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Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2011
Mar. 13, 2012
Jun. 30, 2011
Document and Entity Information
Entity Registrant Name SYNERGY PHARMACEUTICALS, INC.
Entity Central Index Key 0001347613
Document Type 10-K
Document Period End Date Dec 31, 2011
Amendment Flag false
Current Fiscal Year End Date --12-31
Entity Well-known Seasoned Issuer No
Entity Voluntary Filers No
Entity Current Reporting Status Yes
Entity Filer Category Accelerated Filer
Entity Public Float $ 203,272,170
Entity Common Stock, Shares Outstanding 54,306,178
Document Fiscal Year Focus 2011
Document Fiscal Period Focus FY
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CONSOLIDATED BALANCE SHEETS (USD $)
Dec. 31, 2011
Dec. 31, 2010
Current Assets:
Cash and cash equivalents $ 13,244,883 $ 1,707,516
Prepaid expenses and other current assets 1,063,402 997,584
Total Current Assets 14,308,285 2,705,100
Property and equipment, net 5,773 7,749
Security deposits 14,025 14,025
Due from controlling shareholder 1,541,456 1,674,087
Total Assets 15,869,539 4,400,961
Current Liabilities:
Accounts payable 1,415,617 2,961,333
Accrued expenses 1,331,382 2,051,057
Total Current Liabilities 2,746,999 5,012,390
Derivative financial instruments, at estimated fair value-warrants 3,325,114 3,487,959
Total Liabilities 6,072,113 8,500,349
Stockholders' Equity/(Deficit):
Preferred stock, Authorized 20,000,000 shares at December 31, 2011 and 2010, none outstanding.      
Common stock, par value of $.0001. Authorized 100,000,000 shares at December 31, 2011 and 2010. Outstanding 54,279,906 and 46,094,082 shares at December 31, 2011 and 2010, respectively 5,429 4,610
Additional paid-in capital 79,401,015 51,037,984
Deficit accumulated during development stage (69,609,018) (55,141,982)
Total Stockholders' Equity (Deficit) 9,797,426 (4,099,388)
Total Liabilities and Stockholders' Equity (Deficit) $ 15,869,539 $ 4,400,961
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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2011
Dec. 31, 2010
CONSOLIDATED BALANCE SHEETS
Preferred stock, Authorized shares 20,000,000 20,000,000
Preferred stock, Outstanding shares 0 0
Common stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Common stock, Authorized shares 100,000,000 100,000,000
Common stock, Outstanding shares 54,279,906 46,094,082
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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
12 Months Ended 73 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Dec. 31, 2011
Costs and Expenses:
Research and development $ 13,418,754 $ 9,558,608 $ 3,732,734 $ 28,413,154
Purchased in-process research and development 28,156,502
General and administrative 6,745,642 6,562,658 4,467,289 19,644,642
Loss from Operations (20,164,396) (16,121,266) (8,200,023) (76,214,298)
Interest and investment income 89,708 108,562 74,923 278,186
Interest Expense (11,877) (11,877)
Other income 362,498 494,479 856,977
Change in fair value of derivative instruments-warrants 5,257,031 296,784 5,553,815
Total Other Income 5,697,360 899,825 74,923 6,677,101
Loss from Continuing Operations (14,467,036) (15,221,441) (8,125,100) (69,537,197)
Loss from discontinued operations (71,821)
Net loss $ (14,467,036) $ (15,221,441) $ (8,125,100) $ (69,609,018)
Weighted Average Common Shares Outstanding Basic (restated for stock split) (in shares) 47,598,240 44,875,356 36,640,663
Weighted Average Common Shares Outstanding Diluted (restated for stock split) (in shares) 47,598,240 44,875,356 36,640,663
Net Loss per Common Share, Basic and Diluted
Net Loss per Common Share, Basic and Diluted (in dollars per share) $ (0.3) $ (0.34) $ (0.22)
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (USD $)
Total
Common Stock, Par Value
Additional Paid in Capital
Deficit Accumulated during the Development Stage
Balance at Nov. 15, 2005
Increase (Decrease) in Stockholders' Equity
Sale of unregistered common stock to founder $ 2,000 $ 7,569 $ (5,569)
Sale of unregistered common stock to founder (in shares) 75,690,608
Sale of common stock 18,100 685 17,415
Sale of common stock (in shares) 6,850,000
Net loss for the period (16) (16)
Balance at Dec. 31, 2005 20,084 8,254 11,846 (16)
Balance (in shares) at Dec. 31, 2005 82,540,608
Increase (Decrease) in Stockholders' Equity
Net loss for the period (20,202) (20,202)
Balance at Dec. 31, 2006 (118) 8,254 11,846 (20,218)
Balance (in shares) at Dec. 31, 2006 82,540,608
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) 8,254 20,739 (40,261)
Balance (in shares) at Dec. 31, 2007 82,540,608
Increase (Decrease) in Stockholders' Equity
Cancellation of unregistered founder shares (7,499) 7,499
Cancellation of unregistered founder shares (in shares) (74,990,604)
Common stock issued via Exchange Transaction 27,278,861 2,273 27,276,588
Common stock issued via Exchange Transaction (in shares) 22,732,380
Common stock issued via private placements 3,025,000 252 3,024,748
Common stock issued via private placements (in shares) 2,520,833
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) 3,280 30,636,369 (31,795,441)
Balance (in shares) at Dec. 31, 2008 32,803,217
Increase (Decrease) in Stockholders' Equity
Common stock issued via private placements 15,970,100 1,141 15,968,959
Common stock issued via private placements (in shares) 11,407,213
Fees and expenses related to private placements (260,002) (260,002)
Common stock Issued for services rendered 1,500 1 1,499
Common stock Issued for services rendered (in shares) 1,250
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 4,422 47,399,887 (39,920,541)
Balance (in shares) at Dec. 31, 2009 44,211,680
Increase (Decrease) in Stockholders' Equity
Common stock issued via registered direct offering and private placement 7,179,000 121 7,178,879
Common stock issued via registered direct offering and private placement (in shares) 1,209,000
Fees and expenses related to direct offering (468,130) (468,130)
Warrants classified to derivative liability - net (3,784,743) (3,784,743)
Common stock issued to extend lock-up agreements related to unregistered shares 67 (67)
Common stock issued to extend lock-up agreements related to unregistered shares (in shares) 670,933
Common stock Issued for services rendered 18,271 18,271
Common stock Issued for services rendered (in shares) 2,469
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) 4,610 51,037,984 (55,141,982)
Balance (in shares) at Dec. 31, 2010 46,094,082
Increase (Decrease) in Stockholders' Equity
Common stock issued via registered direct offering and private placement 34,369,064 773 34,368,291
Common stock issued via registered direct offering and private placement (in shares) 7,733,093
Fees and expenses related to financing transactions - paid in cash (2,148,383) (2,148,383)
Fees and expenses related to financing transactions - paid in units of common stock and warrants 8 (8)
Fees and expenses related to financing transactions - paid in units of common stock and warrants (in shares) 77,750
Warrants classified to derivative liability - net (5,094,186) (5,094,186)
Common stock issued to make whole certain unregistered shares 22 (22)
Common stock issued to make whole certain unregistered shares (in shares) 215,981
Exercise of warrant 415,309 8 415,301
Exercise of warrant (in shares) 80,000
Common stock Issued for services rendered 341,295 8 341,287
Common stock Issued for services rendered (in shares) 79,000
Stock based compensation expense 480,751 480,751
Net loss for the period (14,467,036) (14,467,036)
Balance at Dec. 31, 2011 $ 9,797,426 $ 5,429 $ 79,401,015 $ (69,609,018)
Balance (in shares) at Dec. 31, 2011 54,279,906
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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
12 Months Ended 73 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Dec. 31, 2011
Cash Flows From Operating Activities:
Net loss $ (14,467,036) $ (15,221,441) $ (8,125,100) $ (69,609,018)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,976 1,976 1,976 7,150
Stock-based compensation expense 822,046 712,158 1,054,562 2,968,649
Purchased in-process research and development 28,156,502
Change in fair value of derivative instruments-warrants (5,257,031) (296,784) (5,553,815)
Changes in operating assets and liabilities:
Security deposit (9,625) (14,025)
Accounts payable and accrued expenses (2,265,391) 3,285,658 (351,501) 2,023,956
Prepaid expenses and other current assets (65,818) 64,046 (1,061,630) (1,063,402)
Total Adjustments (6,764,218) 3,767,054 (366,218) 26,525,015
Net Cash used in Operating Activities (21,231,254) (11,454,387) (8,491,318) (43,084,003)
Cash Flows From Investing Activities:
Net cash paid on Exchange Transaction (155,326)
Loans from (to) related parties 132,631 (701,535) (282,219) (1,541,456)
Additions to property and equipment (12,195)
Net Cash provided by (used in) Investing Activities 132,631 (701,535) (282,219) (1,708,977)
Cash Flows From Financing Activities:
Capital contribution by shareholders 8,893
Issuance of common stock 2,000
Proceeds of sale of common stock 34,369,064 7,179,000 15,970,100 60,543,164
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 private placements (2,148,383) (468,130) (260,002) (2,949,603)
Net Cash provided by Financing Activities 32,635,990 6,710,870 15,710,098 58,037,863
Net increase (decrease) in cash and cash equivalents 11,537,367 (5,445,052) 6,936,561 13,244,883
Cash and cash equivalents at beginning of period 1,707,516 7,152,568 216,007
Cash and cash equivalents at end of period 13,244,883 1,707,516 7,152,568 13,244,883
Supplementary disclosure of cash flow information:
Cash paid for taxes 37,795 31,315 6,289 71,616
Value of warrants classified to derivative liability-net 5,094,186 3,784,743 8,878,929
Value of common stock issued to induce stockholders to extend lock-up agreements $ 3,235,040 $ 3,235,040
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Business Overview
12 Months Ended
Dec. 31, 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. Synergy’s 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 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, the Company’s 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 using a responder analysis. The trial will also evaluate spontaneous bowel movements 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. SP-333 is a second-generation 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
12 Months Ended
Dec. 31, 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 the terms of an Exchange Agreement among Pawfect, Callisto Pharmaceuticals, Inc. (“Callisto”), Synergy-DE, and certain other holders of Synergy-DE common stock (“Exchange Transaction”). For a more detailed discussion of this Exchange Transaction, see Note 3, Acquisition and Stockholders’ Equity (Deficit) below.

