nature, including salaries, benefits, consulting, stability testing and other services.  Technical operations are responsible for planning, coordinating, and executing the Company’s inventory production plan and insuring that product quality satisfies FDA requirements.  Costs incurred by the technical operations organization are recorded as expense in the period in which they are incurred. Certain direct costs associated with pre-commercial inventory, other than packaging, were expensed prior to receiving FDA approval. (See Inventories in Footnote 2 "Basis of Presentation, Accounting Policies and Going Concern").

3. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB") issued a comprehensive new revenue recognition standard ASC 606 Revenue From Contracts With Customers. The new 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. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard is designed to create greater comparability for financial statement users across industries, jurisdictions and capital markets and also requires enhanced disclosures. The new standard will be effective for the Company beginning January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method)

The Company is in the initial stages of its evaluation as to the impact of the new revenue recognition standard on its accounting policies, processes, and system requirements as Synergy began the commercial launch of its product during the first quarter of 2017. Furthermore, Synergy has made and will continue to make investments in systems to enable timely and accurate reporting under the new standard. While Synergy continues to assess the potential impacts of the new standard, Synergy does not know or cannot reasonably estimate the impact of the new standard on our financial statements at this time.

In March 2016, FASB issued Accounting Standards Update ("ASU") No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” ("ASU 2016-09”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company adopted this ASU during the fourth quarter of 2016 and due to losses, the excess tax benefits will not affect expense since these amounts have not, and will not be applicable. The Company is also continuing its policy to estimate the forfeiture rate after adoption of this ASU.


9

Table of Contents

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-to-use asset representing its right to use the underlying asset for the lease term. The amendments of this ASU are effective for reporting periods beginning after December 15, 2018, with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The adoption of ASU 2016-02 is not expected to have a material impact on the Company’s consolidated financial statements and disclosures except upon initial adoption.

4. Cash, Cash Equivalents and Available-for-sale Securities

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. As of March 31, 2017 and December 31, 2016, the amount of cash and cash equivalents was $139.3 million and $82.4 million, respectively and consists of checking accounts and short-term U.S. Treasury money market mutual funds. Checking accounts are held at U.S. commercial banks, and balances were in excess of the FDIC insurance limit.

5. Senior Convertible Notes

On November 3, 2014, Synergy closed a private offering of $200 million aggregate principal amount of 7.50% Convertible Senior Notes due 2019, (the "Notes"), including the full exercise of the over-allotment option granted to the initial purchasers to purchase an additional $25 million aggregate principal amount of the Notes, interest payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2015. The net proceeds from the offering were $187.3 million after deducting the initial purchasers’ discounts and offering expenses. The Notes will mature on November 1, 2019, unless earlier purchased or converted. The Notes are convertible, at any time, into shares of Synergy’s common stock at an initial conversion rate of 321.5434 shares per $1,000 principal amount of notes, which is equivalent to the original conversion price of $3.11 per share.

Initial purchaser's discounts and offering expenses associated with the sale of the Notes of $12.7 million have been deferred and are being recognized as expense over the expected term of the Notes, calculated using the effective interest rate method.  The remaining deferred debt costs have been presented as a reduction of the Notes in accordance with the newly adopted ASU No. 2015-3 “Simplifying the Presentation of Debt Issuance Costs”.

On March 18, 2016 Synergy entered into an agreement (the "Exchange") for the exchange of $79.8 million in aggregate principal amount of the Notes, representing approximately 50% of the outstanding aggregate principal amount of Notes, for 35.3 million shares of Synergy's common stock, with a total of 25.6 million shares representing the conversion price of $3.11 pursuant to the existing terms of the Notes. The Company recognized a debt conversion expense of approximately $25.6 million representing 9.6 million shares for the quarter ended March 31,2016.

In November 2016 Synergy exchanged $55.7 million in aggregate principal amount of the Notes, representing approximately 70% of the outstanding aggregate principal amount of Notes, for 20.5 million shares of Synergy's common stock, with a total of 17.9 million shares representing the conversion price of $3.11 pursuant to the existing terms of the Notes. The Company recognized a debt conversion expense of approximately $14.5 million representing 2.6 million shares for the quarter ended December 31, 2016.

On February 28, 2017, Synergy received consents from certain holders of its Notes to enter into a Supplemental Indenture which eliminates certain restrictive covenants from the Indenture related to the Notes. The restrictive covenants eliminated from the Indenture are Limitation on Indebtedness, Future Financing Rights for Certain Investors and Licensing Limitations. On February 28, 2017, Synergy entered into the Supplemental Indenture with Wells Fargo, N.A., as trustee and paid an aggregate of approximately $1.6 million to such holders for the consent. These fees associated with the debt modification were accounted for under Accounting Standards Codification ("ASC") 470-50 and amortized using the effective interest method over the remaining term of the debt.

