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CONDENSED CONSOLIDATED BALANCE SHEETS (USD  $)
Jun. 30, 2011
Dec. 31, 2010
Current Assets:
Cash and cash equivalents  $ 503,744  $ 1,707,516
Prepaid expenses and other current assets 861,399 997,584
Total Current Assets 1,365,143 2,705,100
Property and equipment, net 6,761 7,749
Security deposits 14,025 14,025
Due from controlling shareholder 1,378,473 1,674,087
Total assets 2,764,402 4,400,961
Current Liabilities:
Accounts payable 2,627,657 2,961,333
Accrued expenses 2,193,099 2,051,057
Total Current Liabilities 4,820,756 5,012,390
Derivative financial instruments, at estimated fair value-warrants 7,958,506 3,487,959
Total Liabilities 12,779,262 8,500,349
Stockholders' Deficit:
Common stock, par value of  $.0001 authorized 200,000,000 shares, outstanding 94,168,578 and 92,188,164 shares at June 30, 2011 and December 31, 2010 9,418 9,220
Additional paid-in capital 53,376,493 51,033,374
Deficit accumulated during development stage (63,400,771) (55,141,982)
Total Stockholders' Deficit (10,014,860) (4,099,388)
Total liabilities and stockholder's deficit  $ 2,764,402  $ 4,400,961
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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD  $)
Jun. 30, 2011
Dec. 31, 2010
CONDENSED CONSOLIDATED BALANCE SHEETS
Common stock, par value (in dollars per share)  $ 0.0001  $ 0.0001
Common stock, authorized shares 200,000,000 200,000,000
Common stock, outstanding shares 94,168,578 92,188,164
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD  $)
3 Months Ended 6 Months Ended 68 Months Ended
Jun. 30, 2011
Jun. 30, 2010
Jun. 30, 2011
Jun. 30, 2010
Jun. 30, 2011
Revenues  $ 0  $ 0  $ 0  $ 0  $ 0
Costs and Expenses:
Research and development 2,354,450 4,395,266 3,832,576 5,579,128 18,826,976
Purchased in-process research and development 28,156,502
General and administrative 1,524,402 1,419,019 3,422,028 2,617,302 16,321,028
Loss from Operations (3,878,852) (5,814,285) (7,254,604) (8,196,430) (63,304,506)
Interest and investment income 20,003 27,724 44,067 60,964 232,545
Interest expense (11,877) (11,877)
Other Income 494,479
Change in fair value of derivative instruments-warrants (697,660) (1,036,375) (739,591)
Loss from Continuing Operations (4,556,509) (5,786,561) (8,258,789) (8,135,466) (63,328,950)
Loss from discontinued operations (71,821)
Net Loss  $ (4,556,509)  $ (5,786,561)  $ (8,258,789)  $ (8,135,466)  $ (63,400,771)
Weighted Average Common Shares Outstanding Basic (in shares) 93,285,801 88,462,128 92,812,943 88,442,851
Weighted Average Common Shares Outstanding Diluted (in shares) 93,285,801 88,462,128 92,812,943 88,442,851
Net Loss per Common Share, Basic and Diluted (in dollars per share)  $ (0.05)  $ (0.07)  $ (0.09)  $ (0.9)
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (USD  $)
Total
Common Stock
Additional Paid in Capital
Deficit Accumulated during the Development Stage
Balance at Nov. 14, 2005
Increase (Decrease) in Stockholders' Equity
Sale of unregistered common stock to founder  $ 2,000  $ 15,138  $ (13,138)
Sale of unregistered common stock to founder (in shares) 151,381,215
Sale of common stock 18,100 1,370 16,730
Sale of common stock (in shares) 13,700,000
Net loss for the year (16) (16)
Balance at Dec. 31, 2005 20,084 16,508 3,592 (16)
Balance (in shares) at Dec. 31, 2005 165,081,215
Increase (Decrease) in Stockholders' Equity
Net loss for the year (20,202) (20,202)
Balance at Dec. 31, 2006 (118) 16,508 3,592 (20,218)
Balance (in shares) at Dec. 31, 2006 165,081,215
Increase (Decrease) in Stockholders' Equity
Capital contribution by shareholders 8,893 8,893
Net loss for the year (20,043) (20,043)
Balance at Dec. 31, 2007 (11,268) 16,508 12,485 (40,261)
Balance (in shares) at Dec. 31, 2007 165,081,215
Increase (Decrease) in Stockholders' Equity
Cancellation of unregistered founder shares (14,998) 14,998
Cancellation of unregistered founder shares (in shares) (149,981,208)
Common stock issued via Exchange Transaction 27,278,861 4,546 27,274,315
Common stock issued via Exchange Transaction (in shares) 45,464,760
Common stock issued via private placement 3,025,000 504 3,024,496
Common stock issued via private placement (in shares) 5,041,667
Fees and expenses related to private placements (73,088) (73,088)
Stock based compensation expense 379,883 379,883
Net loss for the year (31,755,180) (31,755,180)
Balance at Dec. 31, 2008 (1,155,792) 6,560 30,633,089 (31,795,441)