 

Synergy acquired the GI drugs and 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. 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 consolidated financial statements include Synergy and subsidiaries: (1) Synergy-DE, (2) Synergy Advanced Pharmaceuticals, Inc. and (3) IgX, Ltd (Ireland—inactive)). All intercompany balances and transactions have been eliminated. These consolidated financial statements as of December 31, 2011 have been prepared under the assumption that we will continue as a going concern. Synergy’s independent registered public accounting firm has issued a report on our financial statements that included an explanatory paragraph referring to our recurring losses from operations and expressing substantial doubt in Synergy’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 and, ultimately, to generate revenue. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

On November 29, 2011 the Company filed an amendment to its amended and restated articles of incorporation pursuant to which the Company affected a one for two (1:2) reverse stock split on its authorized and issued and outstanding shares of Common Stock effective on November 30, 2011.  All share and per share information has been adjusted to reflect the reverse stock split as if it had occurred at the beginning of the earliest period presented, (e.g. inception November 15, 2005).

 

As of December 31, 2011, Synergy had an accumulated deficit of $69,609,018 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 and SP-333 for the treatment of GI disorders, acquires or licenses technologies, advances other product candidates 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 $21,231,254 for the twelve months ended December 31, 2011. As of December 31, 2011 Synergy has $13,244,883 of cash and cash equivalents. During the twelve months ended December 31, 2011, Synergy incurred net losses from operations of $14,467,036. To date, Synergy’s sources of cash have been primarily limited to the sale of common stock. Net cash provided by financing activities for the twelve months ended December 31, 2011 was $32,635,990. As of December 31, 2011 Synergy had a working capital of $11,561,286.

 

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 may 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.

 

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.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of checking accounts and short-term money market funds as of December 31, 2011 and 2010 on deposit with U.S. commercial banks, which at any point in time, may exceed federally insured limits. The Company considers all highly liquid securities purchased with an original maturity of three months or less, which includes our money market funds, to be cash equivalents. The carrying amount of cash equivalents approximates fair value. The amount of cash equivalents included in cash and cash equivalents was approximately $13.0 million and $0 at December 31, 2011 and 2010, respectively.

 

Derivative Instruments

 

The Company’s derivative liabilities are related to warrants issued in connection with financing transactions and are therefore not designated as hedging instruments. All derivatives are recorded on the Company’s balance sheet at fair value in accordance with current accounting guidelines for such complex financial instruments. Changes in fair value are recorded in the Company’s statement of operations.

 

Fair Value of Financial Instruments

 

In accordance with Accounting Standards Codification (“ASC”) Subtopic 820-10, the Company measures certain assets and liabilities at fair value on a recurring basis using the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers include:

 

·                  Level 1, defined as observable inputs such as quoted prices for identical assets in active markets;

 

·                  Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

 

·                  Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring management to develop its own assumptions based on best estimates of what market participants would use in pricing an asset or liability at the reporting date.

 

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, except derivative instruments which are marked to market at the end of each reporting period.

 

Property, equipment and depreciation

 

Expenditures for additions, renewals and improvements are capitalized at cost. Depreciation is generally computed on a straight-line method based on the estimated useful lives of the related assets. The estimated useful lives of the major classes of depreciable assets are 2 to 5 years for equipment and furniture and fixtures. Expenditures for repairs and maintenance are charged to operations as incurred. Synergy periodically evaluates whether current events or circumstances indicate that the carrying value of its depreciable assets may not be recoverable.

 

Income Taxes

 

Income taxes have been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes result from differences between the financial statement and tax bases of Synergy’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgment.

 

Contingencies

 

In the normal course of business, Synergy is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and tax matters. In accordance with FASB ASC Topic 450, Accounting for Contingencies, (“ASC Topic 450”), Synergy records accruals for such loss contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. Synergy, in accordance with this guidance, does not recognize gain contingencies until realized. For a discussion of contingencies, see Note 6, Commitments and Contingencies below.

 

Research and Development

 

Research and development costs include expenditures for 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  services, including clinical trial and related clinical manufacturing expenses; and other outside expenses patient costs, drug formulation and tableting, data collection, monitoring, clinical trial insurance and FDA consultants. These costs are generally expensed as incurred.

 

In accordance with FASB ASC Topic 730-10-55, Research and Development, Synergy recorded prepaid research and development for nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities pursuant to executory contractual arrangements as current assets on the Company’s balance sheet totaling $577,745 and $683,182 as of December 31, 2011 and 2010, respectively. Synergy expenses these advance payments when goods or services are delivered.

