4. Accounting for Shared-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. ASC Topic 718 did not change the way Synergy accounts for non-employee stock-based compensation. Synergy continues to account for shares of common stock, stock options and warrants issued to non-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 “Plan”) during the quarter ended September 30, 2008. Stock options granted under the Plan typically vest after three years of continuous service from the grant date and have a contractual term of ten years. Synergy did not issue stock options prior to the quarter ended September 30, 2008. On January 17, 2013, Synergy amended its 2008 Equity Compensation Incentive Plan and increased the number of shares of its common stock reserved for issuance under the Plan from 7,500,000 to 15,000,000.

Stock-based compensation expense related to Synergy options and restricted stock units have been recognized in operating results as follows:

	Years Ended December 31,						November 15, 2005 (inception) to
	2012		2011		2010		December 31, 2012
	(dollars in thousands)

Employees—included in research and development	$	975	$	107	$	188	$	1,602
Employees—included in general and administrative	635		93		210		1,409

Subtotal employee stock based compensation	1,610		200		398		3,011
Non-employees—included in research and development	128		73		52		296
Non-employees—included in general and administrative	777		549		262		2,177

Subtotal non-employee stock based compensation	905		622		314		2,473

Total stock-based compensation expense	$	2,515	$	822	$	712	$	5,484

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 year ended December 31, 2012.

	Years Ended December 31,
	2012	2011	2010
Risk-free interest rate	0.85%-1.5%	0.88%-1.25%	2.31%-2.71%
Dividend yield	—	—	—
Expected volatility	60%	70%	90%
Expected term (in years)	6.0 yrs.	6.0 yrs.	6.0 yrs.

Risk-free interest rate —Based on the daily yield curve rates for U.S. Treasury obligations with maturities which correspond to the expected term of the Company’s stock options.

Dividend yield —Synergy has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future.

Expected volatility —Based on the historical volatility of Synergy stock and management’s estimate.

Expected term —Synergy has had no stock options exercised since inception. The expected option term represents the period that stock-based awards are expected to be outstanding based on the simplified method provided in Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment , (“SAB No. 107”), which averages an award’s weighted-average vesting period and expected term for “plain vanilla” share options. Under SAB No. 107, options are considered to be “plain vanilla” if they have the following basic characteristics: (i) granted “at-the-money”; (ii) exercisability is conditioned upon service through the vesting date; (iii) termination of service prior to vesting results in forfeiture; (iv) limited exercise period following termination of service; and (v) options are non-transferable and non-hedgeable.

In December 2007, the SEC issued SAB No. 110, Share-Based Payment, (“SAB No. 110”). SAB No. 110 was effective January 1, 2008 and expresses the views of the Staff of the SEC with respect to extending the use of the simplified method, as discussed in SAB No. 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with ASC Topic 718. The Company will continue to use the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB No. 107, as amended by SAB No. 110. For the expected term, the Company has “plain-vanilla” stock options, and therefore used a simple average of the vesting period and the contractual term for options granted subsequent to January 1, 2006 as permitted by SAB No. 107.

Forfeitures —ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Synergy estimated future unvested option forfeitures based on its historical experience.

The weighted-average fair value per share of all options granted for the years ended December 31, 2012, 2011 and 2010 estimated as of the grant date using the Black-Scholes option valuation model was $2.38, $2.09 and $6.77 per share, respectively.

The unrecognized compensation cost related to non-vested employee stock options outstanding at December 31, 2012 was approximately $ 9,201,000. The December 31, 2012 balance is expected to be recognized over a weighted-average remaining vesting period of approximately 3 years.

On March 1, 2010, a majority of our shareholders acting by written consent approved an amendment to the Plan increasing the number of shares reserved under the Plan to 7,500,000 shares, after a retroactive change of a one for two (1:2) reverse stock split effective on November 30, 2011.

On January 17, 2013, Synergy amended its 2008 Equity Compensation Incentive Plan and increased the number of shares of its common stock reserved for issuance under the Plan from 7,500,000 to 15,000,000. As of December 31, 2012 there were no stock options outstanding under the Plan and no stock options available for future issuance under the Plan.

A summary of stock option activity and of changes in stock options outstanding under Synergy’s plans is presented below:

	Number of Options(1)		Exercise Price Per Share		Weighted Average Exercise Price Per Share		Intrinsic Value (in thousands)
Balance outstanding, January 1, 2010	2,107,008		$	0.50-1.90	$	0.61	$	22,320
Granted (2)	2,232,500		$	1.40	$	1.40
Exercised	—		—		—
Forfeited	(37,500	)	$	1.40	$	1.40
Balance outstanding, January 1, 2011	4,302,008		$	0.50-1.90	$	1.04	$	25,763
Granted	1,807,000		$	3.35-4.30	$	3.50
Exercised	—		—		—
Forfeited	(144,969	)	$	0.50-1.40	$	1.04

Balance outstanding, December 31, 2011	5,964,039		$	0.50-4.30	$	1.77	$	6,027
Granted	3,875,229		$	3.40-5.20	$	4.29
Exercised	—		—		—
Forfeited	(105,000	)	$	3.40-4.38	$	4.10

Balance outstanding, December 31, 2012	9,734,268		$	0.50-5.20	$	2.75	$	24,482

Exercisable at December 31, 2012	2,726,302		$	0.50-5.20	$	1.42	$	10,464

(1) Number of shares outstanding represented above reflect a retroactive change of a one for two (1:2) reverse stock split effective on November 30, 2011.

(2) Contingent vesting upon change of control. The Fair Value at the date of grant was approximately $30,244,000 determined using the Black-Scholes option valuation model assumptions discussed above. No stock based compensation expense associated with these options was recognized since the grant date.

ASC Topic 718 requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) be classified as cash inflows from financing activities and cash outflows from operating activities. Due to Synergy’s accumulated deficit position, no excess tax benefits have been recognized. Synergy accounts for common stock, stock options, and warrants granted to employees and non-employees based on the fair market value of the instrument, using the Black-Scholes option pricing model based on assumptions for expected stock price volatility, term of the option, risk-free interest rate and expected dividend yield, at the grant date.