Balance (in shares) at Dec. 31, 2008 65,606,434
Increase (Decrease) in Stockholders' Equity
Common stock issued via private placement 15,970,100 2,282 15,967,818
Common stock issued via private placement (in shares) 22,814,425
Fees and expenses related to private placements (260,002) (260,002)
Common stock Issued for services rendered 1,500 2 1,498
Common stock Issued for services rendered (in shares) 2,500
Stock based compensation expense 1,053,062 1,053,062
Net loss for the year (8,125,100) (8,125,100)
Balance at Dec. 31, 2009 7,483,768 8,844 47,395,465 (39,920,541)
Balance (in shares) at Dec. 31, 2009 88,423,359
Increase (Decrease) in Stockholders' Equity
Common stock issued via registered direct offering and private placement 7,179,000 242 7,178,758
Common stock issued via registered direct offering and private placement (in shares) 2,418,000
Fees and expenses related to direct offering (468,130) (468,130)
Warrants reclassified to derivative liability - net (3,784,743) (3,784,743)
Common stock issued to extend lock-up agreements 134 (134)
Common stock issued to extend lock-up agreements (in shares) 1,341,867
Common stock Issued for services rendered 18,271 18,271
Common stock Issued for services rendered (in shares) 4,938
Stock based compensation expense 693,887 693,887
Net loss for the year (15,221,441) (15,221,441)
Balance at Dec. 31, 2010 (4,099,388) 9,220 51,033,374 (55,141,982)
Balance (in shares) at Dec. 31, 2010 92,188,164
Increase (Decrease) in Stockholders' Equity
Common stock issued via registered direct offering and exercise of warrants 5,461,242 182 5,461,060
Common stock issued via registered direct offering and exercise of warrants (in shares) 1,980,414
Fees and expenses related to direct offering (395,620) (395,620)
Exercise of warrants 415,309 16 415,293
Warrants reclassified to derivative liability - net (3,434,172) (3,434,172)
Stock based compensation expense 296,558 296,558
Net loss for the year (8,258,789) (8,258,789)
Balance at Jun. 30, 2011  $ (10,014,860)  $ 9,418  $ 53,376,493  $ (63,400,771)
Balance (in shares) at Jun. 30, 2011 94,168,578
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD  $)
6 Months Ended 68 Months Ended
Jun. 30, 2011
Jun. 30, 2010
Jun. 30, 2011
Cash Flows From Operating Activities:
Net Loss  $ (8,258,789)  $ (8,135,466)  $ (63,400,771)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 988 988 6,162
Stock-based compensation expense 296,558 377,405 2,443,161
Purchased in-process research and development 28,156,502
Change in fair value of derivative instruments-warrants 1,036,375 739,591
Changes in operating assets and liabilities:
Security deposit (14,025)
Accounts payable and accrued expenses (191,634) 1,244,640 4,097,713
Prepaid expenses and other current assets 136,185 848,825 (861,399)
Net Cash Used in Operating Activities (6,980,317) (5,663,608) (28,833,066)
Cash Flows From Investing Activities:
Net cash paid on Exchange Transaction (155,326)
Repayment from/(loans to) related parties 295,614 (393,085) (1,378,473)
Additions to property and equipment (12,195)
Net Cash Provided by/ (Used in) Investing Activities 295,614 (393,085) (1,545,994)
Cash Flows From Financing Activities:
Capital contribution by founding shareholders 8,893
Issuance of common stock to founders 2,000
Proceeds from sale of common stock 5,461,242 255,000 31,635,342
Proceeds from exercise of warrants 415,309 415,309
Proceeds from sale of unregistered common stock to founders 18,100
Fees and expenses related to sale of common stock (395,620) (25,000) (1,196,840)
Net Cash Provided by Financing Activities 5,480,931 230,000 30,882,804
Net (decrease) increase in cash and cash equivalents (1,203,772) (5,826,693) 503,744
Cash and cash equivalents at beginning of period 1,707,516 7,152,568
Cash and cash equivalents at end of period 503,744 1,325,875 503,744
Supplementary disclosure of cash flow information:
Cash paid for taxes 8,021 900 41,842
Value of warrants classified as derivative liability - net 3,920,500 7,958,506
Value of common stock issued to induce stockholders to extend lock-up agreements 3,235,040
Cash received in escrow for June 30, 2010 direct registered offering 2,499,000
Accrued finder's fees related to registered direct offering in escrow  $ 261,630
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Business Overview
6 Months Ended
Jun. 30, 2011
Business Overview
Business Overview

1. Business Overview

 

Synergy Pharmaceuticals, Inc., incorporated in Florida on November 15, 2005, (“Synergy” or the “Company”) is a biopharmaceutical company focused primarily on the development of drugs to treat gastrointestinal, or GI, disorders and diseases. Our lead product candidate is plecanatide, a guanylyl cyclase C, or GC-C, receptor agonist, to treat GI disorders, primarily chronic constipation, or CC, and constipation-predominant-irritable bowel syndrome, or IBS-C. CC and IBS-C are functional gastrointestinal disorders that afflict millions of sufferers worldwide. CC is primarily characterized by infrequent and uncomfortable bowel movements but a majority of these patients also report bloating and abdominal discomfort among their most bothersome symptoms. IBS-C is characterized by frequent and recurring abdominal pain and/or discomfort associated with chronic constipation. Synergy is also developing SP-333, our second generation GC-C receptor agonist for the treatment of gastrointestinal inflammatory diseases, such as ulcerative colitis, or UC.

 

Plecanatide

 

Synergy is currently developing plecanatide, a synthetic hexadecapeptide designed to mimic the actions of the GI hormone uroguanylin, for the treatment of CC and IBS-C. Plecanatide is an agonist of GC-C receptor.

 

Plecanatide is covered by a U.S. patent issued on May 9, 2006 with respect to composition of matter that expires on March 25, 2023, subject to possible patent term extension, and a U.S. patent issued on September 21, 2010 with respect to composition of matter that expires on June 9, 2022, subject to possible patent term extension. Synergy has filed patent applications to broaden our patent estate covering GC-C receptor agonists.

 

SP-333

 

We are also developing a second generation GC-C receptor analog, SP-333, which is currently in pre-clinical development for the treatment of gastrointestinal diseases and disorders. SP-333 is a synthetic analog of uroguanylin, a natriuretic hormone which is normally produced in the body’s intestinal tract. Deficiency of this hormone is predicted to be one of the primary reasons for the formation of polyps that can lead to colon cancer, as well as debilitating and difficult-to-treat GI inflammatory disorders such as ulcerative colitis and Crohn’s disease.

 

On February 1, 2011 the U.S. Patent and Trademark Office issued U.S. Patent No. 7,879,802, covering Synergy’s novel drug candidate SP-333 to treat inflammatory bowel disease (IBD). SP-333 is a second-generation guanylate cyclase C (GC-C) agonist with the potential to treat gastrointestinal diseases such as ulcerative colitis. The patent entitled “Agonists of Guanylate Cyclase Useful for the Treatment of Gastrointestinal Disorders, Inflammation, Cancer and Other Disorders” specifically claims composition of matter of SP-333 and use in the treatment of human diseases.

