Accounting for Shared-Based Payments

9 Months Ended

Sep. 30, 2013

Accounting for Shared-Based Payments

Accounting for Shared-Based Payments

6. 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.

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.

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. 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 has been recognized in operating results as follow: (dollars in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30				November 15, 2005 (inception) to
	2013		2012		2013		2012		September 30, 2013
Employees—included in research and development	$	388	$	226	$	942	$	488	$	2,544
Employees—included in general and administrative	386		154		1,166		347		2,576
Subtotal employee stock based compensation	774		380		2,108		835		5,120
Non-employees—included in research and development	3		3		140		3		436
Non-employees—included in general and administrative	313		170		1,010		507		3,186
Subtotal non-employee stock based compensation	316		173		1,150		510		3,622
Total stock-based compensation expense	$	1,090	$	553	$	3,258	$	1,345	$	8,742

The unrecognized compensation cost related to non-vested stock options outstanding at September 30, 2013, net of expected forfeitures, was approximately $8.3 million to be recognized over a weighted-average remaining vesting period of approximately 1.9 years. This unrecognized compensation cost does not include amounts related to 4,364,000 shares of stock options which vest upon a change of control.

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, 2013	Nine Months Ended September 30, 2012
Risk-free interest rate	0.41%-2.64%	0.92%-1.50%
Dividend yield	—	—
Expected volatility	60%	60%
Expected term (in years)	6 years	6 years

A summary of stock option activity and of changes in stock options outstanding under the Plan 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, 2012	9,734,268		$	0.50 — 5.20	$	2.75	$	24,482	6.45 years
Granted	2,495,965	(a)	$	0.44 — 20.01	$	6.45
Exercised	(61,787	)	$	0.44 — 4.28	$	1.91
Forfeited	(887,202	)(a)	$	4.42 — 12.51	$	5.99
Balance outstanding, September 30, 2013	11,281,244	(a)	$	0.44-20.01	$	3.32	$	18,816	7.2 years
Exercisable at September 30, 2013	3,955,151	(a)	$	0.44-20.01	$	2.76	$	9,503	5.8 years

(a) Includes 1,221,316 stock options issued to former Callisto option holders under the terms of Callisto Synergy Merger Agreement dated January 17, 2013, of which 854,763 stock options are vested and 357,202 stock options that expired and were forfeited through September 30, 2013.