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CONDENSED CONSOLIDATED BALANCE SHEETS (USD  $)
Sep. 30, 2011
Dec. 31, 2010
Current Assets:
Cash and cash equivalents  $ 67,370  $ 1,707,516
Prepaid expenses and other current assets 588,407 997,584
Total Current Assets 655,777 2,705,100
Property and equipment, net 6,267 7,749
Security deposits 14,025 14,025
Due from controlling shareholder 1,427,181 1,674,087
Total assets 2,103,250 4,400,961
Current Liabilities:
Accounts payable 4,469,879 2,961,333
Accrued expenses 2,330,856 2,051,057
Total Current Liabilities 6,800,735 5,012,390
Derivative financial instruments, at estimated fair value-warrants 3,860,838 3,487,959
Total Liabilities 10,661,573 8,500,349
Stockholders' Deficit:
Common stock, par value of  $.0001 authorized 200,000,000 shares, issued and outstanding 94,917,057 shares at September 30, 2011 and 92,188,164 December 31, 2010 9,493 9,220
Additional paid-in capital 55,415,806 51,033,374
Deficit accumulated during development stage (63,983,622) (55,141,982)
Total Stockholders' Deficit (8,558,323) (4,099,388)
Total liabilities and stockholder's deficit  $ 2,103,250  $ 4,400,961
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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD  $)
Sep. 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, issued shares 94,917,057 92,188,164
Common stock, outstanding shares 94,917,057 92,188,164
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD  $)
3 Months Ended 9 Months Ended 71 Months Ended
Sep. 30, 2011
Sep. 30, 2010
Sep. 30, 2011
Sep. 30, 2010
Sep. 30, 2011
Revenues  $ 0  $ 0  $ 0  $ 0  $ 0
Costs and Expenses:
Research and development 3,882,803 2,295,362 7,715,379 7,874,490 22,709,779
Purchased in-process research and development 28,156,502
General and administrative 1,102,844 1,220,427 4,524,875 3,837,729 17,423,875
Loss from Operations (4,985,647) (3,515,789) (12,240,254) (11,712,219) (68,290,156)
Interest and investment income 20,000 23,171 64,070 84,135 252,548
Interest expense (11,877) (11,877)
Other Income 494,479
Change in fair value of derivative instruments-warrants 4,382,796 110,937 3,346,421 110,937 3,643,205
Total Other Income 4,402,796 134,108 3,398,614 195,072 4,378,355
Loss from Continuing Operations (582,851) (3,381,681) (8,841,640) (11,517,147) (63,911,801)
Loss from discontinued operations (71,821)
Net Loss  $ (582,851)  $ (3,381,681)  $ (8,841,640)  $ (11,517,147)  $ (63,983,622)
Weighted Average Common Shares Outstanding Basic (in shares) 94,617,892 90,102,405 93,416,805 89,002,114
Weighted Average Common Shares Outstanding Diluted (in shares) 94,617,892 90,102,405 93,416,805 89,002,114
Net Loss per Common Share, Basic and Diluted (in dollars per share)  $ (0.01)  $ (0.04)  $ (0.09)  $ (0.13)
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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 period (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 period (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 period (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 placements 3,025,000 504 3,024,496
Common stock issued via private placements (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 period (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 placements 15,970,100 2,282 15,967,818
Common stock issued via private placements (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 period (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 period (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 8,455,773 273 8,455,500
Common stock issued via registered direct offering and exercise of warrants (in shares) 2,728,893
Fees and expenses related to direct offering (661,052) (661,052)
Warrants reclassified to derivative liability - net (3,719,300) (3,719,300)
Stock based compensation expense 307,284 307,284
Net loss for the period (8,841,640) (8,841,640)
Balance at Sep. 30, 2011  $ (8,558,323)  $ 9,493  $ 55,415,806  $ (63,983,622)
Balance (in shares) at Sep. 30, 2011 94,917,057
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD  $)
9 Months Ended 71 Months Ended
Sep. 30, 2011
Sep. 30, 2010
Sep. 30, 2011
Cash Flows From Operating Activities:
Net loss  $ (8,841,640)  $ (11,517,147)  $ (63,983,622)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,482 1,482 6,656
Stock-based compensation expense 307,284 556,241 2,453,887
Purchased in-process research and development 28,156,502
Change in fair value of derivative instruments-warrants (3,346,421) (110,937) (3,643,205)
Changes in operating assets and liabilities:
Security deposit (14,025)
Accounts payable and accrued expenses 1,788,345 1,695,742 6,077,692
Prepaid expenses and other current assets 409,177 477,470 (588,407)
Total adjustments (840,133) 2,619,998 32,449,100
Net Cash Used in Operating Activities (9,681,773) (8,897,149) (31,534,522)
Cash Flows From Investing Activities:
Net cash paid on Exchange Transaction (155,326)
Repayment from/(loans to) related parties - net 246,906 (542,069) (1,427,181)
Additions to property and equipment (12,195)
Net Cash Provided by/ (Used in) Investing Activities 246,906 (542,069) (1,594,702)
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 8,040,464 3,154,000 34,214,564
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 (661,052) (294,130) (1,462,272)
Net Cash Provided by Financing Activities 7,794,721 2,859,870 33,196,594
Net (decrease) increase in cash and cash equivalents (1,640,146) (6,579,348) 67,370
Cash and cash equivalents at beginning of period 1,707,516 7,152,568
Cash and cash equivalents at end of period 67,370 573,220 67,370
Supplementary disclosure of cash flow information:
Cash paid for taxes 9,104 19,071 48,836
Value of warrants classified as derivative liability - net 4,205,628 4,205,628
Value of common stock issued to induce stockholders to extend lock-up agreements  $ 2,798,020  $ 3,235,040
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Business Overview
9 Months Ended
Sep. 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 idiopathic 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.