In March 2017, Synergy exchanged approximately $4.9 million aggregate principal amount of the Notes for approximately 1.8 million shares of its common stock, with approximately 1.6 million shares representing the conversion price of $3.11 pursuant to the existing terms of the Notes. As of March 31, 2017, approximately $18.6 million of the Notes remain outstanding. The Company recognized a debt conversion expense of approximately $1.2 million representing 0.2 million shares for the quarter ended March 31, 2017.


10

Table of Contents

A summary of quarterly activity and balances associated with the Notes and related deferred debt costs is presented below ($ in thousands):
 
Notes Balance
 
Deferred Debt Costs
 
Notes, net of
Deferred Debt Costs
Balance December 31, 2015
159,011

 
7,770

 
151,241

Less: amortization three months ended March 31, 2016 (1)
 
 
(4,153
)
 
4,153

Conversions
(79,829
)
 

 
(79,829
)
Balance, March 31, 2016
79,182

 
3,617

 
75,565

Less: amortization three months ended June 30, 2016
 
 
(253
)
 
253

Balance, June 30, 2016
79,182

 
3,364

 
75,818

Less: amortization three months ended September 30, 2016
 
 
(252
)
 
252

Balance, September 30, 2016
79,182

 
3,112

 
76,070

Less: amortization three months ended December 31, 2016 (1)
 
 
(2,263
)
 
2,263

Conversions
(55,668
)
 

 
(55,668
)
Balance, December 31, 2016
23,514

 
849

 
22,665

Deferred financing cost related to debt modification on February 28, 2017
 
 
1,591

 
(1,591
)
Less: amortization three months ended March 31, 2017 (1)
 
 
(608
)
 
608

Conversions
(4,911
)
 

 
(4,911
)
Balance, March 31, 2017
$
18,603

 
$
1,832

 
$
16,771

_____________________
(1) Includes accelerated amortization of deferred debt costs attributable to conversions and exchanges

6. Accounting for Share-based Payments

Stock Options

ASC Topic 718 “Compensation—Stock Compensation” requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award.  Synergy accounts for shares of common stock, stock options and warrants issued to employees based on the fair value of the stock, stock option or warrant, if that value is more reliably measurable than the fair value of the consideration or services received.

The Company accounts for stock options issued and vesting to non-employees in accordance with ASC Topic 505-50 “Equity -Based Payment to Non-Employees” and accordingly the value of the stock compensation to non-employees is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Accordingly the fair value of these options is being “marked to market” quarterly until the measurement date is determined.

Synergy adopted the 2008 Equity Compensation Incentive Plan (the “Plan”) during the quarter ended September 30, 2008. Stock options granted under the Plan typically vest after three years of continuous service from the grant date and have a contractual term of ten years. On June 8, 2015, Synergy amended its 2008 Equity Compensation Incentive Plan and increased the number of shares of its common stock reserved for issuance under the Plan from 15,000,000 to 30,000,000.

Stock-based compensation has been recognized in operating results as follows:
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
($ in thousands)
2017
 
2016
Included in research and development
$
1,873

 
$
810

Included in general and administrative
1,024

 
392

Total stock-based compensation expense
$
2,897

 
$
1,202


11

Table of Contents


The unrecognized compensation cost related to non-vested stock options outstanding at March 31, 2017, net of expected forfeitures, was approximately $16.4 million to be recognized over a weighted-average remaining vesting period of approximately 2.16 years. This unrecognized compensation cost does not include amounts related to 2,159,500 shares of common stock underlying stock options which vest and will be measured upon a change of control.

The estimated fair value of stock option awards was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions during the periods indicated.
 
Three Months Ended
March 31, 2017
 
Three Months Ended
March 31, 2016
Risk-free interest rate
1.96%-2.26%

 
1.47%-1.74%

Dividend yield

 

Expected volatility
50
%
 
60
%
Expected term (in years)
6 years

 
6 years


A summary of stock option activity and of changes in stock options outstanding under the Plan is presented below:
 
Number of
Options
 
Exercise Price
Per Share
 
Weighted Average
Exercise Price
Per Share
 
Intrinsic
Value
(in thousands)
 
Weighted Average
Remaining
Contractual Term
Balance outstanding, December 31, 2016 (1)
27,867,171

 
$0.44-9.12
 
$
3.78

 
$
65,618

 
7.1 years
Granted
843,500

 
$4.57-6.77
 
6.06

 

 

Exercised (2)
(89,978
)
 
$1.90-5.34
 
1.90

 
203,957

 

Forfeited
(836,145
)
 
$2.83-7.91
 
4.50

 

 

Balance outstanding, March 31, 2017 (1)
27,784,548

 
$0.44-9.12
 
$
3.91

 
$
31,558

 
6.9 years
 
 
 
 
 
 
 
 
 
 
Exercisable, at March 31, 2017
13,913,788

 
$0.44-9.12
 
$
3.70

 
$
17,227

 
5.7 years
__________________________
(1)  Number of options represented above includes 2,159,500 options vesting upon a change of control, granted between November 20, 2009 and June 22, 2010. The fair value at the date of grant was approximately $28.6 million. Because the probability of a change of control transaction is not predictable no stock based compensation expense associated with these options has been recognized since the grant date.
(2)
The Company received proceeds of approximately $0.3 million from the exercise of stock options during the three months ended March 31, 2017.

