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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: September 30, 2018

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to

Commission File Number: 001-35268

SYNERGY PHARMACEUTICALS INC.
(Exact name of registrant as specified in its charter)
Delaware
33-0505269
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)

420 Lexington Avenue, Suite 2012, New York, New York 10170
(Address of principal executive offices) (Zip Code)

(212) 297-0020
(Registrant’s telephone number)

(Former Name, Former Address and Former Fiscal Year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Emerging growth company o



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No  x

The number of the registrant’s shares of common stock outstanding was 248,037,301 as of November 9, 2018.




SYNERGY PHARMACEUTICALS INC.

FORM 10-Q

TABLE OF CONTENTS

Page
Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017
Condensed Consolidated Statement of Changes in Stockholders' Deficit for the Nine Months Ended September 30, 2018
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

2

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for Synergy Pharmaceuticals Inc. may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are characterized by future or conditional verbs such as “may,” “will,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. Such statements are only predictions and our actual results may differ materially from those anticipated in these forward-looking statements. We do not assume any obligation to update forward-looking statements as circumstances change and thus you should not unduly rely on these statements, which speak only as of the date of this Quarterly Report on Form 10-Q.

We believe that it is important to communicate future expectations to readers. However, there may be events in the future that we are not able to accurately predict or control. Risk factors that may cause such differences between predicted and actual results include, but are not limited to, those discussed in our Form 10-K for the year ended December 31, 2017 filed on March 1, 2018 and other periodic reports filed with the Securities and Exchange Commission.

These risk factors include the uncertainties associated with product development, the risk that we will not obtain approval to market our products in development, fluctuations in our operating results and financial condition, the volatility of the market price of our common stock, our ability to successfully commercialize pharmaceutical products in a timely manner, the impact of competition, the effect of any manufacturing or quality control problems, our ability to manage our growth, the reduction or loss of business with any significant customer, substantial revenues derived from sale of one product, the restrictions imposed by our credit facility, our level of indebtedness and liabilities and the potential impact on cash flow available for operations, the availability of additional funds in the future, the possibility that we may need to seek bankruptcy protection or pursue strategic
alternatives that could result in leaving our current stockholders with little or no financial ownership of the Company, the uncertainty of patent litigation and other legal proceedings, the difficulty of predicting FDA filings and approvals, consumer acceptance and demand for our pharmaceutical products, the impact of market perceptions of us and the safety and quality of our products, changes to FDA approval requirements, our ability to successfully conduct clinical trials, our reliance on third parties to conduct clinical trials and testing, impact of illegal distribution and sale by third parties of counterfeits or stolen products, the availability of raw materials and impact of interruptions in our supply chain, our policies regarding returns, rebates, allowances and chargebacks, the effect of current economic conditions on our industry, business, results of operations and financial condition, our ability to comply with legal and regulatory requirements governing the healthcare industry, the regulatory environment, our ability to protect our intellectual property, exposure to product liability claims, changes in tax regulations, uncertainties involved in the preparation of our financial statements, our ability to maintain an effective system of internal control over financial reporting, the effect of terrorist attacks on our business, expansion of social media platforms, the risks associated with dependence upon key personnel and the need for additional financing.

3

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

SYNERGY PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)

September 30, 2018 December 31, 2017
ASSETS 
Current Assets: 
Cash and cash equivalents  $ 45,647  $ 136,986 
Accounts receivable  9,222  6,491 
Inventories  21,530  17,214 
Prepaid expenses and other current assets  5,259  4,469 
Total Current Assets  81,658  165,160 
Property and equipment, net  1,069  1,134 
Security deposits  312  312 
Total Assets  $ 83,039  $ 166,606 
LIABILITIES AND STOCKHOLDERS' DEFICIT 
Current Liabilities: 
Accounts payable  $ 11,549  $ 23,256 
Accrued expenses  21,225  14,658 
Interest payable on senior convertible notes  581  233 
Deferred revenue  5,000  — 
Senior convertible notes, net  17,834  — 
Term Loan, net  101,739  — 
Total Current Liabilities  157,928  38,147 
Senior convertible notes, net —  17,302 
Term Loan, net —  98,660 
Derivative financial instruments, at estimated fair value-warrants  9,767  17,582 
Deferred revenue, net of current portion  11,236  — 
Other long-term liabilities  352  433 
Total Liabilities  179,283  172,124 
Commitments and contingencies 
Stockholders’ Deficit 
Preferred stock, authorized 20,000,000 shares and none outstanding, at September 30, 2018 and December 31, 2017  —  — 
Common stock, par value of $.0001, 400,000,000 shares authorized at September 30, 2018 and December 31, 2017. Issued and outstanding 248,037,301 shares and 246,660,367 shares at September 30, 2018 and December 31, 2017, respectively.  25  25 
Additional paid-in capital  811,399  801,787 
Accumulated deficit  (907,668) (807,330)
Total Stockholders’ Deficit  (96,244) (5,518)
Total Liabilities and Stockholders’ Deficit  $ 83,039  $ 166,606 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

SYNERGY PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)

Three Months Ended September 30,  Nine Months Ended September 30, 
2018 2017 2018 2017
Net sales  $ 11,105  $ 5,008  $ 31,945  $ 7,420 
Cost of goods sold  3,922  1,722  11,511  5,001 
Gross profit  7,183  3,286  20,434  2,419 
Costs and expenses: 
Research and development  2,904  5,876  9,140  46,346 
Selling, general and administrative  33,887  45,110  108,647  140,083 
Total operating expenses  36,791  50,986  117,787  186,429 
Loss from operations  (29,608) (47,700) (97,353) (184,010)
Other Income (Expense) 
Interest expense, net  (3,369) (1,226) (9,697) (2,361)
Debt conversion expense  —  —  —  (1,209)
State R&D tax credits  —  —  30  — 
Change in fair value of derivative financial instruments-warrants  (433) 55  7,815  216 
Total other expense  (3,802) (1,171) (1,852) (3,354)
Loss before taxes  (33,410) (48,871) (99,205) (187,364)
Tax expense  (1,133) —  (1,133) — 
Net loss  $ (34,543) $ (48,871) $ (100,338) $ (187,364)
Weighted Average Common Shares Outstanding 
Basic and Diluted  247,994,922  224,954,941  247,221,231  221,854,099 
Net Loss per Common Share, Basic and Diluted 
Net Loss per Common Share, Basic and Diluted  $ (0.14) $ (0.22) $ (0.41) $ (0.84)

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

SYNERGY PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
(In thousands, except share amounts)

Common
Shares 
Common
Stock,
Par Value 
Additional
Paid in
Capital 
Accumulated Deficit  Total
Stockholders’ Deficit 
Balance, December 31, 2017  246,660,367  $ 25  $ 801,787  $ (807,330) $ (5,518)
Common stock issued in connection with exercise of stock options  1,376,934  —  434  —  434 
Stock based compensation expense  —  —  9,178  —  9,178 
Net loss for the period  —  —  —  (100,338) (100,338)
Balance, September 30, 2018  248,037,301  $ 25  $ 811,399  $ (907,668) $ (96,244)

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

SYNERGY PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30, 2018 
Nine Months Ended
September 30, 2017 
Cash Flows From Operating Activities: 
Net loss  $ (100,338) $ (187,364)
Adjustments to reconcile net loss to net cash used in operating activities: 
Depreciation and amortization  179  121 
Amortization of deferred debt costs and debt discount  1,222  1,014 
Accretion of back-end facility fee  548  21 
Loss on disposal of property and equipment  —  44 
Stock-based compensation expense  9,178  20,082 
Interest expense — Payment-in-kind (PIK)  4,339  765 
Change in fair value of derivative financial instruments—warrants  (7,815) (216)
Debt conversion expense  —  1,209 
Changes in operating assets and liabilities: 
Accounts receivable  (2,731) (5,036)
Inventories  (4,316) (7,405)
Deferred revenue, net  16,236  1,927 
Security deposits  —  25 
Accounts payable and accrued expenses  (5,140) 2,145 
Prepaid expenses and other current assets  (790) (7,671)
Accrued interest expense on senior convertible notes  348  287 
Total Adjustments  11,258  7,312 
Net Cash used in Operating Activities  (89,080) (180,052)
Cash Flows From Investing Activities: 
Additions to property and equipment  (193) (48)
Net Cash used in Investing Activities  (193) (48)
Cash Flows From Financing Activities: 
Proceeds of sale of common stock, net of issuance costs  —  121,604 
Proceeds from borrowings, net of issuance costs  —  95,140 
Payment for deferred financing costs  (2,500) (1,591)
Proceeds from exercise of stock options  434  347 
Net Cash (used in) provided by Financing Activities  (2,066) 215,500 
Net decrease in cash and cash equivalents  (91,339) 35,400 
Cash and cash equivalents at beginning of period  136,986  82,387 
Cash and cash equivalents at end of period  $ 45,647  $ 117,787 
Supplementary disclosure of cash flow information: 
Cash paid for interest on senior convertible notes  $ 698  $ 698 
Cash paid for interest on Term Loan  $ 3,238  $ — 
Cash paid for taxes  $ 1,133  $ 20 
Supplementary disclosure of non-cash investing and financing activities: 
Conversion of senior convertible notes to Synergy Common Stock  $ —  $ 4,912 
Non-cash tenant improvement allowance  $ —  $ 587 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7

SYNERGY PHARMACEUTICALS INC.

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. Synergy has pioneered 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's proprietary uroguanylin based GI platform includes one commercial product, plecanatide, and one development stage compound, dolcanatide.
The Company's first and only commercial product, plecanatide, is available and being marketed in the United States (U.S.), under the trademark name TRULANCE®, for the treatment of adults with chronic idiopathic constipation (CIC) and irritable bowel syndrome with constipation (IBS-C). On February 27, 2018 Synergy entered into a definitive licensing, development and commercialization agreement ("Cipher Agreement") with Cipher Pharmaceuticals (Cipher) under which the Company granted Cipher the exclusive right to develop, market, distribute and sell TRULANCE in Canada. Under the terms of the Cipher Agreement, Synergy received an upfront payment of $5.0 million and is eligible for an additional milestone payment upon regulatory approval in Canada, as well as royalties from product sales in Canada. Cipher expects to file a New Drug Submission with Health Canada in the second half of 2018. On August 6, 2018, Synergy entered into a definitive licensing, development and commercialization agreement ("Luoxin Agreement") with Luoxin Pharmaceutical Group Co., Shangdong (Luoxin) under which the Company granted Luoxin the exclusive right to develop, market, distribute and sell TRULANCE in Mainland China, Hong Kong and Macau. Under the terms of the Luoxin agreement, Synergy received an upfront payment of $10.1 million (net of China withholding tax and VAT ) and is eligible for additional regulatory and commercial milestone payments, as well as royalties from product sales. Synergy is continuing to evaluate other potential U.S. and ex-U.S. partnership opportunities for TRULANCE.
Dolcanatide is the Company's development stage compound that has demonstrated proof-of-concept in treating patients with opioid induced constipation (OIC) and ulcerative colitis. Synergy is considering OIC as a potential life-cycle growth opportunity for TRULANCE and is currently exploring potential business development opportunities to further advance dolcanatide development in ulcerative colitis. In April 2018, the Company initiated a partnership with the National Cancer Institute (NCI) on a NCI-funded clinical biomarker study designed to evaluate the potential for dolcanatide to prevent colorectal cancer.
Net cash used in operating activities was approximately $89.1 million for the nine months ended September 30, 2018. As of September 30, 2018, Synergy had approximately $45.6 million of cash and cash equivalents. During the nine months ended September 30, 2018, Synergy incurred losses from operations of approximately $97.4 million. As of September 30, 2018, Synergy had negative working capital of approximately $76.3 million.

Recent Developments

On September 1, 2017, Synergy entered into a senior secured term loan (the "Term Loan") of up to $300 million with CRG Servicing LLC, as administrative and collateral agent, and the lenders and guarantors party thereto. The Term Loan is available for working capital and general corporate purposes. The Company borrowed $100 million at the time of closing.

The Term Loan has a maturity date of June 30, 2025, unless prepaid earlier. The Term Loan bears interest at a rate equal to 9.5% per annum, with quarterly, interest-only payments until June 30, 2022, subject to extension through the maturity date upon the Company’s satisfaction of certain conditions. At the Company’s option, until June 30, 2019, a portion of the interest payments may be paid in kind, and thereby added to the principal.  Following, the interest-only period, the Term Loan will amortize in equal quarterly installments unless entirely payable at maturity.

On November 13, 2017, Synergy entered into an underwriting agreement with Jefferies LLC, as representative of the several underwriters, to issue and sell 21,705,426 shares of common stock of the Company together with accompanying warrants (“Warrants”) to purchase an aggregate of 21,705,426 shares of Common Stock in an underwritten offering pursuant to a Registration Statement on Form S-3ASR and a related prospectus and prospectus supplement, in each case filed with the Securities and Exchange Commission (the “Offering”). The offering price was $2.58 per share of Common Stock and accompanying Warrant. The net proceeds from the Offering were approximately $52.2 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

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In February 2018, Synergy amended the Term Loan agreement. The amended Term Loan provides for future borrowings of $25 million, $25 million and $50 million on or before June 30, 2018, September 30, 2018 and December 31, 2018, respectively. Additionally, the total amount of the commitment was reduced from $300 million to $200 million (excluding PIK loans) and the Minimum Market Capitalization covenant of $300 million was revised to be 200% of the outstanding principal amount of the Term Loan (excluding PIK loans).

In June 2018, Synergy further amended the Term Loan agreement to extend the draw down date of the second borrowing from June 30, 2018 to prior to August 29, 2018. In August 2018, Synergy subsequently amended the Term Loan agreement to extend the draw down date of the second borrowing from August 29, 2018 to prior to October 31, 2018. On October 30, 2018, Synergy entered into Amendment and Waiver No. 3 to the Term Loan agreement pursuant to which CRG waived compliance with Section 10.01 and related provisions of the Term Loan agreement from October 25, 2018 to November 6, 2018. On November 6, 2018, Synergy entered into Waiver No. 4 to the Term Loan agreement pursuant to which CRG waived compliance with Section 10.01 and related provisions of the Term Loan agreement through November 12, 2018. 

On October 25, 2018, the Company disclosed that based on the Company’s current updated forecasts, it is projecting TRULANCE total net sales for 2018 to be between $42.0 million to $47.0 million, which will be below the minimum revenue covenant of $61.0 million set forth in its term loan agreement with CRG. Under the terms of the agreement, the Company will be required to repay principal and pay prepayment penalties in an amount equal to $38.0 million to $51.0 million if total net sales fall within the expected range noted above. Such principal repayment and prepayment penalties would be due no later than March 31, 2019.

Synergy did not draw down on the second borrowing available on October 31, 2018, and as a result there are no additional principal borrowings available under the Term Loan agreement.

2. 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
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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.

Reclassifications

Certain prior period amounts were reclassified to conform to the current period presentation and additional information is disclosed in the notes, if material.

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 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

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.

Revenue recognition

Adoption

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.

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Product Sales

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.

Practical expedients

The Company does not disclose the value of unsatisfied performance obligations for contracts with original expected lengths of one year or less.

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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").

3. Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 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 our condensed consolidated financial statements and disclosures except at the time of adoption. At time of adoption, the Company will recognize right of use assets and lease liabilities on the condensed consolidated balance sheet.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11 was issued to address the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this standard to have an impact on its condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, which simplifies the accounting for nonemployee share-based payment transactions. The ASU will be effective for the Company for fiscal years beginning after December 15, 2018, and early adoption is permitted. The Company does not expect that the adoption of this ASU will have a significant impact on its condensed consolidated financial statements.

On August 28, 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820); Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The amendments in ASU 2018-13 apply to all entities that are required GAAP, to make disclosures about recurring or nonrecurring fair value measurements. ASU 2018-13 removes, modifies, and adds certain disclosure requirements in ASC 820, Fair Value Measurement. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (calendar 2020). The Company does not expect it will have a significant impact on its condensed consolidated financial statements.

