NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business Overview
Synergy Pharmaceuticals Inc. ("the Company" or "Synergy") is a biopharmaceutical company focused on the development and commercialization of novel gastrointestinal (GI) therapies. The Company pioneered the discovery, research and development efforts around analogs of uroguanylin, a naturally occurring and endogenous human GI peptide, for the treatment of GI diseases and disorders. Synergy discovered, is developing, and controls 100% worldwide rights to its proprietary uroguanylin based GI platform.
Net cash used in operating activities was approximately
$120.8 million
for the
six months ended June 30, 2017
. As of
June 30, 2017
, Synergy had approximately
$82.0 million
of cash and cash equivalents. During the
six months ended June 30, 2017
, Synergy incurred losses from operations of approximately
$138.5 million
. As of
June 30, 2017
, Synergy had working capital of approximately
$59.4 million
.
Recent Developments
On January 31, 2017, Synergy entered into an underwriting agreement with Cantor Fitzgerald & Co., as representative of the several underwriters, to issue and sell
20,325,204
shares of common stock of the Company in an underwritten public
offering pursuant to a Registration Statement on Form S-3 (File No. 333-205484) and a related prospectus supplement filed with the Securities and Exchange Commission (the “Offering”). The public offering price was
$6.15
per share of Common Stock. The Offering closed on February 6, 2017, yielding net proceeds of approximately
$121.6 million
, after deducting underwriting discounts and commissions and offering expenses payable by the Company.
On February 28, 2017, Synergy received consents from certain holders of its Notes to enter into a Supplemental Indenture which eliminates certain restrictive covenants from the Indenture related to the Notes. The restrictive covenants eliminated from the Indenture are Limitation on Indebtedness, Future Financing Rights for Certain Investors and Licensing Limitations. On February 28, 2017, Synergy entered into the Supplemental Indenture with Wells Fargo, N.A., as trustee and paid an aggregate of approximately
$1.6 million
to such holders for the consent. These fees associated with the debt modification were accounted for under Accounting Standards Codification ("ASC") 470-50 and are amortized using the effective interest method over the remaining term of the debt.
In March 2017, Synergy exchanged approximately
$4.9 million
aggregate principal amount of the Notes for approximately
1.8 million
shares of our common stock, with approximately
1.6 million
shares representing the conversion price of
$3.11
pursuant to the existing terms of the Notes. As of June 30, 2017, approximately
$18.6 million
of the Notes remain outstanding. The Company recognized a debt conversion expense of
$1.2 million
representing
0.2 million
shares during the quarter ended March 31, 2017.
2. Basis of Presentation, Accounting Policies and Going Concern
These unaudited condensed consolidated financial statements include Synergy and its wholly-owned subsidiaries: (1) Synergy Advanced Pharmaceuticals, Inc., and (2) IgX, Ltd (Ireland—inactive). 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, 2016
contained in the Company’s Annual Report on Form 10-K filed with the SEC on
March 1, 2017
. All intercompany balances and transactions have been eliminated.
Notwithstanding the Company's recent equity financing, 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 on unfavorable terms.
Synergy's consolidated financial statements as of
December 31, 2016
and its unaudited condensed consolidated financial statements as of
June 30, 2017
have been prepared under the assumption that the Company will continue as a going concern for the next twelve months. Synergy's independent registered public accounting firm has issued a report as of
December 31, 2016
that includes an explanatory paragraph referring to the Company's recurring and continuing losses from operations and expressing substantial doubt in the Company'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, reduce expenditures, and, ultimately, to generate revenue. Synergy's consolidated financial statements as of
December 31, 2016
and its unaudited condensed consolidated financial statements as of and for the period ended
June 30, 2017
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.
Accounts Receivable
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 related 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
no
t had any write-offs of bad debt, and the Company did
no
t have an allowance for doubtful accounts as of
June 30, 2017
.
Inventories
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.
In July 2015, the FASB issued an accounting standard update (ASU No. 2015-11) intended to simplify the measurement of inventory by requiring inventory to be measured at the lower of cost or net realizable value. Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation, etc. The Company adopted this standard as of January 1, 2017, which had no impact on the consolidated financial statements.