 

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 this guide, 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 years ended December 31, 2011, 2010 and 2009 the effect of 5,964,039, 4,302,008 and 2,107,008, respectively, outstanding stock options and 5,597,203, 728,469 and -0-, respectively, outstanding warrants were excluded from the calculation of diluted loss per share because the effect was antidilutive.

 

Recent Accounting Pronouncements

 

In May 2011, FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820 to provide common fair value measurement and disclosure requirements in U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and International Financial Reporting Standards. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, as well as providing guidance on how fair value should be applied where its use is already required or permitted by other standards within U.S. GAAP. ASU No. 2011-04 is to be applied prospectively, and early adoption is not permitted. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The adoption of ASU No. 2011-04 is not expected to have a material impact on our results of operations or our financial position.

 

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.

 

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 provides for additional disclosures of both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments in this Update are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, and disclosures required by these amendments should be provided retrospectively for all comparative periods presented.

 

In December 2011, the FASB issued ASU 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." ASU 2011-12 defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. ASU 2011-12 did not defer the requirement to report comprehensive income either in a single continuous statement or in two separate but consecutive financial statements. The amendments are effective at the same time as the amendments in ASU 2011-05.

 

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Acquisition and Stockholders' Equity (Deficit)
12 Months Ended
Dec. 31, 2011
Acquisition and Stockholders' Equity (Deficit)
Acquisition and Stockholders' Equity (Deficit)

3. Acquisition and Stockholders’ Equity (Deficit)

 

On July 14, 2008, Pawfect acquired 100% of the common stock of Synergy-DE from Callisto and certain other holders of Synergy-DE shares, in exchange for 22,732,380 unregistered shares of Pawfect’s common stock. This represented approximately 70% of Pawfect’s outstanding common stock after giving effect to (i) a 37.845338 for one stock split, (ii) cancellation of 74,990,604 of 75,690,603 unregistered shares owned by Pawfect’s principal stockholder and (iii) a $3,000,000 private placement of 2,500,000 unregistered shares of Pawfect’s common stock to private investors. Fees and expenses directly related to the closing of this private placement totaled $73,088, yielding net proceeds of $2,926,912. The stock split and change in par value, from $0.001 to $0.0001, resulted in the restatement of all historical common stock and additional paid-in capital amounts presented in the accompanying financial statements.

 

These transactions were completed under the terms of an Exchange Agreement dated as of July 11, 2008, as amended and effective on July 14, 2008 among Pawfect, Callisto, Synergy-DE, and certain other holders of Synergy-DE common stock. Callisto received 22,295,000 of the 22,732,380 shares of Pawfect’s common stock exchanged for ownership of Synergy-DE, and Callisto which represented 68% of Pawfect’s outstanding common stock. See Note 4, Accounting for Share-Based Payments below for shares issued to other holders.

 

The Exchange Transaction was treated as an asset acquisition by Pawfect for accounting purposes. Under this method of accounting, Pawfect is treated as the acquiring entity, issuing stock for the assets and liabilities of Synergy-DE. The assets and liabilities of Synergy-DE, primarily cash and accounts payable, were stated at their fair value. Net liabilities acquired totaled $877,646. The fair value of the 22,727,380 shares issued in connection with the Exchange Transaction, totaled $27,278,856 on July 14, 2008, based on a per share value of $1.20, which was the per share price the Company’s 2,500,000 common shares sold for in a private placement on that date. The total consideration of $28,156,502 was allocated in full to the Synergy research and development projects which had not yet reached technological feasibility and, having no alternative use, this amount was charged to purchased in-process research and development (“IPR&D”) expense as of the date of the Exchange Transaction.

 

In addition to purchased IPR&D, the Company retained four full time employees and acquired a patent related to the technologies acquired. There were no other intangible assets acquired which required allocation of the purchase price. The Company did not assign a value to the acquired employees as all continuing research and development is being performed under the supervision of other Company employees, nor the patent since the technology is still in an early stage. Therefore, the full purchase price accordingly allocated to purchased in-process research and development and there was no value assigned to goodwill. The value of the IPR&D was based on the fair value of the consideration given which was the value most reliably measurable. Net liabilities assumed in excess of Synergy-DE assets acquired in connection with the Exchange Transaction on July 14, 2008 were as follows:

 

Assets

 

 

 

Cash

 

$

194,674

 

 

 

 

 

Total assets acquired

 

194,674

 

Liabilities

 

 

 

Accounts payable and other liabilities

 

(722,320

)

Due to Callisto

 

(350,000

)

 

 

 

 

Total liabilities assumed

 

(1,072,320

)

Net liabilities assumed in excess of assets acquired

 

(877,646

)

Fair value of shares issued to Synergy-DE shareholders

 

(27,278,856

)

 

 

 

 

Total consideration paid by Pawfect to acquire Synergy-DE

 

$

(28,156,502

)

 

On July 14, 2008, Synergy discontinued its pet food business and is now exclusively focused on continuing the development of drugs to treat GI disorders and diseases acquired in connection with the Exchange Transaction.

 

During the twelve months ended December 31, 2009 Synergy sold 11,407,213 shares of unregistered common stock at $1.40 per share to private investors, pursuant to a Securities Purchase Agreement, for aggregate proceeds of $15,970,100. There were no warrants issued in connection with these transactions. Synergy incurred $260,002 in fees to selling agents and attorneys in connection with these transactions. Pursuant to the Securities Purchase Agreement the investors agreed to be subject to a lock-up until August 15, 2010 and Synergy agreed to price protection for the investors in the event of subsequent sales of equity securities as defined, until February 15, 2011. In accordance with the guidance contained in ASC Topic 815-40, the Company has determined that the price protection provisions are embedded derivatives that require bifurcation and recognition at fair value in the company's financial statements. The Company has determined that the fair value of the derivatives is de minimus.

 

On November 20, 2009, the number of common shares authorized increased from 75,000,000 to 100,000,000.

 

On July 21, 2008, Pawfect amended its articles of incorporation in the State of Florida to effect the actions necessary to complete the transactions contemplated by the Exchange Transaction, including: (i) an increase in the authorized number of common shares from 25,000,000 to 75,000,000 (ii) authorized 20,000,000 shares of preferred stock (iii) changed the common stock par value per share from $0.001 to $0.0001and (iv) changed its name to Synergy Pharmaceuticals, Inc.

 

On June 30, 2010, Synergy entered into securities purchase agreements to sell securities to non-U.S. investors and raised gross proceeds of approximately $2,754,000 in a registered direct offering. Synergy sold 324,000 units at $8.50 per share to investors. Each unit consists of one share of Synergy’s common stock and one warrant to purchase one additional share of Synergy’s common stock. The warrants expire after five years and are exercisable at $9.00 per share. The offering was made pursuant to a shelf registration statement on Form S-3 (the base prospectus effective December 10, 2009), as supplemented by a prospectus supplement filed with the Securities and Exchange Commission on June 23, 2010. As of June 30, 2010, Synergy had received proceeds of $255,000, less legal fees of $25,000 associated with this offering. The remaining $2,499,000 was held in escrow and received by Synergy on July 2 and July 8, 2010. In July 2010, the Company paid an aggregate $261,630 to selling agents in connection with this placement.

 

On August 16, 2010, Synergy entered into a securities purchase agreement with an accredited investor to sell securities and raise gross proceeds of $400,000 in a private placement. The Company sold 49,383 units to the investor with each unit consisting of one share of the Company’s common stock and one warrant to purchase one additional share of the Company’s common stock. The purchase price paid by the investor was $8.10 for each unit. The warrants expire after five years and are exercisable at $8.50 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” Synergy has determined that the warrants issued in connection with this Financing transaction must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

On July 13, 2010 and October 12, 2010 Synergy issued 670,933 shares of its common stock as consideration for an agreement by certain holders of the Company’s common stock to extend their lock-up of such shares from August 15, 2010 to January 15, 2011 or enter into a lock-up agreement until such date, as the case may be. This issuance was approved by the Company’s Board of Directors on June 22, 2010 and represents 5% of the shares of previously issued common stock currently subject to a lock-up agreement or being requested to lock-up, as the case maybe. The fair value of the common stock issued to accomplish this lock-up extension totaled $3,235,040, based on the estimated fair value of the shares issued in connection with the June 30, 2010 and October 6, 2010 registered direct offerings. The par value of these shares was charged to additional paid in capital as a cost of facilitating the June 30, 2010 registered direct offering.

 

On October 1, 2010 the Company entered into a securities purchase agreement with an investor and raised gross proceeds of $2,500,000 in a registered direct offering. The Company paid a fee of $50,000 to a non-U.S. selling agent. The Company sold to the investor 500,000 shares of its common stock and warrants to purchase 200,000 shares of common stock. The common stock and warrants were sold in units consisting of one share of common stock and two-fifths of a warrant to purchase a share of common stock. The purchase price paid by the investor was $5.00 for each unit. The warrants expire after five years and each whole warrant has an exercise price of $5.50 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” Synergy has determined that the warrants issued in connection with this Financing transaction must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

On October 18, 2010 the Company entered into a securities purchase agreement with certain investors and raised gross proceeds of $1,525,000 in a registered direct offering. The Company paid a fee of $91,000 to a non-U.S. selling agent. The Company sold 305,000 shares of its common stock and warrants to purchase 122,000 shares of common stock. The common stock and warrants were sold in units consisting of one share of common stock and two-fifths of a warrant to purchase a share of common stock. The purchase price paid by the investors was $5.00 for each unit. The warrants expire after five years and each whole warrant has an exercise price of $5.50 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” Synergy has determined that the warrants issued in connection with this Financing transaction must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

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 300,000 shares of its common stock and warrants to purchase 210,000 shares of common stock. The purchase price paid by the investor was $6.00 for each unit. The warrants expire after seven years and are exercisable at $6.20 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” Synergy has determined that the warrants issued in connection with this Financing transaction 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 416,667 shares of its common stock and warrants to purchase 416,667 shares of common stock. The purchase price paid by the investors was $6.00 for each unit. The warrants expire after seven years, are exercisable at $4.25 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, “Derivatives and Hedging—Contracts in Entity’s Own Equity” Synergy has determined that the warrants issued in connection with this Financing transaction must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.  These liabilities in the amount of $725,000 were reclassed on December 19, 2011 to additional paid in capital.

 

On June 3, 2011, a Synergy warrant holder exercised his warrants and purchased a total of 80,000 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 $5.00 for 49,383 shares and $5.50 for 30,617 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.

 

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 193,541 shares of its common stock and warrants to purchase 193,541 shares of common stock. The purchase price paid by the investors was $6.00 for each unit. The warrants expire after seven years and are exercisable at $6.50 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 had 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 December 19, 2011Synergy filed a registration statement on Form S-3 covering the 193,541shares of common stock and the 193,541 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.  Accordingly, the fair value of these warrants of $315,901 on December 19, 2011 was reclassed from liability to additional paid in capital to equity.

 

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 40,458 shares of its common stock and warrants to purchase 40,458 shares of common stock. The purchase price paid by the investors was $6.00 for each unit. The warrants expire after seven years and are exercisable at $6.50 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 December 19, 2011 Synergy filed a registration statement on Form S-3 covering the 40,458 shares of common stock and the 40,458 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.  Accordingly, the derivative liability associated with these warrants of $73,931 was reclassed from liability to additional paid in capital.

 

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 333,782 shares of its common stock. The purchase price paid by the investors was $7.00 for each share of common stock and there were no warrants issued in connection with this transaction. On December 7, 2011 Synergy issued to these investors an additional 215,981 shares of common stock which make whole brought the purchase price per share paid by these investors to $4.25 per share.

 

On October 4, 2011, we entered into a securities purchase agreement with certain investors for the sale of 552,647 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.  Our gross proceeds from the sale of the units were $2,348,723.  The purchase price paid by the investors was $4.25 per unit.  The warrants expire after five years and are exercisable at $5.50 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” Synergy has determined that the warrants issued in connection with this Financing transaction must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

The October 4, 2011 transaction pricing resulted in the exercise price of the 416,667 warrants issued during May 2011 (the “May Warrants”) to be reduced to $4.25 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 the Company’s listing on NASDAQ, December 1, 2011. This exercise price reduction from $6.50 per share to $4.25 per share decreased the prospective exercise proceeds attributable to the May Warrants by $937,500.

 

On October 19, 2011, we entered into securities purchase agreements with various investors for the sale of 136,912 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 from the sale of the Units were $581,876. The purchase price paid by the investors was $4.25 per Unit.  The Warrants expire after five years and are exercisable at $5.50 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” Synergy has determined that the warrants issued in connection with this Financing transaction must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

On October 28, 2011, we entered into securities purchase agreements with various investors for the sale of 117,647 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 us from the sale of the Units were $500,000. The purchase price paid by the investors was $4.25 per Unit.  The Warrants expire after five years and are exercisable at $5.50 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” Synergy has determined that the warrants issued in connection with this Financing transaction must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

The October warrents relating to 2011 fundraising in the amount of $593,296 from liabilities to additional paid in capital.

 

On November 14, 2011, we entered into a securities purchase agreement with certain accredited investors for the sale of 1,328,941 units in a private placement, with each unit consisting of one share of common stock and one warrant to purchase one share of common stock. The gross proceeds from the sale of the Units were $5,648,000. The purchase price paid by the investors was $4.25 per Unit. The Warrants expire after five years and are exercisable at $5.50 per share.  Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” Synergy has determined that the investor warrants issued in connection with this Financing transaction must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

On December 1, 2011, we entered into an underwriting agreement for the public offering and sale of 1,875,000 units, consisting of two shares of common stock and one warrant to purchase one share of common stock. On December 6, 2011 Synergy closed the offering at a price of $8.00 per unit, resulting in gross proceeds to the Company of $15,000,000.  Each warrant has an exercise price of $5.50 per share and will expire five years from the date of issuance.  Synergy also granted the Underwriters, under the terms of the Underwriting Agreement, an option to purchase up to an additional 281,250 units to cover over-allotments.  On December 15, 2011 the over-allotment option was exercised for additional gross proceeds of $2,250,000.  Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” Synergy has determined that warrants issued in connection with this Financing transaction were not derivative liabilities.

 

On December 6, 2011, in connection with this underwritten financing, Synergy issued a total of 112,500 common stock purchase options to the underwriters and several principals of the firm. The Options expire three years from issuance and have an exercise price of $5.00 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” Synergy has determined that the warrants issued in connection with this Financing transaction were not derivative liabilities.

 

For the twelve months ended December 31, 2011, Synergy paid $2,148,383 in selling agent fees and legal expenses related to the above financing transactions and issued 9,025 warrants to a selling agent which expire after seven years and are exercisable at $6.50 per share, and 77,750 units consisting of one share of common stock and one warrant to purchase one share of common stock, which expire in five years, and are exercisable at $5.50 per share.  Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that 8,025 warrants issued to selling agents were equity instruments upon issuance and 78,750 warrants must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.