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4. Cash and cash equivalents

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. As of September 30, 2018 and December 31, 2017, the amount of cash and cash equivalents was $45.6 million and $137.0 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. Inventories

Inventories as of September 30, 2018 and December 31, 2017 consisted of the following:
($ in thousands)  September 30, 2018 December 31, 2017
Raw materials  $ 14,972  $ 5,754 
Work-in-process  3,015  7,732 
Finished goods  3,543  3,728 
Inventories  $ 21,530  $ 17,214 

6. Debt

Senior Convertible Notes, net

On November 3, 2014, Synergy closed a private offering of $200.0 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 $25.0 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. 2015-03 “ Simplifying the Presentation of Debt Issuance Costs” .

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 ASC No. 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. The Company recognized a debt conversion expense of approximately $1.2 million representing 0.2 million shares for the quarter ended March 31, 2017. As of September 30, 2018, approximately $18.6 million of the Notes remain outstanding.

The Company believes it is probable that it may not be in compliance with certain provisions of the Senior Convertible Notes in the near term which would accelerate maturity, as such the Senior Convertible Notes are classified as a current liability.

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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, 2017  $ 18,603  $ 1,301  $ 17,302 
Less: amortization for the three months ended March 31, 2018  (178) 178 
Balance, March 31, 2018  18,603  1,123  17,480 
Less: amortization for the three months ended June 30, 2018 (177) 177 
Balance, June 30, 2018 18,603  946  17,657 
Less: amortization for the three months ended September 30, 2018 (177) 177 
Balance, September 30, 2018 $ 18,603  $ 769  $ 17,834 

Term Loan, net

On September 1, 2017, Synergy Pharmaceuticals Inc. entered into a senior secured term loan of up to $300 million with CRG Servicing LLC, as administrative and collateral agent, and the lenders and guarantors party thereto (the "Term Loan"). The Term Loan is available for working capital and general corporate purposes. The Company borrowed $100 million at time of closing. In February 2018, the Company amended the Term Loan agreement. The amended Term Loan provides for future borrowings of $25 million, $25 million and $50 million on or before June 30, 2018, September 30, 2018 and December 31, 2018, respectively. Additionally, the total amount of the commitment was reduced from $300 million to $200 million (excluding PIK loans) and the Minimum Market Capitalization covenant of $300 million was revised to be 200% of the outstanding principal amount of the Term Loan (excluding PIK loans).

The Term Loan has a maturity date of June 30, 2025, unless earlier prepaid. The Term Loan bears interest at a rate equal to 9.5% per annum, with quarterly, interest-only payments until June 30, 2022, subject to extension through the maturity date upon the Company’s satisfaction of certain conditions. At the Company’s option, until June 30, 2019, a portion of the interest payments may be paid in kind, and thereby added to the principal.  Following, the interest-only period, the Term Loan will amortize in equal quarterly installments unless entirely payable at maturity.

 The obligations under the Term Loan are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in (i) all tangible and intangible assets of the Company and the Subsidiary Guarantors, except for certain customary excluded property, and (ii) all of the capital stock owned by the Company and Subsidiary Guarantors (limited, in the case of the stock of certain non-U.S. subsidiaries of the Company and certain U.S. subsidiaries substantially all of whose assets consist of equity interests in non-U.S. subsidiaries, to 65% of the capital stock of such subsidiaries, subject to certain exception).  The obligations under the Term Loan are guaranteed by Synergy Advanced Pharmaceuticals, Inc. and each of the Company’s future direct and indirect subsidiaries (other than certain subsidiaries whose guarantee would result in material adverse tax consequences, subject to certain exceptions).
 
The Term Loan contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations. Further, the Term Loan contains customary negative covenants limiting the ability of the Company and its subsidiaries, among other things, to incur future debt, grant liens, make investments, make acquisitions, make certain restricted payments and sell assets, subject to certain exceptions. In addition, the Term Loan requires the Company to comply with a minimum market capitalization covenant, maintain its status as a national exchange listed company, a daily minimum liquidity covenant and an annual revenue requirement based on the sales of TRULANCE.
 
The Term Loan may be prepaid by the Company at any time, subject to a prepayment premium of up to 32.5% of the principal amount, depending on the date of prepayment. Upon the occurrence of certain events relating to asset sales above a specified threshold or in the event of a change of control transaction, the Company may also be required to prepay all or a part of the outstanding principal and interest under the Term Loan in addition to the prepayment premium described above on the principal amount prepaid. Upon payment of the Term Loan at maturity or prepayment on any earlier date, a back-end facility fee will apply to the amounts paid or prepaid.

In June 2018, Synergy further amended the Term Loan agreement to extend the draw down date of the second borrowing from June 30, 2018 to prior to August 29, 2018. In August 2018, Synergy subsequently amended the Term Loan agreement to extend the draw down date of the second borrowing from August 29, 2018 to prior to October 31, 2018. On October 30, 2018, Synergy
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entered into Amendment and Waiver No. 3 to the Term Loan agreement pursuant to which CRG waived compliance with Section 10.01 and related provisions of the Term Loan agreement from October 25, 2018 to November 6, 2018. On November 6, 2018, Synergy entered into Waiver No. 4 to the Term Loan agreement pursuant to which CRG waived compliance with Section 10.01 and related provisions of the Term Loan agreement through November 12, 2018. If CRG does not grant a further waiver beyond November 12, 2018 the Company will likely be in default of Section 10.01.

Synergy did not draw down on the second borrowing available prior to October 31, 2018, and as a result there are no additional principal borrowings available under the Term Loan agreement.

As of September 30, 2018, the Company was in compliance with all applicable covenants, however the Company believes it is probable that it may not be in compliance with certain covenants in the near term, as such the Term Loan has been classified as a current liability.

As of September 30, 2018, principal and PIK payments under the Term Loan were as follows, provided no events of default have occurred:

Principal and PIK Loan Repayments 
Period Ending December 31,  ($ in thousands) 
2018 $ — 
2019 — 
2020 — 
2021 — 
2022 and thereafter  100,000 
100,000 
Add: Accretion of back-end facility fee  654 
Add: PIK interest  7,551 
108,205 
Less: Debt financing costs, net of amortization  (6,466)
Balance at September 30, 2018  $ 101,739 

7. 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.

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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.

Stock-based compensation has been recognized in operating results as follows:

Three Months Ended
September 30, 
Three Months Ended
September 30, 
Nine Months Ended
September 30, 
Nine Months Ended
September 30, 
($ in thousands)  2018 2017 2018 2017
Included in research and development  $ 459  $ 477  $ 1,634  $ 2,270 
Included in selling, general and administrative  2,525  3,411  7,737  17,812 
Total stock-based compensation expense (1)
$ 2,984  $ 3,888  $ 9,371  $ 20,082 
__ ___________________
(1) Stock based compensation expense for the nine months ended September 30, 2018 includes $193,000 recorded as a liability.

The unrecognized compensation cost related to non-vested stock options outstanding at September 30, 2018, net of expected forfeitures, was approximately $12.4 million to be recognized over a weighted-average remaining vesting period of approximately 0.97 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.
Nine Months Ended
September 30, 2018 
Nine Months Ended
September 30, 2017 
Risk-free interest rate  2.33-2.85%  1.85%-2.24% 
Dividend yield  —  — 
Expected volatility  63%-68%  62%-73% 
Expected term  6 years 6 years


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A summary of stock option activity and of changes in stock options outstanding under the Plans 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, 2017  29,868,291  $0.44-9.12  $ 3.83  $ 5,346  6.09 years
Granted  7,917,700  $1.56-2.40  $ 2.12  $ — 
Exercised (1)
(1,805,081) $0.50-1.20  $ 0.56  $ 2,153 
Forfeited  (2,680,222) $0.50-7.91  $ 2.78  $ — 
Balance outstanding, September 30, 2018  33,300,688  $0.44-9.12  $ 3.61  $ 714  6.60 years
Exercisable, at September 30, 2018  22,056,762  $0.44-9.12  $ 4.00  $ 692  5.41 years
____________________
(1) Options exercised includes 428,147 shares withheld for payment of exercise price and related taxes.

8. Commitments and 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. We describe our legal proceedings and other matters that are significant or that we believe could become significant in this footnote and in Note 7, Commitments and contingencies, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017.

Certain recent developments concerning our legal proceedings are discussed below:

Litigation
 
On February 8, 2018, a federal securities action, captioned David Lee v. Synergy Pharmaceuticals Inc. et al. , was filed in the U.S. District Court for the Eastern District of New York. Two similar, related lawsuits —Eileen Countryman v. Synergy Pharmaceuticals Inc. et al. and Wendell Rose v. Synergy Pharmaceuticals Inc. et al —were subsequently filed in the same court. On June 11, 2018, plaintiffs voluntarily dismissed the Countryman complaint. On June 22, 2018, the court consolidated the remaining Lee and Rose actions into a single action under the caption In re Synergy Pharmaceuticals, Inc. Securities Litigation . On August 31, 2018, plaintiffs in the consolidated action filed a consolidated amended complaint that seeks to recover on behalf of a putative class of purchasers of Synergy’s common stock between November 10, 2016 and November 13, 2017. The consolidated amended complaint alleges that the Company and certain of its officers and directors made false and misleading statements, including in connection with the Company's Term Loan from CRG Servicing, LLC and in connection with Trulance’s side-effect profile. The consolidated amended complaint asserts claims under the federal securities laws and seeks to recover unspecified damages, legal fees, interest, and costs.

On April 20, 2018, a shareholder derivative action captioned Solak v. Jacob et al. was filed in the Supreme Court of the State of New York for New York County . Three su bstantially identical shareholder derivative actions, captioned Ecker & Klein v. Jacob et al. , Harding v. Jacob et al. , and Buker v. Jacob et al. , were subsequently filed in the same court. On June 19, 2018, the court consolidated these  four ac tions into a single action captioned Solak v. Jacob et al. On September 28, 2018, plaintiffs in the consolidated action filed a consolidated amended complaint that names Synergy’s directors and certain of its officers as defendants, as well as the Company itself as nominal defendant, and seeks to recover on behalf of the Company. It asserts claims for breach of fiduciary duty, unjust enrichment and gross mismanagement, alleging that the individual defendants caused the Company to issue allegedly false and misleading statements in connection with the Term Loan and Trulance’s side-effect profile. The consolidated amended complaint seeks to recover unspecified damages on behalf of the Company, as well as declaratory relief, equitable remedies, costs, and expenses.

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On June 8, 2018, a shareholder derivative action captioned Davydov v. Hamilton et al. was filed in the U.S. District Court for the Eastern District of New York. The complaint names Synergy’s directors and certain of its officers as defendants, as well as the Company itself as nominal defendant, and seeks to recover on behalf of the Company. The complaint alleges that the individual defendants violated the federal securities laws and breached their fiduciary duties to the Company by causing it to issue allegedly false and misleading statements in connection with the Term Loan, Trulance’s side-effect profile, and the responsibilities of the Company’s directors. The complaint also asserts claims for waste of corporate assets and unjust enrichment based on the same allegations. The complaint seeks to recover unspecified damages on behalf of the Company, as well as equitable remedies, costs, and expenses.  

In the Company’s opinion, a loss in connection with the matters described above is neither probable nor estimable.

9. Stockholders’ Deficit

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.

On June 27, 2017, Synergy increased the number of shares of common stock authorized for issuance from 350,000,000 to 400,000,000.

On November 13, 2017, Synergy entered into an underwriting agreement with Jefferies LLC, as representative of the several underwriters, to issue and sell 21,705,426 shares of common stock of the Company together with accompanying warrants (“Warrants”) to purchase an aggregate of 21,705,426 shares of Common Stock in an underwritten offering pursuant to a Registration Statement on Form S-3ASR and a related prospectus and prospectus supplement, in each case filed with the Securities and Exchange Commission (the “Offering”). The offering price was $2.58 per share of Common Stock and accompanying Warrant. Net proceeds from the Offering were approximately $52.2 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

10. 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 $0.1 million in prepaid research and development costs as of both September 30, 2018 and December 31, 2017, 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.

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11. Derivative Financial Instruments

Synergy Derivative Financial Instruments

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 condensed consolidated 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.

Synergy’s warrants issued on November 13, 2017 (See Footnote 9 “Stockholders’ Deficit”) were recorded as derivative liabilities and the fair value determined using the Monte Carlo simulation.  The assumptions to determine fair value at issuance were $2.44 fair value of stock, warrant term of 2.0 years, 1.62% risk free rate, 66% volatility, and 0% dividend yield.

The assumptions used to determine the fair value of the warrants at each period end was:
September 30, 2018 September 30, 2017
Fair value of Synergy common stock
$ 1.70  $ 2.90 
Expected warrant term
1.1 years  0.4 years
Risk-free interest rate
2.13  % 1.13  %
Expected volatility
65  % 40  %
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 Share-Based Payment 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)
12/31/2017 Balance of derivative financial instruments liability  21,915,426  $ 17,582 
3/31/2018 Change in fair value of warrants during the three months ended March 31, 2018  (5,644)
3/31/2018 Expiration of warrants  (210,000) — 
6/30/2018 Change in fair value of warrants during the three months ended June 30, 2018  (2,604)
9/30/2018 Change in fair value of warrants during the three months ended September 30, 2018  433 
09/30/2018 Balance of derivative financial instruments liability  21,705,426  $ 9,767 

12. Fair Value Measurements

Financial instruments consist of cash and cash equivalents, accounts receivable, security deposits, 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 and the Term Loan is stated at carrying value at September 30, 2018. The Company determined that it is probable that it may not be in compliance with certain debt covenants in the near term, and as a result classified debt as a current liability. Due to the short-term nature of the expected term of the Senior Convertible Notes and the Term Loan, the carrying value approximates fair value.

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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, 2017 and September 30, 2018:

($ 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, 2017 
Quoted Prices
in
Active
Markets
for Identical
Assets and
Liabilities
(Level 1) 
Significant
Other
Observable
Inputs
(Level 2) 
Significant
Unobservable
Inputs
(Level 3) 
Balance as of
September 30, 2018 
Derivative liabilities related to Warrants  $ —  $ —  $ 17,582  $ 17,582  $ —  $ —  $ 9,767  $ 9,767 

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the nine months ended September 30, 2018:

($ in thousands)
Description  Balance as of
December 31, 2017 
(Gain) or loss
recognized in
earnings from
Change in Fair
Value 
Expiration of
warrants 
Balance as of
September 30, 2018
Derivative liabilities related to Warrants  $ 17,582  $ (7,815) $ —  $ 9,767 

The unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities in the Company’s condensed consolidated 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.

13. 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:
Nine Months Ended
September 30, 2018 
Nine Months Ended
September 30, 2017 
Stock Options  33,300,688  28,810,791 
Warrants  21,705,426  869,688 
Senior Convertible Notes  5,981,672  5,981,672 
Total shares issuable upon exercise or conversion  60,987,786  35,662,151 

14. Subsequent Events

On October 25, 2018, the Company disclosed that based on the Company’s current updated forecasts, it is projecting TRULANCE total net sales for 2018 to be between $42.0 million to $47.0 million, which would be below the minimum revenue covenant of $61.0 million set forth in its term loan agreement with CRG. Under the terms of the agreement, the Company will be required to repay principal and pay prepayment penalties in an amount equal to $38.0 million to $51.0 million if total net sales fall within the expected range noted above. Such principal repayment and prepayment penalties would be due
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no later than March 31, 2019. The Company did not draw down on the second borrowing available prior to October 31, 2018, and as a result there are no additional principal borrowings available under the Term Loan agreement.

