Use these links to rapidly review the documentTABLE OF CONTENTS ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

(Mark One)ý

ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2009o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                to


Commission File Number: 333-131722

SYNERGY PHARMACEUTICALS, INC.(Exact name of registrant as specified in its charter)

Florida(State or Other Jurisdiction of
Incorporation or Organization)

20-3823853(I.R.S. Employer
Identification No.)


420 Lexington Avenue, Suite 1609, New York, New York 10170(Address of principal executive offices) (Zip Code)

(212) 297-0020(Registrant's telephone number)

(Former
Name, Former Address and Former Fiscal Year, if changed since last report)

Securities
registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registeredNone


Securities
registered pursuant to section 12(g) of the Act:

Title
of class:None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No ý

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $215,194,087 on
June 30, 2009

As
of March 12, 2010 the registrant had 88,423,359 shares of Common Stock outstanding.



---





Table of Contents

SYNERGY PHARMACEUTICALS, INC.  (A development stage company)

FORM 10-K/A

TABLE OF CONTENTS



PART IItem 1.

Business

2Item 1A.

Risk Factors

11Item 1B.

Unresolved Staff Comments

32Item 2.

Properties

32Item 3.

Legal Proceedings

32Item 4.

Reserved

32PART IIItem 5.

Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

32Item 6.

Selected Financial Data

34Item 7.

Management's Discussion and Analysis of Financial Condition And Results of
Operations

35Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

41Item 8.

Financial Statements and Supplementary Data

42Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures

42Item 9A.

Controls and Procedures

42Item 9B.

Other Information

47PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

48Item 11.

Executive Compensation

53Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

63Item 13.

Certain Relationships and Related Transactions, and Director
Independence

64Item 14.

Principal Accountant Fees and Services

65PART IVItem 15.

Exhibits and Financial Statement Schedules

66SIGNATURES

68


1

---





Table of Contents

Explanatory Note

We are filing this Amendment No. 1 to our Form 10-K for the year ended December 31, 2009, initially filed on
March 15, 2010, in order to respond to certain comments we received from the Securities and Exchange Commission. This amendment does not reflect events occurring after the initial filing of the
Form 10-K, except as related to any amended disclosures, nor does it modify or update the disclosures and information contained in the Form 10-K in any way other than described in this
paragraph.

PART I

This Report on Form 10-K/A for Synergy Pharmaceuticals, Inc. may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are characterized by future or
conditional verbs such as "may," "will," "expect," "intend," "anticipate," believe," "estimate" and "continue" or similar words. You should read statements that
contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking
information. Such statements are only predictions and our actual results may differ materially from those anticipated in these forward-looking statements. We believe that it is important to
communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Factors that may cause such differences include, but are
not limited to, those discussed under Item 1A. Risk Factors and elsewhere in this Form 10-K/A for the year ended December 31, 2009, as filed with the Securities and
Exchange Commission, including the uncertainties associated with product development, the risk that products that appeared promising in early clinical trials do not demonstrate safety and efficacy in
larger-scale clinical trials, the risk that we will not obtain approval to market our products, the risks associated with dependence upon key personnel and the need for additional financing. We do not
assume any obligation to update forward-looking statements as circumstances change.

ITEM 1.    BUSINESS.

GENERAL

We are a biopharmaceutical company focused primarily on the development of drugs to treat gastrointestinal, or GI, disorders and
diseases. Our lead drug candidate is SP-304, a guanylyl cyclase C, or GC-C, receptor agonist, to treat GI disorders, primarily chronic constipation, or CC, and
constipation-predominant irritable bowel syndrome, or IBS-C. CC and IBS-C are functional gastrointestinal disorders that afflict millions of sufferers worldwide. CC is
primarily characterized by constipation symptoms but a majority of these patients report experiencing bloating and abdominal discomfort as among their most bothersome symptoms. IBS-C is
characterized by frequent and recurrent abdominal pain and/or discomfort associated with chronic constipation.

In
December 2008, we completed a Phase 1 clinical trial of SP-304 which showed that SP-304 was well tolerated at all doses studied (0.1 mg to 48.6 mg) and
exhibited gastrointestinal pharmacodynamic activity in healthy volunteers with no detectable systemic absorption of SP-304 in the blood. The data obtained from this trial supported
advancing SP-304 for further clinical studies in patients with CC and IBS-C. In February, 2010, a Phase 2a 14-day, repeated-oral-dose
trial of SP-304 in CC patients opened for enrollment and is currently actively recruiting patients.

SP-304
is an analog of uroguanylin, a natural GI hormone secreted in the gut, which is a key regulator of intestinal function. Uroguanylin works by activating
GC-C receptors on intestinal cells. The GC-C receptor promotes fluid and ion transport in the GI tract. Under normal conditions, the receptor is activated by the natural
hormones uroguanylin and guanylin. Activation of the receptor leads to the

2

---



Table of Contents

transport
of chloride and bicarbonate into the intestinal lumen, and water is carried with these ions into the lumen of the intestine, thereby softening stool, and producing other pharmacologic,
beneficial effects that could potentially benefit patients with CC and IBS-C.

SP-304
has been demonstrated to surpass uroguanylin in its biological activity, protease stability and pH characteristics. SP-304 acts in an identical manner as
the natural hormoneas an agonist (i.e. activator) of the GC-C receptor found on the epithelial cells of the colon. Upon activation, the GC-C receptor
promotes intracellular synthesis of cyclic guanosine monophosphate which in turn activates the cystic fibrosis transmembrane conductance regulator, or CFTR, within the epithelial cells. Activation of
CFTR leads to secretion of salts and water into the intestine, resulting in a more liquid and watery intestine content that is more easily transported through the bowel. Recent animal studies
performed with SP-304 have demonstrated the drug's potential to enhance intestinal motility.

Overview

The gastrointestinal tract has many roles in human physiology, including the intake, breakdown and absorption of vital nutrients and
fluids as well as the elimination of waste. In healthy individuals, waste is formed into stools and eliminated by the process of bowel movements. Bowel movements in healthy individuals cause minimal
pain or discomfort and occur at various frequencies ranging from three times daily to three times weekly. IBS-C and CC are functional gastrointestinal disorders that afflict millions of
sufferers worldwide. IBS-C is characterized by frequent and recurrent abdominal pain and/or discomfort and constipation symptoms
(e.g.infrequent bowel movements, hard/lumpy stools, straining during defecation). CC is primarily characterized by constipation symptoms, but a
majority of these patients report experiencing bloating and abdominal discomfort as among their most bothersome symptoms. Available treatment options primarily improve constipation, leading healthcare
providers to diagnose and manage IBS-C and CC based on stool frequency. However, patients view these conditions as multi-symptom disorders, and while laxatives can be effective at
relieving constipation symptoms, they do not necessarily improve abdominal pain, discomfort or bloating, and can often exacerbate these symptoms. This disconnect between patients and physicians,
amplified by patients' embarrassment to discuss all of their gastrointestinal symptoms, often delays diagnosis and may compromise treatment, possibly causing additional suffering and disruption to
patients' daily activities.