 

During the twelve months ended December 31, 2011 we issued a total of 79,000 shares of common stock in payment for legal, consulting and scientific advisory services rendered.  The fair value of these shares totaled $341,295 which amount has been reflected in our statement of operations for the year ended December 31, 2011.

 

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Accounting for Shared-Based Payments
12 Months Ended
Dec. 31, 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:

 

Stock-based compensation, including all options and restricted stock units, has been recognized in operating results as follow:

 

 

 

Years Ended December 31,

 

November 15, 2005
(inception) to

 

 

 

2011

 

2010

 

2009

 

December 31, 2011

 

Employees—included in research and development

 

$

107,191

 

$

187,520

 

$

252,541

 

$

626,781

 

Employees—included in general and administrative

 

92,924

 

210,591

 

358,167

 

774,410

 

 

 

 

 

 

 

 

 

 

 

Subtotal employee stock based compensation

 

200,115

 

398,111

 

610,708

 

1,401,191

 

Non-employees—included in research and development

 

73,449

 

52,184

 

33,913

 

168,096

 

Non-employees—included in general and administrative

 

548,482

 

261,863

 

409,941

 

1,399,362

 

 

 

 

 

 

 

 

 

 

 

Subtotal non-employee stock based compensation

 

621,931

 

314,047

 

443,854

 

1,567,458

 

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense

 

$

822,046

 

$

712,158

 

$

1,054,562

 

$

2,968,649

 

 

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 year ended December 31, 2011.

 

 

 

Years Ended December 31,

 

 

 

2011

 

2010

 

2009

 

Risk-free interest rate

 

0.88%- 1.25%

 

2.31% - 2.71%

 

2.20%

 

Dividend yield

 

 

 

 

Expected volatility

 

70%

 

90%

 

90%

 

Expected term (in years)

 

6.0 yrs.

 

6.0 yrs.

 

6.0 yrs.

 

 

Risk-free interest rate —Based on the daily yield curve rates for U.S. Treasury obligations with maturities which correspond to the expected term of the Company’s stock options.

 

Dividend yield —Synergy has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future.

 

Expected volatility —Based on the historical volatility of Synergy stock.

 

Expected term —Synergy has had no stock options exercised since inception. The expected option term represents the period that stock-based awards are expected to be outstanding based on the simplified method provided in Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment , (“SAB No. 107”), which averages an award’s weighted-average vesting period and expected term for “plain vanilla” share options. Under SAB No. 107, options are considered to be “plain vanilla” if they have the following basic characteristics: (i) granted “at-the-money”; (ii) exercisability is conditioned upon service through the vesting date; (iii) termination of service prior to vesting results in forfeiture; (iv) limited exercise period following termination of service; and (v) options are non-transferable and non-hedgeable.

 

In December 2007, the SEC issued SAB No. 110, Share-Based Payment, (“SAB No. 110”). SAB No. 110 was effective January 1, 2008 and expresses the views of the Staff of the SEC with respect to extending the use of the simplified method, as discussed in SAB No. 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with ASC Topic 718. The Company will continue to use the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB No. 107, as amended by SAB No. 110. For the expected term, the Company has “plain-vanilla” stock options, and therefore used a simple average of the vesting period and the contractual term for options granted subsequent to January 1, 2006 as permitted by SAB No. 107.

 

Forfeitures —ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Synergy estimated future unvested option forfeitures based on historical experience of its majority-owned shareholder, Callisto.

 

The weighted-average fair value per share of all options granted during the twelve months ended December 31, 2011 and December 31, 2010 estimated as of the grant date using the Black-Scholes option valuation model was $2.09 and $6.77 per share, respectively.

 

The unrecognized compensation cost related to non-vested employee stock options outstanding at December 31, 2011, December 31, 2010, and December 31, 2009 was $2,768,766, $314,921 and $1,010,250, respectively. The December 31, 2011 balance is expected to be recognized over a weighted-average remaining vesting period of approximately 3 years.

 

On March 1, 2010, a majority of our shareholders acting by written consent approved an amendment to the Plan increasing the number of shares reserved under the Plan to 7,500,000 shares, after a retroactive change of a one for two (1:2) reverse stock split effective on November 30, 2011. As of December 31, 2011 there were 5,964,039 stock options outstanding under the Plan, leaving 1,535,961 stock options available for future issuance under the Plan.

 

A summary of stock option activity and of changes in stock options outstanding under Synergy’s plans is presented below:

 

 

 

Number of
Options(2)

 

Exercise Price
Per Share

 

Weighted Average
Exercise Price
Per Share

 

Intrinsic
Value

 

Balance outstanding, January 1, 2010

 

2,107,008

 

$

0.50 – 1.90

 

$

0.61

 

$

22,320,436

 

Granted(1)

 

2,232,500

 

$

1.40

 

$

1.40

 

 

 

Exercised

 

 

 

 

 

 

Forfeited

 

(37,500

)

$

1.40

 

$

1.40

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding, December 31, 2010

 

4,302,008

 

$

0.50 – 1.90

 

$

1.04

 

$

25,763,002

 

Granted

 

1,807,000

 

$

3.35– 4.30

 

$

3.50

 

 

 

Exercised

 

 

 

 

 

 

 

 

Forfeited

 

(144,969

)

$

0.50 – 1.40

 

$

1.04

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding, December 31, 2011

 

5,964,039

 

$

0.50 – 4.30

 

$

1.77

 

$

6,027,368

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2011

 

2,044,539

 

$

0.50 – 4.30

 

$

0.70

 

$

5,787,368

 

 

(1)         Contingent vesting upon change of control. The Fair Value at the date of grant was $30,243,946 determined using the Black-Scholes option valuation model assumptions discussed above. No stock based compensation expense associated with these options was recognized since the grant date.

 

(2)         Number of shares outstanding represented above reflect a retroactive change of a one for two (1:2) reverse stock split effective on November 30, 2011.

 

 

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 tax benefits have been recognized in the cash flow statement.

 

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Income Taxes
12 Months Ended
Dec. 31, 2011
Income Taxes
Income Taxes

5. Income Taxes

 

At December 31, 2011, Synergy-DE has net operating loss carryforwards (“NOLs”) aggregating approximately $60 million, which, if not used, expire beginning in 2012 through 2031. The utilization of these NOLs is subject to limitations based on past and future changes in ownership of Synergy pursuant to Internal Revenue Code Section 382. The Company has determined that ownership changes have occurred for Internal Revenue Code Section 382 purposes and therefore, the ability of the Company to utilize its NOLs is limited. The Company has no other material deferred tax items. Synergy records a valuation allowance against deferred tax assets to the extent that it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Due to the substantial doubt related to Synergy’s ability to continue as a going concern and utilize its deferred tax assets, a valuation allowance for the full amount of the deferred tax assets has been established at December 31, 2011. As a result of this valuation allowance there are no income tax benefits reflected in the accompanying consolidated statements of operations to offset pre-tax losses.

 

The provisions of FASB ASC Topic 740-10-30-7, Accounting for Income Taxes were adopted by Synergy on January 1, 2007 and had no effect on Synergy’s financial position, cash flows or results of operations upon adoption, as Synergy did not have any unrecognized tax benefits. Synergy’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense and none have been incurred to date.