 

On October 24, 2011 Synergy initiated dosing of patients in its Phase II/III clinical trial of plecanatide to treat CC. This study is being conducted at 110 sites in the United States and is designed to enroll 880 patients with CC who will be treated with one of three doses of plecanatide (0.3, 1.0 or 3.0 mg) or placebo taken once daily over a period of 12 weeks.  The study’s primary objective is the measure of complete spontaneous bowel movements (CSBMs) using a responder analysis. The trial will also evaluate spontaneous bowel movements (SBMs) and daily constipation symptoms, as well as the impact of plecanatide on disease-specific quality of life measures.

 

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
9 Months Ended
Sep. 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 September 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 September 30, 2011, Synergy had an accumulated deficit of  $63,983,622 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  $9,681,773 for the nine months ended September 30, 2011. As of September 30, 2011 Synergy has  $67,370 of cash on hand. During the nine months ended September 30, 2011 Synergy incurred a net loss of  $8,841,640. To date, Synergy’s sources of cash have been primarily limited to the sale of common stock, warrants and issuance of notes. Net cash provided by financing activities for the nine months ended September 30, 2011 was  $7,794,721. As of September 30, 2011 Synergy had a negative working capital of  $6,144,958.

 

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
9 Months Ended
Sep. 30, 2011
Recent Accounting Pronouncements
Recent Accounting Pronouncements

3. Recent Accounting Pronouncements

 

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”) which is intended to facilitate the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”) as well as to increase the transparency of items reported in other comprehensive income. As a result of ASU 2011-05, all nonowner changes in stockholders’ equity are required to be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. The option to present other comprehensive income in the statement of changes in equity has been eliminated. ASU 2011-05 is effective for fiscal years beginning after December 15, 2011 and should be applied retrospectively. The Company expects to adopt this standard beginning in 2012. As ASU 2011-05 impacts presentation only, it will have no effect on the Company’s consolidated financial statements.