Proposed Products



We are currently developing SP-304, a synthetic hexadecapeptide designed to mimic the actions of the GI hormone
uroguanylin, for the treatment of CC and IBS-C. SP-304 is an agonist of GC-C. The endogenous agonists of GC-C receptor are uroguanylin and guanylin,
which were discovered as natriuretic hormones based on their structural similarity to bacterial enterotoxin, the peptide secreted by pathogenicEscherichia
coli(E.coli) bacteria responsible for traveler's diarrhea.

SP-304
is a new member of a novel class of non-systemic drugs for treatment of CC, IBS-C and other GI disorders and diseases. SP-304 was
developed by our scientists based on structure-function studies performed in-house. SP-304 is an analog of uroguanylin, a natural peptide hormone produced in the gut that is a
key regulator of intestinal function. Uroguanylin works by activating the GC-C receptor on intestinal cells which promotes fluid and ion transport in the GI tract. Under normal conditions,
this receptor is activated by the natural hormone uroguanylin and/or by a similar natural hormone guanylin.

3

---



Table of Contents



SP-304 has been demonstrated to surpass uroguanylin in its biological activity, protease stability and pH characteristics.
SP-304 acts in an identical manner as the natural hormoneas an agonist (i.e. activator) of the GC-C receptor found on the epithelial cells of the colon.
Upon activation, the GC-C receptor promotes intracellular synthesis which in turn eventually activates the CFTR within the epithelial cells.
Activation of CFTR leads to secretion of salts and water into the intestine, resulting in a liquid and watery intestine content that is more easily transported through the bowel.

Water
secretion into the lumen of intestine is essential for normal bowel movement. In addition, water secretion in lumen is essential for uniform coating of mucin, which protects
gastric mucosa from mechanical damage and from the harmful effects of acidity in the GI tract. A balance must be maintained between the pathway that controls mucin secretion and the pathway that
controls water secretion. To demonstrate the potential therapeutic utility of SP-304 in treatment of CC and IBS-C, we conducted and/or sponsored several in vitrostudies in T84 cells andin vivostudies in preclinical animal models. In these animal studies,
oral administration of SP-304 promoted intestinal secretion of fluid, thereby softening stool, and producing other pharmacologic effects that could potentially benefit patients with CC and
IBS-C. Thus, one of the major physiological functions of uroguanylin and guanylin is the regulation of fluid and electrolyte transport in the lumen of the GI tract by a
cGMP-mediated mechanism. Therefore, agonists of GC-C might be physiologically involved in normal bowel movement and be useful in patients suffering from CC and
IBS-C. Importantly, the animal model and non-clinical safety pharmacology and toxicology studies also indicated potential therapeutic activity of SP-304 as an oral
and safe drug candidate.



On June 4, 2008, we initiated a Phase 1 clinical trial of SP-304 in volunteers. This first study was a
double-blind, placebo-controlled, randomized single, oral, ascending-dose trial performed in 71 healthy male and female volunteers. The primary objective of the clinical trial was to
characterize the safety, tolerability, pharmacokinetic and pharmacodynamic effects of the drug in healthy volunteers.

On
December 9, 2008, we announced the completion of the Phase 1 clinical trial of SP-304 in healthy volunteers. Cohorts of volunteers were administered a
single, oral dose of SP-304ranging in dose from 0.1, 0.3, 0.9, 2.7, 5.4, 8.1, 16.2, 24.3 and 48.6 mg, respectivelyor given a matching placebo dose. No
detectable SP-304 was observed in the plasma of any subject administered SP-304 throughout the range from 0.1-48.6 mg. Pharmacodynamic effects of
SP-304 related to the frequency and consistency of bowel movements after SP-304 administration were studied, and trends were observed related to greater increases in the number
of bowel movements and looser stools for SP-304 in comparison to placebo. These findings suggested a positive pharmacodynamic effect for SP-304 administration compared to
placebo.

Overall,
SP-304 was safe and well tolerated throughout the single-dose range from 0.1-48.6 mg. A maximum tolerated dose, or MTD, was not established
in this study based on the protocol definition. Although the final dose level tested in this study (48.6 mg
SP-304) did not result in adverse events rising to the level of an MTD, the study was stopped because further dose escalation and exposure of additional subjects was not warranted based on
the development plans for SP-304.



A second generation GC-C receptor agonist, SP-333, is now in pre-clinical development to treat
gastrointestinal inflammatory diseases such as UC. We plan to file an IND for SP-333 to treat UC in the fourth quarter of 2010. We previously showed that GC-C receptor agonists
are efficacious in animal models of UC. In addition, we evaluated GC-C receptor agonists in two different animal models of

4

---



Table of Contents

UC,
demonstrating that oral treatment of GC-C receptor agonists were effective in ameliorating GI inflammation in mouse models of experimental colitis. GC-C receptor agonists
appear to produce anti-inflammatory activity via a novel cGMP-mediated mechanism that downregulates pro-inflammatory cytokines.

Development Plan

Our plan of operations for the next twelve months is to focus primarily on the clinical trial development of SP-304 to
treat CC, and SP-333 to treat UC.

In
February, 2010, a Phase 2a 14-day, repeated-oral-dose trial of SP-304 in CC patients opened for enrollment and is currently
actively recruiting patients. We expect to obtain meaningful topline data from this trial in 2010, and use those data to establish doses for follow-up Phase 2b clinical trials in CC
and IBS-C. Our plan is to begin a Phase 2b 28-day repeated-oral-dose, placebo-controlled trial in SP-304 in CC patients in early 2011
and a Phase 2b 90-day repeated-oral-dose, placebo-controlled trial of SP-304 in IBS-C patients in the second quarter of 2011.

We
also plan to initiate a Phase 1clinical trial of SP-333 in volunteers in the fourth quarter of 2010. We expect to follow this trial in 2011 with a Phase 1b
single-dose trial in UC patients to evaluate safety and pharmacokinetics of orally administered SP-333 in UC patients.

Manufacturing of our Product Candidates

We do not have manufacturing capabilities. We currently use contract manufacturers for the manufacturing of SP-304,
SP-333 and our other product candidates. Accordingly, unless or until we develop or acquire sufficient manufacturing capabilities, we will depend on third parties to manufacture
SP-304, SP-333 and any future products that we may develop or acquire. We are in the process of seeking long-term commercial supply contracts with active
pharmaceutical ingredient manufacturers, and we anticipate that we will be able to negotiate these third-party agreements on commercially reasonable terms. We are in the process of working with
third-party manufacturers to develop the ability to produce SP-304 in accordance with current good manufacturing practices, or GMP, on a sufficient scale to meet our future commercial
needs. It is a fundamental part of our commercial strategy to maintain two or more active pharmaceutical ingredient suppliers to ensure continuity in our supply chain.

At
present we have 1.5 kg of SP-304 in production under GMP conditions that will be used for non-clinical work to support further human studies. We also have
sufficient supplies of GMP-grade SP-304 for our Phase 2 clinical trials in CC. Additionally, we have over 400 grams of non-GMP SP-333 available
to support the non-clinical work needed for filing an IND on SP-333 in the third quarter of 2010. Manufacturing of GMP-scale SP-333 is currently
underway. This material is needed for the clinical trial of SP-333 in healthy volunteers scheduled to begin in 2010.