 

Synergy has no uncertain tax positions subject to examination by the relevant tax authorities as of December 31, 2011. Synergy files U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2008 through 2011 tax years generally remain subject to examination by federal and most state tax authorities.

 

On July 14, 2008, Synergy engaged in a tax-free reorganization pursuant to the Internal Revenue Code Section 368(a)(1)(B) thereby acquiring 100% of shares in Synergy-DE, from Callisto, a Delaware corporation, and other restricted holders of Synergy-DE shares, in exchange for 22,732,380 shares of the Company’s common stock (or approximately 70% of the Company’s outstanding common stock). The transaction was characterized as a tax-free type “B” reorganization resulting in no gain or loss recognition to the Company, for federal tax purposes.

 

During the year ended December 31, 2010 Synergy received a $244,479 Federal credit for our Qualifying Therapeutic Discovery Project under the Patient Protection and Affordable Care Act of 2010 and recorded a $250,000 New York City Biotechnology refundable tax credit. The total of these awards $494,479 is reported as other income in the Consolidated Statement of Operations.

 

During the year ended December 31, 2011 the Company recorded refundable tax credit in prepaid and other current assets for its (i) 2010 New York State QETC credit, totalling $248,486 and (ii) its New York City Biotechnology Tax Credit for the tax year of 2011 totalling $118,437. These credits are presented as other income in the statement of operations.

 

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Commitments and Contingencies
12 Months Ended
Dec. 31, 2011
Commitments and Contingencies
Commitments and Contingencies

6. Commitments and Contingencies

 

Employment and Consulting Agreements

 

Gary S. Jacob, Ph.D.

 

On May 2, 2011, Dr. Gary Jacob entered into an amended and restated employment agreement with us in which he agreed to serve as Chief Executive Officer and President. The term of the agreement was effective as of August 1, 2008 and continues until December 31, 2014 and is automatically renewed for successive one year periods at the end of each term. Dr. Jacob’s current base salary is $324,450 per year. Dr. Jacob is eligible to receive a cash bonus of up to 50% of his base salary per year based on meeting certain performance objectives and bonus criteria. Dr. Jacob is also eligible to receive a realization bonus in the event that we enter into an out-license agreement for our technology or enter into a joint venture in which we contribute such rights to the joint venture where the enterprise value equals or exceeds a minimum of $250 million in the term of the agreement or the license fees we contract to receive equals or exceeds $50 million. The realization bonus will be equal to the enterprise value in the case of a joint venture or the sum of the license fees actually received in the case of an out license, multiplied by 0.5%. In addition, in the event we engage in a merger transaction or a sale of substantially all of our assets where (i) our enterprise value at the time of the merger or sale equals or exceed $400 million and our stockholders prior to consummation of the merger or sale beneficially own less than 20% of the stock of the surviving entity after consummation of the merger or (ii) our enterprise value at the time of the merger or sale or 12 months after the merger or sale equals or exceed $250 million and our stockholders prior to consummation of the merger or sale beneficially own 20% or more of the stock of the surviving entity after consummation of the merge, Dr. Jacob shall receive a bonus in an amount determined by multiplying the enterprise value by 2.5%.

 

If the employment agreement is terminated by us other than for cause or as a result of Dr. Jacob’s death or permanent disability or if Dr. Jacob terminates his employment for good reason which includes a change of control, Dr. Jacob shall receive (i) a severance payment equal average monthly base salary paid or accrued during the three full calendar months preceding the termination, (ii) expense compensation in an amount equal to twelve times the sum of his average base salary during the three full months preceding the termination, (iii) immediate vesting of all unvested stock options and the extension of the exercise period of such options to the later of the longest period permitted by our stock option plans or ten years following the termination date, (iv) payment in respect of compensation earned but not yet paid and (v) payment of the cost of medical insurance for a period of twelve months following termination. In the event Dr. Jacob’s employment was terminated upon a change of control as of December 31, 2011, he would have been entitled to receive a lump sum payment of $973,350, less applicable withholding.

 

Gabriele M. Cerrone

 

On May 2, 2011, Gabriele M. Cerrone, our Chairman of the Board, entered into an amended and restated consulting agreement with us. The term of the agreement was effective as of August 1, 2008 and continues until December 31, 2014 and is automatically renewed for successive one year periods at the end of each term. Mr. Cerrone’s current compensation is $319,043 per year. Pursuant to the agreement, Mr. Cerrone is eligible to receive a cash bonus of up to 50% of his base salary per year based on meeting certain performance objectives and bonus criteria. Mr. Cerrone is also eligible to receive a realization bonus in the event that we enter into an out-license agreement for our technology or enter into a joint venture in which we contribute such rights to the joint venture where the enterprise value equals or exceeds a minimum of $250 million during the term of the agreement or the license fees we contract to receive equals or exceeds $50 million. The realization bonus will be equal to the enterprise value in the case of a joint venture or financing or the sum of the license fees actually received multiplied by 0.5%. In addition, in the event we engage in a merger transaction or a sale of substantially all of our assets where (i) our enterprise value at the time of the merger or sale equals or exceed $400 million and our stockholders prior to consummation of the merger or sale beneficially own less than 20% of the stock of the surviving entity after consummation of the merger or (ii) our enterprise value at the time of the merger or sale or 12 months after the merger or sale equals or exceed $250 million and our stockholders prior to consummation of the merger or sale beneficially own 20% or more of the stock of the surviving entity after consummation of the merge, Dr. Jacob shall receive a bonus in an amount determined by multiplying the enterprise value by 2.5%.

 

On October 6, 2010 we achieved the $20 million threshold required for Mr. Cerrone’s realization bonus to be accrued on the cumulative gross proceeds of financing transactions since August 1, 2008. This bonus totaled $1,211,912, was deemed compensatory in nature and charged to expense during the year ended December 31, 2010. Mr. Cerrone has agreed with us to defer payment of his bonus until the earlier of (i) March 31, 2012, (ii) the completion of a financing transaction yielding gross proceeds of $30 million on a cumulative basis subsequent to October 6, 2010 or (iii) the tenth business day after termination of the consulting agreement without cause or good reason (including a termination following a “change of control” transaction as that term is defined in his consulting agreement). In consideration of Mr. Cerrone agreeing to permit us to defer payment of his bonus we agreed to indemnify him from any liability for taxes or penalties that he may incur pursuant to Section 409A of the Internal Revenue Code and comparable state income tax laws. This bonus was paid in full during the twelve months ended December 31, 2011, which payment does not terminate the Company’s indemnification liability.

 

If the consulting agreement is terminated by us other than for cause or as a result of Mr. Cerrone’s death or permanent disability or if Mr. Cerrone terminates the agreement for good reason which includes a change of control, Mr. Cerrone shall receive (i) a severance payment equal to the higher of the aggregate amount of his base compensation for the then remaining term of the agreement or twelve times the average monthly base compensation paid or accrued during the three full calendar months preceding the termination, (ii) expense compensation in an amount equal to twelve times the sum of his average base compensation during the three full months preceding the termination, (iii) immediate vesting of all unvested stock options and the extension of the exercise period of such options to the later of the longest period permitted by our stock option plans or ten years following the termination date, (iv) payment in respect of compensation earned but not yet paid and (v) payment of the cost of medical insurance for a period of twelve months following termination. In the event Mr. Cerrone’s employment was terminated upon a change of control as of December 31, 2011, he would have been entitled to receive a lump sum payment of $957,129 less applicable withholding.