On October 30, 2018, the Company entered into Amendment and Waiver No. 3 to the term loan agreement pursuant to which CRG waived compliance with Section 10.01 and related provisions of the term loan agreement from October 25, 2018 to November 6, 2018. 

On November 6, 2018, the Company entered into Waiver No. 4 to the term loan agreement pursuant to which CRG further waived compliance with Section 10.01 and related provisions of the term loan agreement through November 12, 2018.  If CRG does not grant a further waiver beyond November 12, 2018 the Company will likely be in default of Section 10.01.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
The following discussion should be read in conjunction with our condensed consolidated financial statements and other financial information appearing elsewhere in this quarterly report. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking statements. You can identify these statements by forward-looking words such as “plan,” “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate” and “continue” or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future and thus you should not unduly rely on these statements.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under “Risk Factors” in our Annual Report on Form 10-K as of and for the year ended December 31, 2017 and other periodic reports filed with the United States Securities and Exchange Commission (“SEC”). Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company’s actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements and thus you should not unduly rely on these statements.

Business Overview
We are a biopharmaceutical company focused on the development and commercialization of novel gastrointestinal (GI) therapies. We have pioneered 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. Our proprietary uroguanylin based GI platform includes one commercial product, plecanatide, and one development stage compound, dolcanatide.

Our first and only commercial product, plecanatide, is available and being marketed in the United States (U.S.), under the trademark name TRULANCE®, for the treatment of adults with chronic idiopathic constipation (CIC) and irritable bowel syndrome with constipation (IBS-C). On February 27, 2018 we entered into a definitive licensing, development and commercialization agreement ("Cipher Agreement") with Cipher Pharmaceuticals (Cipher) under which the Company granted Cipher the exclusive right to develop, market, distribute and sell TRULANCE in Canada. Under the terms of the Cipher Agreement, we received an upfront payment of $5.0 million and is eligible for an additional milestone payment upon regulatory approval in Canada, as well as royalties from product sales in Canada. Cipher expects to file a New Drug Submission with Health Canada in the second half of 2018. On August 6, 2018, we entered into a definitive licensing, development and commercialization agreement ("Luoxin Agreement") with Luoxin Pharmaceutical Group Co., Shangdong (Luoxin) under which we granted Luoxin the exclusive right to develop, market, distribute and sell TRULANCE in Mainland China, Hong Kong and Macau. Under the terms of the Luoxin agreement, we received an upfront payment of $10.1 million (net of China withholding tax and VAT) and is eligible for additional regulatory and commercial milestone payments, as well as royalties from product sales. We are continuing to evaluate other potential U.S. and ex-U.S. partnership opportunities for TRULANCE.

Dolcanatide is our development stage compound that has demonstrated proof-of-concept in treating patients with opioid induced constipation (OIC) and ulcerative colitis. We are considering OIC as a potential life-cycle growth opportunity for TRULANCE and are currently exploring potential business development opportunities to further advance dolcanatide development in ulcerative colitis. In April 2018, we initiated a partnership with the National Cancer Institute (NCI) on a NCI-funded clinical biomarker study designed to evaluate the potential for dolcanatide to prevent colorectal cancer.
TRULANCE (plecanatide)
With the exception of a single amino acid substitution for greater binding affinity, TRULANCE is structurally identical to human uroguanylin and is the only treatment thought to replicate the pH-sensitive activity of uroguanylin. Uroguanylin activates GC-C receptors in a pH-sensitive manner primarily in the small intestine, stimulating fluid secretion and maintaining stool consistency necessary for regular bowel function.
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In January 2017, the FDA approved TRULANCE 3 mg tablets for the once-daily treatment of adults with CIC. We began commercializing TRULANCE in the U.S. in March 2017. In January 2018, the FDA approved TRULANCE for the treatment of adults with IBS-C. The efficacy and safety of TRULANCE for the treatment of CIC and IBS-C was established in four 12-week, double-blind, placebo-controlled, randomized, multicenter clinical studies involving over 3,100 patients. TRULANCE demonstrated improvement in the abdominal pain, constipation, stool consistency and straining with bowel movements associated with IBS-C, as well as in the constipation, stool consistency and straining with bowel movements associated with CIC. These patient-reported symptoms returned within one week following discontinuation of TRULANCE. The most common adverse event in both CIC and IBS-C studies was diarrhea (≤5.0% vs. 1.0% placebo). TRULANCE is the only prescription medication for adults with CIC and IBS-C that can be taken once-daily, with or without food, at any time of the day. TRULANCE is packaged in a unique, 30-day calendar blister pack.
Ongoing Post Marketing Commitments  
Under the Pediatric Research Equity Act (PREA) (21 U.S.C. 355c), clinical studies are underway assessing the efficacy and safety of TRULANCE in pediatric patients with CIC and with IBS-C. In addition, development and validation of an anti-drug antibody assay is underway to assess patient clinical trial samples for the potential presence of anti-plecanatide antibodies. As agreed with the FDA following Trulance approval in the CIC indication, we continue with the execution of a milk-only lactation study and the assessment of GC-C receptor density in infants and children (age 0-6 years).
CIC and IBS-C
CIC and IBS-C are chronic, functional GI disorders that afflict millions of people worldwide. An estimated 33 million adults suffer from CIC and 12 million adults suffer from IBS-C in the U.S. alone.
People with CIC have persistent symptoms of difficult-to-pass and infrequent bowel movements. In addition to physical symptoms including abdominal bloating and discomfort, CIC can adversely affect an individual’s quality of life, including increasing stress levels and anxiety. Many patients attempt to manage CIC symptoms with improved diet, fiber, and over-the-counter laxatives; however, these options can be ineffective or may not provide long-term relief. For those patients with persistent symptoms, prescription therapy is recommended. Many patients taking prescription medications fail to respond to therapy, or suffer from treatment-related adverse events, such as nausea and diarrhea.
Irritable bowel syndrome (IBS) is characterized by recurrent abdominal pain associated with 2 or more of the following criteria: related to defecation, associated with a change in the frequency of stool, or associated with a change in the form (appearance) of the stool. IBS can be subtyped by the predominant stool form as measured by the Bristol Stool Form Scale (BSFS): constipation (IBS-C), diarrhea (IBS-D), or mixed (IBS-M). Those within the IBS-C subtype experience Bristol  types 1 or 2  (hard or lumpy) stools  more than 25 percent of the time they have an abnormal bowel movement, and Bristol types 6 or 7 (loose or watery) stools less than 25 percent of the time they have an abnormal bowel movement. Some of the IBS treatment approaches recognized by the American College of Gastroenterology (ACG), including specialized diets, fiber, and psychological interventions, may not always effectively address abdominal pain and discomfort experienced by these patients. While there are prescription drug options, not all patients find complete relief, and many struggle with adverse events.
Dolcanatide (SP-333)
Dolcanatide, our second product candidate, is being evaluated for inflammatory bowel disease (IBD). Dolcanatide is designed to be an analog of uroguanylin with enhanced resistance to standard digestive breakdown by proteases in the intestine. We have demonstrated the potential anti-inflammatory role of uroguanylin and uroguanylin analogs in a number of preclinical colitis models. In these earlier animal studies, oral treatment with dolcanatide was shown to ameliorate DSS- and TNBS-induced acute colitis in murine models and ameliorate spontaneous colitis in T-cell receptor alpha knockout mice.
In January 2016, we announced positive proof-of-concept with dolcanatide in a phase 1b trial evaluating 28 patients with mild-to-moderate ulcerative colitis. We are exploring business development opportunities to further advance dolcanatide development in ulcerative colitis. In April 2018, we entered into a partnership with the National Cancer Institute (NCI) to initiate a NCI-funded and managed clinical biomarker study to evaluate dolcanatide’s potential to prevent colorectal cancer. The study will assess the colorectal bioactivity of dolcanatide in healthy volunteers and will inform the feasibility and design of a larger study to evaluate the potential for dolcanatide to prevent colorectal cancer.

Third Quarter 2018 and Recent Developments
TRULANCE® (plecanatide)
• TRULANCE® (plecanatide) 63,085 TRULANCE 30-count packs were dispensed in the third quarter of 2018, a 104.7% increase versus 30,825 in the prior year quarter, per IQVIA.
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• 23,560 TRULANCE new prescriptions were filled in the third quarter of 2018, a 46.4% increase versus 16,089 in the prior year quarter, per IQVIA.
• Since the launch on March 20, 2017, 250,684 TRULANCE 30-count packs have been dispensed and normalized prescription volume has increased 38.4% on average quarter-over-quarter, per IQVIA.
Collaborations & Partnerships
• In August 2018, we entered into a license agreement with Luoxin Pharmaceutical Group Co., Ltd., Shandong (Luoxin), providing Luoxin exclusive rights to develop and commercialize TRULANCE for the treatment of adults with chronic idiopathic constipation (CIC) and irritable bowel syndrome with constipation (IBS-C) in mainland China, Hong Kong and Macau. Under the terms of the agreement, we received an upfront payment of $10.1 million (net of China withholding tax and VAT). We are also eligible, in the event that certain regulatory and commercial milestones are met, to receive additional payments of up to $56 million in aggregate. In addition, we are eligible to receive tiered royalty payments on aggregate net sales. Pursuant to the license agreement, Luoxin will lead clinical development in China and be responsible for all activities and expenses relating to clinical development, regulatory approval, and commercialization in China. In addition, pursuant to the license agreement, we intend to enter into a supply agreement under which we will supply TRULANCE to Luoxin.  
• Our Canadian partner, Cipher Pharmaceuticals, remains on-track to file a New Drug Submission for TRULANCE in IBS-C with Health Canada in the second half of 2018. The regulatory review period is approximately one-year from the submission date. Under the terms of the licensing agreement, we are eligible for a milestone payment upon regulatory approval in Canada, as well as royalties from product sales in Canada.
• In August 2018, the National Cancer Institute (NCI) initiated an NCI-funded and managed clinical biomarker study to evaluate the potential of dolcanatide, our second uroguanylin analog, to prevent colorectal cancer.  The study is assessing the colorectal bioactivity of dolcanatide in healthy volunteers and will inform the feasibility and design of a potential larger study. This is the first clinical biomarker study evaluating the potential benefit of using a uroguanylin analog in colorectal cancer prevention.
Executive Leadership Updates
• In September 2018, we announced the departure of our Chief Strategy Officer, Marino Garcia. At this time, we do not see a need to fill this position.
• In October 2018, we announced that Melvin K. Spigelman, M.D., who has served as an Independent Director of Synergy since August 2008, assumed the role of Chairman of the Board. Synergy’s outgoing Executive Chairman, Gary S. Jacob, Ph.D., left the Company to pursue other opportunities.
2018 Outlook
• On October 25, 2018, Synergy announced that it is seeking to renegotiate its term loan agreement with CRG Servicing LLC (“CRG”) and has forgone drawing down on any additional amounts pursuant to its term loan agreement. To-date the Company has been unable to further amend the agreement with respect to the financial, revenue and minimum liquidity covenants. Synergy is continuing discussions with CRG and has twice received temporary waivers on the minimum market capitalization covenant, which is set to expire on November 12, 2018 absent further extension. The Company is currently pursuing alternatives that better align with its business, but there is no assurance that the Company can secure CRG’s consent or otherwise achieve a transaction to refinance or otherwise repay CRG on commercially reasonable terms, in which case the Company could default under the term loan agreement and may have to pursue or otherwise accelerate strategic alternatives, including the possibility of seeking bankruptcy protection to protect stakeholder value in the event other options are not reasonably executable. Further updates on alternatives will be provided when available.
• As previously announced, TRULANCE uptake in 2018 has been slower than anticipated due to a highly competitive market access environment and slower than anticipated overall market growth. As a result, based on the Company’s current updated forecasts, Synergy is projecting TRULANCE total net sales for 2018 to be between $42.0 million to $47.0 million, which would be below the minimum revenue covenant of $61.0 million set forth in its term loan agreement with CRG. The Company has continued to evaluate opportunities to reduce cash expenditures to better align with anticipated revenues and available capital. In addition, Synergy has remained committed to the continued evaluation of all strategic opportunities to enhance shareholder value and there is no set timetable for completing this process. Synergy has engaged financial and legal advisors to assist Synergy in evaluating these strategic alternatives. Additional information about the Company's strategic review and go-forward plan will be provided at the appropriate time.

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RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2018 AND SEPTEMBER 30, 2017

We had net sales of $11.1 million during the three months ended September 30, 2018 compared to $5.0 million in net sales during the three months ended September 30, 2017. The increase was due to higher TRULANCE sales volume in the current year period since the product was launched in mid-March 2017.

Cost of goods sold (“COGS”) for the three months ended September 30, 2018 totaled $3.9 million compared to $1.7 million for the three months ended September 30, 2017, primarily due to an increase in production costs from higher net sales during the three months ended September 30, 2018. COGS includes the direct cost of manufacturing and packaging drug product and related technical operations overhead costs which are generally more fixed in nature. Technical Operations is responsible for planning, coordinating, and executing on our inventory production plan and ensuring that product quality satisfies FDA requirements. Costs incurred by our technical operations organization are recorded as expenses in the period in which they are incurred.

Research and development expenses for the three months ended September 30, 2018 decreased approximately $3.0 million or 51.0%, to approximately $2.9 million from approximately $5.9 million for the three months ended September 30, 2017. This decrease in research and development expenses was due primarily to reduced clinical trial spend associated with the TRULANCE IBS-C indication which was approved in early 2018.
 
Selling, general and administrative expenses decreased approximately $11.2 million or 24.8%, to $33.9 million for the three months ended September 30, 2018 from approximately $45.1 million for the three months ended September 30, 2017. This decrease in expenses primarily reflect higher marketing and promotional activities for the product launch of TRULANCE during the third quarter of 2017 and a decrease in salesforce expenses in the current quarter due to lower headcount and consulting fees.

Net loss for the three months ended September 30, 2018 was $34.5 million as compared to a net loss of a $48.9 million for the three months ended September 30, 2017. This decrease in our net loss of $14.4 million or 29.4% was a result of the operating items discussed above and tax expense incurred in the current quarter.

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND SEPTEMBER 30, 2017 

We had net sales of $31.9 million during the nine months ended September 30, 2018 compared to $7.4 million during the nine months ended September 30, 2017. The increase was due to higher TRULANCE sales volume in the current year period since the product was launched in mid-March 2017.

COGS for the nine months ended September 30, 2018 totaled $11.5 million compared to $5.0 million for the nine months ended September 30, 2017, primarily due to primarily due to higher production costs from the increase in net sales during the nine months ended September 30, 2018.

Research and development expenses for the nine months ended September 30, 2018 decreased approximately $37.2 million or 80.3% to approximately $9.1 million from approximately $46.3 million for the nine months ended September 30, 2017. This decrease in research and development expenses was due primarily to reduced clinical trial spend associated with the TRULANCE IBS-C indication which was approved in early 2018, and related reduction in clinical employees.
 
Selling, general and administrative expenses decreased approximately $31.5 million or 22.5%, to $108.6 million for the nine months ended September 30, 2018 from $140.1 million for the nine months ended September 30, 2017. This decrease in expenses primarily reflect higher marketing and promotional activities for the product launch of TRULANCE in the third quarter of 2017, as well as higher stock compensation expense related to modifications from severance agreements and immediate vesting of change-of-control options in the prior year period.

Net loss for the nine months ended September 30, 2018 was $100.3 million as compared to a net loss of $187.4 million for the nine months ended September 30, 2017. This decrease in our net loss of $87.1 million or 46.5% was a result of the operating items discussed above and tax expense incurred in the current quarter.
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LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was approximately $89.1 million and $180.1 million for the nine months ended September 30, 2018 and 2017, respectively. Net cash used in financing activities was approximately $2.1 million for the nine months ended September 30, 2018 and net cash provided by financing activities was approximately $215.5 million for the nine months ended September 30, 2017. As of September 30, 2018, we had approximately $45.6 million of cash and cash equivalents. During the nine months ended September 30, 2018 and 2017, we incurred losses from operations of approximately $97.4 million and $184.0 million, respectively. As of September 30, 2018, we had negative working capital of approximately $76.3 million, as compared to working capital of approximately $127.0 million at December 31, 2017.