Government Regulation

In the United States, pharmaceutical products are subject to extensive regulation by the FDA. The Federal Food, Drug, and Cosmetic Act
and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing,
distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. The FDA has very broad enforcement authority and failure to abide by
applicable regulatory requirements can result in administrative or judicial sanctions being imposed on us, including warning letters, refusals of government contracts, clinical holds, civil penalties,
injunctions, restitution, disgorgement of profits, recall or seizure of products, total or partial

5

---



Table of Contents

suspension
of production or distribution, withdrawal of approval, refusal to approve pending applications, and criminal prosecution.



We believe that our product candidates will be regulated by the FDA as drugs. No manufacturer may market a new drug until it has
submitted an NDA to the FDA, and the FDA has approved it. The steps required before the FDA may approve an NDA generally include:



Preclinical
tests include laboratory evaluation of the product candidate, as well as animal studies to assess the potential safety and efficacy of the product candidate. The conduct of
the pre-clinical tests must comply with federal regulations and requirements including good laboratory practices. We must submit the results of the preclinical tests, together with
manufacturing information, analytical data and a proposed clinical trial protocol to the FDA as part of an IND, which must become effective before we may commence human clinical trials. The IND will
automatically become effective 30 days after its receipt by the FDA, unless the FDA raises concerns or questions before that time about the conduct of the proposed trials. In such a case, we
must work with the FDA to resolve any outstanding concerns before clinical trials can proceed. We cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin, or
that, once begun, issues will not arise that suspend or terminate such trials. The study protocol and informed consent information for patients in clinical trials must also be submitted to an
institutional review board for approval. An institutional review board may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the
institutional review board's requirements or may impose other conditions.

Clinical
trials involve the administration of the product candidate to humans under the supervision of qualified investigators, generally physicians not employed by or under the trial
sponsor's control. Clinical trials are typically conducted in three sequential phases, though the phases may overlap or be combined. In Phase 1, the initial introduction of the drug into
healthy human subjects, the drug is usually tested for safety (adverse effects), dosage tolerance and pharmacologic action, as well as to understand how the drug is taken up by and distributed within
the body. Phase 2 usually involves studies in a limited patient population (individuals with the disease under study) to:



6

---



Table of Contents

Phase 3
trials generally further evaluate clinical efficacy and test for safety within an expanded patient population. The conduct of the clinical trials is subject to extensive
regulation, including compliance with good clinical practice regulations and guidance.

The
FDA may order the temporary or permanent discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial is not being conducted in
accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. We may also suspend clinical trials at any time on various grounds.

The
results of the preclinical and clinical studies, together with other detailed information, including the manufacture and composition of the product candidate, are submitted to the
FDA in the form of an NDA requesting approval to market the drug. FDA approval of the NDA is required before marketing of the product may begin in the U.S. If the NDA contains all pertinent
information and data, the FDA will "file" the application and begin review. The FDA may "refuse to file" the NDA if it does not contain all pertinent information and data. In that case, the applicant
may resubmit the NDA when it contains the missing information and data. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain
performance goals in the review of new drug applications. Most such applications for non-priority drug products are reviewed within 10 months. The review process, however, may be
extended by FDA requests for additional information, preclinical or clinical studies, clarification regarding information already provided in the submission, or submission of a risk evaluation and
mitigation strategy. The FDA may refer an application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the
recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. Before approving an NDA, the FDA will typically inspect the facilities at which the
product candidate is manufactured and will not approve the product candidate unless GMP compliance is satisfactory. FDA also typically
inspects facilities responsible for performing animal testing, as well as clinical investigators who participate in clinical trials. The FDA may refuse to approve an NDA if applicable regulatory
criteria are not satisfied, or may require additional testing or information. The FDA may also limit the indications for use and/or require post-marketing testing and surveillance to
monitor the safety or efficacy of a product. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial
marketing.

The
testing and approval process requires substantial time, effort and financial resources, and our product candidates may not be approved on a timely basis, if at all. The time and
expense required to perform the clinical testing necessary to obtain FDA approval for regulated products can frequently exceed the time and expense of the research and development initially required
to create the product. The results of preclinical studies and initial clinical trials of our product candidates are not necessarily predictive of the results from large-scale clinical trials, and
clinical trials may be subject to additional costs, delays or modifications due to a number of factors, including difficulty in obtaining enough patients, investigators or product candidate supply.
Failure by us to obtain, or any delay in obtaining, regulatory approvals or in complying with requirements could adversely affect the commercialization of product candidates and our ability to receive
product or royalty revenues.

Other Regulatory Requirements

After approval, drug products are subject to extensive continuing regulation by the FDA, which include company obligations to
manufacture products in accordance with GMP, maintain and provide to the FDA updated safety and efficacy information, report adverse experiences with the product, keep certain records and submit
periodic reports, obtain FDA approval of certain manufacturing or labeling changes, and comply with FDA promotion and advertising requirements and restrictions. Failure to meet these obligations can
result in various adverse consequences, both voluntary and FDA-imposed, including product recalls, withdrawal of approval, restrictions on marketing, and the imposition of civil

7

---



Table of Contents

fines
and criminal penalties against the NDA holder. In addition, later discovery of previously unknown safety or efficacy issues may result in restrictions on the product, manufacturer or NDA holder.

We
and any manufacturers of our products are required to comply with applicable FDA manufacturing requirements contained in the FDA's GMP regulations. GMP regulations require among other
things, quality control and quality assurance as well as the corresponding maintenance of records and documentation. The manufacturing facilities for our products must meet GMP requirements to the
satisfaction of the FDA pursuant to a pre-approval inspection before we can use them to manufacture our products. We and any third-party manufacturers are also subject to periodic
inspections of facilities by the FDA and other authorities, including procedures and operations used in the testing and manufacture of our products to assess our compliance with applicable
regulations.

With
respect to post-market product advertising and promotion, the FDA imposes a number of complex regulations on entities that advertise and promote pharmaceuticals, which
include, among others, standards for direct-to-consumer advertising, promoting drugs for uses or in patient populations that are not described in the drug's approved labeling
(known as "off-label use"), industry-sponsored scientific and educational activities, and promotional activities involving the internet. Failure to comply with FDA requirements can have
negative consequences, including adverse publicity, enforcement letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties. Although
physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-label uses.

Changes
to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA
approval of a new NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indication typically requires clinical data similar to that in the original application, and
the FDA uses the same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.

Adverse
event reporting and submission of periodic reports is required following FDA approval of an NDA. The FDA also may require post-marketing testing, known as
Phase 4 testing, risk minimization action plans, and surveillance to monitor the effects of an approved product or place conditions on an approval that could restrict the distribution or use of
the product.

Outside
the United States, our ability to market a product is contingent upon receiving marketing authorization from the appropriate regulatory authorities. The requirements governing
marketing authorization, pricing and reimbursement vary widely from jurisdiction to jurisdiction. At present, foreign marketing authorizations are applied for at a national level, although within the
European Union registration procedures are available to companies wishing to market a product in more than one European Union member state.

