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Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Mar. 15, 2013
Jun. 30, 2012
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, 2012
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 $ 164,803,825
Entity Common Stock, Shares Outstanding 73,388,287
Document Fiscal Year Focus 2012
Document Fiscal Period Focus FY
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CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Current Assets:
Cash and cash equivalents $ 12,416 $ 13,245
Available-for-sale securities 20,086
Prepaid expenses and other current assets 1,547 1,063
Total Current Assets 34,049 14,308
Property and equipment, net 30 6
Security deposits 20 14
Due from Callisto Pharmaceuticals, Inc. 3,306 1,542
Total Assets 37,405 15,870
Current Liabilities:
Accounts payable 5,255 1,416
Accrued expenses 2,060 1,331
Total Current Liabilities 7,315 2,747
Derivative financial instruments, at estimated fair value-warrants 5,258 3,325
Total Liabilities 12,573 6,072
Stockholders' Equity:
Preferred stock, Authorized 20,000,000 shares at December 31, 2012 and 2011, none outstanding.      
Common stock, par value of $.0001. Authorized 100,000,000 shares at December 31, 2012 and 2011. Issued and outstanding 66,621,832 and 54,279,906 shares at December 31, 2012 and 2011, respectively 7 6
Additional paid-in capital 133,878 79,401
Deficit accumulated during development stage (109,053) (69,609)
Total Stockholders' Equity 24,832 9,798
Total Liabilities and Stockholders' Equity $ 37,405 $ 15,870
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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2012
Dec. 31, 2011
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, issued shares 66,621,832 54,279,906
Common stock, outstanding shares 66,621,832 54,279,906
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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended 86 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2012
Costs and Expenses:
Research and development $ 29,294 $ 13,419 $ 9,559 $ 57,707
Purchased in-process research and development 1,000 29,157
General and administrative 7,941 6,745 6,562 27,585
Loss from Operations (38,235) (20,164) (16,121) (114,449)
Other Income /(Loss)
Interest and investment income 218 90 109 496
Interest expense (12) (12)
Other income 506 362 494 1,363
Change in fair value of derivative instruments-warrants (1,933) 5,257 297 3,621
Total Other Income/(loss) (1,209) 5,697 900 5,468
Loss from Continuing Operations (39,444) (14,467) (15,221) (108,981)
Loss from discontinued operations (72)
Net loss $ (39,444) $ (14,467) $ (15,221) $ (109,053)
Weighted Average Common Shares Outstanding, Basic and Diluted (restated for stock split) (in shares) 61,702,277 47,598,240 44,875,356
Net Loss per Common Share, Basic and Diluted
Net Loss per Common Share, Basic and Diluted (in dollars per share) $ (0.64) $ (0.3) $ (0.34)
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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 $ 7,000 $ (5,000)
Sale of unregistered common stock to founder (in shares) 75,690,608
Common stock issued via registered direct offerings, private placements and other 18,000 1,000 17,000
Common stock issued via registered direct offerings, private placements and other (in shares) 6,850,000
Balance at Dec. 31, 2005 20,000 8,000 12,000
Balance (in shares) at Dec. 31, 2005 82,540,608
Increase (Decrease) in Stockholders' Equity
Net loss for the period (20,000) (20,000)
Balance at Dec. 31, 2006 8,000 12,000 (20,000)
Balance (in shares) at Dec. 31, 2006 82,540,608
Increase (Decrease) in Stockholders' Equity
Capital contribution by shareholders 9,000 9,000
Net loss for the period (20,000) (20,000)
Balance at Dec. 31, 2007 (11,000) 8,000 21,000 (40,000)
Balance (in shares) at Dec. 31, 2007 82,540,608
Increase (Decrease) in Stockholders' Equity
Common stock issued via registered direct offerings, private placements and other 3,025,000 3,025,000
Common stock issued via registered direct offerings, private placements and other (in shares) 2,520,833
Cancellation of unregistered founder shares (7,000) 7,000
Cancellation of unregistered founder shares (in shares) (74,990,604)
Common stock issued via Exchange Transaction 27,280,000 3,000 27,277,000
Common stock issued via Exchange Transaction (in shares) 22,732,380
Fees and expenses related to financing transactions - paid in cash (73,000) (73,000)
Stock based compensation expense 380,000 380,000
Net loss for the period (31,757,000) (31,757,000)
Balance at Dec. 31, 2008 (1,156,000) 4,000 30,637,000 (31,797,000)
Balance (in shares) at Dec. 31, 2008 32,803,217
Increase (Decrease) in Stockholders' Equity
Common stock issued via registered direct offerings, private placements and other 15,970,000 1,000 15,969,000
Common stock issued via registered direct offerings, private placements and other (in shares) 11,407,213
Fees and expenses related to financing transactions - paid in cash (260,000) (260,000)
Common stock Issued for services rendered 2,000 2,000
Common stock Issued for services rendered (in shares) 1,250
Stock based compensation expense 1,052,000 1,052,000
Net loss for the period (8,124,000) (8,124,000)
Balance at Dec. 31, 2009 7,484,000 5,000 47,400,000 (39,921,000)
Balance (in shares) at Dec. 31, 2009 44,211,680
Increase (Decrease) in Stockholders' Equity
Common stock issued via registered direct offerings and private placements 7,179,000 7,179,000
Common stock issued via registered direct offerings and private placements (in shares) 1,209,000
Fees and expenses related to financing transactions - paid in cash (468,000) (468,000)
Warrants classified to derivative liability - net (3,785,000) (3,785,000)
Common stock issued to extend lock-up agreements related to unregistered shares (in shares) 670,933
Common stock Issued for services rendered 18,000 18,000
Common stock Issued for services rendered (in shares) 2,469
Stock based compensation expense 694,000 694,000
Net loss for the period (15,221,000) (15,221,000)
Balance at Dec. 31, 2010 (4,099,000) 5,000 51,038,000 (55,142,000)
Balance (in shares) at Dec. 31, 2010 46,094,082
Increase (Decrease) in Stockholders' Equity
Common stock issued via registered direct offerings and private placements 34,369,000 1,000 34,368,000
Common stock issued via registered direct offerings and private placements (in shares) 7,733,093
Fees and expenses related to financing transactions - paid in cash (2,148,000) (2,148,000)
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 (5,094,000) (5,094,000)
Common stock issued to make whole certain unregistered shares (in shares) 215,981
Exercise of warrant 415,000 415,000
Exercise of warrant (in shares) 80,000
Common stock Issued for services rendered 341,000 341,000
Common stock Issued for services rendered (in shares) 79,000 79,000
Stock based compensation expense 481,000 481,000
Net loss for the period (14,467,000) (14,467,000)
Balance at Dec. 31, 2011 9,798,000 6,000 79,401,000 (69,609,000)
Balance (in shares) at Dec. 31, 2011 54,279,906 54,279,906
Increase (Decrease) in Stockholders' Equity
Common stock issued via registered direct offerings, private placements and other 55,862,000 1,000 55,861,000
Common stock issued via registered direct offerings, private placements and other (in shares) 12,315,654
Fees and expenses related to financing transactions - paid in cash (3,774,000) (3,774,000)
Common stock Issued for services rendered 93,000 93,000
Common stock Issued for services rendered (in shares) 26,272
Stock based compensation expense 2,297,000 2,297,000
Net loss for the period (39,444,000) (39,444,000)
Balance at Dec. 31, 2012 $ 24,832,000 $ 7,000 $ 133,878,000 $ (109,053,000)
Balance (in shares) at Dec. 31, 2012 66,621,832 66,621,832
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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended 86 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2012
Cash Flows From Operating Activities:
Net loss $ (39,444) $ (14,467) $ (15,221) $ (109,053)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 2 2 2 10
Loss on disposal of property and equipment 2 2
Stock-based compensation expense 2,515 822 712 5,484
Accretion of discount/premium on investment securities (86) (86)
Purchased in-process research and development 28,157
Change in fair value of derivative instruments-warrants 1,933 (5,257) (297) (3,621)
Changes in operating assets and liabilities:
Security deposit (5) (20)
Accounts payable and accrued expenses 4,442 (2,265) 3,286 6,467
Prepaid expenses and other current assets (484) (66) 64 (1,547)
Total Adjustments 8,319 (6,764) 3,767 34,846
Net Cash used in Operating Activities (31,125) (21,231) (11,454) (74,207)
Cash Flows From Investing Activities:
Net cash paid on Exchange Transaction (155)
(Loans to) /Repayment from related parties (1,764) 133 (702) (3,306)
Purchases of available-for-sale securities (20,000) (20,000)
Additions to property and equipment (28) (42)
Net Cash (used in) /provided by Investing Activities (21,792) 133 (702) (23,503)
Cash Flows From Financing Activities:
Capital contribution by shareholders 9
Issuance of common stock 2
Proceeds of sale of common stock 55,862 34,369 7,179 116,406
Proceeds from exercise of warrants 415 415
Proceeds from sale of unregistered common stock to founders 18
Fees and expenses related to sale of common stock (3,774) (2,148) (468) (6,724)
Net Cash provided by Financing Activities 52,088 32,636 6,711 110,126
Net increase (decrease) in cash and cash equivalents (829) 11,538 (5,445) 12,416
Cash and cash equivalents at beginning of period 13,245 1,707 7,152
Cash and cash equivalents at end of period 12,416 13,245 1,707 12,416
Supplementary disclosure of cash flow information:
Cash paid for taxes 50 38 31 140
Supplementary disclosure of non-cash investing and financing activities:
Value of warrants classified to derivative liability-net 5,094 3,785 8,879
Value of common stock issued to induce stockholders to extend lock-up agreements $ 3,235 $ 3,235
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Business Overview
12 Months Ended
Dec. 31, 2012
Business Overview
Business Overview