On September 1, 2017, we entered into a senior secured term loan of up to $300 million with CRG Servicing LLC, as administrative and collateral agent, and the lenders and guarantors party thereto (the "Term Loan"). The Term Loan is available for working capital and general corporate purposes. We borrowed $100 million at time of closing. In February 2018 we amended the Term Loan agreement. The amended Term Loan provides for future borrowings of $25 million, $25 million and $50 million on or before June 30, 2018, September 30, 2018 and December 31, 2018, respectively. Additionally, the total amount of the commitment was reduced from $300 million to $200 million (excluding PIK loans) and the Minimum Market Capitalization covenant of $300 million was revised to be 200% of the outstanding principal amount of the Term Loan (excluding PIK loans). In June 2018, we further amended the Term Loan agreement to extend the draw down date of the second borrowing from June 30, 2018 to prior to August 29, 2018.  In August 2018, we subsequently amended the Term Loan agreement to extend the draw down date of the second borrowing from August 29, 2018 to prior to October 31, 2018. We did not draw down on the second borrowing available prior to October 31, 2018, and as a result there are no additional principal borrowings available under the Term Loan agreement.

We have been seeking to renegotiate the terms of our term loan agreement with CRG. We have been unable to further amend the agreement with respect to the financial and revenue covenants, and we have decided to forego drawing down on any additional amounts pursuant to our term loan agreement. Moreover, our term loan agreement contains a minimum liquidity covenant that absent relief from CRG may not be satisfied. We are continuing discussions with CRG for covenant relief and in parallel we are currently pursuing alternatives that better align with our business, but there is no assurance that we 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 and may have to pursue or otherwise accelerate strategic alternatives, including alternatives that could result in leaving our current stockholders with little or no financial ownership of the Company and, the possibility of seeking bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code to protect stakeholder value in the event other options are not reasonably executable. On October 30, 2018, we entered into Amendment and Waiver No. 3 to the term loan agreement pursuant to which CRG waived compliance with Section 10.01 and related provisions of the term loan agreement from October 25, 2018 to November 6, 2018. On November 6, 2018, we entered into Waiver No. 4 to the term loan agreement pursuant to which CRG further waived compliance with Section 10.01 and related provisions of the term loan agreement through November 12, 2018. 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.

TRULANCE uptake in 2018 has been slower than anticipated due to a highly competitive market access environment and slower than anticipated overall market growth. As a result, based on our current updated forecasts, we are projecting TRULANCE total net sales for 2018 to be between $42.0 million to $47.0 million, which would be below the minimum revenue covenant of $61.0 million set forth in our term loan agreement with CRG. Under the terms of the agreement, we will be required to repay principal and pay prepayment penalties in an amount equal to $38.0 million to $51.0 million if total net sales fall within the expected range noted above. Such principal repayment and prepayment penalties will be due no later than March 31, 2019.

On November 13, 2017, we entered into an underwriting agreement with Jefferies LLC, as representative of the several underwriters, to issue and sell 21,705,426 shares of our common stock together with accompanying warrants (“Warrants”) to purchase an aggregate of 21,705,426 shares of Common Stock in an underwritten offering pursuant to a Registration Statement on Form S-3ASR and a related prospectus and prospectus supplement, in each case filed with the Securities and Exchange Commission (the “Offering”). The offering price was $2.58 per share of Common Stock and accompanying Warrant. The net proceeds from the Offering were approximately $52.2 million, after deducting underwriting discounts and commissions and offering expenses payable by us.
Our consolidated financial statements as of December 31, 2017 and our unaudited condensed consolidated financial statements as of September 30, 2018 have been prepared under the assumption that we will continue as a going concern for the next twelve months. We have incurred recurring losses from operations and expect to continue to have losses in the future. In addition, our debt agreement is subject to covenants that could restrict the availability of additional loans and accelerate the
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repayment of that debt if breached. These factors individually and collectively raise substantial doubt about our ability to continue as a going concern. Our independent registered public accounting firm has issued a report related to our December 31, 2017 financial statements that includes an explanatory paragraph referring to such conditions and expressing substantial doubt in our ability to continue as a going concern.

Our ability to continue as a going concern is dependent upon our plan 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 we may need to raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we are unable to raise additional capital when required or on acceptable terms, we may have to (i) significantly scale back our commercialization efforts; (ii) seek commercial partners for our 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 we 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. Our consolidated financial statements as of December 31, 2017 and our 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.

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CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our accounting policies are described in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA of our Annual Report on Form 10-K as of and for year ended December 31, 2017, filed with the SEC on March 1, 2018. On January 1, 2018, we adopted a new accounting standard on revenue from contracts with customers, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under that standard, while prior period amounts are not adjusted and continue to be reported in accordance with the previous standard. See Revenue recognition below and Note 2 of Notes to Consolidated Financial Statements for further details. There have been no other changes to our critical accounting policies since December 31, 2017.

Revenue recognition

For product sales of TRULANCE, revenue is recognized upon transfer of control of promised goods to customers in an amount that reflects the consideration to which we expect 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.

For customer contracts with multiple-performance obligations, 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 consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services.

OFF-BALANCE SHEET ARRANGEMENTS

We had no off-balance sheet arrangements as of September 30, 2018.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk on the fair values of certain assets is related to credit risk associated with bank checking accounts, securities held in money market mutual funds and accounts receivable. As of September 30, 2018, we held $45.6 million in checking and U.S. Treasury based mutual funds. Our cash and cash equivalents balances are in excess of the Federally insured limit. We believe our cash and cash equivalents do not contain excessive risk, however we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. We limit our credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary. We do not require collateral to secure amounts owed to us by our customers.

Our senior secured term loan (“Term Loan”) of $107.6 million (including PIK Loans), entered into September 2017, as amended, has a fixed annual interest rate of 9.5% and we, therefore, do not have economic interest rate exposure on the Term Loan. However, the Term Loan requires us to comply with a minimum market capitalization covenant, and our shares are subject to market risk.  On October 30, 2018, we entered into Amendment and Waiver No. 3 to the term loan agreement pursuant to which CRG waived compliance with Section 10.01 and related provisions of the term loan agreement from October 25, 2018 to November 6, 2018. On November 6, 2018, we entered into Waiver No. 4 to the term loan agreement pursuant to which CRG f urther waived compliance with Section 10.01 and related provisions of the term loan agreement through November 12, 2018. 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.

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ITEM 4. CONTROLS AND PROCEDURES

Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2018, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

Disclosure controls and procedures include, without limitations, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

As required by Rule 13a-15(d) of the Exchange Act, our management, including our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded there were no material changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that could significantly affect internal controls over financial reporting during the quarter ended September 30, 2018.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 8, Commitments and contingencies, to the condensed consolidated financial statements included in our Quarterly Report on Form 10-Q for the period ended September 30, 2018, for discussions that are limited to certain recent developments concerning our legal proceedings. Those discussions should be read in conjunction with Note 7, Commitments and contingencies, to the consolidated financial statements in Part IV of our Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 1, 2018.

ITEM 1a.              RISK FACTORS

In addition to the other information in this Quarterly Report on Form 10-Q, any of the factors described below could significantly and negatively affect our business, financial condition, results of operations or prospects. The trading price of our common stock may decline due to these risks.

Risks related to Senior Secured Term Loan ("Term Loan")

Our term loan agreement with CRG Servicing LLC (or CRG) and other lenders party thereto contains restrictions that limit our flexibility in operating our business. We may be required to make a prepayment or repay the outstanding indebtedness earlier than we expect under our Term Loan Agreement if a prepayment event or an event of default occurs, including a material adverse change with respect to us, which could have a materially adverse effect on our business.

In September 2017, we entered into a term loan agreement with CRG. Pursuant to the loan agreement, we borrowed $100 million from the lenders as of the closing date. In February 2018 we amended the Term Loan agreement. The amended Term Loan provides for future borrowings of $25 million, $25 million and $50 million on or before June 30, 2018, September 30, 2018 and December 31, 2018, respectively. In June 2018, we further amended the Term Loan agreement to extend the draw down date of the second borrowing from June 30, 2018 to prior to August 29, 2018. In August 2018, we subsequently amended the Term Loan agreement to extend the draw down date of the second borrowing from August 29, 2018 to prior to October 31, 2018. We did not draw down on the second borrowing available on October 31, 2018, and as a result there are no additional principal borrowings available under the Term Loan agreement.

Our agreement with CRG contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

• Incur additional indebtedness
• enter into a merger, consolidation or certain changing of control events without complying with the terms of the loan agreement;
• change the nature of our business;
• amend, modify or waive any of our material agreements or organizational documents;
• grant certain types of liens on our assets;
• make certain investments;
• pay cash dividends; and
• enter into material transactions with affiliates.
The term loan agreement contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations. Further, the term loan agreement contains customary negative covenants limiting our ability, among other things, to incur future debt, grant liens, make investments, make acquisitions, make certain restricted payments and sell assets, subject to certain exceptions. In addition, the term loan agreement requires us to comply with a minimum market capitalization covenant, maintain its status as a national exchange listed company, a daily minimum liquidity covenant and an annual revenue requirement based on the sales of TRULANCE.

The restrictive covenants of the term loan agreement could cause us to be unable to pursue business opportunities that we or our stockholders may consider beneficial. A breach of any of these covenants could result in an event of default under the term loan agreement. An event of default will also occur if, among other things, a material adverse change in our business,
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operations or condition occurs, or a material impairment of the prospect of our repayment of any portion of the amounts we owe under the term loan agreement occurs. In the case of a continuing event of default under the agreement, CRG could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit, proceed against the collateral in which we granted CRG a security interest under the term loan agreement and related agreements, or otherwise exercise the rights of a secured creditor. Amounts outstanding under the term loan agreement are secured by all of our existing and future assets (excluding certain intellectual property).

We may not have enough available cash or be able to raise additional funds on satisfactory terms, if at all, through equity or debt financings to (i) make any required prepayment or (ii) repay such indebtedness at the time any such prepayment event or event of default occurs. In such an event, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant to others rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Our business, financial condition and results of operations could be materially adversely affected as a result.

TRULANCE sales growth in 2018 has been slower than anticipated due to a highly competitive market access environment and slower than anticipated overall market growth. As a result, based on our current updated forecasts, we are projecting TRULANCE total net sales for 2018 to be between $42.0 million to $47.0 million, which would be below the minimum revenue covenant of $61.0 million set forth in our term loan agreement with CRG. Under the terms of the agreement, we will be required to repay principal and pay prepayment penalties in an amount equal to $38.0 million to $51.0 million if total net sales fall within the expected range noted above. Such principal repayment and prepayment penalties will be due no later than March 31, 2019.

We have been seeking to renegotiate the terms of our term loan agreement with CRG. We have been unable to further amend the agreement with respect to the financial and revenue covenants, and we have decided to forego drawing down on any additional amounts pursuant to our term loan agreement. Moreover, our term loan agreement contains a minimum liquidity covenant that absent relief from CRG may not be satisfied. On October 30, 2018, we entered into Amendment and Waiver No. 3 to the term loan agreement pursuant to which CRG waived compliance with Section 10.01 and related provisions of the term loan agreement from October 25, 2018 to November 6, 2018. On November 6, 2018, we entered into Waiver No. 4 to the term loan agreement pursuant to which CRG further waived compliance with Section 10.01 and related provisions of the term loan agreement through November 12, 2018.

We are continuing discussions with CRG for covenant relief and in parallel we are currently pursuing alternatives that better align with our business, but there is no assurance that we 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 and may have to pursue or otherwise accelerate strategic alternatives, including alternatives that could result in leaving our current stockholders with little or no financial ownership of the Company, and the possibility of seeking bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code to protect stakeholder value in the event other options are not reasonably executable. There can be no guarantee that any such alternative will provide value for our stockholders.

Risks related to our Business

We will need to raise additional capital to fund our operations, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our development programs or commercialization efforts or even discontinue or curtail our operations.

Net cash used in operating activities was approximately $89.1 million and $180.1 million for the nine months ended September 30, 2018 and 2017, respectively. Net cash used in financing activities was approximately $2.1 million for the nine months ended September 30, 2018 and net cash provided by financing activities was approximately $215.5 million for the nine months ended September 30, 2017. As of September 30, 2018, we had approximately $45.6 million of cash and cash equivalents. During the nine months ended September 30, 2018 and 2017, we incurred losses from operations of approximately $97.4 million and $184.0 million, respectively. As of September 30, 2018, we had negative working capital of approximately $76.3 million, as compared to working capital of approximately $127.0 million at December 31, 2017.

During the nine months ended September 30, 2018 and the year ended December 31, 2017, our operating activities used net cash of approximately $89.1 million and $212.9 million, respectively. During the year ended December 31, 2016 and December 31, 2015, our operating activities used net cash of approximately $129.8 million and $101.0 million, respectively. In addition, as of September 30, 2018, December 31, 2017 and December 31, 2016 our cash and cash equivalents was $45.6 million, $137.0 million and $82.4 million, respectively, consisting of checking accounts and short-term money market mutual funds.

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Purchasing commercial quantities of pharmaceutical products, developing product candidates, conducting clinical trials, and commercializing products are expensive and uncertain. Circumstances, our strategic imperatives, or opportunities to create or acquire new programs, as well as maturities, redemptions or repurchases of our outstanding Notes and amounts required to be paid under our term loan agreement, could require us to, or we may choose to, seek to raise additional funds.

The amount and timing of our future funding requirements will depend on many factors, including, but not limited to:

• the level of underlying demand for TRULANCE by prescribers and patients in the U.S.;
• the level of acceptance for TRULANCE among physicians, patients and the medical community;
• the costs associated with commercializing TRULANCE in the U.S.;
• the costs of maintaining and/or expanding sales, marketing and distribution capabilities for TRULANCE;
• the rate of progress, the cost of our clinical trials and the other costs associated with our product development programs;
• the costs and timing of in-licensing additional products or product candidates or acquiring other complementary companies;
• the status, terms and timing of any collaboration, licensing, co-commercialization or other arrangements;
• the timing of any regulatory approvals of our product candidates;
• whether the holders of our outstanding Notes hold the notes to maturity without conversion into our common stock and whether we are required to repurchase our Notes prior to maturity upon a fundamental change, as defined in the indenture governing the Notes; and
• whether we seek to redeem or repurchase all or part of our outstanding Notes through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise.

We may need to raise additional capital to fund our future operations and we cannot be certain that funding will be available on acceptable terms on a timely basis, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that may impact our ability to conduct our business. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of our product candidates or our commercialization efforts. We also may be required to:

• seek collaborators for our product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; and/or

• relinquish license or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on unfavorable terms.

Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going
concern, which may hinder our ability to obtain future financing.

Our consolidated financial statements as of December 31, 2017 have been prepared under the assumption that we will
continue as a going concern for the next twelve months. Our independent registered public accounting firm has issued a report
that includes an explanatory paragraph referring to our recurring and continuing losses from operations, covenants associated with our Term Loan, and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, and to generate significant revenue. Our consolidated financial statements as of December 31, 2017 did not include any adjustments that might result from the outcome of this uncertainty.

We have incurred significant losses since inception and anticipate that we will incur continued losses for the foreseeable future.

As of September 30, 2018 and December 31, 2017, we had an accumulated deficit of approximately $907.7 million and $807.3 m illion, respectively. We will incur significant and increasing operating losses for the next several years if we expand our research and development, continue our clinical trials of TRULANCE, acquire or license technologies, advance dolcanatide into clinical development, complete clinical trials, seek regulatory approval, continue to commercialize TRULANCE and, if we
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receive FDA approval, commercialize our other product candidates. Because of the numerous risks and uncertainties associated with product development efforts, we are unable to predict the extent of any future losses or when we will become profitable, if at all. If we are unable to achieve and then maintain profitability, the market value of our common stock will likely experience significant decline.