Competition

The biopharmaceutical industry is characterized by rapidly evolving technology and intense competition. Our competitors include major
pharmaceutical and biotechnology companies focusing on GI such as Ironwood Pharmaceuticals, Inc., Forest Laboratories, Inc., Takeda Pharmaceuticals America, Inc., Sucampo
Pharmaceuticals, Inc., Salix Pharmaceuticals, Inc. and Movetis NV. Most of our competitors have financial, technical and marketing resources significantly greater than our
resources. Academic institutions, governmental agencies and other public and private research organizations are also conducting research activities and seeking patent protection and may commercialize
products on their own or through joint ventures. We are aware of certain development projects for products to prevent or treat certain diseases targeted by us. The existence of these
potential products or other products or treatments of which we are not aware, or products or treatments that may be developed in the future, may adversely affect our ability to market the products we
develop.

8

---



Table of Contents

Research and Development Expenses

Research and development expenses consist primarily of costs associated with (i) clinical development team salaries and staff
costs, (ii) application and filing for regulatory approval of our proposed products, (iii) regulatory and scientific consulting fees, (iv) clinical and patient costs for product
candidates in on-going trials, (v) sponsored pre-clinical research, (vi) legal and professional fees associated with filing and maintaining our patent and license
rights to our proposed products and (vii) clinical drug substance. We expense all research and development costs as they are incurred and we expect our research and development expenses to
increase significantly in the future as we develop our product candidates. Research and development expenses were $4,257,285 for the twelve months ended December 31, 2009, compared to
$1,909,226 and $0 for the twelve months ended December 31, 2008 and 2007, respectively.

Patents and Proprietary Rights

We are able to protect our technology from unauthorized use by third parties only to the extent that it is covered by valid and
enforceable patents or is effectively maintained as a trade secret or is protected by confidentiality agreements. Accordingly, patents or other proprietary rights are an essential element of our
business.

As
of March 12, 2010, we have one issued United States patent which covers composition-of-matter of SP-304 and expires in 2023. In addition, we have three issued foreign patents
which cover composition-of-matter of SP-304 and expire in 2022. These foreign patents cover Austria, Belgium, Switzerland, Cyprus, Germany, Denmark, Spain, Finland, France, United Kingdom, Greece,
Ireland, Italy, Liechtenstein, Luxembourg, Monaco, Netherlands, Portugal, Sweden, Turkey, Hong Kong and Japan.

Additionally
as of March 12, 2010, we have seven pending United States patent applications and eighteen pending foreign patent applications covering various derivatives and
analogs of SP-304 and SP-333. In April 2010, two parties filed an opposition to our granted patent with the European Patent Office. We cannot predict the final outcome of the opposition, which is
likely to take several years to complete.

Patents
extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual
protection afforded by a patent, which can vary from country to country, depends on the type of patent, the scope of its coverage and the availability of legal remedies in the country.

While
trade secret protection is an essential element of our business and we have taken security measures to protect our proprietary information and trade secrets, we cannot give
assurance that our unpatented proprietary technology will afford us significant commercial protection. We seek to protect our trade secrets by entering into confidentiality agreements with third
parties, employees and consultants. Our employees and consultants also sign agreements requiring that they assign to us their interests in intellectual property arising from their work for us. All
employees sign an agreement not to engage in any conflicting employment or activity during their employment with us and not to disclose or misuse our confidential information. However, it is possible
that these agreements may be breached or invalidated, and if so, there may not be an adequate corrective remedy available. Accordingly, we cannot ensure that employees, consultants or third parties
will not breach the confidentiality provisions in our contracts, infringe or misappropriate our trade secrets and other proprietary rights or that measures we are taking to protect our proprietary
rights will be adequate.

In
the future, third parties may file claims asserting that our technologies or products infringe on their intellectual property. We cannot predict whether third parties will assert such
claims against us or against the licensors of technology licensed to us, or whether those claims will harm our business. If we

9

---



Table of Contents

are
forced to defend ourselves against such claims, whether they are with or without merit and whether they are resolved in favor of, or against, our licensors or us, we may face costly litigation and
the diversion of management's attention and resources. As a result of such disputes, we may have to develop costly non-infringing technology or enter into licensing agreements. These
agreements, if necessary, may be unavailable on terms acceptable to us, or at all.

Employees

As of March 12, 2010, we had 6 full-time and 3 part-time employees. We believe our employee relations
are satisfactory.

Our Website

Our website address iswww.synergypharma.com; Information found on our website is not
incorporated by reference into this report. We make available free of charge through our website our Securities and Exchange Commission, or SEC, filings furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

10

---





Table of Contents

ITEM 1A.    RISK FACTORS.

You should carefully consider the following risk factors and the other information included in this annual report on
Form 10-K/A, as well as the information included in other reports and filings made with the SEC, before investing in our common stock. If any of the following risks actually occurs,
our business, financial condition or results of operations could be harmed. The trading price of our common stock could decline due to any of these risks, and you may lose part or all of your
investment.

Risks Related to Our Business

We are at an early stage of development as a company, currently have no source of revenue and may never become profitable.

We are a development stage biopharmaceutical company. Currently, we have no products approved for commercial sale and, to date, we have
not generated any revenue. Our ability to generate revenue depends heavily on:



All
of our existing product candidates will require extensive additional clinical evaluation, regulatory review, significant marketing efforts and substantial investment before they
could provide us with any revenue. As a result, if we do not successfully develop and commercialize SP-304, we will be unable to generate any revenue for many years, if at all. We do not
anticipate that we will generate revenue for several years, at the earliest, or that we will achieve profitability for at least several years after generating material revenue, if at all. If we are
unable to generate revenue, we will not become profitable, and we may be unable to continue our operations.

Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future
financing.

Our consolidated financial statements as of December 31, 2009 were prepared under the assumption that we will continue as a
going concern for the next twelve months. Our independent registered public accounting firm has issued a report that included an explanatory paragraph referring to our recurring losses from operations
and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern is dependent upon our ability
to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

We do not have any products that are approved for commercial sale and therefore do not expect to generate any revenues from product sales in the foreseeable future, if ever.

To date, we have funded our operations primarily from sales of our securities. We have not received, and do not expect to receive for
at least the next several years, if at all, any revenues from the commercialization of our product candidates. To obtain revenues from sales of our product candidates, we must succeed, either alone or
with third parties, in developing, obtaining regulatory approval for, manufacturing and marketing drugs with commercial potential. We may never succeed in

11

---



Table of Contents

these
activities, and we may not generate sufficient revenues to continue our business operations or achieve profitability.

We have incurred significant losses since inception and anticipate that we will incur continued losses for the foreseeable future.

As of December 31, 2009 and 2008 we had an accumulated deficit of $39,920,541 and $31,795,441, respectively. We expect to incur
significant and increasing operating losses for the next several years as we expand our research and development, continue our clinical trials of SP-304 for the treatment of GI disorders,
acquire or license technologies, advance other product candidates into clinical development, including SP-333, seek regulatory approval and, if we receive FDA approval, commercialize our
products. Because of the numerous risks and uncertainties associated with our product development efforts, we are unable to predict the extent of
any future losses or when we will become profitable, if at all. If we are unable to achieve and then maintain profitability, the market value of our common stock will likely decline.

We will need to raise substantial additional capital within the next year to fund our operations, and our failure to obtain funding when needed may force us to delay, reduce
or eliminate our product development programs or collaboration efforts.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts
to:



We
will be required to raise additional capital within the next year to complete the development and commercialization of our current product candidates and to continue to fund
operations at the current cash expenditure levels. Our future funding requirements will depend on many factors, including, but not limited to:



12

---



Table of Contents



Worldwide
economic conditions and the international equity and credit markets have recently significantly deteriorated and may remain depressed for the foreseeable future. These
developments could make it more difficult for us to obtain additional equity or credit financing, when needed.