1. Business Overview

 

Synergy Pharmaceuticals Inc. (“Synergy” or the “Company”) is a biopharmaceutical company focused primarily on the development of drugs to treat gastrointestinal, or GI, disorders and diseases. Its lead product candidate is plecanatide (formerly called SP-304), a guanylyl cyclase C, or GC-C, receptor agonist, to treat GI disorders, primarily chronic idiopathic constipation, or CIC, and constipation-predominant irritable bowel syndrome, or IBS-C. CIC and IBS-C are functional gastrointestinal disorders that afflict millions of sufferers worldwide. CIC is primarily characterized by constipation symptoms but a majority of these patients report experiencing bloating and abdominal discomfort as 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, its second generation GC-C receptor agonist for the treatment of gastrointestinal inflammatory diseases, such as ulcerative colitis, or UC.

 

On August 23, 2012, Synergy signed an Asset Purchase Agreement with Bristol-Myers Squibb Company and acquired the assets related to FV-100, an orally available nucleoside analogue, currently being developed for the treatment of shingles, a severe, painful skin rash caused by reactivation of the varicella zoster virus — the virus that causes chickenpox. The terms of the Agreement provide for an initial payment of $1 million, subsequent milestone payments covering marketing approval and achieving the milestone of aggregate net sales equal to or greater than $125 million, as well as a single digit royalty based on net sales.

 

On September 14, 2012, Synergy entered into a binding letter of intent (the “LOI”) with Ironwood Pharmaceuticals, Inc. (“Ironwood”) pursuant to which Synergy and Ironwood agreed to enter into a definitive license agreement giving Synergy an exclusive worldwide license to Ironwood’s method of use patents on plecanatide for the treatment of CC and IBS-C. The LOI contemplates a low single digit royalty on net sales of plecanatide and both parties agreed not to challenge each other’s patents covering certain GC-C agonists, with the exception that Synergy retains the right to challenge Ironwood’s method of use patent on plecanatide.

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Basis of Presentation and Going Concern
12 Months Ended
Dec. 31, 2012
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.

 

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.

 

On February 14, 2012, Synergy Pharmaceuticals, Inc., entered into an agreement and plan of merger with its wholly-owned subsidiary, Synergy Pharmaceuticals Inc., a Delaware corporation for the purpose of changing the state of incorporation of the Company to Delaware from Florida. Pursuant to the merger agreement, Synergy merged with and into Synergy-DE with Synergy-DE continuing as the surviving corporation.  The directors and officers in office of Synergy upon the effective date of the merger became the directors and officers of Synergy-DE.

 

These consolidated financial statements include Synergy Pharmaceuticals Inc., a Delaware corporation, and subsidiaries: (1) Synergy Advanced Pharmaceuticals, Inc. and (2) IgX, Ltd (Ireland—inactive) (henceforth “Synergy”). All intercompany balances and transactions have been eliminated. These consolidated financial statements as of December 31, 2012 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 projected future losses along with 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 Synergy filed an amendment to its amended and restated articles of incorporation pursuant to which Synergy 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, 2012, Synergy had an accumulated deficit of approximately $109,053,000 and expects to incur significant and increasing operating losses for the next several years as the Company continues to expand its research and development and clinical trials of plecanatide for the treatment of GI diseases and 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 approximately $31,125,000 for the twelve months ended December 31, 2012. As of December 31, 2012, Synergy had approximately $12,416,000 of cash and cash equivalents and $20,086,000 in available for sale securities. During the twelve months ended December 31, 2012, Synergy incurred net losses from operations of approximately $38,235,000. 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, 2012 was approximately $52,088,000. As of December 31, 2012 Synergy had a working capital of approximately $26,734,000.

 

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, Cash Equivalents and Marketable Securities

 

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. As of December 31, 2012, the amount of cash and cash equivalents was approximately $12 million and consists of checking accounts, short-term money market funds held at U.S. commercial banks. As of December 31, 2011, the amount of cash and cash equivalent was approximately $13 million and consists of checking accounts and short-term money market funds with U.S. commercial banks. At any point in time, the Company’s balance of cash and cash equivalent may exceed federally insured limits.

 

The Company’s marketable securities as of December 31, 2012 consist of $20 million in U.S. Treasury securities and have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the available-for-sale designations as of each balance sheet date. Cash equivalents and marketable securities are carried at amounts that approximate fair value due to their short-term maturities.  As of December 31, 2012, gross unrealized losses were not material. The Company recognized no net realized gains or losses for the year ended December 31, 2012. The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. Fair values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. During the year ended December 31, 2012, the Company did not recognize any impairment charges. As of December 31, 2012, the Company did not consider any of its investments to be other-than-temporarily impaired. There was no investment in marketable securities for the year ended December 31, 2011.

 

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, marketable securities, 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. Leasehold improvements are depreciated over the remaining useful life of the lease. 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 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, and clinical trial insurance.