We may need to decrease the size of our organization which may have an adverse effect on sales of TRULANCE.

We are a small company with 291 employees as of September 30, 2018. As a result of TRULANCE uptake in 2018 being slower than anticipated due to a highly competitive market access environment and slower than anticipated overall market growth, we may have to decrease the size of our organization. Our future financial performance and our ability to commercialize our products and product candidate and to compete effectively will depend, in part, on our ability to manage any such decrease effectively. In the event we are unable to maintain our own sales force at sufficient levels to sell our products and product candidates, we may not be able to commercialize our products and product candidates which would negatively impact our ability to generate revenue.

We are parties to securities complaints filed against us in U.S. federal court which if determined adversely to us may have a material adverse effect on our business and financial condition.

On February 8, 2018, a federal securities action, captioned David Lee v. Synergy Pharmaceuticals Inc. et al. , was filed in the U.S. District Court for the Eastern District of New York. Two similar, related lawsuits —Eileen Countryman v. Synergy Pharmaceuticals Inc. et al. and Wendell Rose v. Synergy Pharmaceuticals Inc. et al —were subsequently filed in the same court. On June 11, 2018, plaintiffs voluntarily dismissed the Countryman complaint. On June 22, 2018, the court consolidated the remaining Lee and Rose actions into a single action under the caption In re Synergy Pharmaceuticals, Inc. Securities Litigation . On August 31, 2018, plaintiffs in the consolidated action filed a consolidated amended complaint that seeks to recover on behalf of a putative class of purchasers of Synergy’s common stock between November 10, 2016 and November 13, 2017. The consolidated amended complaint alleges that the Company and certain of its officers and directors made false and misleading statements, including in connection with the Company's Term Loan from CRG Servicing, LLC and in connection with Trulance’s side-effect profile. The consolidated amended complaint asserts claims under the federal securities laws and seeks to recover unspecified damages, legal fees, interest, and costs.

We are subject to uncertainty relating to pricing and reimbursement policies in the U.S. which, if not favorable for our products, could hinder or prevent our products’ commercial success.

Our ability to commercialize our products successfully depend in part on the coverage and reimbursement levels set by governmental authorities, private health insurers and other third-party payers. In determining whether to approve reimbursement for our products and at what level, we expect that third-party payers will consider factors that include the efficacy, cost effectiveness and safety of our products, as well as the availability of other treatments including generic prescription drugs and over-the-counter alternatives. Further, in order to obtain and maintain acceptable reimbursement levels and access for patients at copay levels that are reasonable and customary, we may face increasing pressure to offer discounts or rebates from list prices or discounts to a greater number of third-party payers or other unfavorable pricing modifications. Obtaining and maintaining favorable reimbursement can be a time consuming and expensive process, and there is no guarantee that we will be able to negotiate or continue to negotiate pricing terms with third-party payers at levels that are profitable to us, or at all. Certain third-party payers also require prior authorization for, or even refuse to provide, reimbursement for our products, and others may do so in the future. Our business would be materially adversely affected if we are not able to receive approval for reimbursement of our products from third-party payers on a broad, timely or satisfactory basis; if reimbursement is subject to overly broad or restrictive prior authorization requirements; or if reimbursement is not maintained at satisfactory levels or becomes subject to prior authorization. In addition, our business could be adversely affected if private health insurers, including managed care organizations, the Medicare or Medicaid programs or other reimbursing bodies or payers limit or reduce the indications for or conditions under which our products may be reimbursed.

We expect to experience pricing pressures in connection with the sale of our current product and future products due to competition, the healthcare reforms discussed below, as well as the trend toward programs aimed at reducing healthcare costs, the increasing influence of managed care, the scrutiny of pharmaceutical pricing, the ongoing debates on reducing government spending and additional legislative proposals. These healthcare reform efforts or any future legislation or regulatory actions aimed at controlling and reducing healthcare costs, including through measures designed to limit reimbursement, restrict access or impose unfavorable pricing modifications on pharmaceutical products, could impact our and our partners’ ability to obtain or maintain reimbursement for our products at satisfactory levels, or at all, which could materially harm our business and financial results.

We are dependent on the commercial success of TRULANCE in the U.S. for the foreseeable future. We cannot guarantee when, or if, we will attain profitability or positive cash flows.

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We began selling TRULANCE in the U.S. in the first quarter of 2017 for CIC and in the first quarter of 2018 for IBS-C. The commercial success of TRULANCE depends on a number of factors, including:

• the effectiveness of TRULANCE as a treatment for adult patients with CIC or IBS-C;

• the size of the treatable patient population;

• the effectiveness of the sales, managed markets and marketing efforts by us;

• the adoption of TRULANCE by physicians, which depends on whether physicians view it as a safe and effective treatment for adult patients with CIC or IBS-C;

• our success in educating and activating adult CIC and IBS-C patients to enable them to more effectively communicate their symptoms and treatment history to their physicians;

• our ability to both secure and maintain adequate reimbursement for, and optimize patient access to, TRULANCE by providing third party payers with a strong value proposition based on the existing burden of illness associated with CIC and IBS-C and the benefits of TRULANCE;

• the effectiveness of our partners' distribution networks;

• the occurrence of any side effects, adverse reactions or misuse, or any unfavorable publicity in these areas, associated with TRULANCE; and

• the development or commercialization of competing products or therapies for the treatment of CIC and IBS-C, or their associated symptoms.

Our revenues from the commercialization of TRULANCE are subject to these factors, and therefore may be unpredictable from quarter-to-quarter. We may never generate sufficient revenues from TRULANCE to reach or maintain profitability for our company or to sustain our anticipated levels of operations.

A substantial portion of our total revenues is derived from sales to a limited number of customers.

We derive a substantial portion of our revenue from sales to a limited number of customers. In 2017, our three major customers, McKesson Corporation, Cardinal Health, AmerisourceBergen, accounted for 37%, 31%, and 29%, respectively, or an aggregate of 97%, of our gross revenue.

A reduction in, or loss of business with, any one of these customers, or any failure of a customer to pay us on a timely basis, would adversely affect our business.

TRULANCE may cause undesirable side effects or have other properties that could limit its commercial potential.

The most commonly reported adverse reaction in the Phase III placebo-controlled trials for TRULANCE in CIC and IBS-C was diarrhea. Severe diarrhea was reported in 2% or less of the TRULANCE-treated patients, and its incidence was similar between the IBS-C and CIC populations in these trials. If we or others identify previously unknown side effects, if known side effects are more frequent or severe than in the past, if we or others detect unexpected safety signals for TRULANCE or any products perceived to be similar to TRULANCE, or if any of the foregoing are perceived to have occurred, then in any of these circumstances:


• sales of TRULANCE may be impaired;

• regulatory approvals for TRULANCE may be denied, restricted or withdrawn;

• we may decide to, or be required to, send product warning letters or field alerts to physicians, pharmacists and hospitals;


• reformulation of the product, additional nonclinical or clinical studies, changes in labeling or changes to or reapprovals of manufacturing facilities may be required;

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• we may be precluded from pursuing additional development opportunities to enhance the clinical profile of TRULANCE within its indicated populations, as well as be precluded from studying TRULANCE in additional indications, populations and formulations;

• our reputation in the marketplace may suffer; and

• government investigations or lawsuits, including class action suits, may be brought against us.

Any of the above occurrences would harm or prevent sales of TRULANCE, increase our expenses and impair our ability to successfully commercialize TRULANCE.

Furthermore, as we explore development opportunities to enhance the clinical profile of TRULANCE through additional clinical trials, the number of patients treated with TRULANCE within and outside of its current indications or patient populations may expand, which could result in the identification of previously unknown side effects, increased frequency or severity of known side effects, or detection of unexpected safety signals. As a result, regulatory authorities, healthcare practitioners, third party payers or patients may perceive or conclude that the use of TRULANCE is associated with serious adverse effects, undermining our commercialization efforts.

In addition, the FDA-approved label for TRULANCE contains a boxed warning about its use in pediatric patients. TRULANCE is contraindicated in pediatric patients less than 6 years of age based on nonclinical data from studies in neonatal mice approximately equivalent to human pediatric patients less than 2 years of age. There is also a warning advising physicians to avoid the use of TRULANCE in pediatric patients 6 to less than 18 years of age. This warning is based on data in young juvenile mice and the lack of clinical safety and efficacy data in pediatric patients of any age group.

Clinical trials involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Our product candidates may not prove to be safe and efficacious in clinical trials and may not meet all the applicable regulatory requirements needed to receive regulatory approval. In order to receive regulatory approval for the commercialization of our product candidates, we must conduct, at our own expense, extensive preclinical testing and clinical trials to demonstrate safety and efficacy of these product candidates for the intended indication of use. Clinical testing is expensive, can take many years to complete, if at all, and its outcome is uncertain. Failure can occur at any time during the clinical trial process.

The results of preclinical studies and early clinical trials of new drugs do not necessarily predict the results of later-stage clinical trials. The design of our clinical trials is based on many assumptions about the expected effects of our product candidates, and if those assumptions are incorrect may not produce statistically significant results. Preliminary results may not be confirmed on full analysis of the detailed results of an early clinical trial. Product candidates in later stages of clinical trials may fail to show safety and efficacy sufficient to support intended use claims despite having progressed through initial clinical testing. The data collected from clinical trials of our product candidates may not be sufficient to support the filing of an NDA or to obtain regulatory approval in the United States or elsewhere. Because of the uncertainties associated with drug development and regulatory approval, we cannot determine if or when we will have an approved product for commercialization or achieve sales or profits.

Delays in clinical testing could result in increased costs to us and slow down our product development.

We may experience delays in clinical testing of our product candidates. We do not know whether planned clinical trials will begin on time, will need to be redesigned or will be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence a clinical trial, in securing clinical trial agreements with prospective sites with acceptable terms, in obtaining institutional review board approval to conduct a clinical trial at a prospective site, in recruiting patients to participate in a clinical trial or in obtaining sufficient supplies of clinical trial materials. Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, competing clinical trials and new drugs approved for the conditions we are investigating. Clinical investigators will need to decide whether to offer their patients enrollment in clinical trials of our product candidates versus treating these patients with commercially available drugs that have established safety and efficacy profiles. Any delays in completing our clinical trials will increase our costs and slow down our product development and timeliness and approval process.

We may be required to suspend or discontinue clinical trials due to unexpected side effects or other safety risks that could preclude approval of our product candidates.

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Our clinical trials may be suspended at any time for a number of reasons. For example, we may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to the clinical trial patients. In addition, the FDA or other regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety risk to the clinical trial patients.

Administering any product candidate to humans may produce undesirable side effects. These side effects could interrupt, delay or halt clinical trials of our product candidates and could result in the FDA or other regulatory authorities denying further development or approval of our product candidates for any or all targeted indications. Ultimately, some or all of our product candidates may prove to be unsafe for human use. Moreover, we could be subject to significant liability if any volunteer or patient suffers, or appears to suffer, adverse health effects as a result of participating in our clinical trials. Any of these events could prevent us from achieving or maintaining market acceptance of TRULANCE and could substantially increase commercialization costs.

If we fail to comply with healthcare regulations, we could face substantial enforcement actions, including civil and criminal penalties and our business, operations and financial condition could be adversely affected.

As a developer of pharmaceuticals, even though we do not intend to make referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse, false claims and patients' privacy rights are and will be applicable to our business. We could be subject to healthcare fraud and abuse laws and patient privacy laws of both the federal government and the states in which we conduct our business.

The laws include:

• the federal healthcare program anti-kickback law, which prohibits, among other things, persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

• federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like us which provide coding and billing information to customers;

• the federal Health Insurance Portability and Accountability Act of 1996, which prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information;

• the Federal Food, Drug, and Cosmetic Act, which among other things, strictly regulates drug manufacturing and product marketing, prohibits manufacturers from marketing drug products for off-label use and regulates the distribution of drug samples; and

• state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by federal laws, thus complicating compliance efforts.

If our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert management's attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.

If TRULANCE is unable to compete effectively with marketed drugs targeting similar indications as TRULANCE, our commercial opportunity will be reduced or eliminated.

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We face competition generally from established pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies and private and public research institutions. Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Small or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize GI drugs that are safer, more effective, have fewer side effects or are less expensive than TRULANCE.

TRULANCE competes with at least two currently approved prescription therapies for the treatment of CIC and IBS-C, namely, Amitiza and Linzess. In addition, over-the-counter products are also used to treat certain symptoms of CIC and IBS-C. We know other companies are developing products that will compete with TRULANCE should they be approved by the FDA. If potential competitors are successful in completing drug development for their product candidates and obtain approval from the FDA, they could limit the demand for TRULANCE. We expect that our ability to compete effectively will depend upon our ability to:


• maintain a proprietary position for our products and manufacturing processes and other related product technology;

• attract and retain key personnel;

• ensure competitive patient access to our products in the U.S. based on any required discounts and rebates to payors;

• develop relationships with physicians prescribing these products; and

• build and maintain an adequate sales and marketing infrastructure for TRULANCE.

Because we will be competing against significantly larger companies with established track records, we will have to demonstrate that, based on clinical data, side-effect profiles and other factors, our products are competitive with other products. If we are unable to compete effectively in the GI drug market and differentiate our products from other marketed GI drugs, we may never generate meaningful revenue.

If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop our product candidates, conduct our clinical trials and commercialize our products and product candidates.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We are highly dependent upon our senior management and scientific staff. The loss of one or more of our senior management could delay or prevent the successful completion of any planned or ongoing clinical trials, any ongoing regulatory activities with FDA or the commercialization of our products and product candidates.

The competition for qualified personnel in the biotechnology and pharmaceuticals field is intense. We will need to hire additional personnel as we expand our commercial and supply chain activities. We may not be able to attract and retain quality personnel on acceptable terms given the competition for such personnel among biotechnology, pharmaceutical and other companies.

We are in the early stages of operating our commercial organization. If we are unable to maintain a direct sales force in the U.S. to promote our products, the commercial opportunity for our products may be diminished.

We are in the early stages of operating our commercial organization. We will incur significant additional expenses and commit significant additional management resources to maintain our own sales force. We may not be able to maintain such capabilities despite these additional expenditures. We will also have to compete with other pharmaceutical and biotechnology companies to recruit, hire and train sales and marketing personnel. If we elect to rely on third parties to sell our products and product candidates in the United States, we may receive less revenue than if we sold our products directly. In addition, although we would intend to use due diligence in monitoring their activities, we may have little or no control over the sales efforts of those third parties. In the event we are unable to maintain our own sales force or collaborate with a third party to sell our products and product candidates, we may not be able to commercialize our products and product candidates which would negatively impact our ability to generate revenue.

We may need to rely on third parties to market and commercialize TRULANCE and our product candidates in international markets.

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Currently, we do not have any commercial infrastructure in international markets. In the future, if appropriate regulatory approvals are obtained, we may commercialize TRULANCE and our product candidates in international markets. On February 27, 2018, we entered into a definitive licensing, development and commercialization agreement with Cipher Pharmaceuticals for the Canadian market. Significant commercialization of TRULANCE in Canada is several years away, if at all. If Cipher Pharmaceuticals is not able to effectively register and commercialize TRULANCE in Canada, we may not be able to generate revenue from the license agreement as a result of sales of TRULANCE in Canada or China.