 

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Accounting for Share-Based Payments
9 Months Ended
Sep. 30, 2011
Accounting for Share-Based Payments
Accounting for Share-Based Payments

4. 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. 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 September 30,

 

Nine Months
Ended September 30,

 

November 15,
2005
(inception) to

 

 

 

2011

 

2010

 

2011

 

2010

 

September 30, 2011

 

Employees—included in research and development

 

 $

1,225

 

 $

45,991

 

 $

75,131

 

 $

145,254

 

 $

594,721

 

Employees—included in general and administrative

 

1,487

 

46,553

 

91,220

 

164,501

 

772,706

 

Non-employees—included in research and development

 

4,832

 

26,819

 

21,649

 

43,636

 

116,296

 

Non-employees—included in general and administrative

 

3,184

 

59,473

 

119,284

 

202,850

 

970,164

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense

 

 $

10,728

 

 $

178,836

 

 $

307,284

 

 $

556,241

 

 $

2,453,887

 

 

There was no unrecognized share-based compensation related to time vested employee stock options at September 30, 2011. 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.

 

 

 

Nine Months Ended
September 30, 2011

 

Nine Months Ended
September 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, September 30, 2011

 

8,314,077

 

 $0.25-0.95

 

 $

0.51

 

 $

14,174,290

 

7.66 years

 

Exercisable at September 30, 2011

 

2,783,386

 

 $0.25-0.95

 

 $

0.28

 

 $

5,367,937

 

6.78 years

 

 

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Stockholder's Equity
9 Months Ended
Sep. 30, 2011
Stockholder's Equity
Stockholder's Equity

5. 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.

 

From May 2 to May 23, 2011, Synergy entered into securities purchase agreements with certain investors to raise gross proceeds of  $2,499,999 in a registered direct offering.  The Company issued to the investors 833,333 shares of its common stock and warrants to purchase 833,333 shares of common stock. The purchase price paid by the investors was  $3.00 for each unit. The warrants expire after seven years, are exercisable at  $3.25 per share and the exercise price is protected, in the event of subsequent equity sales at a lower price, for a period of two years from issuance.  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 6 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. On November 4, 2011 Synergy filed a registration statement on Form S-3 covering the 387,081 shares of common stock and the 387,081 shares of common stock issuable upon exercise of the above warrants. This registration removed the condition which required these warrants to be treated as derivative liabilities.  The amount included in Synergy’s derivative liability balance associated with these warrants was  $614,318 as of September 30, 2011.

 

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. 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 November 4, 2011 Synergy filed a registration statement on Form S-3 covering the 80,916 shares of common stock and the 80,916 shares of common stock issuable upon exercise of the above warrants. This registration removed the condition which required these warrants to be treated as derivative liabilities.  The amount included in Synergy’s derivative liability balance associated with these warrants was  $128,422 as of September 30, 2011.

 

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  $231,291 and there were no warrants issued in connection with this transaction.

 

For the nine months ended September 30, 2011, Synergy paid  $661,052 in selling agent fees and legal expenses related to the above financing transactions and issued 18,050 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 16,050  warrants issued to selling agents were equity instruments upon issuance and 2,000 warrants were treated as derivative liabilities.

 

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Derivative Financial Instruments
9 Months Ended
Sep. 30, 2011
Derivative Financial Instruments
Derivative Financial Instruments

6. 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 is indicated below:

 

 

 

Nine Months Ended
September 30, 2011

 

Nine Months Ended
September 30, 2010

 

Estimated fair value of Synergy common stock

 

 $1.06- $2.07

 

 $2.50- $3.70

 

Expected warrant term

 

5-7 years

 

5 years

 

Risk-free interest rate

 

0.69-1.43

%

1.20-1.79

%

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 nine months ended September 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. 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

 

9/30/2011

 

Fair value of new warrants issued during the quarter

 

80,916

 

285,128

 

9/30/2011

 

Change in fair value of warrants during the quarter

 

 

 $

(4,382,796

)

9/30/2011

 

Balance of derivative financial instruments liability

 

3,018,268

 

 $

3,860,838

 

 

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 September 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
September 30,
2011

 

Derivative liabilities related to Warrants

 

 $

 

 $

 

 $

3,487,959

 

 $

3,487,959

 

 $

 

 $

 

 $

3,860,838

 

 $

3,860,838

 

 

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

 

Derivative liabilities related to Warrants

 