 

In accordance with FASB ASC Topic 730-10-55, Research and Development, Synergy recorded prepaid research and development costs of $926,380 as of December 31, 2012, as compared to $577,745 as of December 31, 2011, for nonrefundable pre-payments for production of drug substance, analytical testing services for its drug candidates, and clinical trials. In accordance with this guidance, Synergy expenses deferred research and development costs when drug compound is delivered and services are performed.

 

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, 2012, 2011 and 2010 the effect of  9,734,268, 5,964,039, and 4,302,008, respectively, outstanding stock options and 5,647,203, 5,597,203, and 728,469 respectively, outstanding warrants were excluded from the calculation of diluted loss per share because the effect was antidilutive.

 

Recent Accounting Pronouncements

 

There are no recent accounting pronouncements affecting the Company.

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Acquisition and Stockholders' Equity (Deficit)
12 Months Ended
Dec. 31, 2012
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 exclusively focused on continuing the development of drugs to treat GI disorders and diseases acquired in connection with the Exchange Transaction.

 

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.

 

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 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 reclassified 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, Synergy 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, Synergy 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. Synergy was listed on NASDAQ on December 1, 2011. This listing removed the condition which required these warrants to be treated as derivative liabilities.

 

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 due to price protection features and marked to market on a quarterly basis. Synergy was listed on NASDAQ on December 1, 2011. This listing removed the condition which required these warrants to be treated as derivative liabilities

 

The October warrants relating to the 2011 fundraising in the amount of $593,296 were reclassed from liabilities to additional paid in capital upon listing of the NASDAQ.

 

On November 14, 2011, Synergy 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, Synergy 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.

 

On January 29, 2012 Synergy issued 26,272 unregistered shares of common stock to its corporate counsel for professional services rendered. The shares had a fair value on the date of issuance of $3.53 per share and $92,663 was recorded as legal expense during the year ended December 31, 2012.

 

On February 14, 2012, Synergy 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 was 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 on February 16, 2012.

 

On May 9, 2012, Synergy closed an underwritten public offering of 10,000,000 shares of common stock at an offering price of $4.50 per share. The gross proceeds from this offering were $45 million, before deducting underwriting discounts and commissions and other estimated offering expenses of $2,952,930. Synergy also granted the underwriters a 45-day option to purchase up to an additional 1,500,000 shares of common stock at an offering price of $4.50 per share to cover over-allotments, if any.  On June 6, 2012 the underwriters exercised the over-allotment option resulting in additional gross proceeds of $6,750,000, before deducting underwriting discounts, commissions and other offering expenses of $405,000, bringing total gross proceeds from the offering to $51,750,000.

 

On June 21, 2012, Synergy entered into a controlled equity sales agreement with a placement agent (“Agent”) and agreed that Synergy may issue and sell through the Agent, up to $30,000,000 of common stock of the Company. From October 8, 2012 through December 31, 2012, Synergy sold 815,654 shares of common stock with gross proceeds of $4,111,802, at an average selling price of $5.04 per share. Selling agent fees totaled $123,385 on these sales. Synergy incurred $10,000 to attorneys’ fee in connection with this transaction.

 

On January 15, 2013, the number of authorized shares of common stock increased from 100,000,000 to 200,000,000.

 

Synergy - Callisto Merger

 

On July 20, 2012, Synergy entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Callisto.  Pursuant to the Merger Agreement, following the satisfaction or waiver of each of the applicable conditions set forth in the Merger Agreement, we and Callisto will merge (the “Merger”), whereupon Callisto’s separate corporate existence will cease and we will continue as the surviving corporation of the Merger.  Callisto was our largest shareholder and a development stage biopharmaceutical company.

 

On October 15, 2012, Synergy entered into Amendment No. 1 to the above Agreement and Plan of Merger, dated July 20, 2012 with Callisto.  Pursuant to the Amendment, the parties agreed to, among other things, (i) increase the exchange ratio from .17 to .1799 and (ii) change the lock-up provision such that each share of our common stock received in connection with the Merger shall be subject to a lock-up beginning on the effective date of the Merger and ending on the earlier of (i) twenty-four (24) months after such date, (ii) a Change in Control (as defined in the Merger Agreement), or (iii) our written consent, at our sole discretion, provided our consent shall apply to all shares of our common stock issued pursuant to the Merger.

 

On July 23, 2012, Synergy paid $207,905 and on October 16, 2012, Synergy paid $74,945, to an investment bank in regards to a fairness opinion, from a financial point of view, of the Synergy shares to be issued to Callisto shareholders, in connection with the Merger with Callisto.  These costs were reflected in Synergy’s statement of changes in stockholder’s equity/ (deficit) as costs of capital during the twelve months ended December 31, 2012.

 

The consummation of the Merger was subject to various customary closing conditions, including but not limited to, (i) approval by Callisto’s and our stockholders, (ii) the Registration Statement on Form S-4 shall have been declared effective by the SEC and (iii) the shares of our common stock to be issued in the Merger shall have been approved for listing on The NASDAQ Capital Market. As of January 15, 2013, all of these conditions were met.

 

On January 17, 2013, we completed our acquisition of Callisto Pharmaceuticals, pursuant to the Merger Agreement.  As a result of the Merger, each outstanding share of Callisto common stock was converted into the right to receive 0.1799 of one share of our common stock and the 22,295,000 shares of our common stock held by Callisto were canceled. In addition, each stock option exercisable for shares of Callisto common stock that was outstanding on January 17, 2013 was assumed by us and converted into a stock option to purchase the number of shares of our common stock that the holder would have received if such holder had exercised such stock option for shares of Callisto common stock prior to the Merger and exchanged such shares for shares of the Company’s common stock in accordance with the Exchange Ratio. In addition, each Callisto stock option exercisable for shares of our common stock outstanding on January 17, 2013 was assumed by us and each outstanding warrant or obligation to issue a warrant to purchase shares of Callisto common stock, whether or not vested, was cancelled. Upon consummation of the Merger the related party balance due from Callisto, $3,305,636 as of December 31, 2012, was eliminated.  In connection with the consummation of the Merger, we issued a total of approximately 28,605,354 shares of its common stock to former Callisto stockholders in exchange for their shares of Callisto common stock.

 

As Callisto does not meet the input, process and output definition of a business under ASC 805, the merger will not be accounted for as a business combination. The merger is expected to be accounted for as a recapitalization of us, effected through exchange of Callisto shares for our shares, and the cancellation of our shares held by Callisto. The excess of our shares issued to Callisto shareholders over our shares held by Callisto is the result of a discount associated with the restricted nature of our shares to be received by Callisto shareholders. Therefore, considering this discount, the share exchange has been determined to be equal from a fair value stand point. Upon the effective date of the Merger, we will account for the merger by assuming Callisto’s net liabilities, of approximately $1.7 million. Our financial statements will not be restated retroactively to reflect the historical financial position or results of operations of Callisto.

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Accounting for Shared-Based Payments
12 Months Ended
Dec. 31, 2012
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.

 

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. On January 17, 2013, Synergy amended its 2008 Equity Compensation Incentive Plan and increased the number of shares of its common stock reserved for issuance under the Plan from 7,500,000 to 15,000,000.

