10. Derivative Financial Instruments

Synergy 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 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 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 was:

	Nine Months Ended September 30, 2013		Nine Months Ended September 30, 2012
Fair value of Synergy common stock	$	4.57	$	4.75
Expected warrant term	1.8 - 4.4 years		2.8 - 5.4 years
Risk-free interest rate	0.33%-1.39%		0.32%-1.33%
Expected volatility	60%		60%
Dividend yield	—		—

Fair value of stock is the closing market price of the Company’s common stock on the date of warrant issuance and 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 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 of grant or quarterly revaluation.

On November 14, 2011, Synergy entered into a securities purchase agreement with certain accredited investors for the sale of 1,328,941 units in a private placement and on December 1, 2011, Synergy issued 77,750 units to a selling agent related to November and December financing transactions. Each unit consists of one share of common stock and one warrant to purchase one share of Synergy’s common stock. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” Synergy recorded the above warrants as derivative liabilities upon issuance and they were marked to market on a quarterly basis. The price protection clauses on 1,328,941 warrants and 77,750 warrants expired on May 14, 2013 and June 1, 2013 respectively, which removed the condition requiring derivative liability accounting, resulting in a zero value ratchet. Accordingly the warrants were marked to market through the expected expiration dates and the total fair value of approximately $3.6 million was reclassified from derivative liability - warrants to additional paid in capital upon the respective expiration dates.

As of September 30, 2013, Synergy does not have any outstanding warrants which contained terms that require the use of a binomial model to determine fair value.

The range of assumptions in the binomial model used to determine the fair value of certain warrants at the dates indicated was as follows:

		Nine months ended September 30, 2012
Fair value of Synergy common stock		$3.28-$4.50
Expected warrant term		4.4 - 4.6 years
Risk-free interest rate		0.72%-1.03%
Expected volatility		60%
Dividend yield		—

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 in part on the 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 at the date of grant or quarterly revaluation.

The following table sets forth the components of changes in 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)
12/31/2011	Balance	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 recognized as other income in the statement of operations			(8		)
3/31/2012	Balance	2,265,160		3,317
6/30/2012	Fair value of new warrants issued during the quarter	112,500		169

6/30/2012	Change in fair value of warrants during the quarter recognized as other expense in the statement of operations	—		1,317
6/30/2012	Balance	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 recognized as other income in the statement of operations	—		(140		)
9/30/2012	Balance	2,377,660		4,663
12/31/2012	Fair value of new warrants issued during the quarter	—		—
12/31/2012	Reclassification of derivative liability to equity during the quarter	(112,500	)	(169		)
12/31/2012	Change in fair value of warrants during the quarter recognized as other expense in the statement of operations	—		764
12/31/2012	Balance	2,265,160		5,258
3/31/2013	Change in fair value of warrants during the quarter recognized as other expense in the statement of operations	—		1,093

3/31/2013	Balance	2,265,160		6,351
6/30/2013	Fair value of new warrants issued during the quarter	—		—
6/30/2013	Reclassification of derivative liability to equity during the quarter	(1,406,691	)	(3,575		)
6/30/2013	Change in fair value of warrants during the quarter recognized as other income in the statement of operations	—		(1,803		)
6/30/2013	Balance	858,469		$	973
9/30/2013	Fair value of new warrants issued during the quarter	—		—
9/30/2013	Change in fair value of warrants during the quarter recognized as other income in the statement of operations	—		77
9/30/2013	Balance	858,469		$	1,050

Synergy Fair Value Measurements

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, 2012 and September 30, 2013:

($ 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, 2012		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 September 30, 2013
Derivative liabilities related to Warrants	$	—	$	—	$	5,258	$	5,258	$	—	$	—	$	1,050	$	1,050

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the nine months ended September 30, 2013:

Description	Balance at December 31, 2012		Fair value of warrants reclassified to additional paid in capital			(Gain) or loss recognized in earning from Change in Fair Value			Balance as of September 30, 2013
Derivative liabilities related to Warrants	$	5,258	$	(3,575	)	$	(633	)	$	1,050

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 are instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.