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Basis of Presentation and Going Concern
6 Months Ended
Jun. 30, 2011
Basis of Presentation and Going Concern
Basis of Presentation and Going Concern

2. Basis of Presentation and Going Concern

 

On July 14, 2008, Pawfect Foods Inc. (“Pawfect”), a Florida corporation incorporated on November 15, 2005, acquired 100% of the common stock of Synergy Pharmaceuticals, Inc., a Delaware corporation incorporated on September 11, 1992, and its wholly-owned subsidiary, Synergy Advanced Pharmaceuticals, Inc., (collectively “Synergy-DE”), under an exchange agreement (the “Exchange Transaction”). Pawfect acquired the GI drugs (plecanatide and SP-333) and the related technology in connection with the Exchange Transaction. On July 21, 2008, Pawfect amended its articles of incorporation to effect the actions necessary to complete the transactions contemplated by the Exchange Transaction and changed its name to Synergy Pharmaceuticals, Inc. (“Synergy” or “the Company”).

 

The acquisition of Synergy-DE was treated as an asset acquisition, since Synergy-DE is a development stage company and does not have the necessary inputs and outputs to meet the definition of a business. The results of operations of Synergy-DE are included in the accompanying consolidated financial statements from the date of acquisition. As a result of the acquisition of Synergy-DE on July 14, 2008, the Company decided to discontinue its pet food business and accordingly, amounts in the consolidated statements of operations and related notes for all historical periods have been restated to reflect these operations as discontinued.

 

These unaudited condensed consolidated financial statements include Synergy and its wholly-owned subsidiaries: (1) Synergy-DE, (2) Synergy Advanced Pharmaceuticals, Inc. and (3) 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, 2010 contained in the Company’s Annual Report on Form 10-K filed with the Securities Exchange Commission (“SEC”) on March 16, 2011. Certain items in the prior year’s financial statements have been reclassified to conform to the current year’s presentation. All intercompany balances and transactions have been eliminated.

 

These condensed consolidated financial statements as of June 30, 2011 and December 31, 2010 have been prepared under the assumption that Synergy will continue as a going concern for the next twelve months. 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 and, ultimately, to generate revenue. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

As of June 30, 2011, Synergy had an accumulated deficit of  $63,400,771 and expects to incur significant and increasing operating losses for the next several years as the Company expands its research and development, continues clinical trials of plecanatide for the treatment of GI disorders, acquires or licenses technologies, advances other product candidates (e.g. SP-333) into clinical development, seeks regulatory approval and, if FDA approval is received, commercializes products. Because of the numerous risks and uncertainties associated with product development efforts, Synergy is unable to predict the extent of any future losses or when Synergy will become profitable, if at all.

 

Net cash used in operating activities was  $6,980,317 for the six months ended June 30, 2011. As of June 30, 2011 Synergy has  $503,744 of cash on hand. During the six months ended June 30, 2011 Synergy incurred a net loss of  $8,258,789. To date, Synergy’s sources of cash have been primarily limited to the sale of common stock and issuance of notes. Net cash provided by financing activities for the six months ended June 30, 2011 was  $5,480,931. As of June 30, 2011 Synergy had a negative working capital of  $3,435,613.

 

On July 11, 2011, Synergy entered into a securities purchase agreement with an investor to raise gross proceeds of  $242,750 in a private placement.  The Company issued to the investor 80,916 shares of its common stock and warrants to purchase 80,916 shares of common stock. The purchase price paid by the investor was  $3.00 for each unit. The warrants expire after seven years and are exercisable at  $3.25 per share. Synergy also paid a selling agent  $16,993 and issued 6,503 warrants in connection with this transaction.

 

On July 28, 2011, Synergy entered into a securities purchase agreement with certain investors to raise gross proceeds of  $2,336,472 in a registered direct offering.   The Company issued to the investors 667,563 shares of its common stock. The purchase price paid by the investors was  $3.50 for each share of common stock. Selling agent fees and expenses totaled approximately  $287,000 and there were no warrants issued in connection with this transaction.

 

Recent worldwide economic conditions, as well as domestic and international equity and credit markets, have significantly deteriorated and may remain depressed for the foreseeable future. These developments will make it more difficult to obtain additional equity or credit financing, when needed.

 

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; (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.

