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 discovered and owns 100% worldwide rights to its proprietary uroguanylin based GI platform which 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 agreement with Cipher Pharmaceuticals under which the Company granted Cipher the exclusive right to develop, market, distribute and sell TRULANCE in Canada. Under the terms of the licensing 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. 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 $73.5 million for the six months ended June 30, 2018. As of June 30, 2018, Synergy had approximately $61.2 million of cash and cash equivalents. During the six months ended June 30, 2018, Synergy incurred losses from operations of approximately $67.7 million. As of June 30, 2018, Synergy had working capital of approximately $61.5 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 Loans 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.
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.
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 June 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 as of December 31, 2017 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 our commercialization efforts; (ii) seek commercial partners for our products on terms that are less favorable than might otherwise be available; or (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. Synergy's consolidated financial statements as of December 31, 2017 and its unaudited condensed consolidated financial statements as of and for the period ended June 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 June 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 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 financial statements.
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 a licensing, development and commercialization agreement to out-license the sale of TRULANCE in Canada ("Cipher Agreement"). This agreement requires the Company to deliver (i) intellectual property rights or licenses and (ii) product supply. The underlying terms of the agreement provides for consideration to Synergy in the form of a non-refundable up-front license payment, milestone payment, and royalty payments. As of June 30, 2018, the Company had not satisfied any performance obligations under this agreement.
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 June 30, 2018, all revenue recognized by the Company is from TRULANCE product sales in the United States. For the six months ended June 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.
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 FASB issued ASU 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-to-use asset representing its right to use the underlying asset for the lease term. The amendments of this ASU are effective for reporting periods beginning after December 15, 2018, with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The adoption of ASU 2016-02 is not expected to have a material impact on 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 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.
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 June 30, 2018 and December 31, 2017, the amount of cash and cash equivalents was $61.2 million and $137.0 million, respectively and consists of checking accounts and short-term U.S. Treasury money market mutual funds. Checking accounts are held at U.S. commercial banks, and balances were in excess of the FDIC insurance limit.
5. Inventories
Inventories as of June 30, 2018 and December 31, 2017 consisted of the following:
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|
|
|
|
|
|
|
($ in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
Raw materials
|
|
$
|
9,127
|
|
$
|
5,754
|
Work-in-process
|
|
3,740
|
|
7,732
|
Finished goods
|
|
4,742
|
|
3,728
|
|
|
|
|
|
Inventories
|
|
$
|
17,609
|
|
$
|
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. 2015-3 “
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 Accounting Standards Codification ("ASC") 470-50 and amortized using the effective interest method over the remaining term of the debt.
In March 2017, Synergy exchanged approximately $4.9 million aggregate principal amount of the Notes for approximately 1.8 million shares of its common stock, with approximately 1.6 million shares representing the conversion price of $3.11 pursuant to the existing terms of the Notes. 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 June 30, 2018, approximately $18.6 million of the Notes remain outstanding.
A summary of quarterly activity and balances associated with the Notes and related deferred debt costs is presented below:
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($ in thousands)
|
|
Notes Balance
|
|
Deferred Debt Costs
|
|
Notes, net of
Deferred Debt Costs
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Long term debt, 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).
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.
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 40% 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.
As of June 30, 2018, the Company was in compliance with all applicable covenants.
As of June 30, 2018, principal and PIK payments under the Term Loan were as follows:
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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
|
436
|
Add: PIK interest
|
6,598
|
|
107,034
|
Less: Debt financing costs, net of amortization
|
(6,707)
|
Balance at June 30, 2018
|
$
|
100,327
|
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.
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 $6.8 million during the three months ended June 30, 2017.
Stock-based compensation has been recognized in operating results as follows:
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|
Three Months Ended June 30,
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
Six Months Ended June 30,
|
($ in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Included in research and development
|
|
$
|
504
|
|
$
|
(80)
|
|
1,175
|
|
$
|
1,793
|
Included in selling, general and administrative
|
|
2,924
|
|
13,378
|
|
5,212
|
|
14,402
|
Total stock-based compensation expense
(1)
|
|
$
|
3,428
|
|
$
|
13,298
|
|
$
|
6,387
|
|
$
|
16,195
|
_____________________
(1) Stock based compensation expense for the current year periods includes $193,000 recorded as a liability.
The unrecognized compensation cost related to non-vested stock options outstanding at June 30, 2018, net of expected forfeitures, was approximately $15.8 million to be recognized over a weighted-average remaining vesting period of approximately 1.07 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.