7. Stockholders’ Equity

On May 5, 2016, Synergy announced that it had entered into definitive agreements with certain institutional investors to sell 29,948,334 shares of common stock at a price of $3.00 per share. The shares were offered and sold directly to institutional investors by the company in a registered direct offering conducted without an underwriter or placement agent. The gross proceeds from the offering were approximately $89.8 million. The offering closed on May 6, 2016.

From January 1, 2016 through December 31, 2016 warrants to purchase 2,430,657 shares of common stock were exercised, yielding proceeds to the company of $11.3 million.

On January 31, 2017, Synergy entered into an underwriting agreement with Cantor Fitzgerald & Co., as representative of several underwriters, to issue and sell 20,325,204 shares of common stock of the Company in an underwritten public
offering pursuant to a Registration Statement on Form S-3 (File No. 333-205484) and a related prospectus and prospectus
supplement, in each case filed with the Securities and Exchange Commission (the “Offering”). The public offering price was
$6.15 per share of Common Stock. The Offering closed on February 6, 2017, yielding net proceeds of approximately $121.6 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.


12

Table of Contents

8. Research and Development Expense

Research and development costs include expenditures in connection with an in-house research and development laboratory, salaries and staff costs, application and filing for regulatory approval of proposed products, regulatory and scientific consulting fees, as well as contract research, patient costs, drug formulation and tableting, data collection, monitoring, and clinical insurance.

In accordance with FASB ASC Topic 730-10-55, Research and Development, Synergy recorded prepaid research and development costs of approximately $1.0 million as of March 31, 2017 and $0.5 million as of December 31, 2016, for nonrefundable advances for production of drug substance and analytical testing services for its drug candidates. In accordance with this guidance, Synergy expenses these costs when drug compound is delivered and services are performed.

The Company recorded inventory, manufactured for sale of a product candidate, when the product candidate was considered to have a high likelihood of regulatory approval and the related costs are expected to be recoverable through sales. In determining whether or not to record such inventories, the Company evaluated, among other factors, information regarding the product candidate's safety and efficacy, the status of regulatory submissions and communications with regulatory authorities and the outlook for commercial sales. Prior to October 1, 2016, all costs associated with batches of inventory and manufactured for sale of our product candidates, were charged to research and development as incurred. Beginning in the fourth quarter of 2016, Synergy began capitalizing inventory costs for TRULANCE in preparation for its planned launch in the U.S. The Company will record inventory, manufactured for sale of a product candidate, when the product candidate is considered to have a high likelihood of regulatory approval and the related costs are expected to be recoverable through sales. In determining whether or not to record such inventories, the Company evaluates, among other factors, information regarding the product candidate's safety and efficacy, the status of regulatory submissions and communications with regulatory authorities and the outlook for commercial sales.

9. Derivative Financial Instruments

Synergy Derivative Financial Instruments

Effective January 1, 2009, the Company adopted provisions of ASC Topic 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Equity” (“ASC Topic 815-40”). ASC Topic 815-40 clarifies the determination of whether an instrument issued by an entity (or an embedded feature in the instrument) is indexed to an entity’s own stock, which would qualify as a scope exception under ASC Topic 815-10.

Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that certain warrants issued in connection with sale of its common stock must be classified as derivative instruments. In accordance with ASC Topic 815-40, these warrants are also being re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair value are being recorded in the Company’s statement of operations. The Company estimates the fair value of certain warrants using the Black-Scholes option pricing model in order to determine the associated derivative instrument liability and change in fair value described above. The range of assumptions used to determine the fair value of the warrants at each period end was:
 
Three Months Ended
March 31, 2017
 
Three Months Ended
March 31, 2016
Fair value of Synergy common stock
$
4.66

 
$
2.76

Expected warrant term
0.9 years

 
1.9 years

Risk-free interest rate
0.68
%
 
0.80
%
Expected volatility
50
%
 
60
%
Dividend yield

 


Fair value of stock is the closing market price of the Company’s common stock at the end of each reporting period when the derivative instruments are marked to market. Expected volatility is a management estimate of future volatility, over the expected warrant term, based on historical volatility of Synergy’s common stock. The warrants have a transferability provision and based on guidance provided in SAB 107 for instruments issued with such a provision, Synergy used the full contractual term as the expected term of the warrants. The risk free rate is based on the U.S. Treasury security rates for maturities consistent with the expected remaining term of the warrants at the date quarterly revaluation.