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Recent Accounting Pronouncements
6 Months Ended
Jun. 30, 2011
Recent Accounting Pronouncements
Recent Accounting Pronouncements

3. Recent Accounting Pronouncements

 

In April 2010, the FASB issued ASU 2010-13, “Compensation—Stock Compensation (Topic 718)—Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The adoption of this standard did not have a material effect on the Company’s results of operations or its financial position.

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Accounting for Shared-Based Payments
6 Months Ended
Jun. 30, 2011
Accounting for Shared-Based Payments
Accounting for Shared-Based Payments

4. Accounting for Shared-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. ASC Topic 718 did not change the way Synergy accounts for non-employee stock-based compensation. Synergy continues to account for shares of common stock, stock options and warrants issued to non-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.

 

ASC Topic 718 requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) be classified as cash inflows from financing activities and cash outflows from operating activities. Due to Synergy’s accumulated deficit position, no excess tax benefits have been recognized. Synergy accounts for common stock, stock options, and warrants granted to employees and non-employees based on the fair market value of the instrument, using the Black-Scholes option pricing model based on assumptions for expected stock price volatility, term of the option, risk-free interest rate and expected dividend yield, at the grant date.

 

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. Synergy did not issue stock options prior to the quarter ended September 30, 2008. Stock-based compensation expense related to Synergy options and restricted stock units have been recognized in operating results as follow:

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30

 

November 15,
2005
(inception) to

 

 

 

2011

 

2010

 

2011

 

2010

 

June 30, 2011

 

Employees—included in research and development

 

 $

 37,157

 

 $

 49,804

 

 $

73,906

 

 $

 99,263

 

 $

 593,496

 

Employees—included in general and administrative

 

45,115

 

58,994

 

89,733

 

117,948

 

771,219

 

Non-employees—included in research and development

 

8,456

 

8,455

 

16,818

 

16,817

 

111,464

 

Non-employees—included in general and administrative

 

58,370

 

71,778

 

116,101

 

143,377

 

966,982

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense

 

 $

 149,098

 

 $

 189,031

 

 $

 296,558

 

 $

 377,405

 

 $

 2,443,161

 

 

The unrecognized compensation cost related to non-vested employee stock options outstanding at June 30, 2011, net of expected forfeitures, was  $10,727 to be recognized over a weighted-average remaining vesting period of approximately three months. This unrecognized compensation cost does not include amounts related to stock options which vest upon 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 following periods indicated.

 

 

 

Six Months Ended
June 30, 2011

 

Six Months Ended
June 30, 2010

 

Risk-free interest rate

 

(*)

 

2.31- 2.71%

 

Dividend yield

 

(*)

 

 

Expected volatility

 

(*)

 

90%

 

Expected term (in years)

 

(*)

 

6.0 yrs

 

 

 

(*) No stock options granted during this period.

 

On March 1, 2010, a majority of Synergy’s shareholders acting by written consent approved an amendment to the Plan increasing the number of shares reserved under the Plan to 15,000,000 shares. 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

 

Weighted Average
Remaining
Contractual Term

 

Balance outstanding, December 31, 2010

 

8,604,016

 

 $0.25 - 0.95

 

 $

0.51

 

 $

25,763,002

 

8.4 years

 

Granted

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

Forfeited

 

(289,939

)

 $0.25-0.70

 

 $

0.52

 

 

 

 

 

Balance outstanding, June 30, 2011

 

8,314,077

 

 $0.25-0.95

 

 $

0.51

 

 $

29,887,896

 

7.91 years

 

Exercisable at June 30, 2011

 

2,683,343

 

 $0.25-0.95

 

 $

0.30

 

 $

10,208,371

 

7.04 years

 

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Notes Payable
6 Months Ended
Jun. 30, 2011
Notes Payable
Notes Payable

5. Notes Payable

 

On February 8, 2011, Synergy entered into a loan agreement (the “Agreement”) with an investor (the “Lender”), pursuant to which the Lender agreed to lend an aggregate  $950,000 to Synergy. Simultaneously with the execution and delivery of the Agreement, Synergy borrowed and issued a note to the Lender in the principal amount of  $500,000 (the “First Note”). Synergy had, but never exercised, the option to issue an additional note to the Lender in the principal amount of  $450,000 beginning February 21, 2011 (the “Second Note” and with the First Note, the “Notes”). The Notes bore interest at 17% per annum and were payable on April 1, 2011. The First Note principal and interest totaling  $511,877 was paid when due on April 1, 2011 and the loan agreement was terminated.