We
cannot be certain that funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may
experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct our business. If we are unable to raise additional capital when
required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates. We also may be
required to:



We are largely dependent on the success of our lead product candidate, SP-304, and we cannot be certain that this product candidate will receive regulatory
approval or be successfully commercialized.

We currently have no products for sale, and we cannot guarantee that we will ever have any drug products approved for sale. The
research, testing, manufacturing, labeling, approval, selling, marketing and distribution of drug products are subject to extensive regulation by the FDA and comparable regulatory authorities in other
countries. We are not permitted to market any of our product candidates in the United States until we receive approval of a new drug application, or NDA, for a product candidate from the FDA or its
foreign equivalent from a foreign regulatory authority. Obtaining FDA approval is a lengthy, expensive and uncertain process. We currently have one lead product candidate, SP-304 for the
treatment of GI disorders, and the success of our business currently depends on its successful development and commercialization. This product candidate has not completed the clinical development
process; therefore, we have not submitted an NDA or foreign equivalent or received marketing approval for this product candidate.

The
clinical development program for SP-304 may not lead to commercial products for a number of reasons, including if we fail to obtain necessary approvals from the FDA or
similar foreign regulatory authorities because our clinical trials fail to demonstrate to their satisfaction that this product candidate is safe and effective. We may also fail to obtain the necessary
approvals if we have inadequate financial or other resources to advance our product candidates through the clinical trial process. Any failure or delay in completing clinical trials or obtaining
regulatory approval for SP-304 in a timely manner would have a material and adverse impact on our business and our stock price.

We will need to obtain FDA approval of any proposed product names, and any failure or delay associated with such approval may adversely impact our business.

Any names we intend to use for our product candidates will require approval from the FDA regardless of whether we have secured a formal
trademark registration from the U.S. Patent and Trademark Office, or the PTO. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with
other product names. The FDA may also object to a product name if it believes the name inappropriately implies medical claims. If the FDA objects to any of our proposed product names, we may be
required to adopt an alternative name for our product candidates. If we adopt an alternative name, we would lose the benefit of our existing trademark applications for such product candidate and may
be required to expend significant additional resources in an effort to identify a suitable product name that would qualify under applicable trademark laws, not

13

---



Table of Contents

infringe
the existing rights of third parties and be acceptable to the FDA. We may be unable to build a successful brand identity for a new trademark in a timely manner or at all, which would limit
our ability to commercialize our product candidates.

Our quarterly operating results may fluctuate significantly.

We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by
numerous factors, including:



If
our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly
fluctuations in our operating results may, in turn, cause the price of our common stock to fluctuate substantially.

A majority of our common stock is owned by a single stockholder, and it may therefore by able to control our management and affairs.

Callisto Pharmaceuticals, Inc. currently owns approximately 50.4% of our outstanding common stock. Therefore, Callisto
Pharmaceuticals will be able to elect all of our directors and maintain control of our board of directors and our operations. It should also be noted that for the most part, authorization to modify
our Articles of Incorporation, as amended, requires only majority stockholder consent and approval to modify our amended and restated By- Laws requires authorization of only a majority of
the board of directors. This concentration of ownership could also have the effect of delaying or preventing a change in our control.

Our management overlaps substantially with the management and beneficial owners of our principal stockholder, which may give rise to potential conflicts of interest.

Several of our executive officers and directors are also officers and/or directors of our principal stockholder, Callisto
Pharmaceuticals, and certain of such executive officers and directors are, in turn, the principal stockholders of Callisto Pharmaceuticals. Accordingly, there may be inherent, albeit
non-specific, potential conflicts involved in the participation by members of each company's management, audit committee, compensation committee, nominating
committee and other applicable board committees which will oversee questions of possible conflicts of interest and compensation, notwithstanding an effort to appoint independent directors that do not
have these inherent conflicts. In addition, as a matter of practicality, efficiency and appropriate accounting, the costs of certain service (including salaries of executive officers) are allocated,
which creates inter-company obligations.

Clinical trials involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

In order to receive regulatory approval for the commercialization of our product candidates, we must conduct, at our own expense,
extensive clinical trials to demonstrate safety and efficacy of these

14

---



Table of Contents

product
candidates. Clinical testing is expensive, can take many years to complete and its outcome is uncertain. Failure can occur at any time during the clinical trial process.

The
results of preclinical studies and early clinical trials of our product candidates do not necessarily predict the results of later-stage clinical trials. Product candidates in later
stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through initial clinical testing. The data collected from clinical trials of our product
candidates may not be sufficient to support the submission of a new drug application or to obtain regulatory approval in the United States or elsewhere. Because of the uncertainties associated with
drug development and regulatory approval, we cannot determine if or when we will have an approved product for commercialization or achieve sales or profits.

Delays in clinical testing could result in increased costs to us and delay our ability to generate revenue.

We may experience delays in clinical testing of our product candidates. We do not know whether planned clinical trials will begin on
time, will need to be redesigned or will be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence a
trial, in reaching agreement on acceptable clinical trial terms with prospective sites, in obtaining institutional review board approval to conduct a trial at a prospective site, in recruiting
patients to participate in a trial or in obtaining sufficient supplies of clinical trial materials. Many factors affect patient enrollment, including the size of the patient population, the proximity
of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new drugs approved for the conditions we are investigating. Prescribing physicians will also have
to decide to use our product candidates over existing drugs that have established safety and
efficacy profiles. Any delays in completing our clinical trials will increase our costs, slow down our product development and approval process and delay our ability to generate revenue.

We may be required to suspend or discontinue clinical trials due to unexpected side effects or other safety risks that could preclude approval of our product candidates.

Our clinical trials may be suspended at any time for a number of reasons. For example, we may voluntarily suspend or terminate our
clinical trials if at any time we believe that they present an unacceptable risk to the clinical trial patients. In addition, regulatory agencies may order the temporary or permanent discontinuation
of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety
risk to the clinical trial patients.

Administering
any product candidates to humans may produce undesirable side effects. These side effects could interrupt, delay or halt clinical trials of our product candidates and could
result in the FDA or other regulatory authorities denying further development or approval of our product candidates for any or all targeted indications. Ultimately, some or all of our product
candidates may prove to be unsafe for human use. Moreover, we could be subject to significant liability if any volunteer or patient suffers, or appears to suffer, adverse health effects as a result of
participating in our clinical trials.

If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

As a developer of pharmaceuticals, even though we do not and will not control referrals of healthcare services or bill directly to
Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients' rights are and will be applicable to our business.
We could be subject to healthcare fraud and abuse and patient privacy

15

---



Table of Contents

regulation
by both the federal government and the states in which we conduct our business. The regulations include:



If
our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to us, we may be subject to penalties, including civil and
criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our
ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be
entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's
attention from the operation of our business. Moreover,
achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.

If we are unable to satisfy regulatory requirements, we may not be able to commercialize our product candidates.

We need FDA approval prior to marketing our product candidates in the United States. If we fail to obtain FDA approval to market our
product candidates, we will be unable to sell our product candidates in the United States and we will not generate any revenue.