Revenue recognition
Synergy recognizes revenue from sales of TRULANCE when the earnings process is complete, which under Accounting Standards Codification ASC 605, Revenue Recognition is when revenue is realized or realizable and earned, there is persuasive evidence a revenue arrangement exists, delivery of goods or services has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Until Synergy has the ability to reliably estimate returns of TRULANCE from its customers, revenue will be recognized based on patient prescriptions, and not based on sales to distributors. Product sales that that are not yet patient prescriptions are classified as Deferred revenues, net. Product sales are recorded net of all sales related deductions 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 Company estimates these sales deductions based on contractual terms, historical payment experience, third party data, estimated utilization or redemption rates, government regulations, and customer inventory levels. Accruals for trade discounts, fee for service agreements and chargebacks are reflected as a direct reduction of accounts receivable and accruals for commercial and government rebates and customer loyalty programs are reflected as accrued expenses.
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").
Prior Period Adjustments
The three months ended June 30, 2017, includes an adjustment of
$1.0 million
related to the prior period. Had the adjustment been made during the prior period, Research and development expenses would have been
$3.1 million
higher and Selling, general and administrative expenses would have been
$4.1 million
lower during the three months ended March 31, 2017. The cumulative impact of these adjustments were not considered to be material to the Company’s condensed consolidated financial statements for the three months ended March 31 2017 and there is no impact to the Company’s condensed consolidated financial statements for the six months ended June 30, 2017.
3. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB") issued a comprehensive new revenue recognition standard ASC 606
Revenue From Contracts With Customers.
The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard is designed to create greater comparability for financial statement users across industries, jurisdictions and capital markets and also requires enhanced disclosures. The new standard will be effective for the Company beginning January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method)
The Company is in the initial stages of its evaluation as to the impact of the new revenue recognition standard on its accounting policies, processes, and system requirements as Synergy launched its first and only commercial product during the first quarter of 2017. Furthermore, Synergy has made and will continue to make investments in systems to enable timely and accurate reporting under the new standard. While Synergy continues to assess the potential impacts of the new standard, Synergy does not know or cannot reasonably estimate the impact of the new standard on our financial statements at this time.
In March 2016, FASB issued Accounting Standards Update ("ASU") No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” ("ASU 2016-09”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact,
classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company adopted this ASU during the fourth quarter of 2016 and due to losses, the excess tax benefits will not affect expense since these amounts have not, and will not be applicable. The Company is also continuing its policy to estimate the forfeiture rate after adoption of this ASU.
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-to-use asset representing its right to use the underlying asset for the lease term. The amendments of this ASU are effective for reporting periods beginning after December 15, 2018, with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The adoption of ASU 2016-02 is not expected to have a material impact on the Company’s consolidated financial statements and disclosures except upon initial adoption.
4. Cash, Cash Equivalents and Available-for-sale Securities
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. As of
June 30, 2017
and
December 31, 2016
, the amount of cash and cash equivalents was
$82.0 million
and
$82.4 million
, respectively and consists of checking accounts and short-term U.S. Treasury money market mutual funds. Checking accounts are held at U.S. commercial banks, and balances were in excess of the FDIC insurance limit.
5. Senior Convertible Notes
On November 3, 2014, Synergy closed a private offering of
$200 million
aggregate principal amount of
7.50%
Convertible Senior Notes due 2019, (the "Notes"), including the full exercise of the over-allotment option granted to the initial purchasers to purchase an additional
$25 million
aggregate principal amount of the Notes, interest payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2015. The net proceeds from the offering were
$187.3 million
after deducting the initial purchasers’ discounts and offering expenses. The Notes will mature on November 1, 2019, unless earlier purchased or converted. The Notes are convertible, at any time, into shares of Synergy’s common stock at an initial conversion rate of
321.5434
shares per $1,000 principal amount of notes, which is equivalent to the original conversion price of
$3.11
per share.
Initial purchaser's discounts and offering expenses associated with the sale of the Notes of
$12.7 million
have been deferred and are being recognized as expense over the expected term of the Notes, calculated using the effective interest rate method. The remaining deferred debt costs have been presented as a reduction of the Notes in accordance with the newly adopted ASU No. 2015-3 “
Simplifying the Presentation of Debt Issuance Costs”
.
On March 18, 2016 Synergy entered into an agreement (the "Exchange") for the exchange of
$79.8 million
in aggregate principal amount of the Notes, representing approximately
50%
of the outstanding aggregate principal amount of Notes, for
35.3 million
shares of Synergy's common stock, with a total of
25.6 million
shares representing the conversion price of
$3.11
pursuant to the existing terms of the Notes. The Company recognized a debt conversion expense of approximately
$25.6 million
representing
9.6 million
shares for the quarter ended March 31,2016.