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Stockholder's Equity
6 Months Ended
Jun. 30, 2011
Stockholder's Equity
Stockholder's Equity

6. Stockholder’s Equity

 

On March 4, 2011, Synergy closed a registered direct offering with a non-U.S. investor which raised gross proceeds of  $1,800,000. Synergy issued to the investor 600,000 shares of its common stock and warrants to purchase 420,000 shares of common stock. The purchase price paid by the investor was  $3.00 for each unit. The warrants expire after seven years and are exercisable at  $3.10 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that the warrants issued in connection with this registered direct offering must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

On May 2, 2011, Synergy entered into a securities purchase agreement with certain investors to raise gross proceeds of  $1,300,002 in a registered direct offering.  The Company issued to the investors 433,334 shares of its common stock and warrants to purchase 433,334 shares of common stock. The purchase price paid by the investors was  $3.00 for each unit. The warrants expire after seven years and are exercisable at  $3.25 per share.  Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that the warrants issued in connection with this registered direct offering must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

From May 17 to May 23, 2011, Synergy entered into securities purchase agreements with certain investors to raise gross proceeds of  $1,199,997 in a registered direct offering.  The Company issued to the investors 399,999 shares of its common stock and warrants to purchase 399,999 shares of common stock. The purchase price paid by the investors was  $3.00 for each unit. The warrants expire after seven years and are exercisable at  $3.25 per share.  Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that the warrants issued in connection with this registered direct offering must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

On June 3, 2011, a Synergy warrant holder exercised his warrants and purchased a total of 160,000 shares of common stock.  Synergy raised gross proceeds of  $415,309 as a result of the warrant exercise.  The purchase price paid by the warrant holder was  $2.50 for 98,675 shares and  $2.75 for 61,235 shares. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy had determined that the warrants exercised in connection with this transaction were derivative liabilities when issued and the Company had been marking this liability to market at the end of each reporting period. Upon the exercise of these warrants the fair value of the related derivative liability totaling  $486,328 was reclassified to Additional Paid in Capital. (See Note 8 Derivative Financial Instruments)

 

From June 3 to June 15, 2011, Synergy entered into securities purchase agreements with certain investors to raise gross proceeds of  $1,161,243 in a private placement.  The Company issued to the investors 387,081 shares of its common stock and warrants to purchase 387,081 shares of common stock. The purchase price paid by the investors was  $3.00 for each unit. The warrants expire after seven years and are exercisable at  $3.25 per share. In connection with this transaction Synergy entered into a registration rights agreement with each of the investors pursuant to which Synergy agreed to register the shares of common stock and shares of common stock underlying the warrants in a resale registration statement to be filed within 45 days after the final closing of the private placement.  Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that the warrants issued in connection with this private placement must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

For the six months ended June 30, 2011, Synergy paid  $395,620 in selling agent fees and legal expenses related to the above financing transactions and issued 11,547 warrants to a selling agent which expire after seven years and are exercisable at  $3.25 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that these warrants issued to selling agents were equity instruments upon issuance.

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Derivative Financial Instruments
6 Months Ended
Jun. 30, 2011
Derivative Financial Instruments
Derivative Financial Instruments

7. 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 the warrants issued in connection with its registered direct offerings and private placements must be recorded as derivative liabilities. Accordingly the warrants are also being re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair value is being recorded in the Company’s statement of operations.

 

The Company estimates the fair value of the warrants using the Black-Scholes 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 the end of each period of June 30, 2011 and June 30, 2010 were indicated as follows:

 

 

 

Six Months Ended
June 30, 2011

 

Six Months Ended
June 30, 2010

 

Estimated fair value of Synergy common stock

 

2.56-3.30

 

2.64

 

Expected warrant term

 

5-7 years

 

5 years

 

Risk-free interest rate

 

1.18%-2.5

%

1.79

%

Expected volatility

 

90

%

90

%

Dividend yield

 

 

 

 

Estimated fair value of the stock is based on a Black-Scholes based apportionment of the unit price paid for the shares and warrants issued in Synergy’s registered direct offerings, which resulting stock prices were deemed to be arms-length negotiated prices. Expected volatility is 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.