This
regulatory review and approval process, which includes evaluation of preclinical studies and clinical trials of a product candidate as well as the evaluation of our manufacturing
process and our contract manufacturers' facilities, is lengthy, expensive and uncertain. To receive approval, we must, among other things, demonstrate with substantial evidence from
well-controlled clinical trials that the product candidate is both safe and effective for each indication where approval is sought. Satisfaction of these requirements typically takes
several years and the time needed to satisfy them may vary substantially, based on the type, complexity and novelty of the pharmaceutical product. We cannot predict if or when we might submit for
regulatory review any of our product candidates currently under

16

---



Table of Contents

development.
Any approvals we may obtain may not cover all of the clinical indications for which we are seeking approval. Also, an approval might contain significant limitations in the form of narrow
indications, warnings, precautions, or contra-indications with respect to conditions of use.

The
FDA has substantial discretion in the approval process and may either refuse to file our application for substantive review or may form the opinion after review of our data that our
application is insufficient to allow approval of our product candidates. If the FDA does not file or approve our application, it may require that we conduct additional clinical, preclinical or
manufacturing validation studies and submit that data before it will reconsider our application. Depending on the extent of these or any other studies, approval of any applications that we submit may
be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered
sufficient by the FDA to make our applications approvable. If any of these outcomes occur, we may be forced to abandon our applications for approval, which might cause us to cease operations.

We
will also be subject to a wide variety of foreign regulations governing the development, manufacture and marketing of our products. Whether or not FDA approval has been obtained,
approval of a product by the comparable regulatory authorities of foreign countries must still be obtained prior to manufacturing or marketing the product in those countries. The approval process
varies from country
to country and the time needed to secure approval may be longer or shorter than that required for FDA approval. We cannot assure you that clinical trials conducted in one country will be accepted by
other countries or that approval in one country will result in approval in any other country.

If our product candidates are unable to compete effectively with marketed drugs targeting similar indications as our product candidates, our commercial opportunity will be
reduced or eliminated.

We face competition generally from established pharmaceutical and biotechnology companies, as well as from academic institutions,
government agencies and private and public research institutions. Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing,
preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Smaller or early-stage companies may also prove to be significant
competitors, particularly through collaborative arrangements with large, established companies. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize GI
drugs that are safer, more effective, have fewer side effects or are less expensive than our product candidates. These third parties compete with us in recruiting and retaining qualified scientific
and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or
advantageous to our business.

If
approved and commercialized, SP-304 will compete with one existing prescription therapy for the treatment of CC and IBS-C, Amitiza. In addition,
over-the-counter products are also used to treat certain symptoms of CC and IBS-C. We believe certain companies are developing other products which could compete
with SP-304 should they be approved by the FDA. Currently, there are at least two compounds in late stage development. One compound, linoclotide, is being developed by Ironwood
Pharmaceuticals, Inc. This compound is being co-developed with Forest Laboratories, Inc. and has completed Phase 3 trials for CC and is expecting to have data from
Phase 3 trials for IBS-C in the second half of 2010. Another compound, velusetrag, is being developed by Theravance, Inc. and has completed Phase 2 trials for CC. To
our knowledge, other potential competitors are in earlier stages of development. If our potential competitors are successful in completing drug development for their drug candidates and obtain
approval from the FDA, they could limit the demand for SP-304.

17

---



Table of Contents

We
expect that our ability to compete effectively will depend upon our ability to:



Because
we will be competing against significantly larger companies with established track records, we will have to demonstrate to physicians that based on experience, clinical data,
side-effect profiles and other factors, our products are preferable to existing GI drugs. If we are unable to compete effectively in the GI drug market and differentiate our products from
currently marketed GI drugs, we may never generate meaningful revenue.

We currently have no sales and marketing organization. If we are unable to establish a direct sales force in the United States to promote our products, the commercial
opportunity for our products may be diminished.

We currently have no sales and marketing organization. If any of our product candidates are approved by the FDA, we intend to market
that product directly to hospitals and other pharmaceutical distribution channels in the United States through our own sales force. We will incur significant additional expenses and commit significant
additional management resources to establish this sales force. We may not be able to establish these capabilities despite these additional expenditures. We will also have to compete with other
pharmaceutical and biotechnology companies to
recruit, hire and train sales and marketing personnel. If we elect to rely on third parties to sell our product candidates in the United States, we may receive less revenue than if we sold our
products directly. In addition, we may have little or no control over the sales efforts of those third parties. In the event we are unable to develop our own sales force or collaborate with a third
party to sell our product candidates, we may not be able to commercialize our product candidates which would negatively impact our ability to generate revenue.

We may need others to market and commercialize our product candidates in international markets.

In the future, if appropriate regulatory approvals are obtained, we intend to commercialize our product candidates in international
markets. However, we have not decided how to commercialize our product candidates in those markets. We may decide to build our own sales force or sell our products through third parties. Currently, we
do not have any plans to enter international markets. If we decide to sell our product candidates in international markets through a third party, we may not be able to enter into any marketing
arrangements on favorable terms or at all. In addition, these arrangements could result in lower levels of income to us than if we marketed our product candidates entirely on our own. If we are unable
to enter into a marketing arrangement for our product candidates in international markets, we may not be able to develop an effective international sales force to successfully commercialize those
products in international markets. If we fail to enter into marketing arrangements for our products and are unable to develop an effective international sales force, our ability to generate revenue
would be limited.

18

---



Table of Contents

If the manufacturers upon whom we rely fail to produce SP-304 and our product candidates, including SP-333, in the volumes that we require on a
timely basis, or fail to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development and commercialization of our product candidates.

We do not currently possess internal manufacturing capacity. We currently utilize the services of contract manufacturers to manufacture
our clinical supplies. With respect to the manufacturing of SP-304, we are currently pursuing long-term commercial supply agreements with multiple manufacturers. Any
curtailment in the availability of SP-304 could result in production or other delays with consequent adverse effects on us. In addition, because regulatory authorities must generally
approve raw material sources for pharmaceutical products, changes in raw material suppliers may result in production delays or higher raw material costs.

We
may be required to agree to minimum volume requirements, exclusivity arrangements or other restrictions with the contract manufacturers. We may not be able to enter into
long-term agreements on commercially reasonable terms, or at all. If we change or add manufacturers, the FDA and comparable foreign regulators must approve these manufacturers' facilities
and processes prior to use, which would require new testing and compliance inspections, and the new manufacturers would have to be educated in or independently develop the processes necessary for the
production of our product candidates. Peptide manufacturing is a highly specialized manufacturing business. While we believe we will have long term arrangements with a sufficient number of contract
manufacturers, if we lose a manufacturer, it would take us a substantial amount of time to identify and develop a relationship with an alternative manufacturer.

The
manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls.
Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up production. These problems include difficulties with production costs and yields,
quality control, including stability of the product and quality assurance testing, shortages of qualified personnel, as well as compliance with federal, state and foreign regulations. In addition, any
delay or interruption in the supply of clinical trial supplies could delay the completion of our clinical trials, increase the costs associated with conducting our clinical trials and, depending upon
the period of delay, require us to commence new trials at significant additional expense or to terminate a trial.