 

Stock-based compensation expense related to Synergy options and restricted stock units have been recognized in operating results as follows:

 

 

 

Years Ended December 31,

 

November 15, 2005
(inception) to

 

 

 

2012

 

2011

 

2010

 

December 31, 2012

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees—included in research and development

 

$

975

 

$

107

 

$

188

 

$

1,602

 

Employees—included in general and administrative

 

635

 

93

 

210

 

1,409

 

 

 

 

 

 

 

 

 

 

 

Subtotal employee stock based compensation

 

1,610

 

200

 

398

 

3,011

 

Non-employees—included in research and development

 

128

 

73

 

52

 

296

 

Non-employees—included in general and administrative

 

777

 

549

 

262

 

2,177

 

 

 

 

 

 

 

 

 

 

 

Subtotal non-employee stock based compensation

 

905

 

622

 

314

 

2,473

 

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense

 

$

2,515

 

$

822

 

$

712

 

$

5,484

 

 

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, 2012.

 

 

 

Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Risk-free interest rate

 

0.85%-1.5%

 

0.88%-1.25%

 

2.31%-2.71%

 

Dividend yield

 

 

 

 

Expected volatility

 

60%

 

70%

 

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 and management’s estimate.

 

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 its historical experience.

 

The weighted-average fair value per share of all options granted for the years ended December 31, 2012, 2011 and 2010 estimated as of the grant date using the Black-Scholes option valuation model was $2.38, $2.09 and $6.77 per share, respectively.

 

The unrecognized compensation cost related to non-vested employee stock options outstanding at December 31, 2012  was approximately $ 9,201,000. The December 31, 2012 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.

 

On January 17, 2013, Synergy amended its 2008 Equity Compensation Incentive Plan and increased the number of shares of its common stock reserved for issuance under the Plan from 7,500,000 to 15,000,000. As of December 31, 2012 there were no stock options outstanding under the Plan and no 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(1)

 

Exercise Price
Per Share

 

Weighted Average
Exercise Price
Per Share

 

Intrinsic
Value

(in thousands)

 

Balance outstanding, January 1, 2010

 

2,107,008

 

$

0.50-1.90

 

$

0.61

 

$

22,320

 

Granted (2)

 

2,232,500

 

$

1.40

 

$

1.40

 

 

 

Exercised

 

 

 

 

 

 

Forfeited

 

(37,500

)

$

1.40

 

$

1.40

 

 

 

Balance outstanding, January 1, 2011

 

4,302,008

 

$

0.50-1.90

 

$

1.04

 

$

25,763

 

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

 

Granted

 

3,875,229

 

$

3.40-5.20

 

$

4.29

 

 

 

Exercised

 

 

 

 

 

 

Forfeited

 

(105,000

)

$

3.40-4.38

 

$

4.10

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding, December 31, 2012

 

9,734,268

 

$

0.50-5.20

 

$

2.75

 

$

24,482

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2012

 

2,726,302

 

$

0.50-5.20

 

$

1.42

 

$

10,464

 

 

 

(1)         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.

 

(2)         Contingent vesting upon change of control. The Fair Value at the date of grant was approximately $30,244,000 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.

 

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.

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Income Taxes
12 Months Ended
Dec. 31, 2012
Income Taxes
Income Taxes

5. Income Taxes

 

At December 31, 2012, Synergy-DE has net operating loss carry forwards (“NOLs”) aggregating approximately $94 million, which, if not used, expire beginning in 2013 through 2032. 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, 2012. 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, 2012. Synergy files U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2009 through 2012 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, , 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.

 

Synergy periodically files for and receives certain federal, state and local research and development tax credits. The following are reported as other income in the Company’s statement of operations for the years indicated: ($ in thousands)

 

Year

 

Federal
Qualifying Therapeutic
Discovery Project

 

New York State
QETC Credit

 

New York City
 Biotechnology Tax Credit

 

Total

 

2010

 

$

244

 

 

$

250

 

$

494

 

2011

 

 

246

 

116

 

362

 

2012

 

 

256

 

250

 

506

 

Total

 

$

244

 

$

502

 

$

616

 

$

1,362

 

 

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Commitments and Contingencies
12 Months Ended
Dec. 31, 2012
Commitments and Contingencies
Commitments and Contingencies

6. Commitments and Contingencies

 

Employment and Consulting Agreements

 

Gary S. Jacob, Ph.D.

 

On December 28, 2012, Dr. Gary Jacob, Chief Executive Officer and President entered into a new employment agreement with Synergy. This agreement is substantially similar to the previous Synergy employment agreement that was entered into on May 2, 2011, except, among other things, the base salary for Dr. Jacob is $425,000 and the term of this agreement begins on January 1, 2013 and ends on December 31, 2016.

 

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 Synergy 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.

 

Gabriele M. Cerrone

 

On December 28, 2012, Gabriele Cerrone, our Chairman, entered into a new consulting agreement with Synergy. This agreement is substantially similar to the previous consulting agreement that was entered on May 2, 2011, except, among other things, the base consulting fee for Mr. Cerrone is $425,000 and the term of this agreement begins on January 1, 2013 and ends on December 31, 2016.

 

Mr. Cerrone is eligible to receive a cash bonus of up to 50% of his base consulting fee 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, Mr. Cerrone 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 agreed with Synergy 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 Synergy to defer payment of his bonus Synergy 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 Synergy 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 consulting fee for the then remaining term of the agreement or twelve times the average monthly base consulting fee 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 consulting fee 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 consulting fee earned but not yet paid and (v) payment of the cost of medical insurance for a period of twelve months following termination.

 

Bernard F. Denoyer

 

On January 20, 2011, Bernard F. Denoyer entered into an executive employment agreement with Synergy 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, 2012 and is automatically renewed for successive one year periods at the end of each term. Mr. Denoyer’s base salary is currently $200,850 as of December 31, 2012 and $215,000 effective January 1, 2013.  He is eligible to receive a cash bonus of up to 25% 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 Synergy 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.

 

Kunwar Shailubhai

 

On June 25, 2012, Kunwar Shailubhai entered into an amended and restated employment agreement with us, which amended his previous agreement dated April 6, 2004. In his new agreement, Mr. Shailubhai agreed to serve as Chief Scientific Officer and Executive Vice President. The term of the agreement continues until June 25, 2014 and is automatically renewed for successive one year periods at the end of each term. Mr. Shailubhai’s base salary is currently $250,000 as of December 31, 2012 and $270,000 effective January 1, 2013. He is eligible to receive a cash bonus of up to 30% 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 Synergy other than for cause or as a result of Mr. Shailubhai’s death or permanent disability or if Mr. Shailubhai terminates his employment for good reason which includes a change of control, Mr. Shailubhai 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.

 

Lease agreements

 

Synergy’s corporate headquarters located at 420 Lexington Avenue, New York, was subject to a lease which has a monthly rate of $16,000 and expired on March 31, 2012.  This facility was provided to Synergy under a space sharing arrangement with Callisto.  On March 30, 2012 Synergy assumed the Callisto lease and extended this lease through March 31, 2014, at a monthly rate of approximately $19,000. On August 28, 2012 Synergy entered into a Lease Modification, Substitution of Space and Extension Agreement with SL Green Graybar Associates.  Under the new lease we will be moving our corporate headquarters and clinical development offices to a larger office space on the 20th floor of 420 Lexington Avenue. The new lease has a monthly rate of approximately $35,000 and expires March 31, 2019.  Synergy expects to move in first half of 2013.

 

Synergy also occupies a small laboratory and several offices in the Bucks County Biotechnology Center in Doylestown, Pennsylvania under a lease which expired August 31, 2011. On February 1, 2012 Synergy extended this lease through December 31, 2013, at a monthly rate of $2,800.

 

Clinical Research Organization arrangements  

 

The Company may be obligated in future periods to make additional payments, which would become due and payable only upon the achievement of certain research and development, regulatory, and approval milestones. The specific timing of such milestones cannot be predicted and depends upon future discretionary clinical developments as well as regulatory agency actions which cannot be predicted with certainty (including action which may never occur). These additional contingent payments aggregate to approximately $19 million.

 

The following table is a summary of contractual obligations for the periods indicated that existed as of December 31, 2012.

 

 

 

Total

 

Less than
1 Year

 

1-2 Years

 

3-5
Years

 

More
than
5 Years

 

Operating leases

 

$

2,752

 

$

532

 

$

805

 

$

1,301

 

$

114

 

Purchase obligations—principally employment and consulting services(1)

 

6,060

 

1,971

 

2,792

 

1,297

 

 

Purchase Obligations—Major Vendors(2)

 

19,380

 

19,380

 

 

 

 

Total obligations

 

$

28,192

 

$

21,883

 

$

3,597

 

$

2,598

 

$

114

 

 

(1) Represents salary, bonus, and benefits for remaining term of employment agreements with Gary S. Jacob, CEO, Bernard F Denoyer, Senior Vice President, Finance, Kunwar Shailubhai, Chief Scientific Officer and consulting fees, bonus and benefits for remaining term of consulting agreement with Gabriele M. Cerrone, Chairman.

 

(2) Represents amounts that will become due upon future delivery of supplies, drug substance and test results from various suppliers, under open purchase orders as of December 31, 2012.

 

Litigation

 

On August 9, 2012, a purported stockholder class action complaint was filed in the Supreme Court for the State of New York, captioned Shona Investments v. Callisto Pharmaceuticals, Inc., et al., Civil Action No. 652783/2012. The complaint names as defendants, Callisto, each member of the Board of Callisto (the “Individual Defendants “) and Synergy. The complaint generally alleges that the Individual Defendants breached their fiduciary duties and that Synergy aided and abetted the purported breaches of such fiduciary duties. The relief sought includes, among other things, an injunction prohibiting consummation of the proposed transaction, rescission (to the extent the proposed transaction has already been consummated) and the payment of plaintiffs’ attorneys’ fees and costs. Callisto and Synergy believe the plaintiffs’ allegations lack merit and will contest them.

 

On August 31, 2012, a purported stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Gary Wagner v. Gary S. Jacob, Inc., et al., Case No. 7820-VCP. The complaint names as defendants, Callisto, the Individual Defendants and Synergy. The complaint generally alleges that the Individual Defendants breached their fiduciary duties and that Synergy aided and abetted the purported breaches of such fiduciary duties. The relief sought includes, among other things, an injunction prohibiting consummation of the proposed transaction, rescission (to the extent the proposed transaction has already been consummated) and the payment of plaintiffs’ attorneys’ fees and costs. Callisto and Synergy believe the plaintiffs’ allegations lack merit and will contest them.

 

On or about November 2, 2012, counsel for the Delaware Plaintiff reached an agreement with Counsel for Plaintiff in the New York action by which the Plaintiffs from the two cases agreed to conduct preliminary injunctive proceedings and discovery related thereto in the New York action only, and during the pendency of which the plaintiff in the Delaware action would effectively stay any prosecution of its case. The parties have discussed the scope of preliminary discovery and document production.

 

There can be no assurance as to the outcome of these proceedings.

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Research and Development Expense
12 Months Ended
Dec. 31, 2012
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 and clinical trial insurance.

 

In accordance with FASB ASC Topic 730-10-55, Research and Development, Synergy recorded prepaid research and development costs of $926,380 as of December 31, 2012, as compared to $577,745 as of December 31, 2011, for nonrefundable pre-payments for production of drug substance, analytical testing services for its drug candidates, and clinical trials. In accordance with this guidance, Synergy expenses deferred research and development costs when drug compound is delivered and services are performed.

 

In addition, on August 17, 2012, Synergy signed an Asset Purchase Agreement with Bristol-Myers Squibb Company (“BMS”) and acquired certain assets related to FV-100, an orally available nucleoside analog, currently being developed for the treatment of shingles, a severe, painful skin rash caused by reactivation of the varicella zoster virus — the virus that causes chickenpox. The terms of the Agreement provide for an initial base payment of $1 million, subsequent milestone payments covering (i) marketing (FDA) approval and (ii) on achieving the milestone of aggregate net sales equal to or greater than $125 million, as well as a single digit royalty based on net sales.

 

The FV-100 assets acquired from BMS include (i) an exclusive license to the patent portfolio and (ii) all historical research and clinical study protocols, data and results.  Both of these intangible assets enable Synergy to continue the clinical development in future trials and ultimately have the freedom to operate (“FTO”) should FDA approval be achieved. Synergy believes the intangible assets purchased from BMS are limited exclusively to the future development of FV-100 for the treatment of shingles.  ASC Topic 350-30-25-2(c) requires that the costs of intangibles that are purchased from others for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred. Accordingly, Synergy charged the $1,000,000 base payment to purchased in-process research and development expense during the twelve months ended December 31, 2012.

 

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Derivative Financial Instruments
12 Months Ended
Dec. 31, 2012
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, 2012 and prior years 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, 2012 and December 31, 2011 were:

 

 

 

Year ended
December 31, 2012

 

Year ended
December 31, 2011

 

Fair value of Synergy common stock

 

$4.05-$5.26

 

$3.50 - $9.04

 

Expected warrant term

 

5-7 years

 

4-7 years

 

Risk-free interest rate

 

0.23%-1.33%

 

0.36% - 2.22%

 

Expected volatility

 

60%

 

70%-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, 2012 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, 2012 was as follows:

 

 

 

Year ended
December 31,

 

 

 

2012

 

2011

 

Estimated fair value of Synergy common stock

 

$3.28-$4.53

 

$2.71-$5.02

(*)

Expected warrant term

 

4.13-4.63 years

 

5-7 years

 

Risk-free interest rate

 

0.62%-1.04%

 

0.90%-2.64%

 

Expected volatility

 

60%

 

70%-90%

 

Dividend yield

 

0%

 

0%

 

 

 

(*) Restated for 1:2 reverse stock split effective November 30, 2011.