13

Table of Contents

The following table sets forth the components of changes in the Synergy’s outstanding warrants which were deemed derivative financial instruments and the associated liability balance for the periods indicated:
Date
 
Description
 
Warrants
 
Derivative
Instrument
Liability
(in thousands)
12/31/2016
 
Balance of derivative financial instruments liability
 
210,000

 
$
216

3/31/2017
 
Change in fair value of warrants during the three months ended March 31, 2017
 
 
 
(122
)
3/31/2017
 
Balance of derivative financial instruments liability
 
210,000

 
$
94


10. Fair Value Measurements

Financial instruments consist of cash and cash equivalents, accounts payable and derivative instruments. These financial instruments are stated at their respective historical carrying amounts, which approximate fair value due to their short term nature.

The value of Senior Convertible Notes is stated at its carrying value at March 31, 2017. The Company believes it could obtain borrowings at March 31, 2017 at comparable interest rates as the November 2014 Notes, therefore, the carrying value approximates fair value.

The following table presents the Company’s liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2016 and March 31, 2017:

($ in thousands)
Description
 
Quoted Prices
in
Active
Markets
for Identical
Assets and
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance as of
December 31, 2016
 
Quoted Prices
in
Active
Markets
for Identical
Assets and
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance as of
March 31, 2017
Derivative liabilities related to Warrants
 
$

 
$

 
$
216

 
$
216

 
$

 
$

 
$
94

 
$
94


The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the Three months ended March 31, 2017:

($ in thousands)
Description
 
Balance as of
December 31, 2016
 
(Gain) or loss
recognized in
earning from
Change in Fair
Value
 
Expiration of
warrants
 
Balance as of
March 31, 2017
Derivative liabilities related to Warrants
 
$
216

 
$
(122
)
 
$

 
$
94


The unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities in the Company’s statement of operations. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, Synergy reviews the assets and liabilities that are subject to ASC Topic 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.


14

Table of Contents

11. Loss per Share

Basic and diluted net loss per share is presented in conformity with ASC Topic 260, Earnings per Share, (“ASC Topic 260”) for periods presented. In accordance with ASC Topic 260, basic and diluted net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted-average common shares outstanding during the period. Diluted weighted-average shares are the same as basic weighted-average shares because shares issuable pursuant to the exercise of stock options and warrants would be antidilutive.
The following table sets forth potential common shares issuable upon the exercise of outstanding options, the exercise of warrants, and the conversion of the Senior Convertible Notes, all of which have been excluded from the computation of diluted weighted average shares outstanding as they would be antidilutive, including the impact on dilutive net loss per share of in-the-money warrants as per ASC 260-10-45-35 through ASC 260-10-45-37:
 
Three Months Ended
March 31, 2017
 
Three Months Ended
March 31, 2016
Stock Options
27,784,548

 
21,227,948

Warrants
919,690

 
4,726,823

Senior Convertible Notes
5,981,672

 
25,460,450

Total shares issuable upon exercise or conversion
34,685,910

 
51,415,221



15

Table of Contents

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
The following discussion should be read in conjunction with our condensed consolidated financial statements and other financial information appearing elsewhere in this quarterly report. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking statements. You can identify these statements by forward-looking words such as “plan,” “may,” “will,” “expect,” “intend,” “anticipate,” believe,” “estimate” and “continue” or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future and thus you should not unduly rely on these statements.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under “Risk Factors” in our Annual Report on Form 10-K as of and for the year ended December 31, 2016 and other periodic reports filed with the United States Securities and Exchange Commission (“SEC”). Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company’s actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements and thus you should not unduly rely on these statements.

Business Overview
We are a biopharmaceutical company focused on the development and commercialization of novel gastrointestinal (GI) therapies. We have pioneered discovery, research and development efforts around analogs of uroguanylin, a naturally occurring and endogenous human GI peptide, for the treatment of GI diseases and disorders. We discovered, are developing and control 100% worldwide rights to our proprietary uroguanylin based GI platform, which includes one commercial product, TRULANCE (plecanatide), and a second product candidate, dolcanatide.
TRULANCE (plecanatide)
Our first and only commercial product, TRULANCE™, is approved and marketed in the United States (U.S.), under the trademark name TRULANCE™, as a once-daily treatment for adults with chronic idiopathic constipation, or CIC. In clinical trials, TRULANCE helped improve stool consistency and provide more regular bowel movements. TRULANCE is the only prescription medication for CIC that can be taken once-daily, with or without food, at any time of the day. In addition, we are developing TRULANCE for the treatment of adults with irritable bowel syndrome with constipation (IBS-C). We submitted a supplement NDA (sNDA) on March 24, 2017 and expect a 10-month review period.
TRULANCE is the first drug designed to replicate the function of uroguanylin. Uroguanylin, a guanylate cyclase-C (GC-C) receptor agonist, is thought to work in a pH-sensitive manner primarily in the small intestine to stimulate fluid secretion. Uroguanylin stimulates fluid secretion into the lumen of the intestinal tract and maintains stool consistency that is necessary for normal bowel function. With the exception of a single amino acid, TRULANCE is structurally identical to uroguanylin and is the only treatment that is thought to replicate the pH-sensitive activity of human uroguanylin. The single amino acid substitution results in improved (8x) binding affinity and therefore increases the potency of TRULANCE over uroguanylin.
CIC and IBS-C
CIC and IBS-C are chronic, functional GI disorders that afflict millions of people worldwide. An estimated 33 million adults suffer from CIC and 12 million adults suffer from IBS-C in the U.S. alone.
People with CIC have persistent symptoms of difficult-to-pass and infrequent bowel movements. In addition to physical symptoms including abdominal bloating and discomfort, CIC can adversely affect an individual’s quality of life, including increasing stress levels and anxiety. Many patients attempt to manage CIC symptoms with improved diet, fiber, and over-the-counter laxatives; however, these options can be ineffective or may not provide long-term relief. For those patients with persistent symptoms, prescription therapy is recommended. Many patients taking prescription medications fail to respond to therapy, or suffer from treatment-related adverse events, such as nausea and diarrhea.
Irritable bowel syndrome (IBS) is characterized by recurrent abdominal pain associated with 2 or more of the following criteria: related to defecation, associated with a change in the frequency of stool, or associated with a change in the form

16

Table of Contents

(appearance) of the stool. IBS can be subtyped by the predominant stool form as measured by the Bristol Stool Form Scale (BSFS): constipation (IBS-C), diarrhea (IBS-D), or mixed (IBS-M). Those within the IBS-C subtype experience Bristol  types 1 or 2  (hard or lumpy) stools  more than 25 percent of the time they have an abnormal bowel movement, and Bristol types 6 or 7 (loose or watery) stools less than 25 percent of the time they have an abnormal bowel movement. Some of the IBS treatment approaches recognized by the American College of Gastroenterology (ACG), including specialized diets, fiber, and psychological interventions, may not always effectively address abdominal pain and discomfort experienced by these patients. While there are prescription drug options, not all patients find complete relief, and many struggle with adverse events.  
Dolcanatide (SP-333)
Dolcanatide, our second product candidate, is being evaluated for inflammatory bowel disease (IBD). Dolcanatide is designed to be an analog of uroguanylin with enhanced resistance to standard digestive breakdown by proteases in the intestine. We have demonstrated the potential anti-inflammatory role of uroguanylin and uroguanylin analogs in a number of preclinical colitis models. In these earlier animal studies, oral treatment with dolcanatide was shown to ameliorate DSS- and TNBS-induced acute colitis in murine models and ameliorate spontaneous colitis in T-cell receptor alpha knockout mice.
In January 2016, we announced positive proof-of-concept with dolcanatide in a phase 1b trial evaluating 28 patients with mild-to-moderate ulcerative colitis. We plan to meet with regulatory agencies to discuss next steps in development for dolcanatide in mild-to-moderate ulcerative colitis.
In November 2014, we reported successful proof-of-concept with dolcanatide in a double-blind, placebo-controlled phase 2 trial in 289 patients with opioid induced constipation ("OIC"), demonstrating the utility of our uroguanylin based GI platform in OIC. We are considering OIC as a potential life cycle growth opportunity for TRULANCE.

Recent Developments

TRULANCE™ (plecanatide) CIC Update
In January 2017, the United States Food and Drug Administration (FDA) approved TRULANCE for the treatment of adults with CIC. TRULANCE can help improve stool consistency and provide more regular bowel movements. TRULANCE is the only prescription medication for CIC that can be taken once-daily, with or without food, at any time of the day. In addition, TRULANCE is the only prescription medication for CIC available in a unique calendar pack that is patient preferred versus a traditional pill bottle.
TRULANCE IBS-C Development Update
In March 2017, we submitted a sNDA for TRULANCE for the treatment of adults with IBS-C. We expect a 10-month review period from the submission date of March 24, 2017. The application is based on data from two of the largest Phase 3 IBS-C clinical trials to date, which evaluated more than 2,100 patients. In both 12-week studies, TRULANCE met the primary endpoint and showed statistical significance in the percentage of patients who were Overall Responders compared to placebo. The FDA has defined an Overall Responder as a patient who achieves ≥ 30% reduction in worst abdominal pain and an increase of ≥ 1 complete spontaneous bowel movement (CSBM) from baseline, in the same week, for at least 50% of the 12 treatment weeks.
TRULANCE IP Update
On April 12, 2017, we announced that the United States Patent and Trademark Office (USPTO) has issued three new patents covering TRULANCE. The first patent relates to the method for manufacturing TRULANCE and will expire March 1, 2032. The two other patents relate to formulations and methods of using TRULANCE for treating chronic idiopathic constipation (CIC) and irritable bowel syndrome with constipation (IBS-C) at 3mg or 6 mg dose; both of these patents will expire September 15, 2031.