In November 2016 Synergy exchanged
$55.7 million
in aggregate principal amount of the Notes, representing approximately
70%
of the outstanding aggregate principal amount of Notes, for
20.5 million
shares of Synergy's common stock, with a total of
17.9 million
shares representing the conversion price of
$3.11
pursuant to the existing terms of the Notes. The Company recognized a debt conversion expense of approximately
$14.5 million
representing
2.6 million
shares for the quarter ended December 31, 2016.
On February 28, 2017, Synergy received consents from certain holders of its Notes to enter into a Supplemental Indenture which eliminates certain restrictive covenants from the Indenture related to the Notes. The restrictive covenants eliminated from the Indenture are Limitation on Indebtedness, Future Financing Rights for Certain Investors and Licensing Limitations. On February 28, 2017, Synergy entered into the Supplemental Indenture with Wells Fargo, N.A., as trustee and paid an aggregate of approximately
$1.6 million
to such holders for the consent. These fees associated with the debt modification were accounted for under Accounting Standards Codification ("ASC") 470-50 and amortized using the effective interest method over the remaining term of the debt.
In March 2017, Synergy exchanged approximately
$4.9 million
aggregate principal amount of the Notes for approximately
1.8 million
shares of its common stock, with approximately
1.6 million
shares representing the conversion price of
$3.11
pursuant to the existing terms of the Notes. As of
June 30, 2017
, approximately
$18.6 million
of the Notes remain outstanding. The Company recognized a debt conversion expense of approximately
$1.2 million
representing
0.2 million
shares for the quarter ended March 31, 2017.
A summary of quarterly activity and balances associated with the Notes and related deferred debt costs is presented below ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Balance
|
|
Deferred Debt Costs
|
|
Notes, net of
Deferred Debt Costs
|
Balance December 31, 2015
|
$
|
159,011
|
|
|
$
|
7,770
|
|
|
$
|
151,241
|
|
Less: amortization three months ended March 31, 2016
(1)
|
|
|
(4,153
|
)
|
|
4,153
|
|
Conversions
|
(79,829
|
)
|
|
—
|
|
|
(79,829
|
)
|
Balance, March 31, 2016
|
79,182
|
|
|
3,617
|
|
|
75,565
|
|
Less: amortization three months ended June 30, 2016
|
|
|
(253
|
)
|
|
253
|
|
Balance, June 30, 2016
|
79,182
|
|
|
3,364
|
|
|
75,818
|
|
Less: amortization three months ended September 30, 2016
|
|
|
(252
|
)
|
|
252
|
|
Balance, September 30, 2016
|
79,182
|
|
|
3,112
|
|
|
76,070
|
|
Less: amortization three months ended December 31, 2016
(1)
|
|
|
(2,263
|
)
|
|
2,263
|
|
Conversions
|
(55,668
|
)
|
|
—
|
|
|
(55,668
|
)
|
Balance, December 31, 2016
|
23,514
|
|
|
849
|
|
|
22,665
|
|
Deferred financing cost related to debt modification on February 28, 2017
|
|
|
1,591
|
|
|
(1,591
|
)
|
Less: amortization three months ended March 31, 2017
(1)
|
|
|
(608
|
)
|
|
608
|
|
Conversions
|
(4,911
|
)
|
|
—
|
|
|
(4,911
|
)
|
Balance, March 31, 2017
|
18,603
|
|
|
1,832
|
|
|
16,771
|
|
Less: amortization of deferred financing cost for the three months ended June 30, 2017
(1)
|
|
|
(59
|
)
|
|
59
|
|
Less: amortization of debt modification cost for the three months ended June 30, 2017
(1)
|
|
|
(118
|
)
|
|
118
|
|
Balance, June 30, 2017
|
$
|
18,603
|
|
|
$
|
1,655
|
|
|
$
|
16,948
|
|
_____________________
(1) Includes accelerated amortization of deferred debt costs attributable to conversions and exchanges
6. Accounting for Share-based Payments
Stock Options
ASC Topic 718
“Compensation—Stock Compensation”
requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. Synergy accounts for shares of common stock, stock options and warrants issued to 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 “2008 Plan”) during the quarter ended September 30, 2008. Stock options granted under the 2008 Plan typically vest after
three years
of continuous service from the grant date and have a contractual term of
ten years
. On June 8, 2015, Synergy amended its 2008 Plan and increased the number of shares of its common stock reserved for issuance under the Plan from
15,000,000
to
30,000,000
.
Synergy adopted the 2017 Equity Incentive Plan (the “2017 Plan”) during the quarter ended June 30, 2017. The number of shares of its common stock reserved for issuance under the 2017 Plan is
9,000,000
and
no
grants have been awarded as of
June 30, 2017
.