 

In the Binomial model, the assumption for estimated fair value of the 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, adjusted for small discounts experienced in recent registered direct offerings. 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

 

Derivative
Instrument
Liability

(in thousands)

 

12/31/2010

 

Balance of derivative financial instruments liability

 

728,469

 

$

3,487

 

3/31/2011

 

Fair value of new warrants issued during the quarter

 

210,000

 

1,313

 

3/31/2011

 

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

 

 

339

 

3/31/2011

 

Balance of derivative financial instruments liability

 

938,469

 

5,139

 

6/30/2011

 

Fair value of new warrants issued during the quarter

 

611,207

 

2,608

 

6/30/2011

 

Exercise of warrants during the quarter

 

(80,000

)

(486

)

6/30/2011

 

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

 

 

698

 

6/30/2011

 

Balance of derivative financial instruments liability

 

1,469,676

 

7,959

 

9/30/2011

 

Fair value of new warrants issued during the quarter

 

40,458

 

285

 

9/30/2011

 

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

 

 

(4,383

)

9/30/2011

 

Balance of derivative financial instruments liability

 

1,510,134

 

3,861

 

12/31/2011

 

Fair value of new warrants issued during the quarter

 

1,810,294

 

3,082

 

12/31/2011

 

Reclass of derivative liability to equity during the quarter

 

(1,055,268

)

(1,707

)

12/31/2011

 

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

 

 

(1,911

)

12/31/2011

 

Balance of derivative financial instruments liability

 

2,265,160

 

3,325

 

 

 

 

 

 

 

 

 

3/31/2012

 

Fair value of new warrants issued during the quarter

 

 

 

3/31/2012

 

Change in fair value of warrants during the quarter

 

 

(8

)

 

 

 

 

 

 

 

 

3/31/2012

 

Balance of derivative financial instruments liability

 

2,265,160

 

3,317

 

6/30/2012

 

Warrants classified to derivative liability during quarter

 

112,500

 

169

 

6/30/2012

 

Change in fair value of warrants during the quarter

 

 

1,317

 

6/30/2012

 

Balance of derivative financial instruments liability

 

2,377,660

 

4,803

 

9/30/2012

 

Fair value of new warrants issued during the quarter

 

 

 

9/30/2012

 

Change in fair value of warrants during the quarter

 

 

(140

)

 

 

 

 

 

 

 

 

9/30/2012

 

Balance of derivative financial instruments liability

 

2,377,660

 

4,663

 

12/31/2012

 

Fair value of new warrants issued during the quarter

 

 

 

12/31/2012

 

Change in fair value of warrants during the quarter

 

 

764

 

12/31/2012

 

Reclass of derivative liability to equity during the quarter

 

(112,500

)

(169

)

12/31/2012

 

Balance of derivative financial instruments liability

 

2,265,160

 

$

5,258

 

 

 

(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, 2012
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, 2011 and December 31, 2012:

 

($ in thousands)

 

Description

 

Quoted
Prices
in Active
Markets for
Identical
Assets
and
Liabilities
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Balance as of
December 31,
2011

 

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,
2012

 

Derivative liabilities related to Warrants

 

$

 

$

 

$

3,325

 

$

3,325

 

$

 

$

 

$

5,258

 

$

5,258

 

 

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, 2012 and December 31, 2011:

 

($ in thousands)

 

Description

 

Balance at
December 31,
2010

 

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

 

Fair Value of
warrants upon
issuance

 

(Gain) or loss
recognized in
earning from
Change in Fair
Value

 

Balance as of
December 31,
2011

 

Fair Value of
warrants upon
issuance

 

(Gain) or loss
recognized in
earning from
Change in
Fair Value

 

Balance as of
December 31,
2012

 

Derivative liabilities related to Warrants

 

$

3,487

 

$

(2,193

)

$

7,288

 

$

(5,257

)

$

3,325

 

$

 

$

1,933

 

$

5,258

 

 

The 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, 2012
Property and Equipment
Property and Equipment

10. Property and Equipment

 

Property and equipment consists of leasehold improvements, which are recorded at cost. The Company will depreciate the costs when the property is placed into service, using the straight-line method over the remaining term of the underlying lease.

 

Property and equipment also includes laboratory, testing and computer equipment, and furniture and fixtures, which consist of office furniture. Both are 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, 2012, 2011, 2010 and from November 15, 2005 (inception) to December 31, 2012 were approximately $2,000, $2,000, $2,000 and $10,000, respectively.

 

($ in thousands)

 

 

 

December 31, 2012

 

December 31, 2011

 

Furniture and fixtures

 

$

39

 

$

39

 

Machinery and equipment

 

12

 

12

 

Leasehold improvement

 

26

 

 

Less accumulated depreciation

 

(47

)

(45

)

 

 

 

 

 

 

Property and equipment, net

 

$

30

 

$

6

 

 

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Related Parties
12 Months Ended
Dec. 31, 2012
Related Parties
Related Parties

11. Related Parties

 

As of December 31, 2012, Synergy’s principal shareholder, Callisto, owns 34% of its outstanding shares.

 

As of December 31, 2012, Synergy had advanced Callisto $3,305,636, 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 approximately $148,000 and $84,000 during the twelve months ended December 31, 2012 and 2011, respectively.

 

As of December 31, 2012 and December 31, 2011, the balances due from Callisto Pharmaceuticals, Inc. are comprised of the following amounts:

 

($ in thousands)

 

 

 

December 31, 2012

 

December 31, 2011

 

Rent, utilities, and property taxes

 

$

123

 

$

90

 

Insurance and other facilities related overhead

 

344

 

250

 

Independent accountants and legal

 

935

 

510

 

Financial printer and transfer agent fees

 

427

 

217

 

Salaries and consulting fees

 

344

 

289

 

Income Taxes

 

325

 

 

Merger fairness opinion

 

270

 

 

Working capital advances, net of repayments

 

538

 

186

 

Total due from Callisto

 

$

3,306

 

$

1,542

 

 

Upon consummation of the Merger the related party balances due from Callisto was eliminated and charged to Synergy’s equity (See Note 3. above).

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Quarterly Consolidated Financial Data (Unaudited)
12 Months Ended
Dec. 31, 2012
Quarterly Consolidated Financial Data (Unaudited)
Quarterly Consolidated Financial Data (Unaudited)

12. Quarterly Consolidated Financial Data (Unaudited)

 

 

 

Quarter Ended

 

 

 

March 31,
2012

 

June 30,
2012

 

September 30,
2012

 

December 31,
2012

 

 

 

(dollars in thousands, except share and per share data)

 

Revenues

 

$

 

$

 

$

 

$

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Research and Development

 

5,338

 

7,626

 

7,245

 

9,085

 

Purchased in-process research and development

 

 

 

1,000

 

 

General and administrative

 

1,732

 

1,919

 

1,843

 

2,447

 

Loss from operations

 

(7,070

)

(9,545

)

(10,088

)

(11,532

)

 

 

 

 

 

 

 

 

 

 

Other income

 

 

256

 

 

250

 

Interest and investment income

 

39

 

48

 

63

 

68

 

Change in fair value of derivative instruments—warrants

 

8

 

(1,317

)

140

 

(764

)

Total Other Income/ (Loss)

 

47

 

(1,013

)

203

 

(446

)

Net Loss

 

$

(7,023

)

$

(10,558

)

$

(9,885

)

$

(11,978

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic and diluted

 

54,298,079

 

60,416,068

 

65,806,178

 

66,194,306

 

Net loss per Common Share, basic and diluted(a):

 

$

(0.13

)

$

(0.17

)

$

(0.15

)

$

(0.18

)

 

 

(a)   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,
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

 

Total Other Income/(Loss)

 

(327

)

(678

)

4,403

 

2,299

 

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

 

Net loss per common share—basic and diluted(b):

 

$

(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.