 $

3,487,959

 

 $

(486,328

)

 $

4,205,628

 

 $

(3,346,421

)

 $

3,860,838

 

 

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
9 Months Ended
Sep. 30, 2011
Research and Development Expense
Research and Development Expense

7. 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  $485,600 and  $683,182 as of September 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
9 Months Ended
Sep. 30, 2011
Loss per Share
Loss per Share

8. 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 nine months ended September 30, 2011 the effect of 8,314,077 outstanding stock options and 3,036,318 warrants were excluded from the calculation of diluted loss per share because the effect was antidilutive. For the three and nine months ended September 30, 2010 the effect of 8,604,016 outstanding stock options and 751,703 warrants were excluded from the calculation of diluted loss per share because the effect was antidilutive.

 

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Related Parties
9 Months Ended
Sep. 30, 2011
Related Parties
Related Parties

9. Related Parties

 

As of September 30, 2011, Synergy’s majority shareholder, Callisto Pharmaceuticals, Inc., owns approximately 47 % 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 of  $16,414.

 

As of September 30, 2011 Synergy had advanced Callisto  $1,427,181which 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 September 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 September 30, 2011 and December 31, 2010, the balances due from Callisto Pharmaceuticals, Inc. are comprised of the following amounts:

 

 

 

September 30,
2011

 

December 31,
2010

 

Rent, utilities and property taxes

 

 $

82,258

 

 $

61,813

 

Insurance and other facilities related overhead

 

212,653

 

150,836

 

Independent accountants and legal fees

 

505,724

 

417,298

 

Financial printer and transfer agent fees

 

189,693

 

147,171

 

Salaries and consulting fees of shared executives

 

276,274

 

214,311

 

Working capital advances, net of repayments

 

160,579

 

682,658

 

 

 

 

 

 

 

Total due from Callisto

 

 $

1,427,181

 

 $

1,674,087

 

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Subsequent Events
9 Months Ended
Sep. 30, 2011
Subsequent Events
Subsequent Events

10. Subsequent Events

 

On October 4, 2011, Synergy entered into a securities purchase agreement with certain investors for the sale of 1,105,293 units in a registered direct offering, with each unit consisting of one share of common stock and one warrant to purchase 0.5 shares of common stock.  The net proceeds to the Company from the sale of the units was  $2,166,248, after deducting placement agent fees and other estimated offering expenses payable by the Company. The purchase price paid by the investors was  $2.125 per unit.  The warrants expire after five years and are exercisable at  $2.75 per share.

 

The October 4, 2011 transaction pricing resulted in the exercise price of the 833,333 warrants issued during May 2011 (the “May Warrants”) to be reduced to  $2.125 per share. No other outstanding warrants or common stock were affected by this subsequent equity sale at a lower price. The “price protection” rights attributable to the May Warrants remain in effect until May 2013. This exercise price reduction from  $3.25 per share to  $2.125 per share decreased the exercise proceeds attributable to the May Warrants by  $937,500.

 

On October 14, 2011, Synergy entered into securities purchase agreements with various investors for the sale of 273,824 units in a registered direct offering, with each unit consisting of one share of common stock and one warrant to purchase 0.5 shares of common stock.  The net proceeds to the Company from the sale of the Units was  $525,326, after deducting placement agent fees and other estimated offering expenses payable by the Company. The purchase price paid by the investors was  $2.125 per Unit.  The Warrants expire after five years and are exercisable at  $2.75 per share.

 

On October 28, 2011, Synergy entered into securities purchase agreements with various investors for the sale of 235,294 units in a registered direct offering, with each unit consisting of one share of common stock and one warrant to purchase 0.5 shares of common stock.  The gross proceeds to the Company from the sale of the Units was  $500,000. The purchase price paid by the investors was  $2.125 per Unit.  The Warrants expire after five years and are exercisable at  $2.75 per share.

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Document and Entity Information
9 Months Ended
Sep. 30, 2011
Nov. 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 Sep 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 96,624,468
Document Fiscal Year Focus 2011
Document Fiscal Period Focus Q3
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