 

Certain of Synergy’s warrants issued during the six months ended June 30, 2011 contained a price protection clause which variable term required the Company to use a binomial model to determine fair value. The exercise price protection clause is effective on 833,333 warrants in the event of a subsequent equity sale at a price lower than  $3.25 per share of common stock, for a period of two years from date of issuance.  Except for this variable exercise price the input assumptions to this methodology were the same as used in our Black Scholes model indicated above.

 

The following table sets forth the components of changes in the Synergy’s derivative financial instruments liability balance for the periods indicated:

 

Date 

 

Description

 

Warrants

 

Derivative
Instrument
Liability

 

12/31/2009

 

Balance of derivative financial instruments liability

 

 

 $

 

 

 

 

 

 

 

 

 

6/30/2010

 

Fair value of new warrants issued during the quarter

 

648,000

 

 $

1,045,214

 

9/30/2010

 

Fair value of new warrants issued during the quarter

 

103,703

 

 $

163,905

 

9/30/2010

 

Change in fair value of warrants during the quarter

 

 

 $

(110,937

)

 

 

 

 

 

 

 

 

9/30/2010

 

Balance of derivative financial instruments liability

 

751,703

 

 $

1,098,182

 

12/31/2010

 

Fair value of new warrants issued during the quarter

 

705,235

 

 $

2,575,624

 

12/31/2010

 

Change in fair value of warrants during the quarter

 

 

 $

(185,847

)

 

 

 

 

 

 

 

 

12/31/2010

 

Balance of derivative financial instruments liability

 

1,456,938

 

 $

3,487,959

 

3/31/2011

 

Fair value of new warrants issued during the quarter

 

420,000

 

 $

1,312,673

 

3/31/2011

 

Change in fair value of warrants during the quarter

 

 

 $

338,715

 

3/31/2011

 

Balance of derivative financial instruments liability

 

1,876,938

 

 $

5,139,347

 

6/30/2011

 

Fair value of new warrants issued during the quarter

 

1,220,414

 

2,607,827

 

6/30/2011

 

Exercise of warrants during the quarter

 

(160,000

)

 $

(486,328

)

6/30/2011

 

Change in fair value of warrants during the quarter

 

 

 $

697,660

 

6/30/2011

 

Balance of derivative financial instruments liability

 

2,937,352

 

 $

7,958,506

 

 

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, 2010 and June 30, 2011:

 

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,
2010

 

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
June 30,
2011

 

Derivative liabilities related to Warrants

 

 $

 

 $

 

 $

3,487,959

 

 $

3,487,959

 

 $

 

 $

 

 $

7,958,506

 

 $

7,958,506

 

 

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the six months ended June 30, 2011:

 

Description 

 

Balance at
December 31,
2010

 

Fair Value of
Warrants Exercised
and Reclassified to
Additional Paid in
Capital

 

Fair value of
New Warrants
Issued During
the Period

 

Unrealized
(gains) or
losses

 

Balance as of
June 30,
2011

 

Derivative liabilities related to Warrants

 

 $

3,487,959

 

 $

(486,328

)

 $

3,920,500

 

 $

1,036,375

 

 $

7,958,506

 

 

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, the Company 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.

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Research and Development Expense
6 Months Ended
Jun. 30, 2011
Research and Development Expense
Research and Development Expense

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, purchased in-process research and development, regulatory and scientific consulting fees, as well as contract research, patient costs, drug formulation and tableting, data collection, monitoring, insurance and FDA consultants.

 

In accordance with FASB ASC Topic 730-10-55, Research and Development, Synergy recorded prepaid research and development costs of  $574,691 and  $683,182 as of June 30, 2011 and December 31, 2010, respectively, for nonrefundable pre-payments for production of plecanatide drug substance and analytical testing services of our drug candidate plecanatide and SP-333. In accordance with this guidance, Synergy expenses prepaid research and development costs when drug compound is delivered and services are performed.