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Subsequent Events
12 Months Ended
Dec. 31, 2012
Subsequent Events
Subsequent Events

13. Subsequent Events

 

On January 17, 2013, Synergy completed its acquisition of Callisto, pursuant to the Merger Agreement, as amended (see Note 3).  As a result of the Merger, each outstanding share of Callisto common stock was converted into the right to receive 0.1799 of one share of Synergy common stock and the 22,295,000 shares of common stock held by Callisto were canceled. In addition, each stock option exercisable for shares of Callisto common stock that was outstanding on January 17, 2013 was assumed by Synergy and converted into a stock option to purchase the number of shares of Synergy’s common stock that the holder would have received if such holder had exercised such stock option for shares of Callisto common stock prior to the Merger and exchanged such shares for shares of the Company’s common stock in accordance with the Exchange Ratio. In addition, each Callisto stock option exercisable for shares of Synergy’s common stock outstanding on January 17, 2013 was assumed by Synergy and each outstanding warrant or obligation to issue a warrant to purchase shares of Callisto common stock, whether or not vested, was cancelled.

 

In connection with the consummation of the Merger, Synergy issued a total of approximately 28,605,354 shares of its common stock to former Callisto stockholders in exchange for their shares of Callisto common stock. Each share of Synergy’s common stock received in connection with the Merger will be subject to a lock-up beginning on January 17, 2013 and ending on the earlier of (i) twenty-four (24) months after such date, (ii) a Change in Control (as defined in the merger agreement), or (iii) written consent of Synergy, at Synergy’s sole discretion, provided Synergy’s consent shall apply to all shares issued pursuant to the Merger.

 

As Callisto does not meet the definition of a business under ASC 805, the merger will not be accounted for as a business combination. The merger is expected to be accounted for as a recapitalization of Synergy, affected through exchange of Callisto shares for Synergy shares, and the cancellation of Synergy shares held by Callisto. The excess of Synergy shares issued to Callisto shareholders over the Synergy shares held by Callisto is the result of a discount associated with the restricted nature of the Synergy shares to be received by Callisto shareholders. Therefore, considering this discount, the share exchange has been determined to be equal from a fair value stand point. Upon the effective date of the Merger, Synergy will account for the merger by assuming Callisto’s net liabilities, of approximately $1.7 million. Synergy’s financial statements will not be restated retroactively to reflect the historical financial position or results of operations of Callisto.

 

From January 1, 2013 through March 18, 2013, Synergy sold 758,093 shares of common stock with gross proceeds of $4,670,861, at an average selling price of $6.16 per share, pursuant to the June 2012 controlled equity sales agreement with a placement agent (footnote 3). Selling expenses totaled $140,126.

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Basis of Presentation and Going Concern (Policies)
12 Months Ended
Dec. 31, 2012
Basis of Presentation and Going Concern
Use of Estimates

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, Cash Equivalents and Marketable Securities

Cash, Cash Equivalents and Marketable Securities

 

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. As of December 31, 2012, the amount of cash and cash equivalents was approximately $12 million and consists of checking accounts, short-term money market funds held at U.S. commercial banks. As of December 31, 2011, the amount of cash and cash equivalent was approximately $13 million and consists of checking accounts and short-term money market funds with U.S. commercial banks. At any point in time, the Company’s balance of cash and cash equivalent may exceed federally insured limits.

 

The Company’s marketable securities as of December 31, 2012 consist of $20 million in U.S. Treasury securities and have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the available-for-sale designations as of each balance sheet date. Cash equivalents and marketable securities are carried at amounts that approximate fair value due to their short-term maturities.  As of December 31, 2012, gross unrealized losses were not material. The Company recognized no net realized gains or losses for the year ended December 31, 2012. The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. Fair values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. During the year ended December 31, 2012, the Company did not recognize any impairment charges. As of December 31, 2012, the Company did not consider any of its investments to be other-than-temporarily impaired. There was no investment in marketable securities for the year ended December 31, 2011.

Derivative Instruments

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

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, marketable securities, 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

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. Leasehold improvements are depreciated over the remaining useful life of the lease. 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

 

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

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

 

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, and clinical trial insurance.

 

In accordance with FASB ASC Topic 730-10-55, Research and Development, Synergy recorded prepaid research and development costs of $926,380 as of December 31, 2012, as compared to $577,745 as of December 31, 2011, for nonrefundable pre-payments for production of drug substance, analytical testing services for its drug candidates, and clinical trials. In accordance with this guidance, Synergy expenses deferred research and development costs when drug compound is delivered and services are performed.

Loss Per Share

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, 2012, 2011 and 2010 the effect of  9,734,268, 5,964,039, and 4,302,008, respectively, outstanding stock options and 5,647,203, 5,597,203, and 728,469 respectively, outstanding warrants were excluded from the calculation of diluted loss per share because the effect was antidilutive.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

 

There are no recent accounting pronouncements affecting the Company.

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Acquisition and Stockholders' Equity (Deficit) (Tables)
12 Months Ended
Dec. 31, 2012
Acquisition and Stockholders' Equity (Deficit)
Schedule of net liabilities assumed in excess of Synergy-DE assets acquired in connection with the Exchange Transaction

 

 

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

)

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Accounting for Shared-Based Payments (Tables)
12 Months Ended
Dec. 31, 2012
Accounting for Shared-Based Payments
Schedule of stock-based compensation expense

 

 

 

 

Years Ended December 31,

 

November 15, 2005
(inception) to

 

 

 

2012

 

2011

 

2010

 

December 31, 2012

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees—included in research and development

 

$

975

 

$

107

 

$

188

 

$

1,602

 

Employees—included in general and administrative

 

635

 

93

 

210

 

1,409

 

 

 

 

 

 

 

 

 

 

 

Subtotal employee stock based compensation

 

1,610

 

200

 

398

 

3,011

 

Non-employees—included in research and development

 

128

 

73

 

52

 

296

 

Non-employees—included in general and administrative

 

777

 

549

 

262

 

2,177

 

 

 

 

 

 

 

 

 

 

 

Subtotal non-employee stock based compensation

 

905

 

622

 

314

 

2,473

 

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense

 

$

2,515

 

$

822

 

$

712

 

$

5,484

 

Schedule of weighted-average assumptions used to estimate fair value of stock option awards using the Black-Scholes option valuation model

 

 

 

 

Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Risk-free interest rate

 

0.85%-1.5%

 

0.88%-1.25%

 

2.31%-2.71%

 

Dividend yield

 

 

 

 

Expected volatility

 

60%

 

70%

 

90%

 

Expected term (in years)

 

6.0 yrs.

 

6.0 yrs.

 

6.0 yrs.

 

Summary of stock option activity and of changes in stock options outstanding under the Plan

 

 

 

 

Number of
Options(1)

 

Exercise Price
Per Share

 

Weighted Average
Exercise Price
Per Share

 

Intrinsic
Value

(in thousands)

 

Balance outstanding, January 1, 2010

 

2,107,008

 

$

0.50-1.90

 

$

0.61

 

$

22,320

 

Granted (2)

 

2,232,500

 

$

1.40

 

$

1.40

 

 

 

Exercised

 

 

 

 

 

 

Forfeited

 

(37,500

)

$

1.40

 

$

1.40

 

 

 

Balance outstanding, January 1, 2011

 

4,302,008

 

$

0.50-1.90

 

$

1.04

 

$

25,763

 

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

 

Granted

 

3,875,229

 

$

3.40-5.20

 

$

4.29

 

 

 

Exercised

 

 

 

 

 

 

Forfeited

 

(105,000

)

$

3.40-4.38

 

$

4.10

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding, December 31, 2012

 

9,734,268

 

$

0.50-5.20

 

$

2.75

 

$

24,482

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2012

 

2,726,302

 

$

0.50-5.20

 

$

1.42

 

$

10,464

 

 

 

(1)         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.