Each
of our contract manufacturers would need to comply with GMP requirements enforced by the FDA through its facilities inspection program. These requirements include, among other
things, quality control, quality assurance and the maintenance of records and documentation. Manufacturers of SP-304 and other product candidates, including SP-333, may be
unable to comply with these GMP requirements and with other FDA and foreign regulatory requirements. We have little control over our manufacturers' compliance with these regulations and standards. A
failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of
product approval. If the safety of SP-304 or other product candidates is compromised due to a manufacturers' failure to adhere to applicable laws or for other reasons, we may not be able
to obtain regulatory approval for or successfully commercialize SP-304 or other product candidates, and we may be held liable for any injuries sustained as a result. Any of these factors
could cause a delay of clinical trials, regulatory submissions, approvals or commercialization of SP-304 or other product candidates, entail higher costs or result in our being unable to
effectively commercialize SP-304 or other product candidates. Furthermore, if our manufacturers fail to deliver the required commercial quantities on a timely basis and at commercially
reasonable prices, we may be unable to meet demand for any approved products and would lose potential revenues.

19

---





Table of Contents

We may not be able to manufacture our product candidates in commercial quantities, which would prevent us from commercializing our product candidates.

To date, our product candidates have been manufactured in small quantities for preclinical studies and clinical trials. If any of our
product candidates is approved by the FDA or comparable regulatory authorities in other countries for commercial sale, we will need to manufacture such product candidate in larger quantities. We may
not be able to increase successfully the manufacturing capacity for any of our product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may
require additional validation studies, which the FDA must review and approve. If we are unable to increase successfully the manufacturing capacity for a product candidate, the regulatory approval or
commercial launch of that product candidate may be delayed or there may be a shortage in supply. Our product candidates require precise, high quality manufacturing. Our failure to achieve and maintain
these high manufacturing standards in collaboration with our third-party manufacturers, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or
withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could harm our business, financial condition and results of operations.

Materials necessary to manufacture our product candidates may not be available on commercially reasonable terms, or at all, which may delay the development and
commercialization of our product candidates.

We rely on the third-party manufacturers of our product candidates to purchase from third-party suppliers the materials necessary to
produce the bulk active pharmaceutical ingredients, or API, and product candidates for our clinical trials, and we will rely on such manufacturers to purchase such materials to produce the API and
finished product for any commercial distribution of our products if we obtain marketing approval. Suppliers may not sell these materials to our manufacturers at the time they need them in order to
meet our required delivery schedule or on commercially reasonable terms, if at all. We do not have any control over the process or timing of the acquisition of these materials by our manufacturers.
Moreover, we currently do not have any agreements for the production of these materials. If our manufacturers are unable to obtain these materials for our clinical trials, testing of the affected
product candidate would be delayed, which may significantly impact our ability to develop the product candidate. If we or our manufacturers are unable to purchase these materials after regulatory
approval has been obtained for one of our products, the commercial launch of such product would be delayed or there would be a shortage in supply of such product, which would harm our ability to
generate revenues from such product and achieve or sustain profitability.

Our product candidates, if approved for sale, may not gain acceptance among physicians, patients and the medical community, thereby limiting our potential to generate
revenues.

If one of our product candidates is approved for commercial sale by the FDA or other regulatory authorities, the degree of market
acceptance of any approved product by physicians, healthcare professionals and third-party payors and our profitability and growth will depend on a number of factors,
including:



20

---



Table of Contents



If
any product candidate that we develop does not provide a treatment regimen that is as beneficial as, or is perceived as being as beneficial as, the current standard of care or
otherwise does not provide patient benefit, that product candidate, if approved for commercial sale by the FDA or other regulatory authorities, likely will not achieve market acceptance. Our ability
to effectively promote and sell any approved products will also depend on pricing and cost-effectiveness, including our ability to produce a product at a competitive price and our ability
to obtain sufficient third-party coverage or reimbursement. If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, patients and third-party payors,
our ability to generate revenues from
that product would be substantially reduced. In addition, our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant
resources and may never be successful.

Guidelines and recommendations published by various organizations can reduce the use of our products.

Government agencies promulgate regulations and guidelines directly applicable to us and to our products. In addition, professional
societies, practice management groups, private health and science foundations and organizations involved in various diseases from time to time may also publish guidelines or recommendations to the
health care and patient communities. Recommendations of government agencies or these other groups or organizations may relate to such matters as usage, dosage, route of administration and use of
concomitant therapies. Recommendations or guidelines suggesting the reduced use of our products or the use of competitive or alternative products that are followed by patients and health care
providers could result in decreased use of our proposed products.

If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product
candidates.

We face an inherent risk of product liability lawsuits related to the testing of our product candidates, and will face an even greater
risk if we sell our product candidates commercially. Currently, we are not aware of any anticipated product liability claims with respect to our product candidates. In the future, an individual may
bring a liability claim against us if one of our product candidates causes, or merely appears to have caused, an injury. If we cannot successfully defend ourselves against the product liability claim,
we may incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:



21

---



Table of Contents



We
have clinical trial liability insurance with a $5,000,000 aggregate limit for up to 60 patients participating at the same time in our clinical trials. We intend to expand our
insurance coverage to include the sale of commercial products if marketing approval is obtained for our product candidates. Our current insurance coverage may prove insufficient to cover any liability
claims brought against us. In addition, because of the increasing costs of insurance coverage, we may not be able to maintain
insurance coverage at a reasonable cost or obtain insurance coverage that will be adequate to satisfy any liability that may arise.

Our failure to successfully discover, acquire, develop and market additional product candidates or approved products would impair our ability to grow.

As part of our growth strategy, we intend to develop and market additional products and product candidates. We are pursuing various
therapeutic opportunities through our pipeline. We may spend several years completing our development of any particular current or future internal product candidate, and failure can occur at any
stage. The product candidates to which we allocate our resources may not end up being successful. In addition, because our internal research capabilities are limited, we may be dependent upon
pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products or technology to us. The success of this strategy depends partly upon our ability to
identify, select, discover and acquire promising pharmaceutical product candidates and products. Failure of this strategy would impair our ability to grow.

The
process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with
substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We have limited resources to identify
and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to
potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rights
to additional product candidates on terms that we find acceptable, or at all.

In
addition, future acquisitions may entail numerous operational and financial risks, including:



Further,
any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and
applicable foreign

22

---



Table of Contents

regulatory
authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be
sufficiently safe and effective for approval by regulatory authorities.

Even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties.

Even if U.S. regulatory approval is obtained, the FDA may still impose significant restrictions on a product's indicated uses or
marketing, or impose ongoing requirements for potentially costly post-approval studies. SP-304 and other product candidates, including SP-333, would also be subject
to ongoing FDA requirements governing the labeling, packaging, storage, advertising, promotion, recordkeeping and submission of safety and other post-market information. In addition,
manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing
practices, or GMP, regulations. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the
facility where the product is manufactured, a regulatory agency may impose restrictions on that product or the manufacturer, including requiring withdrawal of the product from the market or suspension
of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency
may:



Even if our product candidates receive regulatory approval in the U.S., we may never receive approval to commercialize them outside of the U.S.