We have not decided how to commercialize TRULANCE and our product candidates in other international markets. We may decide to build our own sales force or sell our products through third parties. If we decide to sell TRULANCE and our product candidates in international markets through a third party, we may not be able to enter into any marketing arrangements on favorable terms or at all. In addition, these arrangements could result in lower levels of income to us than if we marketed TRULANCE and our product candidates entirely on our own. If we are unable to enter into a marketing arrangement for TRULANCE and our product candidates in international markets, we may not be able to develop an effective international sales force to successfully commercialize those products in international markets. If we fail to enter into marketing arrangements for our products and are unable to develop an effective international sales force, our ability to generate revenue would be limited.

If the manufacturers upon whom we rely fail to produce TRULANCE and dolcanatide, in the volumes that we require on a timely basis, or fail to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development and commercialization of our products and product candidates.

We do not currently possess internal manufacturing capacity. We currently utilize the services of contract manufacturers to manufacture our clinical supplies and commercial products. With respect to the manufacturing of TRULANCE, we have executed supply agreements with contract manufacturers sufficient to meet our foreseeable clinical trial and commercial requirements. If any of our suppliers were to limit or terminate production or otherwise fail to meet the quality or delivery requirements needed to satisfy the supply, the process of locating and qualifying alternate sources could require up to several months, during which time our production could be delayed. Pursuant to the license agreements with Cipher Pharmaceuticals and Luoxin, we have agreed to supply each Cipher Pharmaceuticals and Luoxin with TRULANCE for development and commercialization in Canada and China, respectively. Any curtailment in the availability of TRULANCE would have a material adverse effect on our business, financial position and results of operations and adversely affect our relationship with each of Cipher Pharmaceuticals and Luoxin. In addition, because regulatory authorities must generally approve raw material sources for pharmaceutical products, changes in raw material suppliers may result in production delays or higher raw material costs.

Since the commercial manufacturing process for TRULANCE is single sourced for Active Pharmaceutical Ingredient, or API, and Drug Product, we are currently at risk until we establish secondary suppliers. We continue to pursue additional API and drug product supply agreements with other contract manufacturers. We may be required to agree to minimum volume requirements, exclusivity arrangements or other restrictions with the contract manufacturers. We may not be able to enter into long-term agreements on commercially reasonable terms, or at all. If we change or add manufacturers, the FDA and comparable foreign regulators may require approval of the changes. Approval of these changes could require new testing by the manufacturer and compliance inspections to ensure the manufacturer is conforming to all applicable laws and regulations, including good manufacturing practices, or GMP. In addition, the new manufacturers would have to be educated in or independently develop the processes necessary for the production of our products and product candidates. Peptide manufacturing is a highly specialized manufacturing process. While we believe we will have long term arrangements with a sufficient number of contract manufacturers, if we lose a manufacturer, it would take us a substantial amount of time to identify and develop a relationship, and seek regulatory approval, where necessary, for an alternative manufacturer.

The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products may encounter difficulties in production, particularly in scaling up production. These problems include difficulties with production costs and yields, quality control, including stability of the product and quality assurance testing, shortages of qualified personnel, as well as compliance with federal, state and foreign regulations. In addition, any delay or interruption in the supply of clinical trial supplies could delay the completion of our clinical trials, increase the costs associated with conducting our clinical trials and, depending upon the period of delay, require us to commence new clinical trials at significant additional expense or to terminate a clinical trial.

We are responsible for ensuring that each of our contract manufacturers comply with the GMP requirements of the FDA and other regulatory authorities from which we seek to obtain product approval. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. The approval process for NDAs includes a review of the manufacturer's compliance with GMP requirements. We are responsible for regularly assessing a contract manufacturer's compliance with GMP requirements through record reviews and periodic audits and for ensuring that the contract manufacturer takes responsibility and corrective action for any identified deviations. Manufacturers of TRULANCE and other product candidates, including dolcanatide, may be unable to comply with these GMP requirements and
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with other FDA and foreign regulatory requirements, if any. While we will oversee compliance by our contract manufacturers, ultimately we will not have control over our manufacturers' compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of TRULANCE or other product candidates is compromised due to a manufacturers' failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize TRULANCE or other product candidates, and we may be held liable for any injuries sustained as a result. Any of these factors could cause a delay of clinical trials, regulatory submissions, approvals or commercialization of TRULANCE or other product candidates, entail higher costs or result in us being unable to effectively commercialize TRULANCE or other product candidates. Furthermore, if our manufacturers fail to deliver the required commercial quantities on a timely basis and at commercially reasonable prices, we may be unable to meet demand for any approved products and would lose potential revenues.

Materials necessary to manufacture TRULANCE and our product candidates may not be available on commercially reasonable terms, or at all, which could impair commercialization of TRULANCE and may delay the development of our product candidates.

We rely on third-party manufacturers of TRULANCE and our product candidates to purchase from third-party suppliers the materials necessary to produce the bulk APIs and product candidates for our clinical trials, and we rely on such manufacturers to purchase such materials to produce the APIs and finished products for any commercial distribution of TRULANCE. Suppliers may not sell these materials to our manufacturers at the time they need them in order to meet our required delivery schedule or on commercially reasonable terms, if at all. We do not have any control over the process or timing of the acquisition of these materials by our manufacturers. Moreover, we currently do not have any agreements for the production of these materials. If we, or our manufacturers, are unable to purchase these materials, the commercialization of TRULANCE would be impaired and there could be a shortage in supply of such product, which would harm our ability to generate revenues from such product and achieve or sustain profitability and adversely impact our relationship with Cipher Pharmaceuticals.

TRULANCE may not gain acceptance among physicians, patients and the medical community, thereby limiting our potential to generate revenues.

The degree of market acceptance of any approved product by physicians, healthcare professionals and third-party payors and our profitability and growth will depend on a number of factors, including:


• demonstration of safety and efficacy;

• changes in the practice guidelines and the standard of care for the targeted indication;

• relative convenience and ease of administration;

• the prevalence and severity of any adverse side effects;

• budget impact of adoption of our product on relevant drug formularies

• the availability, cost and potential advantages of alternative treatments, including less expensive generic drugs;

• pricing, reimbursement and cost effectiveness, which may be subject to regulatory control;

• effectiveness of our or any of our partners' sales and marketing strategies;

• the product labeling or product insert required by the FDA or regulatory authority in other countries; and

• the availability of adequate third-party insurance coverage or reimbursement.

If any product candidate that we develop does not provide a treatment regimen that is as beneficial as, or is perceived as being as beneficial as, the current standard of care or otherwise does not provide patient benefit, that product candidate, if approved for commercial sale by the FDA or other regulatory authorities, likely will not achieve market acceptance. Our ability to effectively promote and sell any approved products will also depend on pricing and cost-effectiveness, including our ability to produce a product at a competitive price and our ability to obtain sufficient third-party coverage or reimbursement. If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, patients and third-party payors, our ability to generate revenues from that product would be substantially reduced. In addition, our efforts to educate the
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medical community and third-party payors on the benefits of our product candidates may require significant resources, may be constrained by FDA rules and policies on product promotion, and may never be successful.

Guidelines and recommendations published by various organizations can impact the use of our products and product candidates.

Government agencies promulgate regulations and guidelines directly applicable to us and to our products and product candidates. In addition, professional societies, practice management groups, private health and science foundations and organizations involved in various diseases from time to time may also publish guidelines or recommendations to the health care and patient communities. Recommendations of government agencies or these other groups or organizations may relate to such matters as usage, dosage, route of administration and use of concomitant therapies. Recommendations or guidelines suggesting the reduced use of our products and product candidates or the use of competitive or alternative products that are followed by patients and health care providers could result in decreased use of our products and product candidates.

We face potential product liability exposure, and, if claims brought against us are successful, we could incur substantial liabilities.

The use of our product candidates in clinical trials and the sale of marketed products expose us to product liability claims. Currently, we are not aware of any anticipated product liability claims with respect to our products or product candidates. In the future, an individual may bring a liability claim against us if one of our products or product candidates causes, or merely appears to have caused, an injury. If we cannot successfully defend ourselves against the product liability claim, we may incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:


• decreased demand for our approved products;

• impairment of our business reputation;

• withdrawal of clinical trial participants;

• costs of related litigation;

• initiation of investigations by regulators;

• substantial monetary awards to patients or other claimants;

• distraction of management's attention from our primary business;

• product recalls;

• loss of revenue; and

• the inability to commercialize our product candidates.

We currently have product liability insurance coverage for the commercial sale of TRULANCE and for the clinical trials of our product candidates which is subject to industry-standard terms, conditions and exclusions. Our current insurance coverage may prove insufficient to cover any liability claims brought against us. In addition, because of the increasing costs of insurance coverage, we may not be able to maintain insurance coverage at a reasonable cost or obtain insurance coverage that will be adequate to satisfy liabilities that may arise. A successful product liability claim or series of claims could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

Our failure to successfully discover, acquire, develop and market additional product candidates or approved products could impair our ability to grow.

As part of our growth strategy, we intend to develop and market additional products and product candidates. We are pursuing various therapeutic opportunities through our pipeline. We may spend several years completing our development of any particular current or future internal product candidate, and failure can occur at any stage. The product candidates to which we allocate our resources may not end up being successful. In addition, because our internal research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products or technology to us. The success of this strategy depends partly upon our ability to identify, select, discover and acquire promising pharmaceutical product candidates and products. Failure of this strategy would impair our ability to grow.

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The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rights to additional product candidates on terms that we find acceptable, or at all. In addition, future acquisitions may entail numerous operational and financial risks, including:


• disruption of our business and diversion of our management's time and attention to develop acquired products or technologies;

• incurrence of substantial debt, dilutive issuances of securities or depletion of cash to pay for acquisitions;

• higher than expected acquisition and integration costs;

• difficulty in combining the operations and personnel of any acquired businesses with our operations and personnel;

• increased amortization expenses;

• assumption of known and unknown liabilities;

• impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and

• inability to motivate key employees of any acquired businesses.

Further, any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities.

Even though TRULANCE is approved by the FDA for the treatment of adults with CIC and IBS-C, it faces post-approval development and regulatory requirements, which will present additional challenges.

In January 2017, the FDA approved TRULANCE as a once-daily treatment for adult men and women suffering from CIC and in January 2018 for IBS-C. TRULANCE will be subject to ongoing FDA requirements governing the labeling, packaging, storage, advertising, promotion, recordkeeping, post approval commitments and submission of safety and other post-market indications. Manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with GMP regulations. If we or a regulatory agency discovers previously unknown problems with a
product, such as adverse events of unanticipated severity or frequency, or problems with a facility where the product is manufactured, a regulatory agency may impose restrictions on that product or the manufacturer, including requiring implementation of a risk evaluation and mitigation strategy program, withdrawal of the product from the market or suspension of manufacturing. If we, our partners or the manufacturing facilities for TRULANCE fail to comply with applicable regulatory requirements, a regulatory agency may:

• issue warning letters or untitled letters;

• impose civil or criminal penalties;

• suspend or withdraw regulatory approval;

• suspend any ongoing clinical trials;

• refuse to approve pending applications or supplements to applications submitted by us;

• impose restrictions on operations, including costly new manufacturing requirements; or

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• seize or detain products or require us to initiate a product recall.

Even though TRULANCE is approved for marketing in the U.S., we or our partners may never receive approval to commercialize TRULANCE or our other product candidates outside of the United States.

In the future, we may seek to commercialize TRULANCE and/or dolcanatide, in foreign countries outside of the United States. In order to market any products outside of the United States, we must establish and comply with numerous and varying regulatory requirements of other jurisdictions regarding safety and efficacy. Approvals procedures vary among jurisdictions and can involve product testing and administrative review periods different from, and greater than, those in the United States. The time required to obtain approval in other jurisdictions might differ from that required to obtain FDA approval. Pursuant to our license agreements with Cipher Pharmaceuticals and Luoxin, each of Cipher and Luoxin is responsible for all regulatory activities in Canada and China, respectively. If Cipher cannot obtain regulatory approval for TRULANCE in Canada or Luoxin cannot obtain regulatory approval for TRULANCE in China, our relationship with Cipher and Luoxin, as the case may be, will be adversely affected and we will not be able to generate any revenue from the license agreements with Cipher and Luoxin. In addition, even if we and Cipher or Luoxin obtains marketing approval for TRULANCE in Canada or China, respectively, Health Canada or the China Food and Drug Administration may impose restrictions on TRULANCE’s conditions for use, distribution or marketing and in some cases may impose ongoing requirements for post-market surveillance, post-approval studies or clinical trials.

The approval process varies and the time needed to secure approval in any region such as the European Union or in a country with an independent review procedure may be longer or shorter than that required for FDA approval. We cannot assure you that clinical trials conducted in one country will be accepted by other countries or that an approval in one country or region will result in approval elsewhere. Regulatory approval in one jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory processes in others. Failure to obtain regulatory approvals in other jurisdictions or any delay or setback in obtaining such approvals could have an adverse effect on us. Such effects include the risks that TRULANCE or our other product candidates may not be approved for all indications for use included in proposed labeling or for any indications at all, which could limit the uses of TRULANCE or other product candidates and have an adverse effect on our products' commercial potential or require costly post-marketing studies.

We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to seek or obtain regulatory approval for or commercialize our product candidates.

We have agreements with third-party contract research organizations, or CROs, under which we have delegated to the CROs the responsibility to coordinate and monitor the conduct of our clinical trials and to manage data for our clinical programs. We, our CROs and our clinical sites are required to comply with current Good Clinical Practices, or GCPs, regulations and guidelines issued by the FDA and by similar governmental authorities in other countries where we are conducting clinical trials. We have an ongoing obligation to monitor the activities conducted by our CROs and at our clinical sites to confirm compliance with these requirements. In the future, if we, our CROs or our clinical sites fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. In addition, our clinical trials must be conducted with product produced under cGMP regulations, and may require a large number of test subjects. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our
clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for our product candidates would be harmed, our costs could increase, and our ability to generate revenue could be delayed.

Reimbursement may not be available for TRULANCE or our other product candidates, which would impede sales.

Market acceptance and sales of TRULANCE and other potential product candidates may depend on coverage and reimbursement policies and health care reform measures. Decisions about formulary coverage as well as levels at which government authorities and third-party payers, such as private health insurers and health maintenance organizations, reimburse patients for the price they pay for our products as well as levels at which these payors pay directly for our products, where applicable, could affect whether we are able to commercialize these products. We cannot be sure that reimbursement will be available for any of these products. Also, we cannot be sure that coverage or reimbursement amounts will not reduce the
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demand for, or the price of, our products. If coverage and reimbursement are not available, are available only at limited levels, or are available and then withdrawn, we may not be able to successfully commercialize our products.

In recent years, officials have made numerous proposals to change the health care system in the United States. These proposals include measures that would limit or prohibit payments for certain medical treatments or subject the pricing of drugs to government control and international reference pricing. In addition, in many foreign countries, particularly the countries of the European Union, the pricing of prescription drugs is subject to government control. If our products are or become subject to government regulation that limits or prohibits payment for our products, or that subjects the price of our products to governmental control, we may not be able to generate revenue, attain profitability or commercialize our products.

As a result of legislative proposals and the trend towards managed health care in the United States, third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new drugs. They may also impose strict prior authorization requirements and/or refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted market approvals. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of newly-approved drugs, which in turn will put pressure on the pricing of drugs.

In addition, there is a degree of unpredictability with regard to the eventual pricing and reimbursement levels of medications in markets outside the United States. If the pricing and reimbursement levels of TRULANCE are lower than we anticipate, then affordability of, and market access to, TRULANCE may be adversely affected and thus market potential in these territories would suffer. Furthermore, with regard to any indications for which we may gain approval in territories outside the United States, the number of actual patients with the condition included in such approved indication may be smaller than we anticipate. If any such approved indication is narrower than we anticipate, the market potential in these countries for our product would suffer.

We will incur significant liability if it is determined that we are promoting any "off-label" use of TRULANCE.