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Loss per Share
6 Months Ended
Jun. 30, 2011
Loss per Share
Loss per Share

9. 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 all 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 would have been antidilutive. For the three and six months ended June 30, 2011 the effect of 8,314,077 outstanding stock options and 2,948,899 warrants were excluded from the calculation of diluted loss per share because the effect was antidilutive. For the three and six months ended June 30, 2010 the effect of 8,679,016 outstanding stock options and 648,000 warrants were excluded from the calculation of diluted loss per share because the effect was antidilutive. For the three and six months ended June 30, 2009 the effect of 4,080,016 outstanding stock options was excluded from the calculation of diluted loss per share because the effect was antidilutive.

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Related Parties
6 Months Ended
Jun. 30, 2011
Related Parties
Related Parties

10. Related Parties

 

As of June 30, 2011, Synergy’s majority shareholder, Callisto, owns 47.4 % of its outstanding shares. Synergy occupies corporate office space in New York City under a month to month sharing arrangement with Callisto. Rent is allocated from Callisto monthly based on the square footage of office space occupied by Synergy. On July 21, 2011 Callisto extended its lease on Suite 1609 from June 30, 2011, to March 31, 2012; at a monthly rent  $16,414.

 

As of June 30, 2011 Synergy had advanced Callisto  $ 1,378,473 which is Callisto’s share of Synergy payments for common operating costs since July 2008. The indebtedness as of December 31, 2010 is evidenced by an unsecured promissory note which bears interest at 6% per annum. Despite a small reduction in the balance due from Callisto during the quarter ended June 30, 2011, Synergy is unable to determine when this balance will be repaid and accordingly Synergy has classified the balance due as a long term asset. As of June 30, 2011 and December 31, 2010, the balances due from Callisto Pharmaceuticals, Inc. are comprised of the following amounts:

 

 

 

June 30,
2011

 

December 31,
2010

 

Rent, utilities and property taxes

 

 $

73,936

 

 $

61,813

 

Insurance and other facilities related overhead

 

176,645

 

150,836

 

Independent accountants and legal fees

 

487,615

 

417,298

 

Financial printer and transfer agent fees

 

170,535

 

147,171

 

Salaries and consulting fees of shared executives

 

255,165

 

214,311

 

Working capital advances, net of repayments

 

214,577

 

682,658

 

 

 

 

 

 

 

Total due from Callisto

 

 $

1,378,473

 

 $

1,674,087

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Subsequent Events
6 Months Ended
Jun. 30, 2011
Subsequent Events
Subsequent Events

11. Subsequent Events

 

On July 11, 2011, Synergy entered into a securities purchase agreement with an investor to raise gross proceeds of  $242,750 in a private placement.  The Company issued to the investor 80,916 shares of its common stock and warrants to purchase 80,916 shares of common stock. The purchase price paid by the investors was  $3.00 for each unit. The warrants expire after seven years and are exercisable at  $3.25 per share. Synergy also paid a selling agent  $16,993 and issued 9,547 warrants, with the same terms as the investor warrants, in connection with this transaction. In connection with this transaction Synergy entered into a registration rights agreement with the investor pursuant to which Synergy agreed to register the shares of common stock and shares of common stock underlying the warrants in a resale registration statement to be filed within 45 days after the final closing of the private placement. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that the warrants issued in connection with this private placement must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

On July 28, 2011, Synergy entered into a securities purchase agreement with certain investors to raise gross proceeds of  $2,336,472 in a registered direct offering.   The Company issued to the investors 667,563 shares of its common stock. The purchase price paid by the investors was  $3.50 for each share of common stock. Selling agent fees and expenses totaled approximately  $287,000 and there were no warrants issued in connection with this transaction.

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Document and Entity Information
6 Months Ended
Jun. 30, 2011
Aug. 08, 2011
Document and Entity Information
Entity Registrant Name SYNERGY PHARMACEUTICALS, INC.
Entity Central Index Key 0001347613
Document Type 10-Q
Document Period End Date Jun 30, 2011
Amendment Flag false
Current Fiscal Year End Date --12-31
Entity Current Reporting Status Yes
Entity Filer Category Accelerated Filer
Entity Common Stock, Shares Outstanding 94,464,708
Document Fiscal Year Focus 2011
Document Fiscal Period Focus Q2
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