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Derivative Financial Instruments

6 Months Ended

Jun. 30, 2011

7. Derivative Financial Instruments

Effective January 1, 2009, the Company adopted provisions of ASC Topic 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Equity” (“ASC Topic 815-40”). ASC Topic 815-40 clarifies the determination of whether an instrument issued by an entity (or an embedded feature in the instrument) is indexed to an entity’s own stock, which would qualify as a scope exception under ASC Topic 815-10.

Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that the warrants issued in connection with its registered direct offerings and private placements must be recorded as derivative liabilities. Accordingly the warrants are also being re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair value is being recorded in the Company’s statement of operations.

The Company estimates the fair value of the warrants using the Black-Scholes model in order to determine the associated derivative instrument liability and change in fair value described above. The range of assumptions used to determine the fair value of the warrants at the end of each period of June 30, 2011 and June 30, 2010 were indicated as follows:

	Six Months Ended June 30, 2011		Six Months Ended June 30, 2010
Estimated fair value of Synergy common stock	2.56-3.30		2.64
Expected warrant term	5-7 years		5 years
Risk-free interest rate	1.18%-2.5	%	1.79	%
Expected volatility	90	%	90	%
Dividend yield	—		—

Estimated fair value of the stock is based on a Black-Scholes based apportionment of the unit price paid for the shares and warrants issued in Synergy’s registered direct offerings, which resulting stock prices were deemed to be arms-length negotiated prices. Expected volatility is based on historical volatility of Synergy’s common stock. The warrants have a transferability provision and based on guidance provided in SAB 107 for instruments issued with such a provision, Synergy used the full contractual term as the expected term of the warrants. The risk free rate is based on the U.S. Treasury security rates for maturities consistent with the expected remaining term of the warrants.

Certain of Synergy’s warrants issued during the six months ended June 30, 2011 contained a price protection clause which variable term required the Company to use a binomial model to determine fair value. The exercise price protection clause is effective on 833,333 warrants in the event of a subsequent equity sale at a price lower than $3.25 per share of common stock, for a period of two years from date of issuance. Except for this variable exercise price the input assumptions to this methodology were the same as used in our Black Scholes model indicated above.

The following table sets forth the components of changes in the Synergy’s derivative financial instruments liability balance for the periods indicated:

Date	Description	Warrants		Derivative Instrument Liability
12/31/2009	Balance of derivative financial instruments liability	—		$	—

6/30/2010	Fair value of new warrants issued during the quarter	648,000		$	1,045,214
9/30/2010	Fair value of new warrants issued during the quarter	103,703		$	163,905
9/30/2010	Change in fair value of warrants during the quarter	—		$	(110,937	)

9/30/2010	Balance of derivative financial instruments liability	751,703		$	1,098,182
12/31/2010	Fair value of new warrants issued during the quarter	705,235		$	2,575,624
12/31/2010	Change in fair value of warrants during the quarter	—		$	(185,847	)

12/31/2010	Balance of derivative financial instruments liability	1,456,938		$	3,487,959
3/31/2011	Fair value of new warrants issued during the quarter	420,000		$	1,312,673
3/31/2011	Change in fair value of warrants during the quarter	—		$	338,715
3/31/2011	Balance of derivative financial instruments liability	1,876,938		$	5,139,347
6/30/2011	Fair value of new warrants issued during the quarter	1,220,414		2,607,827
6/30/2011	Exercise of warrants during the quarter	(160,000	)	$	(486,328	)
6/30/2011	Change in fair value of warrants during the quarter	—		$	697,660
6/30/2011	Balance of derivative financial instruments liability	2,937,352		$	7,958,506

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, 2010 and June 30, 2011:

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, 2010		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, 2011
Derivative liabilities related to Warrants	$	—	$	—	$	3,487,959	$	3,487,959	$	—	$	—	$	7,958,506	$	7,958,506

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, 2011:

Description	Balance at December 31, 2010		Fair Value of Warrants Exercised and Reclassified to Additional Paid in Capital			Fair value of New Warrants Issued During the Period		Unrealized (gains) or losses		Balance as of June 30, 2011
Derivative liabilities related to Warrants	$	3,487,959	$	(486,328	)	$	3,920,500	$	1,036,375	$	7,958,506

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, the Company reviews the assets and liabilities that are subject to ASC Topic 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.