17

Table of Contents

TRULANCE Commercial Launch Update
Driving Awareness of TRULANCE and Stimulating Trial and Adoption
Our sales force of approximately 250 is fully deployed across the U.S. and now educating approximately 27,000 high prescribers about TRULANCE.
The targeted prescriber base includes gastroenterologists, primary care physicians, nurse practitioners and physician assistants that currently account for approximately 70% of the total branded prescriptions, according to QuintilesIMS.
To date, our sales force has reached over 80% of the prescribers in the top three deciles.
According to QuintilesIMS analog research, we are exceeding expectations in terms of penetration and adoption curves with top decile prescribers after one month of launch.
Since launch, approximately 50% of TRULANCE prescriptions are coming from other branded prescription products and 50% are new patients.
Over 300,000 7-day sample packs of TRULANCE have been distributed to the field force, to-date.
Initiated peer-to-peer educational programs with approximately 140 gastroenterologists now educating local gastroenterologists, primary care physicians and other health care professionals on patient, disease and product-specific information to enable appropriate use of TRULANCE.
Launched a comprehensive print and digital media plan to drive awareness of TRULANCE and stimulate trial and adoption among target prescribers.
Presented new TRULANCE data and insights from the BURDEN-CIC study at DDW 2017.
Presented six abstracts, including one late-breaker oral presentation highlighting TRULANCE data from the two Phase 3 IBS-C trials. Two of the abstracts were recognized by the American Gastroenterology Association (AGA) as Posters of Distinction.
Presented new insights from the BURDEN-CIC study that examined patient and physician perceptions and experiences with CIC. The results highlight the condition’s impact and show the need for additional CIC treatment options.
Ensuring Market Access
To-date, approximately 60% of adult CIC patients with commercial insurance have unrestricted access to TRULANCE.
The TRULANCE “Savings-to-Go” program helps to ensure an average copay of $25 per prescription for over 95% of patients with commercial insurance.
The TRULANCE Access Support Services Program provides healthcare providers and patients additional assistance for certain managed care plans that require prior authorizations.
Medicare Part D and Medicaid discussions are ongoing and progressing well.
Activating and Supporting the Rx Ready Patient
Launched consumer media campaigns to support the product launch and drive awareness of the TRULANCE brand and the current unmet needs of patients with CIC.
TRULANCE Branded Campaign:
Point-of-care promotion: targeting ~20,000 offices.
Web sponsorships and display advertisements generated over 36 million impressions, to-date.
Search engine marketing initiatives generated over 65,000 clicks, to-date.
Over 100,000 visits to the Trulance.com consumer site, to-date.
“Confront Constipation” Campaign:
Disease awareness initiative designed to increase the understanding and improve the dialogue between patients, prescribers, and other health care providers on managing CIC.
Campaign has generated 28 original media placements and over 300 million media impressions, to-date.
Over 60,000 downloads of the Poop Troop emoji keyboard, to-date.
 
RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016

We had net sales of $0.1 million during the three months ended March 31, 2017 and no revenues during the three corresponding months in 2016.


18

Table of Contents

Cost of goods sold (“COGS”) for the quarter-ended March 31, 2017 totaled $1.8 million, which includes (i) direct cost of manufacturing and packaging drug product and (ii) technical operations overhead costs which are generally more fixed in nature, including salaries, benefits, consulting, stability testing and other services.  Technical operations are responsible for planning, coordinating, and executing on our inventory production plan and insuring that product quality satisfies FDA requirements.  Costs incurred by our technical operations organization are recorded as expense in the period in which they are incurred. As such, technical operations overhead represent the vast majority of COGS in our Statement of Operations for the three months ended March 31, 2017.

Certain direct costs associated with pre-commercial inventory, other than packaging, were expensed prior to receiving FDA approval.

Research and development expenses for the three months ended March 31, 2017 (“Current Year Quarter”) decreased approximately $2.1 million or 9.9%, to approximately $19.1 million from approximately $21.2 million for the three months ended March 31, 2016 (“Prior Year Quarter”). This decrease in research and development expenses was due primarily to lower spending on CIC clinical studies and dolcanatide.

The following table sets forth our research and development expenses directly related to our product candidates, as well as indirect costs, for the three months ended March 31, 2017 and 2016. Direct expenses include external costs associated with chemistry, manufacturing and controls including costs of drug substance and product formulation, as well as filing fees for regulatory approval, preclinical studies and clinical trial costs.
 
