9. 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 are 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 were:

	Nine Months Ended September 30, 2014		Nine Months Ended September 30, 2013
Fair value of Synergy common stock	$	2.79	$	4.57
Expected warrant term	0.75-3.4 years		1.8-4.4 years
Risk-free interest rate	0.08%-1.25%		0.33%-1.39%
Expected volatility	52% - 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.

The following table sets forth the components of changes in the 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)
12/31/2012	Balance of derivative financial instruments liability	2,265,160		$	5,258

3/31/2013	Change in fair value of warrants during the quarter	—		1,093

3/31/2013	Balance of derivative financial instruments liability	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	—		(1,803		)
6/30/2013	Balance of derivative financial instruments liability	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	—		77

9/30/2013	Balance of derivative financial instruments liability	858,469		1,050
12/31/2013	Fair value of new warrants issued during the quarter	—		—
12/31/2013	Change in fair value of warrants during the quarter	—		484

12/31/2013	Balance of derivative financial instruments liability	858,469		1,534
3/31/2014	Fair value of new warrants issued during the quarter	—		—
3/31/2014	Change in fair value of warrants during the quarter	—		(223		)
3/31/2014	Balance of derivative financial instruments liability	858,469		1,311
6/30/2014	Fair value of new warrants issued during the quarter	—		—
6/30/3014	Change in fair value of warrants during the quarter	—		(756		)
6/30/2014	Balance of derivative financial instruments liability	858,469		555
9/30/2014	Fair value of new warrants issued during the quarter	—		—
9/30/2014	Change in fair value of warrants during the quarter	—		(425		)
9/30/2014	Balance of derivative financial instruments liability	858,469		$	130

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, 2013 and September 30, 2014:

($ 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, 2013			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, 2014
Derivative liabilities related to Warrants		$	—		$	—		$	1,534		$	1,534		$	—		$	—		$	130		$	130

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, 2014:

Description		Balance at December 31, 2013			Fair Value of warrants upon issuance			(Gain) or loss recognized in earning from Change in Fair Value			Balance as of September 30, 2014
Derivative liabilities related to Warrants		$	1,534		$	—		$	(1,404	)	$	130

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, Synergy 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.

On January 28, 2014, the Synergy Board of Directors declared a stock dividend of .0986 ContraVir shares for each share of Synergy common stock held as of the record date of February 6, 2014, which was distributed on February 18, 2014. As a result of the distribution, an adjustment was made to the exercise price of all outstanding warrants in accordance with their terms and accordingly the exercise price decreased approximately $0.011 per share on the record date and was reflected in the fair value calculation of the warrants. As of the record date there were 5,647,203 warrants outstanding (which includes 858,469 warrants recorded as derivatives, see footnote 9) with a weighted average exercise price of $5.37 per share pre-distribution and $5.359 per share as adjusted.