Physicians are permitted to prescribe drug products and medical devices for uses that are not described in the product's labeling and that differ from those approved by the FDA or other applicable regulatory agencies. Such "off-label" uses are common across medical specialties. Although the FDA and other regulatory agencies do not regulate a physician's choice of treatments, the FDA and other regulatory agencies do restrict communications on the subject of off-label use. Companies are not permitted to promote drugs or medical devices for off-label uses. Accordingly, we do not permit promotion of TRULANCE in the U.S. for use in any indications other than CIC and IBS-C or in any patient populations other than adult men and women. Similarly, we do not permit promotion of any other approved product we develop, license, co-promote or otherwise partner for any indication, population or use not described in such product's label. The FDA and other regulatory and enforcement authorities actively enforce laws and regulations prohibiting promotion of off-label uses and the promotion of products for which marketing approval has not been obtained. A company that is found to have promoted off-label uses will be subject to significant liability, including civil and administrative remedies as well as criminal sanctions.

Notwithstanding the regulatory restrictions on off-label promotion, the FDA and other regulatory authorities allow companies to engage in truthful, non-misleading, and non-promotional scientific exchange concerning their products. We intend to engage in medical education activities and communicate with healthcare providers in compliance with all applicable laws, regulatory guidance and industry best practices. Although we believe we have put in place a robust compliance program, which is designed to ensure that all such activities are performed in a legal and compliant manner, we cannot be certain that our program will address all areas of potential exposure and the risks in this area cannot be entirely eliminated.

If we fail to comply with healthcare and other regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

TRULANCE is marketed in the U.S. and is covered by federal healthcare programs; and, as a result, certain federal and state healthcare laws and regulations pertaining to product promotion and fraud and abuse are applicable to, and may affect, our business. These laws and regulations include:


• federal healthcare program anti-kickback laws, which prohibit, among other things, persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid;

• federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, information or claims for payment from Medicare, Medicaid, or other third-party payers
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that are false or fraudulent, and which may apply to us for reasons including providing coding and billing advice to customers;

• the federal Health Insurance Portability and Accountability Act of 1996, which prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information;

• the Federal Food, Drug, and Cosmetic Act, which among other things, strictly regulates drug product and medical device marketing, prohibits manufacturers from marketing such products for off-label use and regulates the distribution of samples;

• federal laws that require pharmaceutical manufacturers to report certain calculated product prices to the government or provide certain discounts or rebates to government authorities or private entities, often as a condition of reimbursement under government healthcare programs;

• the so-called "federal sunshine" law, which requires pharmaceutical and medical device companies to monitor and report certain financial interactions with physicians and other healthcare professionals and healthcare organizations to the federal government for re-disclosure to the public; and

• state law equivalents of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers, state transparency laws and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by federal laws, thus complicating compliance efforts.

Our global activities are subject to the U.S. Foreign Corrupt Practices Act which prohibits corporations and individuals from paying, offering to pay, or authorizing the payment of anything of value to any foreign government official, government staff member, political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. We are also subject to similar anti-bribery laws in the other countries in which we do business.

If our operations are found to be in violation of any of the laws described above or any other laws, rules or regulations that apply to us, we will be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, rules or regulations, we cannot be certain that our program will address all areas of potential exposure and the risks in this area cannot be entirely eliminated, particularly because the requirements and government interpretations of the requirements in this space are constantly evolving. Any action against us for violation of these laws, rules or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's attention from the operation of our business, as well as damage our business or reputation. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security, fraud and reporting laws may prove costly.

Healthcare reform and other governmental and private payer initiatives could hinder or prevent our products' or product candidates' commercial success.

The U.S. government and other governments have shown significant interest in pursuing continued healthcare reform. Any government-adopted reform measures could adversely impact the pricing of healthcare products and services in the United States or internationally and the amount of reimbursement available from governmental agencies or other third party payors. The continuing efforts of the U.S. and foreign governments, insurance companies, managed care organizations and other payors
of health care services to contain or reduce health care costs may adversely affect our ability to set prices for our products which we believe are fair, and our ability to generate revenues and achieve and maintain profitability.

New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to healthcare availability, methods of delivery or payment for products and services, or sales, marketing or pricing, may limit our potential revenue, and we may need to revise our research and development programs. The pricing and reimbursement environment may change in the future and become more challenging due to several reasons, including policies advanced by the current executive administration in the United States, new healthcare legislation or fiscal challenges faced by government health administration authorities. Specifically, in both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably.

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For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the PPACA has substantially changed the way healthcare is financed by both government health plans and private insurers, and significantly impacts the pharmaceutical industry. The PPACA contains a number of provisions that are expected to impact our business and operations in ways that may negatively affect our potential revenues in the future. For example, the PPACA imposes a non-deductible excise tax on pharmaceutical manufacturers or importers that sell branded prescription drugs to U.S. government programs which we believe will increase the cost of our products. In addition, as part of the PPACA's provisions closing a funding gap that currently exists in the Medicare Part D prescription drug program (commonly known as the "donut hole"), we will be required to provide a discount on branded prescription drugs equal to 50% of the government-negotiated price, for drugs provided to certain beneficiaries who fall within the donut hole. Similarly, PPACA increases the minimum level of Medicaid rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1% and requires collection of rebates for drugs paid by Medicaid managed care organizations. The PPACA also includes significant changes to the 340B drug discount program including expansion of the list of eligible covered entities that may purchase drugs under the program. At the same time, the expansion in eligibility for health insurance benefits created under PPACA is expected to increase the number of patients with insurance coverage who may receive our products. While it is too early to predict all the specific effects the PPACA or any future healthcare reform legislation will have on our business, they could have a material adverse effect on our business and financial condition.

Some of the provisions of the PPACA have yet to be implemented, and there have been legal and political challenges to certain aspects of the PPACA. Since January 2017, President Trump has signed two executive orders and other directives designed to delay, circumvent, or loosen certain requirements mandated by the PPACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the PPACA. While Congress has not passed repeal legislation, the Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Congress may consider other legislation to repeal or replace elements of the PPACA.

Congress periodically adopts legislation like the PPACA and the Medicare Prescription Drug, Improvement and Modernization Act of 2003, that modifies Medicare reimbursement and coverage policies pertaining to prescription drugs. Implementation of these laws is subject to ongoing revision through regulatory and sub regulatory policies. Congress also may consider additional changes to Medicare policies, potentially including Medicare prescription drug policies, as part of ongoing budget negotiations. While the scope of any such legislation is uncertain at this time, there can be no assurances that future legislation or regulations will not decrease the coverage and price that we may receive for our proposed products. Other third-party payors are increasingly challenging the prices charged for medical products and services. It will be time consuming and expensive for us to go through the process of seeking coverage and reimbursement from Medicare and private payors. Our proposed products may not be considered cost-effective, and coverage and reimbursement may not be available or sufficient to allow us to sell our proposed products on a profitable basis. Further federal and state proposals and health care reforms are likely which could limit the prices that can be charged for our products and product candidates that we develop and may further limit our commercial opportunities. Our results of operations could be materially adversely affected by proposed healthcare reforms, by the Medicare prescription drug coverage legislation, by the possible effect of such current or future legislation on amounts that private insurers will pay and by other health care reforms that may be enacted or adopted in the future.

Individual states have become increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access, and marketing cost disclosure and transparency measures, and to encourage importation from other countries and bulk purchasing. Legally mandated price controls on payment amounts by third-party payors or other restrictions could harm our business, results of operations, financial condition and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This could reduce ultimate demand for our products or put pressure on our product pricing, which could negatively affect our business, results of operations, financial condition and prospects.

In addition, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and state legislatures will likely continue to focus on healthcare reform, the cost of prescription drugs and the reform of the Medicare and Medicaid programs. While we cannot predict the full outcome of any such legislation, it may result in decreased reimbursement for drugs, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This could harm our ability to generate revenues. Increases in importation or re-importation of pharmaceutical products from foreign countries into the United States could put competitive pressure on our ability to profitably price our products, which, in turn, could adversely affect our business, results of operations, financial condition and prospects. We might elect not to seek approval for or market our products in foreign jurisdictions in order to minimize the risk of re-importation, which could also reduce the
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revenue we generate from our product sales. It is also possible that other legislative proposals having similar effects will be adopted.

In September 2007, the Food and Drug Administration Amendments Act of 2007 was enacted, giving the FDA enhanced post-marketing authority, including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies approved by the FDA. The FDA's exercise of this authority could result in delays or increased costs following the commercial launch of TRULANCE for the treatment of adult men and women suffering from CIC and IBS-C and could result in potential restrictions on the sale and/or distribution of TRULANCE, even in its approved indication and patient populations.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our suppliers and business partners, as well as personally identifiable information of clinical trial participants and employees. Similarly, our business partners and third party providers possess certain of our sensitive data. The secure maintenance of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information, including our data being breached at our business partners or third-party providers, could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations, and damage our reputation which could adversely affect our business.

It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection.

Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our product candidates, and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. We will only be able to protect our product candidates from unauthorized making, using, selling and offering to sell or importation by third parties to the extent that we have rights under valid and enforceable patents or trade secrets that cover these activities.

For example:


• others may be able to make compounds that are competitive with our products but that are not covered by the claims of our patents;

• we may not have been the first to make the inventions covered by our pending patent applications;

• we may not have been the first to file patent applications for these inventions;

• others may independently develop similar or alternative technologies or duplicate any of our technologies;

• it is possible that our pending patent applications will not result in issued patents

• it is possible that our issued patents could be narrowed in scope, invalidated, held to be unenforceable, or circumvented;

• we may not develop additional proprietary technologies that are patentable; or

• the patents of others may have an adverse effect on our business.

We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

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We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use, our technology.

If we choose to go to court to stop someone else from using the inventions claimed in our patents, that individual or company has the right to ask the court to rule that these patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and would consume time and other resources even if we were successful in stopping the infringement of these patents. In addition, there is a risk that the court will decide that these patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the other party on the ground that such other party's activities do not infringe our rights to these patents.

Furthermore, a third party may claim that we are using inventions covered by the third party's patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we are infringing the third party's patents and would order us to stop the activities covered by the patents. In addition, there is a risk that a court will order us to pay the other party damages for having violated the other party's patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.

Because some patent applications in the United States may be maintained in secrecy until the patents are issued, patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents or our pending applications or that we were the first to invent the technology. Our competitors have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications and could further require us to obtain rights to issued patents covering such technologies. If another party has filed a United States patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the PTO, to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such inventions.

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submissions, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentaries, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

We have not yet registered trademarks for the company name "Synergy Pharmaceuticals," TRULANCE or other potential drug names for plecanatide in all our potential markets, and failure to secure those registrations could adversely affect our ability to market TRULANCE, other product candidates and our business.

We have applied to register trademarks for our company name and for TRULANCE in the United States and other jurisdictions, but may not have covered all potential markets. Our trademark applications have received registrations in some jurisdictions. Our remaining trademark applications may not be allowed for registration, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the United States and in foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Oppositions or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. In jurisdictions where we have not yet filed trademark applications, we may be conflicted from obtaining registration if/when we do file trademark applications due to third party conflicts. Failure to secure trademark
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registrations in the United States and in foreign jurisdictions could adversely affect our ability to market TRULANCE, our other product candidates and our business.

We received a demand letter from a large pharmaceutical company, or PharmCo, demanding that we withdraw our applications for TRULANCE in the United States and elsewhere, claiming that the mark is too similar to a mark used in connection with products and services related to diabetes. On November 2, 2016, we entered into a Trademark Consent Agreement pursuant to which PharmCo agreed to our use and registration of the TRULANCE mark in connection with products for the treatment of constipation and irritable bowel syndrome and related conditions in oral tablet form. We agreed not to use such TRULANCE or any mark including the term TRULANCE or commencing with the letters TRUL on or in connection with products and services related to diabetes or any product involving subcutaneous injection and, where possible, to amend our trademark filings to include the limitation "all of the aforesaid excluding pharmaceutical preparations for the treatment of diabetes." PharmCo has reserved its right to object and take legal action in the event we use a mark with the prefix TRU in connection with drugs in the diabetes field.

In addition, an opposition has been filed in the European Union to our application to register SYNERGY PHARMACEUTICALS.

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property, which could limit our ability to compete.

Because we operate in the highly technical field of research and development of small molecule drugs, we rely in part on trade secret protection in order to protect our proprietary trade secrets and unpatented know-how. However, trade secrets are difficult to protect, and we cannot be certain that others will not develop the same or similar technologies on their own. We have taken steps, including entering into confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers, manufacturers and other advisors, to protect our trade secrets and unpatented know-how. These agreements generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us during the course of the party's relationship with us. We also typically obtain agreements from these parties that provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets or know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets or know-how. The failure to obtain or maintain trade secret protection could adversely affect our competitive position.

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

As is common in the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

Risks Related to the Convertible Senior Notes

The indenture for our senior convertible notes, or the Notes, contains covenants limiting our financial and operating flexibility.

The indenture for the Notes contains covenants that will restrict our ability and the ability of certain of our subsidiaries to:


• declare or pay any dividends on our or our subsidiaries' capital stock;

• redeem or repurchase capital stock, or prepay or repurchase subordinated debt.

These restrictive covenants could limit our ability to pursue our growth plans, restrict our flexibility in planning for, or reacting to, changes in our business and industry and increase our vulnerability to general adverse economic and industry conditions. We may enter into additional financing arrangements in the future, which could further restrict our flexibility.

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Any defaults of covenants contained in the Notes may lead to an event of default under the Notes and the indenture. We may not be able to pay any amounts due to holders of the Notes in the event of such default, and such default may significantly impair our ability to satisfy our obligations under the Notes.

We will not make any adjustment to the conversion rate for Notes converted in connection with a fundamental change, and noteholders will not be compensated for any lost value of their Notes as a result of such transaction.

We will not increase or make any other adjustment to the conversion rate upon a conversion of Notes in connection with a fundamental change or similar event. Therefore, noteholders will not be compensated for any lost value of their Notes as a result of such transaction.

The Notes are effectively subordinated to any of our future secured debt and any liabilities of our subsidiaries.

The Notes will rank senior in right of payment to our future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our trade payables and other future unsecured indebtedness that is not so subordinated; effectively junior to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all future indebtedness (including trade payables) incurred by our subsidiaries. In the event of our bankruptcy, liquidation, reorganization or other winding up, our assets that secure debt ranking senior or equal in right of payment to the Notes will be available to pay obligations on the Notes only after the secured debt has been repaid in full. There may not be sufficient assets remaining to pay amounts due on any or all of the Notes then outstanding.

Servicing our debt will require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

Recent regulatory actions may adversely affect the trading price and liquidity of the Notes.

We expect that investors in, and potential purchasers of, the Notes may employ, or seek to employ, an arbitrage strategy with respect to the Notes. Investors that employ an arbitrage strategy with respect to the Notes typically implement that strategy by selling short the common stock underlying the Notes and dynamically adjusting their short position while they hold the Notes. Investors may also implement this hedging strategy by entering into swaps on our common stock in lieu of or in addition to short selling the common stock.

The Securities and Exchange Commission, or SEC, and other regulatory and self-regulatory authorities have implemented various rules and may adopt additional rules in the future that may impact those engaging in short selling activity involving equity securities (including our common stock), including Rule 201 of SEC regulation SHO, the Financial Industry Regulatory Authority, Inc.'s "Limit Up-Limit Down" program, market-wide circuit breaker systems that halt trading of stock for certain periods following specific market declines, and rules stemming from the enactment and implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Past regulatory actions, including emergency actions or regulations, have had a significant impact on the trading prices and liquidity of equity-linked instruments. Any governmental action that similarly restricts the ability of investors in, or potential purchasers of, the Notes to effect short sales of our common stock could similarly adversely affect the trading price and the liquidity of the Notes.

Volatility in the market price and trading volume of our common stock could adversely impact the trading price of the Notes.