($ in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
TRULANCE
$
14,909

 
$
18,200

Dolcanatide
246

 
472

Total direct costs
15,155

 
18,672

Total indirect costs
3,974

 
2,503

Total Research and Development
$
19,129

 
$
21,175


Indirect research and development costs which are comprised of in-house staff compensation, facilities, depreciation, stock-based compensation and research and development support services, are not directly allocated to specific drug candidates. Indirect costs were approximately $4.0 million in the Current Year Quarter, as compared to approximately $2.5 million during the Prior Year Quarter representing an increase of approximately $1.5 million which was primarily due to severance accruals for terminated employees and higher stock based compensation.

Selling, general and administrative expenses increased approximately $35.5 million or 554.7%, to $41.9 million for the Current Year Quarter from approximately $6.4 million for the Prior Year Quarter. These increased expenses primarily reflect the cost of building a Commercial Organization as part of our product launch of TRULANCE in the Current Year Quarter. These costs include commercial preparedness and planning expenses including an approximately $26.6 million increase in marketing and sales expenses, a $2.2 million increase in consulting expenses, a $3.7 million increase in employee compensation and benefits costs, and a $0.6 million increase in stock compensation expense.

Net loss for the Current Year Quarter was $64.6 million as compared to a net loss of a $59.9 million for the Prior Year Quarter. This increase in our net loss of $4.7 million or 7.8% was a result of the operating items discussed above partially offset by approximately a $24.4 million decrease in debt conversion expense and approximately a $3.5 million decrease in amortization of deferred financing costs, both related to the conversion of $25.6 million of our convertible debt in the Prior Year Quarter.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was approximately $63.5 million for the three months ended March 31, 2017. As of March 31, 2017, we had approximately $139.3 million of cash and cash equivalents. During the three months ended March 31, 2017, we incurred losses from operations of $62.7 million. As of March 31, 2017, we had working capital of approximately $119.8 million, as compared to approximately $59.5 million at December 31, 2016


19

Table of Contents

Notwithstanding the Company's recent equity financing, we will be required to raise additional capital within the next year to continue the development and commercialization of current product candidates and to continue to fund operations at the current cash expenditure levels. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we are unable to raise additional capital when required or on acceptable terms, we may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on unfavorable terms.
Our consolidated financial statements as of December 31, 2016 and our unaudited condensed consolidated financial statements as of March 31, 2017 have been prepared under the assumption that we will continue as a going concern for the next twelve months. Our independent registered public accounting firm has issued a report as of December 31, 2016 that includes an explanatory paragraph referring to our recurring and continuing losses from operations and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate profits. Our consolidated financial statements as of December 31, 2016 and our unaudited condensed consolidated financial statements as of March 31, 2017 do not include any adjustments that might result from the resolution of this uncertainty.

CRITICAL ACCOUNTING POLICIES

Revenue recognition

We recognize net product revenue from sales of TRULANCE in accordance with Accounting Standards Codification ("ASC") 605, Revenue Recognition which considers the following two factors, (a) Being realized or realizable. Revenue and gains generally are not recognized until realized or realizable, namely when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. These revenue and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash and (b) revenues should be recognized only once they have been earned. An entity's revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. Therefore, for gains that commonly result from transactions and other events that involve no earning process, and for recognizing gains, being earned is generally less significant than being realized or realizable.

The first units of TRULANCE were shipped to distributors in March 2017. Due to the early stage of the product launch, we are not able to reliably make certain estimates, including returns, necessary to recognize product revenue upon shipment to distributors. As a result, we deferred revenue recognition until TRULANCE prescriptions are dispensed to patients, based on third party prescription sales IMS data.  Our estimates used to determine certain gross-to-net (GTN) sales adjustments rely on third party data, and certain third party information is itself an estimate. We will continue to evaluate historical activity and visibility into the distribution channel, in order to reasonably make all estimates required under ASC 605 to recognize revenue upon shipment to the distributor.

Our net product revenues and related net deferred revenues for TRULANCE therefore represent total revenues less estimated customer credits, including returns, rebates, and other discounts. These allowances are recorded for consideration given by a commercial or government payor to a patient, or by us to a distributor, and presumed to be a reduction of the selling price of our product and, therefore, characterized as a reduction of revenue and net deferred revenue.

Cost of Goods Sold

COGS includes (i) direct cost of manufacturing and packaging drug product and (ii) technical operations overhead costs which are generally more fixed in nature, including salaries, benefits, consulting, stability testing and other services.  Technical operations are responsible for planning, coordinating, and executing our inventory production plan and insuring that product quality satisfies FDA requirements.  Costs incurred by the technical operations organization are recorded as expense in the period in which they are incurred. Certain direct costs associated with pre-commercial inventory, other than packaging, were expensed prior to receiving FDA approval.


20

Table of Contents

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our accounting policies are described in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA of our Annual Report on Form 10-K as of and for year ended December 31, 2016, filed with the SEC on March 1, 2017. There have been no other changes to our critical accounting policies since December 31, 2016.