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|
|
Six Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2017
|
Risk-free interest rate
|
2.33-2.85%
|
|
1.85%-2.24%
|
Dividend yield
|
—
|
|
—
|
Expected volatility
|
63%-66%
|
|
|
66%-73%
|
|
Expected term
|
6 years
|
|
6 years
|
A summary of stock option activity and of changes in stock options outstanding under the Plans is presented below:
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|
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
|
7,694,200
|
|
$1.56-2.40
|
|
$
|
2.13
|
|
$
|
—
|
|
|
Exercised
(1)
|
(1,485,035)
|
|
$ 0.50
|
|
$
|
0.50
|
|
$
|
1,846
|
|
|
Forfeited
|
(1,168,715)
|
|
$1.81-7.91
|
|
$
|
3.94
|
|
$
|
—
|
|
|
Balance outstanding, June 30, 2018
|
34,908,741
|
|
$0.44-9.12
|
|
$
|
3.60
|
|
$
|
1,229
|
|
6.61 years
|
|
|
|
|
|
|
|
|
|
|
Exercisable, at June 30, 2018
|
22,324,074
|
|
$0.44-9.12
|
|
$
|
3.89
|
|
$
|
1,201
|
|
5.24 years
|
_____________________
(1) Options exercised includes 282,180 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. The complaint names Synergy and certain of its current directors and officers as defendants and seeks to recover on behalf of a putative class of purchasers of Synergy’s common stock between September 5, 2017 and November 14, 2017. On February 14, 2018, a substantially identical lawsuit captioned
Eileen Countryman v. Synergy Pharmaceuticals Inc. et al
. was filed in the same court against the same defendants on behalf of an identical putative class. On March 2, 2018, a related federal securities action captioned
Wendell Rose v. Synergy Pharmaceuticals Inc. et al
. was filed in the same court. The
Rose
complaint names the same defendants as well as additional officers of the company and seeks to recover on behalf of a putative class of purchasers of Synergy’s common stock between November 10, 2016 and November 12, 2017. Each of the complaints alleges that the defendants made false and misleading statements, including in connection with the Company's senior secured loan from CRG Servicing, LLC. The
Rose
complaint further alleges false and misleading statements in connection with Trulance’s side-effect profile. The complaints assert claims under the federal securities laws and seek to recover unspecified damages, as well as interest, costs, and expenses. 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 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. On April 27, 2018 and May 1, 2018, respectively, two substantially identical shareholder derivative actions, captioned
Ecker & Klein v. Jacob et al
. and
Harding v. Jacob et al.
, were filed in the same court. On May 18, 2018, an additional shareholder derivative action captioned
Buker v. Jacob et al
. was filed in the same court. The complaints name Synergy, its directors, and certain of its current or former directors and officers as defendants and seek to recover on behalf of the company. Each of the complaints alleges that the individual defendants breached their fiduciary duties to the company by causing it to issue allegedly false and misleading statements in connection with our senior secured loan from CRG Servicing, LLC and Trulance’s side-effect profile. The
Buker
complaint further asserts claims for unjust enrichment and gross mismanagement based on the same allegations. The complaints seek to recover unspecified damages, as well as declaratory relief, equitable remedies, costs, and expenses. On June 19, 2018, the court consolidated these four actions into a single action captioned
Solak v. Jacob et al
. On July 30, 2018, the court granted plaintiffs’ unopposed motion seeking the appointment of lead counsel.
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, its directors, and certain of its current or former directors and officers as defendants 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 Company's senior secured loan from CRG Servicing, LLC and Trulance’s side-effect profile. 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, as well as equitable remedies, costs, and expenses.
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 June 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.
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 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 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
Fair value of Synergy common stock
|
$
|
1.74
|
|
$
|
4.45
|
Expected warrant term
|
1.4 years
|
|
0.7 years
|
Risk-free interest rate
|
2.40
|
%
|
|
1.14
|
%
|
Expected volatility
|
65
|
%
|
|
50
|
%
|
Dividend yield
|
—
|
|
—
|
Fair value of stock is the closing market price of the Company’s common stock at the end of each reporting period when the derivative instruments are marked to market. Expected volatility is a management estimate of future volatility, over the
expected warrant term, based on historical volatility of Synergy’s common stock. The warrants have a transferability provision and based on guidance provided in SAB 107
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)
|
|
|
|
|
|
|
|
6/30/2018
|
|
Balance of derivative financial instruments liability
|
|
21,705,426
|
|
$
|
9,334
|
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 June 30, 2018. The Company believes it could obtain borrowings at June 30, 2018 with comparable terms as the November 2014 Notes and the Term Loan, therefore, the carrying value approximates fair value.
The following table presents the Company’s liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2017 and June 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
June 30, 2018
|
Derivative liabilities related to Warrants
|
|
$
|
—
|
|
$
|
—
|
|
$
|
17,582
|
|
$
|
17,582
|
|
$
|
—
|
|
$
|
—
|
|
$
|
9,334
|
|
$
|
9,334
|
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the six months ended June 30, 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
June 30, 2018
|
Derivative liabilities related to Warrants
|
|
$
|
17,582
|
|
$
|
(8,248)
|
|
$
|
—
|
|
$
|
9,334
|
The unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities in the Company’s statement of operations. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, Synergy reviews the assets and liabilities that are subject to ASC Topic 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2017
|
Stock Options
|
34,908,741
|
|
28,882,068
|
Warrants
|
21,749,134
|
|
869,688
|
Senior Convertible Notes
|
5,981,672
|
|
5,981,672
|
Total shares issuable upon exercise or conversion
|
62,639,547
|
|
35,733,428
|
14. Subsequent Events
On August 6, 2018, Synergy announced a license agreement with Luoxin Pharmaceutical Group Co., Ltd., Shandong (Luoxin). Under the terms of the agreement, Synergy will receive an upfront payment of $12.0 million and is eligible for additional regulatory and commercial milestone payments, as well as royalties from product sales in mainland China, Hong Kong and Macau. The agreement provides that Synergy will be responsible for manufacturing and supplying product to Luoxin.