The stock market in recent years has experienced significant price and volume fluctuations that have often been unrelated to the operating performance of companies. The market price of our common stock could fluctuate significantly for many reasons, including in response to the risks described in this section and elsewhere in this Form 10-K or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or negative announcements by our customers, competitors or suppliers regarding their own performance, as well as industry conditions and general financial, economic and political instability. A decrease in the market price of our common stock would likely adversely impact the trading price of the Notes. The market price of our common stock could also be affected by possible sales of our common stock by investors who view the Notes as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that we
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expect to develop involving our common stock. This trading activity could, in turn, affect the trading prices of the Notes. This may result in greater volatility in the trading price of the Notes than would be expected for non-convertible debt securities.

Subject to certain limitations, we continue to have the ability to incur debt; if we incur substantial additional debt, these higher levels of debt may affect our ability to pay the principal of and interest on the Notes.

Subject to certain limitations, we and our subsidiaries may be able to incur substantial additional debt in the future, some of which may be secured debt. The indenture governing the Notes does not restrict our ability to incur additional subordinated indebtedness or require us to maintain financial ratios or specified levels of net worth or liquidity. If we incur substantial additional indebtedness in the future, these higher levels of indebtedness may affect our ability to pay the principal of and interest on the Notes, or any fundamental change purchase price, and our creditworthiness generally.

We may not have the ability to raise the funds necessary to purchase the Notes as required upon a fundamental change, and our future debt may contain limitations on our ability to purchase the Notes.

Following a fundamental change as defined, holders of Notes will have the right to require us to purchase their Notes for cash. A fundamental change may also constitute an event of default or prepayment under, and result in the acceleration of the maturity of, our then-existing indebtedness. We cannot assure noteholders that we will have sufficient financial resources, or will be able to arrange financing, to pay the fundamental change purchase price in cash with respect to any Notes surrendered by holders for purchase upon a fundamental change. In addition, restrictions in our then existing credit facilities or other indebtedness, if any, may not allow us to purchase the Notes upon a fundamental change. Our failure to purchase the Notes upon a fundamental change when required would result in an event of default with respect to the Notes which could, in turn, constitute a default under the terms of our other indebtedness, if any. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and purchase the Notes.

Some significant restructuring transactions may not constitute a fundamental change, in which case we would not be obligated to offer to purchase the Notes.

Upon the occurrence of a fundamental change as defined, noteholders have the right to require us to purchase their Notes. However, the fundamental change provisions will not afford protection to holders of Notes in the event of certain transactions that could adversely affect the Notes. For example, transactions such as leveraged recapitalizations, refinancings, restructurings or acquisitions initiated by us would not constitute a fundamental change requiring us to repurchase the Notes. In addition, holders will not be entitled to require us to purchase their Notes upon a significant change in the composition of our board. In the event of any such transaction, holders of the Notes would not have the right to require us to purchase their Notes, even though each of these transactions could increase the amount of our indebtedness, or otherwise adversely affect our capital structure or any credit ratings, thereby adversely affecting holders of the Notes.

Future sales of our common stock in the public market could lower the market price for our common stock and adversely impact the trading price of the Notes.

In the future, we may sell additional shares of our common stock to raise capital. In addition, a substantial number of shares of our common stock are reserved for issuance upon the exercise of stock options and warrants and upon conversion of
the Notes. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. The issuance and sale of substantial amounts of common stock, or the perception that such issuances and sales may occur, could adversely affect the trading price of the Notes and the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.

The Notes may not have an active market, and the price may be volatile, so noteholders may be unable to sell their Notes at the price they desire or at all.

The Notes are a new issue of securities for which there is currently no active trading market. We cannot be certain that a liquid market will develop for the Notes, that noteholders will be able to sell any of the Notes at a particular time (if at all) or that the prices they receive if or when noteholders sell the Notes will be above their initial offering price. In addition, we do not intend to apply to list the Notes on any securities exchange or for inclusion of the Notes on any automated dealer quotation system. The initial purchasers have advised us that they intend to make a market in the Notes, but they are not obligated to do so and may discontinue any market-making in the Notes at any time in their sole discretion and without notice. Future trading prices of the Notes on any market that may develop will depend on many factors, including our operating performance and financial condition, prevailing interest rates, the market for similar securities and general economic conditions.

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Moreover, even if noteholders are able to sell their Notes, they may not receive a favorable price for their Notes. Future trading prices of the Notes will depend on many factors, including, among other things, prevailing interest rates, our operating results, the price of our common stock and the market for similar securities. Historically, the market for convertible debt has been subject to disruptions that have caused volatility in prices. It is possible that the market for the Notes will be subject to disruptions that may have a negative effect on the holders of the Notes, regardless of our prospects or financial performance.

Any adverse rating of the Notes may negatively affect the trading price and liquidity of the Notes and the price of our common stock.

We do not intend to seek a rating on the Notes. However, if a rating service were to rate the Notes and if such rating service were to assign the Notes a rating lower than the rating expected by investors or were to lower its rating on the Notes below the rating initially assigned to the Notes or otherwise announce its intention to put the Notes on credit watch, the trading price or liquidity of the Notes and the price of our common stock could decline.

The conversion rate of the Notes may not be adjusted for all dilutive events.

The conversion rate of the Notes is subject to adjustment for certain events, including, but not limited to, the issuance to all or substantially all holders of our common stock of stock dividends, certain rights, options or warrants, capital stock, indebtedness, assets or cash, and subdivisions and combinations of our common stock, and certain issuer tender or exchange offers as defined. However, the conversion rate will not be adjusted for other events, such as a third-party tender or exchange offer or an issuance of common stock for cash, that may adversely affect the trading price of the Notes or the common stock. An event that adversely affects the value of the Notes may occur, and that event may not result in an adjustment to the conversion rate.

The Notes are protected by restrictive covenants only to a limited extent.

The indenture governing the Notes does not contain any financial or operating covenants or restrictions on the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. The indenture does not contain covenants or other provisions to afford protection to holders of the Notes in the event of a fundamental change except as defined. We could engage in many types of transactions, such as acquisitions, refinancings or recapitalizations that could substantially affect our capital structure and the value of the Notes and shares of our common stock but may not constitute a fundamental change that permits holders to require us to purchase their Notes. For these reasons, noteholders should not consider the covenants in the indenture or the fundamental change purchase feature of the Notes as significant factors in evaluating whether to invest in the Notes.

The issuance of shares of common stock upon conversions of the Notes will dilute the ownership interest of our existing stockholders, including holders who had previously converted their Notes.

The issuance of shares of common stock upon the conversion of some or all of the Notes will dilute the ownership interests of our existing stockholders. Any sales in the public market of such shares of our common stock could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could depress the price of our common stock.

Noteholders are not entitled to any rights with respect to our common stock, but are subject to all changes made with respect to our common stock to the extent noteholders convert their Notes and receive shares of our common stock.

Holders who convert their Notes will not be entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to receive any dividends or other distributions on our common stock) until the conversion date relating to such Notes, but holders of Notes will be subject to all changes affecting our common stock. For example, if an amendment is proposed to our second amended and restated certificate of incorporation, as amended or our amended and restated by-laws requiring stockholder approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to the conversion date with respect to any Notes surrendered for conversion, then the holder surrendering such Notes will not be entitled to vote on the amendment, although such holder will nevertheless be subject to any changes affecting our common stock.

Upon conversion of the Notes, holders may receive less valuable consideration than expected because the value of our common stock may decline after they exercise their conversion right but before we settle our conversion obligation.

Under the Notes, a converting holder will be exposed to fluctuations in the value of our common stock during the period from the date such holder surrenders Notes for conversion until the date we settle our conversion obligation.

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Upon conversion of the Notes, we will be required to deliver the shares of our common stock, together with cash for any fractional share, on the third business day following the relevant conversion date. Accordingly, if the price of our common stock decreases during this period, the value of the shares that noteholders receive will be adversely affected and would be less than the conversion value of the Notes on the conversion date.

The fundamental change purchase feature of the Notes may delay or prevent an otherwise beneficial attempt to take over our company.

The terms of the Notes require us to offer to purchase the Notes for cash in the event of a fundamental change, as defined. A non-stock takeover of our company may trigger the requirement that we purchase the Notes. This feature may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to investors.

The market price of our common stock may be volatile and adversely affected by several factors.

The market price of our common stock could fluctuate significantly in response to various factors and events, including:


• the commercial performance of TRULANCE in the U.S.;

• any third-party coverage and reimbursement policies for TRULANCE;

• market conditions in the pharmaceutical and biotechnology sectors;

• our ability to execute our business plan;

• announcements regarding regulatory developments with respect to our product candidates;

• announcements concerning product development results, including clinical trial results, or intellectual property rights of others;

• developments, litigation or public concern about the safety of TRULANCE or our potential products;

• our issuance of additional securities, including debt or equity or a combination thereof, necessary to fund our operating expenses;

• announcements of technological innovations or new products by us or our competitors;

• loss of any strategic relationship;

• industry developments, including, without limitation, changes in healthcare policies or practices or third-party reimbursement policies;

• deviations in our operating results from any guidance we may provide or the estimates of securities analysts;

• economic and other external factors effecting U.S. or global equity markets;

• period-to-period fluctuations in our financial result;

• discussion of us or our stock price in the financial or scientific press or in online investor communities; and

• Our compliance with the terms of our term loan agreement.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

We have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future. Any return on investment in shares of common stock may be limited to the value of our common stock.

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our capital stock will depend on our earnings, financial condition
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and other business and economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on any investment in shares of our common stock will only occur if the common stock price appreciates.

A sale of a substantial number of shares of the common stock may cause the price of our common stock to decline.

If our stockholders sell, or the market perceives that our stockholders intend to sell for various reasons, substantial amounts of our common stock in the public market it may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of biotechnology and biopharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, securities class action litigation has often been brought against a company following a decline in the market price of our securities. This risk is especially relevant for us because biotechnology and biopharmaceutical companies have experienced significant stock price volatility in recent years. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts management's attention and resources, which could adversely affect our business.

Our quarterly and annual operating results may fluctuate significantly.

We expect our operating results to be subject to frequent fluctuations. Our net profit or loss and other operating results will be affected by numerous factors, including:


• the level of underlying demand for TRULANCE in the U.S. and wholesalers' buying patterns;

• the costs associated with commercializing TRULANCE in the U.S.;

• competitive activity in the market and overall market growth rates;

• the cost of manufacturing and distributing TRULANCE;

• variations in the level of expenses related to our development programs;

• any excess or obsolete inventory or asset impairments and associated write-downs;

• initiation or completion of clinical trials;

• any intellectual property infringement lawsuit in which we may become involved;

• regulatory developments affecting our product candidates;

• our execution of any collaborative, licensing or similar arrangements, and the timing of payments under these arrangements;

• any material lawsuit in which we may become involved; and

• interest payments on our Term Loan and outstanding Notes.

If our operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly or annual fluctuations in our operating results may, in turn, cause the price of our common stock to fluctuate substantially.

Our ability to use our net operating loss carry forwards may be subject to limitation.

Generally, a change of more than 50% in the ownership of a company's stock, by value, over a three-year period constitutes an ownership change for U.S. federal income tax purposes. An ownership change may limit our ability to use our net operating loss carryforwards attributable to the period prior to the change. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability for us. At December 31, 2017, we had net operating loss carryforwards aggregating approximately $733.6 million. We have determined that an ownership change occurred as of April 30, 2003
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pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, or the Code. In addition, the shares of our common stock that we issued from July 14, 2008 through July 8, 2010 have resulted in an additional ownership change. As a result of these events and other prospective dilutive events our ability to utilize our operating loss carry forwards is and may be further limited.

U.S. federal income tax reform could adversely affect us.

On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (TCJA) that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We do not expect tax reform to have a material impact to our projection of minimal cash taxes or to our net operating losses. Our net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate, and the impact will be recognized in our tax expense in the year of enactment. We continue to examine the impact this tax reform legislation may have on our business. The impact of this tax reform on holders of our common stock is uncertain and could be adverse. This Annual Report on Form 10-K does not discuss any such tax legislation or the manner in which it might affect purchasers of our common stock. We urge our stockholders to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our common stock.

If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to accounting controls and procedures, or if we discover material weaknesses and deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.

If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent auditors addressing these assessments. If material weaknesses or significant deficiencies are discovered or if we otherwise fail to achieve and maintain the adequacy of our internal control, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.

Our certificate of incorporation and bylaws and Delaware law may have anti-takeover effects that could discourage, delay or prevent a change in control, which may cause our stock price, and the value of the Notes, to decline.

Our second amended and restated certificate of incorporation, as amended and our amended and restated bylaws and Delaware law could make it more difficult for a third party to acquire us, even if closing such a transaction would be beneficial to our stockholders or holders of the Notes. We are authorized to issue up to 20,000,000 shares of preferred stock. This preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our board of directors without further action by stockholders. The terms of any series of preferred stock may include voting rights (including the right to vote as a series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions. No preferred stock is currently outstanding. The issuance of any preferred stock could materially adversely affect the rights of the holders of our common stock, and therefore, reduce the value of our common stock and the Notes. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party and thereby preserve control by the present management.

Provisions of our second amended and restated certificate of incorporation, as amended and our amended and restated bylaws and Delaware law also could have the effect of discouraging potential acquisition proposals or making a tender offer or delaying or preventing a change in control, including changes a stockholder or holder of the Notes might consider favorable. Such provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. In particular, our second amended and restated certificate of incorporation, as amended and amended and restated bylaws and Delaware law, as applicable, among other things:


• provide the board of directors with the ability to alter the bylaws without stockholder approval;

• place limitations on the removal of directors; and

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• provide that vacancies on the board of directors may be filled by a majority of directors in office, although less than a quorum.

We are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits "business combinations" between a publicly-held Delaware corporation and an "interested stockholder," which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation's voting stock for a three-year period following the date that such stockholder became an interested stockholder. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with our board. These provisions may delay or prevent someone from acquiring or merging with us, which may cause the market price of our common stock and the value of the Notes to decline.

ITEM 2. PROPERTIES

There have been no material changes in our properties since the filing on March 1, 2018 of our Form 10-K for the year ended December 31, 2017.


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ITEM 5. OTHER INFORMATION

On November 6, 2018, we entered into an amended and restated executive employment agreement with Troy Hamilton , our CEO, pursuant to which, among other things, upon a termination without cause or for good reason (as defined in the agreement), Mr. Hamilton (i) would be paid his severance payment in a lump sum amount within ten (10) business days after executing a release, (ii) would be provided D&O coverage under our D&O policy (with coverage no less favorable than the coverage provided for our then existing officers and directors) for a period of six (6) years following the date of termination and (iii) would be entitled to receive a pro-rata bonus for the fiscal year in which he was terminated in the same amount as if he remained employed by us through the date of payment.

The foregoing description of the amended and restated executive employment agreement with Mr. Hamilton is a summary, is not complete, and is qualified in its entirety by the terms and conditions of the amended and restated executive employment agreement, a form of which will be filed as an exhibit to our Annual Report on Form 10-K for the year ending December 31, 2018.

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ITEM 6.
EXHIBITS
(a)
Exhibits
Separation Agreement dated September 17, 2018 by and between Marino Garcia and Synergy Pharmaceuticals Inc.
Separation Agreement dated October 30, 2018 by and between Gary S. Jacob and Synergy Pharmaceuticals Inc.
License, Development and Commercialization Agreement dated as of August 3, 2018 by and between Synergy Pharmaceuticals Inc. and Shandong Luoxin Pharmaceutical Group Stock Co., Ltd.*
Certification of Chief Executive Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.
Certification of Chief Financial Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.
Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101  Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended September 30, 2018, filed on November 8, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statement of Stockholders' Deficit (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text. 
*Portions of this exhibit were omitted and filed separately with the U.S. Securities and Exchange Commission pursuant to a request for confidential treatment. 

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