OFF-BALANCE SHEET ARRANGEMENTS

We had no off-balance sheet arrangements as of March 31, 2017.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk on the fair values of certain assets is related to credit risk associated with bank checking accounts and securities held in money market mutual funds. As of March 31, 2017, we held $139.3 million in checking and U.S. Treasury based mutual funds. Our cash and cash equivalents balances are in excess of the Federally insured limit. We believe our cash and cash equivalents do not contain excessive risk, however we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value.

ITEM 4.    CONTROLS AND PROCEDURES

Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2017, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitations, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

As required by Rule 13a-15(d) of the Exchange Act, our management, including our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded there were no material changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that could significantly affect internal controls over financial reporting during the quarter ended March 31, 2017.


21

Table of Contents

PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

There have been no material changes from the legal proceedings disclosed in our Form 10-K for the year ended December 31, 2016, filed on March 1, 2017.

ITEM 1a.               RISK FACTORS

There have been no material changes in our risk factors since the filing on March 1, 2017 of our Form 10-K for the year ended December 31, 2016.

ITEM 2.    PROPERTIES

There have been no material changes in our properties since the filing on March 1, 2017 of our Form 10-K for the year ended December 31, 2016.


22

Table of Contents

ITEM 6.
EXHIBITS
 
 
(a)
Exhibits
 
 
10.1
Executive Employment Agreement dated April 17, 2017 by and between Synergy Pharmaceuticals Inc. and Gary Gemignani (incorporated by reference to Exhibit 10.1 to Form 8-K filed April 17,2017).
 
 
31.1
Certification of Chief Executive Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.
 
 
31.2
Certification of Chief Financial Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.
 
 
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended March 3, 2017, filed on May 10, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statement of Stockholders' Equity (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text.

23

Table of Contents

SIGNATURES

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

 
SYNERGY PHARMACEUTICALS INC.
 
(Registrant)
 
 
 
Date: May 10, 2017
By:
/s/ GARY S. JACOB
 
 
Gary S. Jacob
 
 
President, Chairman of Board, and Chief Executive Officer
 
 
 
Date: May 10, 2017
By:
/s/ GARY G. GEMIGNANI
 
 
Gary G. Gemignani
 
 
Executive Vice President, Chief Financial Officer

24

Table of Contents


EXHIBIT 31.1
 
CERTIFICATIONS
 
I, Gary S. Jacob, certify that:
 
1)                                      I have reviewed this report on Form 10-Q of Synergy Pharmaceuticals Inc.
 
2)                                      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3)                                      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4)                                      The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
 
a)                                      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)                                      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)                                       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)                                      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5)                                      The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions);
 
a)                                      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)                                      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 

Date: May 10, 2017
/s/ GARY S. JACOB
 
Gary S. Jacob
 
President, Chairman of Board, and Chief Executive Officer
 

25

Table of Contents



EXHIBIT 31.2
 
CERTIFICATIONS
 
I, Gary G. Gemignani, certify that:
 
1)                                      I have reviewed this report on Form 10-Q of Synergy Pharmaceuticals Inc.
 
2)                                      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3)                                      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4)                                      The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
 
a)                                      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)                                      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)                                       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)                                      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5)                                      The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions);
 
a)                                      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)                                      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 

Date: May 10, 2017
/s/ GARY G. GEMIGNANI
 
Gary G. Gemignani
 
Executive Vice President, Chief Financial Officer
 

26

Table of Contents



EXHIBIT 32.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
SYNERGY PHARMACEUTICALS INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2017
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I am the Chief Executive Officer of Synergy Pharmaceuticals Inc., a Delaware corporation (the “Company”). I am delivering this certificate in connection with the Form 10-Q of the Company for the quarter ended March 31, 2017 and filed with the Securities and Exchange Commission (“Form 10-Q”).
 
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I hereby certify that, to the best of my knowledge, the Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 

Date: May 10, 2017
/s/ GARY S. JACOB
 
Gary S. Jacob
 
President, Chairman of Board, and Chief Executive Officer
 


27

Table of Contents


EXHIBIT 32.2
 
CERTIFICATION OF SENIOR VICE PRESIDENT, FINANCE
SYNERGY PHARMACEUTICALS INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2017
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I am the Senior Vice President, Finance of Synergy Pharmaceuticals Inc., a Delaware corporation (the “Company”). I am delivering this certificate in connection with the Form 10-Q of the Company for the quarter ended March 31, 2017 and filed with the Securities and Exchange Commission (“Form 10-Q”).
 
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I hereby certify that, to the best of my knowledge, the Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 

Date: May 10, 2017
/s/ GARY G. GEMIGNANI
 
Gary G. Gemignani
 
Executive Vice President, Chief Financial Officer


28