Basis of Presentation, Accounting Policies and Going Concern
|9 Months Ended|
Sep. 30, 2018
|Organization, Consolidation and Presentation of Financial Statements [Abstract]|
|Basis of Presentation, Accounting Policies and Going Concern||Basis of Presentation, Accounting Policies and Going Concern
These unaudited condensed consolidated financial statements include Synergy and its wholly-owned subsidiary Synergy Advanced Pharmaceuticals, Inc. These unaudited condensed consolidated financial statements have been prepared following the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States (“U.S. GAAP”) for interim reporting, which permit reduced disclosures for interim reporting. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly Synergy’s interim financial information. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2017 contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2018. All intercompany balances and transactions have been eliminated.
Synergy's consolidated financial statements as of December 31, 2017 and its unaudited condensed consolidated financial statements as of September 30, 2018 have been prepared under the assumption that the Company will continue as a going concern for the next twelve months. The Company has incurred recurring losses from operations and expects to continue to have losses in the future. In addition, the Company’s debt agreement is subject to covenants that could restrict the availability of additional loans and accelerate the repayment of that debt if breached. These factors individually and collectively raise substantial doubt about the Company’s ability to continue as a going concern. Synergy's independent registered public accounting firm has issued a report related to the Company's December 31, 2017 financial statements that includes an explanatory paragraph referring to such conditions and expressing substantial doubt in the Company's ability to continue as a going concern.
Synergy's ability to continue as a going concern is dependent upon its plans to generate significant revenue, attain further operating efficiencies, reduce expenditures, and if deemed necessary obtain additional equity or debt financing, which may not be available on acceptable terms or at all. To the extent that Synergy may need to raise 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 scale back its commercialization efforts; (ii) seek commercial partners for its products on terms that are less favorable than might otherwise be available; (iii) relinquish or otherwise dispose of rights, on unfavorable terms, to technologies, product candidates or products that Synergy would otherwise seek to develop or commercialize itself; or (iv) seek bankruptcy protection to protect stakeholder value in the event other options are not reasonably executable. On October 25, 2018, the Company announced that it is seeking to renegotiate the term loan agreement with CRG Servicing LLC (“CRG”) and has forgone drawing down on any additional amounts pursuant to the term loan agreement. To date the Company has been unable to further amend the agreement with respect to the financial and revenue covenants. The Company is continuing discussions with CRG and has received a temporary waiver on the minimum market cap covenant through November 12, 2018. The Company is currently pursuing alternatives that better align with its business, but
there is no assurance that Synergy can secure CRG’s consent or otherwise achieve a transaction to refinance or otherwise repay CRG on commercially reasonable terms, in which case we could default under the term loan agreement. If CRG does not grant a further waiver beyond November 12, 2018 the Company will likely be in default of the minimum market cap covenant.
Synergy's consolidated financial statements as of December 31, 2017 and its unaudited condensed consolidated financial statements as of and for the period ended September 30, 2018 do not include any adjustments that might result from the unfavorable outcome of this uncertainty.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP and the rules and regulations of the SEC 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.
Certain prior period amounts were reclassified to conform to the current period presentation and additional information is disclosed in the notes, if material.
The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not specifically reviewed. The Company’s receivables primarily relate to amounts due from 3rd party customers for the sale of TRULANCE. The Company believes that credit risks associated with these customers are not significant. To date, the Company has not had any write-offs of bad debt, and the Company did not have an allowance for doubtful accounts as of September 30, 2018. The adoption of the new revenue standard did not change the Company's historical accounting methods for our accounts receivable.
Inventories consist of finished goods, work in process and raw materials and are stated at the lower of cost or net realizable value with cost determined under the first-in, first-out basis. Synergy capitalizes inventories manufactured in preparation for initiating sales of a product candidate when the related product candidate is considered to have a high likelihood of regulatory approval and the related costs are expected to be recoverable through sales of the inventories. In determining whether or not to capitalize such inventories, Synergy evaluates, among other factors, information regarding the product candidate's safety and efficacy, the status of regulatory submissions and communications with regulatory authorities and the outlook for commercial sales. In addition, Synergy evaluates risks associated with manufacturing the product candidate and the remaining shelf life of the inventories.
Costs associated with developmental products prior to satisfying the inventory capitalization criteria are charged to
research and development expense as incurred. There is a risk inherent in these judgments and any changes in these judgments may have a material impact on Synergy's financial results in future periods.
The Company adopted Accounting Standard Codification ("ASC") 606 Revenue From Contracts With Customers using the modified retrospective method as applied to customer contracts that were not completed as of January 1, 2018. As a result, financial information for reporting periods beginning after January 1, 2018 are reported under the new standard, while comparative financial information has not been adjusted and continues to be reported in accordance with the previous standard. There was no cumulative impact to adopting the new standard on the Company's Condensed Consolidated financial statements.
Revenue from sale of TRULANCE is recognized upon transfer of control of promised goods to customers (typically upon delivery, which is also when transfer of title occurs) in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods. The terms of a contract or historical business practice can give rise to variable consideration, including but not limited to: customer loyalty programs, trade discounts, fee for service agreements, sales returns and allowances, commercial and government rebates, and chargebacks. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Our estimates of variable consideration are probability weighted to derive an estimate of expected value and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.
Arrangements with multiple-performance obligations
In February 2018, the Company entered into the Cipher Agreement to out-license the sale of TRULANCE in Canada. In August 2018, the Company entered into the Luoxin Agreement to out-license the sale of TRULANCE in Mainland China, Hong Kong and Macau. These agreements require the Company to deliver (i) intellectual property rights or licenses and (ii) product supply. The underlying terms of the agreements provide for consideration to Synergy in the form of non-refundable up-front license payments, milestone payments, and royalty payments. As of September 30, 2018, the Company had not satisfied any performance obligations under these agreements.
In arrangements involving more than one performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available, and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on their respective relative stand-alone selling price. The estimated selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold by the Company on a stand-alone basis. For future royalties due under the contract the Company will utilize the sales and usage based royalty exception.
The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services. Consideration associated with at-risk substantive performance milestones is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur.
Disaggregation of Revenue
As of September 30, 2018, all revenue recognized by the Company is from TRULANCE product sales in the United States. For the nine months ended September 30, 2018, our three major customers accounted for an aggregate of 95% of our gross revenue.
Financing and payment
The Company's payment terms vary by the type of customer and the product or service offered. Payment is generally required in a term from 30 to 60 days from date of shipment or satisfaction of the performance obligation. In certain cases, the Company may require payment before the satisfaction of the performance obligation.
The Company does not disclose the value of unsatisfied performance obligations for contracts with original expected lengths of one year or less.
Cost of Goods Sold
Cost of goods sold (“COGS”) includes (i) direct cost of manufacturing and packaging drug product, and (ii) technical operations overhead costs which are generally more fixed in nature, including salaries, benefits, consulting, stability testing and other services. Technical operations are responsible for planning, coordinating, and executing the Company’s inventory production plan and ensuring that product quality satisfies FDA requirements. Costs incurred by the technical operations organization are recorded as expense in the period in which they are incurred. Certain direct costs associated with pre-commercial inventory, other than packaging, were expensed prior to receiving FDA approval. (See Inventories in Footnote 2 "Basis of Presentation, Accounting Policies and Going Concern").
The entire disclosure for organization, consolidation and basis of presentation of financial statements disclosure.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef