8. Derivative Financial Instruments

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

Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that certain warrants issued in connection with sale of our common stock in the year ended December 31, 2012 and prior years 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 is being recorded in the Company’s statement of operations. The Company estimates the fair value of certain warrants using the Black-Scholes option pricing model in order to determine the associated derivative instrument liability and change in fair value described above. The range of assumptions used to determine the fair value of the warrants at each period end during the twelve months ended December 31, 2012 and December 31, 2011 were:

	Year ended December 31, 2012	Year ended December 31, 2011
Fair value of Synergy common stock	$4.05-$5.26	$3.50 - $9.04
Expected warrant term	5-7 years	4-7 years
Risk-free interest rate	0.23%-1.33%	0.36% - 2.22%
Expected volatility	60%	70%-90%
Dividend yield	0%	0%

Estimated fair value of stock is the closing market price of the Company’s common stock on the date of warrant issuance and end of each reporting period the derivative instruments are marked to market. 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. Expected volatility is based on historical volatility of the Company’s common stock.

Certain of Synergy’s warrants issued during the twelve months ended December 31, 2012 contained a price protection clause which variable exercise price required the Company to use a binomial model to determine fair value. The range of assumptions used to determine the fair value of the warrants at each period end during the twelve months ended December 31, 2012 was as follows:

	Year ended December 31,
	2012	2011
Estimated fair value of Synergy common stock	$3.28-$4.53	$2.71-$5.02	(*)
Expected warrant term	4.13-4.63 years	5-7 years
Risk-free interest rate	0.62%-1.04%	0.90%-2.64%
Expected volatility	60%	70%-90%
Dividend yield	0%	0%

(*) Restated for 1:2 reverse stock split effective November 30, 2011.

In the Binomial model, the assumption for estimated fair value of the stock is the closing market price of the Company’s common stock on the date of warrant issuance and end of each reporting period the derivative instruments are marked to market, adjusted for small discounts experienced in recent registered direct offerings. 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.

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 (in thousands)
12/31/2010	Balance of derivative financial instruments liability	728,469		$	3,487
3/31/2011	Fair value of new warrants issued during the quarter	210,000		1,313
3/31/2011	Change in fair value of warrants during the quarter recognized as other expense in the statement of operations	—		339
3/31/2011	Balance of derivative financial instruments liability	938,469		5,139
6/30/2011	Fair value of new warrants issued during the quarter	611,207		2,608
6/30/2011	Exercise of warrants during the quarter	(80,000	)	(486		)
6/30/2011	Change in fair value of warrants during the quarter recognized as other expense in the statement of operations	—		698
6/30/2011	Balance of derivative financial instruments liability	1,469,676		7,959
9/30/2011	Fair value of new warrants issued during the quarter	40,458		285
9/30/2011	Change in fair value of warrants during the quarter recognized as other income in the statement of operations	—		(4,383		)
9/30/2011	Balance of derivative financial instruments liability	1,510,134		3,861
12/31/2011	Fair value of new warrants issued during the quarter	1,810,294		3,082
12/31/2011	Reclass of derivative liability to equity during the quarter	(1,055,268	)	(1,707		)
12/31/2011	Change in fair value of warrants during the quarter recognized as other income in the statement of operations	—		(1,911		)
12/31/2011	Balance of derivative financial instruments liability	2,265,160		3,325

3/31/2012	Fair value of new warrants issued during the quarter	—		—
3/31/2012	Change in fair value of warrants during the quarter	—		(8		)

3/31/2012	Balance of derivative financial instruments liability	2,265,160		3,317
6/30/2012	Warrants classified to derivative liability during quarter	112,500		169
6/30/2012	Change in fair value of warrants during the quarter	—		1,317
6/30/2012	Balance of derivative financial instruments liability	2,377,660		4,803
9/30/2012	Fair value of new warrants issued during the quarter	—		—
9/30/2012	Change in fair value of warrants during the quarter	—		(140		)

9/30/2012	Balance of derivative financial instruments liability	2,377,660		4,663
12/31/2012	Fair value of new warrants issued during the quarter	—		—
12/31/2012	Change in fair value of warrants during the quarter	—		764
12/31/2012	Reclass of derivative liability to equity during the quarter	(112,500	)	(169		)
12/31/2012	Balance of derivative financial instruments liability	2,265,160		$	5,258

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