 

(2)         Contingent vesting upon change of control. The Fair Value at the date of grant was approximately $30,244,000 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.

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Income Taxes (Tables)
12 Months Ended
Dec. 31, 2012
Income Taxes
Schedule of research and development tax credits reported as other income in statement of operations

The following are reported as other income in the Company’s statement of operations for the years indicated: ($ in thousands)

 

Year

 

Federal
Qualifying Therapeutic
Discovery Project

 

New York State
QETC Credit

 

New York City
 Biotechnology Tax Credit

 

Total

 

2010

 

$

244

 

 

$

250

 

$

494

 

2011

 

 

246

 

116

 

362

 

2012

 

 

256

 

250

 

506

 

Total

 

$

244

 

$

502

 

$

616

 

$

1,362

 

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Commitments and Contingencies (Tables)
12 Months Ended
Dec. 31, 2012
Commitments and Contingencies
Summary of contractual obligations

 

 

 

 

Total

 

Less than
1 Year

 

1-2 Years

 

3-5
Years

 

More
than
5 Years

 

Operating leases

 

$

2,752

 

$

532

 

$

805

 

$

1,301

 

$

114

 

Purchase obligations—principally employment and consulting services(1)

 

6,060

 

1,971

 

2,792

 

1,297

 

 

Purchase Obligations—Major Vendors(2)

 

19,380

 

19,380

 

 

 

 

Total obligations

 

$

28,192

 

$

21,883

 

$

3,597

 

$

2,598

 

$

114

 

 

(1) Represents salary, bonus, and benefits for remaining term of employment agreements with Gary S. Jacob, CEO, Bernard F Denoyer, Senior Vice President, Finance, Kunwar Shailubhai, Chief Scientific Officer and consulting fees, bonus and benefits for remaining term of consulting agreement with Gabriele M. Cerrone, Chairman.

 

(2) Represents amounts that will become due upon future delivery of supplies, drug substance and test results from various suppliers, under open purchase orders as of December 31, 2012.

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Derivative Financial Instruments (Tables)
12 Months Ended
Dec. 31, 2012
Derivative Financial Instruments
Schedule of changes in derivative financial instruments liability balance

 

 

Date

 

Description

 

Warrants

 

Derivative
Instrument
Liability

(in thousands)

 

12/31/2010

 

Balance of derivative financial instruments liability

 

728,469

 

$

3,487

 

3/31/2011

 

Fair value of new warrants issued during the quarter

 

210,000

 

1,313

 

3/31/2011

 

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

 

 

339

 

3/31/2011

 

Balance of derivative financial instruments liability

 

938,469

 

5,139

 

6/30/2011

 

Fair value of new warrants issued during the quarter

 

611,207

 

2,608

 

6/30/2011

 

Exercise of warrants during the quarter

 

(80,000

)

(486

)

6/30/2011

 

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

 

 

698

 

6/30/2011

 

Balance of derivative financial instruments liability

 

1,469,676

 

7,959

 

9/30/2011

 

Fair value of new warrants issued during the quarter

 

40,458

 

285

 

9/30/2011

 

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

 

 

(4,383

)

9/30/2011

 

Balance of derivative financial instruments liability

 

1,510,134

 

3,861

 

12/31/2011

 

Fair value of new warrants issued during the quarter

 

1,810,294

 

3,082

 

12/31/2011

 

Reclass of derivative liability to equity during the quarter

 

(1,055,268

)

(1,707

)

12/31/2011

 

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

 

 

(1,911

)

12/31/2011

 

Balance of derivative financial instruments liability

 

2,265,160

 

3,325

 

 

 

 

 

 

 

 

 

3/31/2012

 

Fair value of new warrants issued during the quarter

 

 

 

3/31/2012

 

Change in fair value of warrants during the quarter

 

 

(8

)

 

 

 

 

 

 

 

 

3/31/2012

 

Balance of derivative financial instruments liability

 

2,265,160

 

3,317

 

6/30/2012

 

Warrants classified to derivative liability during quarter

 

112,500

 

169

 

6/30/2012

 

Change in fair value of warrants during the quarter

 

 

1,317

 

6/30/2012

 

Balance of derivative financial instruments liability

 

2,377,660

 

4,803

 

9/30/2012

 

Fair value of new warrants issued during the quarter

 

 

 

9/30/2012

 

Change in fair value of warrants during the quarter

 

 

(140

)

 

 

 

 

 

 

 

 

9/30/2012

 

Balance of derivative financial instruments liability

 

2,377,660

 

4,663

 

12/31/2012

 

Fair value of new warrants issued during the quarter

 

 

 

12/31/2012

 

Change in fair value of warrants during the quarter

 

 

764

 

12/31/2012

 

Reclass of derivative liability to equity during the quarter

 

(112,500

)

(169

)

12/31/2012

 

Balance of derivative financial instruments liability

 

2,265,160

 

$

5,258

 

 

 

(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.

Derivative instrument liability | Warrants | Black-Scholes option pricing model
Derivative Financial Instruments
Schedule of range of assumptions used to determine the fair value of the warrants

 

 

 

 

Year ended
December 31, 2012

 

Year ended
December 31, 2011

 

Fair value of Synergy common stock

 

$4.05-$5.26

 

$3.50 - $9.04

 

Expected warrant term

 

5-7 years

 

4-7 years

 

Risk-free interest rate

 

0.23%-1.33%

 

0.36% - 2.22%

 

Expected volatility

 

60%

 

70%-90%

 

Dividend yield

 

0%

 

0%

 

Derivative instrument liability | Warrants | Binomial model
Derivative Financial Instruments
Schedule of range of assumptions used to determine the fair value of the warrants

 

 

 

Year ended
December 31,

 

 

 

2012

 

2011

 

Estimated fair value of Synergy common stock

 

$3.28-$4.53

 

$2.71-$5.02

(*)

Expected warrant term

 

4.13-4.63 years

 

5-7 years

 

Risk-free interest rate

 

0.62%-1.04%

 

0.90%-2.64%

 

Expected volatility

 

60%

 

70%-90%

 

Dividend yield

 

0%

 

0%

 

 

 

(*) Restated for 1:2 reverse stock split effective November 30, 2011.

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Fair Value Measurements (Tables)
12 Months Ended
Dec. 31, 2012
Fair Value Measurements
Schedule of liabilities that are measured and recognized at fair value on a recurring basis

 

 

($ in thousands)

 

Description

 

Quoted
Prices
in Active
Markets for
Identical
Assets
and
Liabilities
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Balance as of
December 31,
2011

 

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,
2012

 

Derivative liabilities related to Warrants

 

$

 

$

 

$

3,325

 

$

3,325

 

$

 

$

 

$

5,258

 

$

5,258

 

Summary of changes in the fair value of Level 3 liabilities

 

 

($ in thousands)

 

Description

 

Balance at
December 31,
2010

 

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

 

Fair Value of
warrants upon
issuance

 

(Gain) or loss
recognized in
earning from
Change in Fair
Value

 

Balance as of
December 31,
2011

 

Fair Value of
warrants upon
issuance

 

(Gain) or loss
recognized in
earning from
Change in
Fair Value

 

Balance as of
December 31,
2012

 

Derivative liabilities related to Warrants

 

$

3,487

 

$

(2,193

)

$

7,288

 

$

(5,257

)

$

3,325

 

$

 

$

1,933

 

$

5,258