In June 2017, the Company modified
2,159,500
stock options, which were previously granted as change of control options, to become immediately vested. The Company recorded a charge of
$6.8 million
during the three months ended June 30, 2017. There are no outstanding change of control options as of June 30, 2017.
Stock-based compensation has been recognized in operating results as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Included in research and development
|
|
$
|
(80
|
)
|
|
$
|
784
|
|
|
1,793
|
|
|
1,594
|
|
Included in selling, general and administrative
|
|
13,378
|
|
|
1,923
|
|
|
14,402
|
|
|
2,315
|
|
Total stock-based compensation expense
|
|
$
|
13,298
|
|
|
$
|
2,707
|
|
|
$
|
16,195
|
|
|
$
|
3,909
|
|
The unrecognized compensation cost related to non-vested stock options outstanding at
June 30, 2017
, net of expected forfeitures, was approximately
$17.7 million
to be recognized over a weighted-average remaining vesting period of approximately
1.39 years
.
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 periods indicated.
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2017
|
|
Six Months Ended
June 30, 2016
|
Risk-free interest rate
|
1.85%-2.24%
|
|
|
1.22%-1.49%
|
|
Dividend yield
|
—
|
|
|
—
|
|
Expected volatility
|
66%-73%
|
|
|
50
|
%
|
Expected term (in years)
|
6 years
|
|
|
6 years
|
|
A summary of stock option activity and of changes in stock options outstanding under the Plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Exercise Price
Per Share
|
|
Weighted Average
Exercise Price
Per Share
|
|
Intrinsic
Value
(in thousands)
|
|
Weighted Average
Remaining
Contractual Term
|
Balance outstanding, December 31, 2016
|
27,867,171
|
|
|
$0.44-9.12
|
|
$
|
3.78
|
|
|
$
|
65,618
|
|
|
7.1 years
|
Granted
|
2,055,500
|
|
|
$3.63-6.77
|
|
4.98
|
|
|
—
|
|
|
|
Exercised
(1)
|
(99,978
|
)
|
|
$0.50-5.34
|
|
3.47
|
|
|
226,757
|
|
|
|
Forfeited
|
(940,625
|
)
|
|
$2.83-7.91
|
|
4.52
|
|
|
—
|
|
|
|
Balance outstanding, June 30, 2017
|
28,882,068
|
|
|
$0.44-9.12
|
|
$
|
3.90
|
|
|
$
|
27,677
|
|
|
6.8 years
|
|
|
|
|
|
|
|
|
|
|
Exercisable, at June 30, 2017
(2)
|
19,238,509
|
|
|
$0.44-9.12
|
|
$
|
3.49
|
|
|
$
|
23,650
|
|
|
5.7 years
|
__________________________
|
|
(1)
|
The Company received proceeds of approximately
$0.3 million
from the exercise of stock options during the
three months ended June 30, 2017
.
|
|
|
(2)
|
Includes
2,159,500
change of control stock options that were immediately vested during June 2017.
|
7. Stockholders’ Equity
On
May 5, 2016
, Synergy announced that it had entered into definitive agreements with certain institutional investors to sell
29,948,334
shares of common stock at a price of
$3.00
per share. The shares were offered and sold directly to institutional
investors by the Company in a registered direct offering conducted without an underwriter or placement agent. The gross proceeds from the offering were approximately
$89.8 million
. The offering closed on May 6, 2016.
From January 1, 2016 through December 31, 2016 warrants to purchase
2,430,657
shares of common stock were exercised, yielding proceeds to the Company of
$11.3 million
.
On January 31, 2017, Synergy entered into an underwriting agreement with Cantor Fitzgerald & Co., as representative of several underwriters, to issue and sell
20,325,204
shares of common stock of the Company in an underwritten public
offering pursuant to a Registration Statement on Form S-3 (File No. 333-205484) and a related prospectus and prospectus
supplement, in each case filed with the Securities and Exchange Commission (the “Offering”). The public offering price was
$6.15
per share of Common Stock. The Offering closed on February 6, 2017, yielding net proceeds of approximately
$121.6 million
, after deducting underwriting discounts and commissions and offering expenses payable by the Company.
8. Research and Development Expense
Research and development costs include expenditures in connection with the Company's research and development laboratory, salaries and staff costs, application and filing for regulatory approval of proposed products, 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
no
prepaid research and development costs as of
June 30, 2017
and approximately
$0.5 million
as of
December 31, 2016
, for nonrefundable advances for production of drug substance and analytical testing services for its drug candidates. In accordance with this guidance, Synergy expenses these costs when drug compound is delivered and services are performed.