 

Bernard F. Denoyer

 

On January 20, 2011, Bernard F. Denoyer entered into an executive employment agreement with us in which he agreed to serve as Senior Vice President, Finance.  The term of the agreement was effective as of January 20, 2011, continues until January 20, 2013 and is automatically renewed for successive one year periods at the end of each term. Mr. Denoyer’s base salary is currently $200,850 and he is eligible to receive a cash bonus of up to 20% of his base salary per year at the discretion of the Compensation Committee of the Board of Directors. If the employment agreement is terminated by us other than for cause or as a result of Mr. Denoyer’s death or permanent disability or if Mr. Denoyer terminates his employment for good reason which includes a change of control, Mr. Denoyer shall receive (i) a severance payment equal to the higher of the aggregate amount of his base salary for the then remaining term of the agreement or twelve times the average monthly base salary paid or accrued during the three full calendar months preceding the termination, (ii)  immediate vesting of all unvested stock options and the extension of the exercise period of such options to the later of the longest period permitted by our stock option plans or ten years following the termination date, (iii)  payment in respect of compensation earned but not yet paid and (iv)  payment of the cost of medical insurance for a period of twelve months following termination. . In the event Mr. Denoyer’s employment was terminated upon a change of control as of December 31, 2011, he would have been entitled to receive a lump sum payment of $211,855, less applicable withholding.

 

Lease agreements

 

Our corporate headquarters totals approximately 3,800 square feet in Suite 1609, located at 420 Lexington Avenue, New York, NY, expired on June 30, 2011.  On July 21, 2011 we extended our lease on Suite 1609 until March 31, 2012, at a monthly rent of $16,414. The Company also occupies a small laboratory and several offices, totaling approximately 1,000 square feet, in the Bucks County Biotechnology Center in Doylestown, Pennsylvania under a lease expiring August 31, 2011. Rent expense for the twelve months ended December 31, 2011 and 2010 totaled $239,189 and $272,663, respectively.

 

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Research and Development Expense
12 Months Ended
Dec. 31, 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 $577,745 and $683,182 as of December 31, 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 deferred research and development costs when drug compound is delivered and services are performed.

 

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Derivative Financial Instruments
12 Months Ended
Dec. 31, 2011
Derivative Financial Instruments
Derivative Financial Instruments

8. 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 our common stock in the year ended December 31, 2011 and December 31, 2010 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 is 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 during the twelve months ended December 31, 2011 and December 31, 2010 were:

 

 

 

Twelve months ended
December 31, 2011

 

Twelve months ended
December 31, 2010

 

Estimated fair value of stock

 

$3.50 - $9.04

 

$5.00 - $7.40

 

Expected warrant term

 

4-7 years

 

5 years

 

Risk-free interest rate

 

0.36% - 2.22%

 

1.20 - 2%

 

Expected volatility

 

70%-90%

 

90%

 

Dividend yield

 

0%

 

0%

 

 

Estimated fair value of stock is the closing market price of the Company’s common stock on the date of warrant issuance and end of each reporting period the derivative instruments are marked to market. 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. Expected volatility is based on historical volatility of the Company’s common stock.

 

Certain of Synergy’s warrants issued during the twelve months ended December 31, 2011 contained a price protection clause which variable exercise price required the Company to use a binomial model to determine fair value. The range of assumptions used to determine the fair value of the warrants at each period end during the twelve months ended December 31, 2011 was as follows:

 

 

 

Twelve months ended
December 31, 2011

 

Estimated fair value of stock

 

$2.71 - $5.02

 

Expected warrant term

 

5-7years

 

Risk-free interest rate

 

0.90% - 2.64%

 

Expected volatility

 

70%-90%

 

Dividend yield

 

0%

 

 

In the Binomial model, the assumption for 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 most recent 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.

 

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 (1)

 

Derivative
Instrument
Liability

 

12/31/2009

 

Balance of derivative financial instruments liability

 

 

$

 

6/30/2010

 

Fair value of new warrants issued during the quarter

 

324,000

 

$

1,045,214

 

9/30/2010

 

Fair value of new warrants issued during the quarter

 

51,851

 

$

163,905

 

9/30/2010

 

Change in fair value of warrants during the quarter recognized as other income in the statement of operations

 

 

$

(110,937

)

9/30/2010

 

Balance of derivative financial instruments liability

 

375,851

 

$

1,098,182

 

12/31/2010

 

Fair value of new warrants issued during the quarter

 

352,618

 

$

2,575,624

 

12/31/2010

 

Change in fair value of warrants during the quarter recognized as other income in the statement of operations

 

 

$

(185,847

)

12/31/2010

 

Balance of derivative financial instruments liability

 

728,469

 

$

3,487,959

 

3/31/2011

 

Fair value of new warrants issued during the quarter

 

210,000

 

$

1,312,673

 

3/31/2011

 

Change in fair value of warrants during the quarter recognized as other income in the statement of operations

 

 

$

338,715

 

3/31/2011

 

Balance of derivative financial instruments liability

 

938,469

 

$

5,139,347

 

6/30/2011

 

Fair value of new warrants issued during the quarter

 

611,207

 

$

2,607,827

 

6/30/2011

 

Exercise of warrants during the quarter

 

(80,000

)

$

(486,328

)

6/30/2011

 

Change in fair value of warrants during the quarter recognized as other income in the statement of operations

 

 

$

697,660

 

6/30/2011

 

Balance of derivative financial instruments liability

 

1,469,676

 

$

7,958,506

 

9/30/2011

 

Fair value of new warrants issued during the quarter

 

40,458

 

$

285,128

 

9/30/2011

 

Change in fair value of warrants during the quarter recognized as other income in the statement of operations

 

 

$

(4,382,796

)

9/30/2011

 

Balance of derivative financial instruments liability

 

1,510,134

 

$

3,860,838

 

12/31/2011

 

Fair value of new warrants issued during the quarter

 

1,810,294

 

$

3,082,203

 

12/31/2011

 

Reclass of derivative liability to equity during the quarter

 

(1,055,268

)

$

(1,707,317

)

12/31/2011

 

Change in fair value of warrants during the quarter recognized as other income in the statement of operations

 

 

$

(1,910,610

)

12/31/2011

 

Balance of derivative financial instruments liability

 

2,265,160

 

$

3,325,114

 

 

 

(1)          Number of warrants outstanding represented above reflect a retroactive effect of a one for two (1:2) reverse stock split effective on November 30, 2011.

 

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Fair Value Measurements
12 Months Ended
Dec. 31, 2011
Fair Value Measurements
Fair Value Measurements

9. Fair Value Measurements

 

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 December 31, 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
December 31,
2011

 

Derivative liabilities related to Warrants

 

$

 

$

 

$

3,487,959

 

$

3,487,959

 

$

 

$

 

$

3,325,114

 

$

3,325,114

 

 

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the twelve months ended December 31, 2011 and December 31, 2010:

 

Description

 

Balance at
December 31,
2009

 

Fair Value of
warrants upon
issuance

 

Unrealized
(gains) or
losses

 

Balance as of
December 31,
2010

 

Fair value of
warrants
exercised and
reclassified to
additional paid
in capital

 

Fair Value of
warrants
upon
issuance

 

Unrealized
(gains) or
losses

 

Balance as of
December 31,
2011

 

Derivative liabilities related to Warrants

 

 

$

3,784,743

 

$

(296,784

)

$

3,487,959

 

$

(2,193,645

)

$

7,287,831

 

$

(5,257,031

)

$

3,325,114

 

 

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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Property and Equipment
12 Months Ended
Dec. 31, 2011
Property and Equipment
Property and Equipment

10. Property and Equipment

 

Equipment consists of laboratory, testing and computer equipment and furniture and fixtures consists of office furniture, both stated at cost, with useful lives ranging from 2 - 5 years, depreciated on a straight line basis. Depreciation expense for the years ended December 31, 2011, 2010, 2009 and from November 15, 2005 (inception) to December 31, 2011 were $1,976, $1,976, $1,976 and $7,150 respectively.

 

 

 

December 31,
2011

 

December 31,
2010

 

Furniture and fixtures

 

$

38,343

 

$

38,343

 

Machinery and equipment

 

12,195

 

12,195

 

Less accumulated depreciation

 

(44,765

)

(42,789

)

 

 

 

 

 

 

Property and equipment, net

 

$

5,773

 

$

7,749

 

 

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Related Parties
12 Months Ended
Dec. 31, 2011
Related Parties
Related Parties

11. Related Parties

 

As of December 31, 2011, Synergy’s principal shareholder, Callisto, owns 41.10% of its outstanding shares. Synergy occupies corporate office space in New York City under a month to month sharing arrangement with Callisto, its principal shareholder. Rent is allocated from Callisto monthly based on the square footage of office space occupied by Synergy.

 

As of December 31, 2011 Synergy had advanced Callisto $1,541,456 which is Callisto’s share of Synergy payments for common operating costs since July 2008. This indebtedness is evidenced by an unsecured promissory note which bears interest at 6% per annum. Interest income earned on this note totaled approximated $84,000 and $89,000 during the twelve months ended December 31, 2011 and 2010, respectively.  Due to the uncertainty surrounding Callisto’s ability to raise capital 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 December 31, 2011 and December 31, 2010, the balances due from Callisto Pharmaceuticals, Inc. are comprised of the following amounts:

 

 

 

December 31,
2011

 

December 31,
2010

 

Rent, utilities and property taxes

 

$

90,166

 

$

61,813

 

Insurance and other facilities related overhead

 

249,635

 

150,836

 

Independent accountants and legal

 

510,331

 

417,298

 

Financial printer and transfer agent fees

 

217,476

 

147,171

 

Salaries and consulting fees of shared executives

 

289,270

 

214,311

 

Working capital advances

 

184,578

 

682,658

 

Total due from Callisto

 

$

1,541,456

 

$

1,674,087

 

 

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Quarterly Consolidated Financial Data (Unaudited)
12 Months Ended
Dec. 31, 2011
Quarterly Consolidated Financial Data (Unaudited)
Quarterly Consolidated Financial Data (Unaudited)

12. Quarterly Consolidated Financial Data (Unaudited)

 

 

 

Quarter Ended

 

 

 

March 31,
2011

 

June 30,
2011

 

September 30,
2011

 

December 31,
2011

 

 

 

(dollars in thousands, except per share data)

 

Revenues

 

$

 

$

 

$

 

$

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Research and Development

 

1,478

 

2,355

 

3,883

 

5,703

 

General and administrative

 

1,897

 

1,524

 

1,103

 

2,222

 

Loss from operations

 

(3,375

)

(3,879

)

(4,986

)

(7,925

)

Other income

 

 

 

 

362

 

Interest and investment income

 

24

 

20

 

20

 

26

 

Interest expense

 

(12

)

 

 

 

Change in fair value of derivative instruments—warrants

 

(339

)

(698

)

4,383

 

1,911

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(3,702

)

$

(4,557

)

$

(583

)

$

(5,626

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic and diluted (a)

 

46,167,416

 

46,642,901

 

47,308,946

 

48,657,013

 

Earnings per common share—basic and diluted(b):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net per common share

 

$

(0.08

)

$

(0.10

)

$

(0.01

)

$

(0.12

)

 

(a)   Weighted average common shares outstanding represented above reflect a retroactive change of a one for two (1:2) reverse stock split effective on November 30, 2011.

 

(b)   Basic and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not agree to the total for the year.

 

 

 

Quarter Ended

 

 

 

March 31,
2010

 

June 30,
2010

 

September 30,
2010

 

December 31,
2010

 

 

 

(dollars in thousands, except per share data)

 

Revenues

 

$

 

$

 

$

 

$

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Research and Development

 

1,183

 

4,395

 

2,295

 

1,686

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

1,199

 

1,419

 

1,220

 

2,724

 

Loss from operations

 

(2,382

)

(5,814

)

(3,515

)

(4,410

)

Other income

 

 

 

 

494

 

Interest and investment income

 

33

 

27

 

23

 

25

 

Change in fair value of derivative instruments—warrants

 

 

 

111

 

185

 

Net Loss

 

$

(2,348

)

$

(5,787

)

$

(3,381

)

$

(3,706

)

Weighted average common shares outstanding—basic and diluted (a)

 

44,211,680

 

44,231,064

 

45,051,203

 

45,986,047

 

Earnings per common share—basic and diluted(b):

 

 

 

 

 

 

 

 

 

Net per common share

 

$

(0.06

)

$

(0.12

)

$

(0.08

)

$

(0.08

)

 

(a)         Weighted average common shares outstanding represented above reflect a retroactive change of a one for two (1:2) reverse stock split effective on November 30, 2011.

 

(b)         Basic and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not agree to the total for the year.

 

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Subsequent Events
12 Months Ended
Dec. 31, 2011
Subsequent Events
Subsequent Events

13. Subsequent Events

 

On February 14, 2012, Synergy Pharmaceuticals, Inc., (the “Company”) entered into an agreement and plan of merger (the “Agreement”) with its wholly-owned subsidiary, Synergy Pharmaceuticals Inc., a Delaware corporation (“Synergy-DE”) for the purpose of changing the state of incorporation of the Company to Delaware from Florida. Pursuant to the Agreement, the Company merged with and into Synergy-DE with Synergy-DE continuing as the surviving corporation.  The directors and officers in office of the Company upon the effective date of the merger shall be the directors and officers of Synergy-DE, all of whom shall hold their directorships and offices until the election and qualification of their respective successors or until their tenure is otherwise terminated in accordance with the by-laws of Synergy-DE.  The effective date of the merger shall be the date on which the Certificate of Merger is filed with the Secretary of State of Delaware and the Secretary of State of Florida.  The Certificate of Merger was filed with the Secretary of State of Florida on February 15, 2012 and with the Secretary of State of Delaware of February 16, 2012.

 

Each issued share of the Company shall, upon the effective date of the merger, be converted into one share of Synergy-DE.  After the effective date of the merger, certificates representing shares of the Company’s common stock will represent shares of Synergy-DE’s common stock, and upon surrender of the same to the transfer agent for the Company, who also shall serve as the transfer agent for Synergy-DE, the holder thereof shall be entitled to receive in exchange therefor a certificate or certificates representing the number of shares of Synergy-DE common stock into which such shares of the Company’s common stock shall have been converted.  All outstanding warrants, options and rights issued by the Company to purchase shares of the Company’s common stock (the “Company Securities”), will either be exchanged for or converted into warrants, options or rights issued by Synergy-DE, or amended to provide that, on the effective date of the merger, each Company Security so exchanged, converted or amended shall become, a warrant, option or right to acquire the same number of shares of Synergy-DE common stock and at the same exercise price as the holder of such Company Securities would have been entitled to receive pursuant to the merger had such holder exercised such Company Securities in full immediately prior to the effective time of the merger, without any other action required by any such holder.

 

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