The Company recorded inventory, manufactured for sale of a product candidate, when the product candidate was considered to have a high likelihood of regulatory approval and the related costs are expected to be recoverable through sales. In determining whether or not to record such inventories, the Company evaluated, 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. Prior to October 1, 2016, all costs associated with batches of inventory, manufactured for sale, were charged to research and development as incurred. Beginning in the fourth quarter of 2016, Synergy began capitalizing inventory costs for TRULANCE in preparation for its planned launch in the U.S. The Company will record inventory, manufactured for sale of a product candidate, when the product candidate is considered to have a high likelihood of regulatory approval and the related costs are expected to be recoverable through sales. In determining whether or not to record such inventories, the Company 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.
9. Derivative Financial Instruments
Synergy 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 its common stock 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 are 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 was:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
Fair value of Synergy common stock
|
$
|
4.45
|
|
|
$
|
3.80
|
|
Expected warrant term
|
0.7 years
|
|
|
1.7 years
|
|
Risk-free interest rate
|
1.14
|
%
|
|
0.52
|
%
|
Expected volatility
|
50
|
%
|
|
50
|
%
|
Dividend yield
|
—
|
|
|
—
|
|
Fair value of stock is the closing market price of the Company’s common stock at the end of each reporting period when the derivative instruments are marked to market. Expected volatility is a management estimate of future volatility, over the expected warrant term, 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 at the date quarterly revaluation.
The following table sets forth the components of changes in the Synergy’s outstanding warrants which were deemed derivative financial instruments and the associated liability balance for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Description
|
|
Warrants
|
|
Derivative
Instrument
Liability
(in thousands)
|
12/31/2016
|
|
Balance of derivative financial instruments liability
|
|
210,000
|
|
|
$
|
216
|
|
3/31/2017
|
|
Change in fair value of warrants during the three months ended March 31, 2017
|
|
|
|
(122
|
)
|
6/30/2017
|
|
Change in fair value of warrants during the three months ended June 30, 2016
|
|
|
|
(39
|
)
|
6/30/2017
|
|
Balance of derivative financial instruments liability
|
|
210,000
|
|
|
$
|
55
|
|
10. Fair Value Measurements
Financial instruments consist of cash and cash equivalents, accounts payable and derivative instruments. These financial instruments are stated at their respective historical carrying amounts, which approximate fair value due to their short term nature.
The value of Senior Convertible Notes is stated at its carrying value at
June 30, 2017
. The Company believes it could obtain borrowings at
June 30, 2017
with comparable terms as the November 2014 Notes, therefore, the carrying value approximates fair value.
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, 2016
and
June 30, 2017
:
($ 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, 2016
|
|
Quoted Prices
in
Active
Markets
for Identical
Assets and
Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Balance as of
June 30, 2017
|
Derivative liabilities related to Warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
216
|
|
|
$
|
216
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
55
|
|
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the
six months ended June 30, 2017
:
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance as of December 31, 2016
|
|
(Gain) or loss
recognized in
earnings from
Change in Fair
Value
|
|
Expiration of
warrants
|
|
Balance as of
June 30, 2017
|
Derivative liabilities related to Warrants
|
|
$
|
216
|
|
|
$
|
(161
|
)
|
|
$
|
—
|
|
|
$
|
55
|
|
The unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities in the Company’s statement of operations. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, Synergy 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.
11. 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 periods presented. In accordance with ASC Topic 260, basic and diluted net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted-average common shares outstanding during the period. Diluted weighted-average shares are the same as basic weighted-average shares because shares issuable pursuant to the exercise of stock options and warrants would be antidilutive.
The following table sets forth potential common shares issuable upon the exercise of outstanding options, the exercise of warrants, and the conversion of the Senior Convertible Notes, all of which have been excluded from the computation of diluted weighted average shares outstanding as they would be antidilutive, including the impact on dilutive net loss per share of in-the-money warrants as per ASC 260-10-45-35 through ASC 260-10-45-37:
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2017
|
|
Six Months Ended
June 30, 2016
|
Stock Options
|
28,882,068
|
|
|
26,355,948
|
|
Warrants
|
869,688
|
|
|
4,726,823
|
|
Senior Convertible Notes
|
5,981,672
|
|
|
25,460,450
|
|
Total shares issuable upon exercise or conversion
|
35,733,428
|
|
|
56,543,221
|
|