In the future, we or our collaborators, if any, may seek to commercialize SP-304 and/or other product candidates, including
SP-333, in foreign countries outside of the United States. In order to market any products outside of the U.S., we must establish and comply with numerous and varying regulatory
requirements of other jurisdictions regarding safety and efficacy. Approval procedures vary among jurisdictions and can involve product testing and administrative review periods different from, and
greater than, those in the U.S. The time required to obtain approval in other jurisdictions might differ from that required to obtain FDA approval. The regulatory approval process in other
jurisdictions may include all of the risks detailed above regarding FDA approval in the U.S. as well as other risks. Regulatory approval in one jurisdiction does not ensure regulatory approval in
another, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory processes in others. Failure to obtain regulatory approvals in other
jurisdictions or any delay or setback in obtaining such approvals could have the same adverse effects detailed above regarding FDA approval in the U.S. As described above, such effects include the
risks that SP-304 or other product candidates may not be approved for all indications requested, which could limit the uses of SP-304 or other product candidates and have an
adverse effect on our products' commercial potential or require costly post-marketing studies.

23

---



Table of Contents

We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not
be able to seek or obtain regulatory approval for or commercialize our product candidates.

We have agreements with third-party contract research organizations, or CROs, to provide monitors and to manage data for our clinical
programs. We and our CROs are required to comply with current Good Clinical Practices, or GCPs, regulations and guidelines enforced by the FDA for all of our products in clinical development. The FDA
enforces GCPs through periodic
inspections of trial sponsors, principal investigators and trial sites. In the future, if we or our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be
deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that
any of our clinical trials for products in clinical development comply with GCPs. In addition, our clinical trials must be conducted with product produced under cGMP regulations, and will require a
large number of test subjects. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

If
CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data
they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, and we may
not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for our product candidates would be
harmed, our costs could increase, and our ability to generate revenue could be delayed.

If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop our product candidates, conduct our clinical trials
and commercialize our product candidates.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and
scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions, clinicians and scientists. We are highly dependent upon our senior
management and scientific staff, particularly Gary S. Jacob, Ph.D., our President and Chief Executive Officer and Kunwar Shailubhai, Ph.D., our Chief Scientific Officer. The loss of services of
Dr. Jacob or one or more of our other members of senior management could delay or prevent the successful completion of our planned clinical trials or the commercialization of our product
candidates.

The
competition for qualified personnel in the biotechnology and pharmaceuticals field is intense. We will need to hire additional personnel as we expand our clinical development and
commercial activities. We may not be able to attract and retain quality personnel on acceptable terms given the competition for such personnel among biotechnology, pharmaceutical and other companies.

We will need to increase the size of our organization, and we may experience difficulties in managing growth.

We are a small company with 6 full-time and 3 part-time employees as of March 12, 2010. To continue our
clinical trials and commercialize our product candidates, we will need to expand our employee base for managerial, operational, financial and other resources. Future growth will impose significant
added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees. Over the next 12 months depending on the progress of our
planned clinical trials, we plan to add additional employees to assist us with our clinical programs. Our future financial performance and our ability to commercialize our product candidates and to

24

---



Table of Contents

compete
effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to:



We
may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our financial results and impact our ability to achieve development milestones.

Reimbursement may not be available for our product candidates, which would impede sales.

Market acceptance and sales of our product candidates may depend on reimbursement policies and health care reform measures. The levels
at which government authorities and third-party payors, such as private health insurers and health maintenance organizations, reimburse patients for the price they pay for our products could affect
whether we are able to commercialize these products. We cannot be sure that reimbursement will be available for any of these products. Also, we cannot be sure that reimbursement amounts will not
reduce the demand for, or the price of, our products. We have not commenced efforts to have our product candidates reimbursed by government or third party payors. If reimbursement is not available or
is available only to limited levels, we may not be able to commercialize our products.

In
recent years, officials have made numerous proposals to change the health care system in the United States. These proposals include measures that would limit or prohibit payments for
certain medical treatments or subject the pricing of drugs to government control. In addition, in many foreign countries, particularly the countries of the European Union, the pricing of prescription
drugs is subject to government control. If our products are or become subject to government regulation that limits or prohibits payment for our products, or that subject the price of our products to
governmental control, we may not be able to generate revenue, attain profitability or commercialize our products.

As
a result of legislative proposals and the trend towards managed health care in the United States, third-party payers are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement of new drugs. They may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA
has granted market approvals. As a result, significant uncertainty exists as to whether and how much third-party payers will reimburse patients for their use of newly-approved drugs, which in turn
will put pressure on the pricing of drugs.

Healthcare reform measures could hinder or prevent our product candidates' commercial success.

The U.S. government and other governments have shown significant interest in pursuing healthcare reform. Any government-adopted reform
measures could adversely impact the pricing of healthcare products and services in the U.S. or internationally and the amount of reimbursement available from governmental agencies or other third party
payors. The continuing efforts
of the U.S. and foreign governments, insurance companies, managed care organizations and other payors of health care services to contain or reduce health care costs may adversely affect our ability to
set prices for our products which we believe are fair, and our ability to generate revenues and achieve and maintain profitability.

25

---



Table of Contents

New
laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to healthcare availability, methods of delivery or payment
for products and services, or sales, marketing or pricing, may limit our potential revenue, and we may need to revise our research and development programs. The pricing and reimbursement environment
may change in the future and become more challenging due to several reasons, including policies advanced by the current executive administration in the U.S., new healthcare legislation or fiscal
challenges faced by government health administration authorities. Specifically, in both the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to
change the health care system in ways that could affect our ability to sell our products profitably. In the U.S., changes in federal health care policy are being considered by Congress this year. Some
of these proposed reforms could result in reduced reimbursement rates for our product candidates, which would adversely affect our business strategy, operations and financial results.

In
addition, the Medicare Prescription Drug Improvement and Modernization Act of 2003 reforms the way Medicare will cover and reimburse for pharmaceutical products. This legislation
could decrease the coverage and price that we may receive for our proposed products. Other third-party payors are increasingly challenging the prices charged for medical products and services. It will
be time consuming and expensive for us to go through the process of seeking reimbursement from Medicare and private payors. Our proposed products may not be considered cost-effective, and
coverage and reimbursement may not be available or sufficient to allow us to sell our proposed products on a profitable basis. Further federal and state proposals and health care reforms are likely
which could limit the prices that can be charged for the product candidates that we develop and may further limit our commercial opportunity. Our results of operations could be materially adversely
affected by the proposed healthcare reforms, by the Medicare prescription drug coverage legislation, by the possible effect of such current or future legislation on amounts that private insurers will
pay and by other health care reforms that may be enacted or adopted in the future.

In
September 2007, the Food and Drug Administration Amendments Act of 2007 was enacted, giving the FDA enhanced post-marketing authority, including the authority to require
post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies approved by the FDA. The FDA's
exercise of this authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to assure compliance with
post-approval regulatory requirements, and potential restrictions on the sale and/or distribution of approved products.

Our ability to use our net operating loss carryforwards may be subject to limitation.

Generally, a change of more than 50% in the ownership of a company's stock, by value, over a three-year period constitutes
an ownership change for U.S. federal income tax purposes. An ownership change may limit a company's ability to use its net operating loss carryforwards attributable to the period prior to the change.
As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations,
which could potentially result in increased future tax liability for us. At December 31, 2009, we had net operating loss carryforwards aggregating approximately $30 million. We have
determined that an ownership change occurred pursuant to Section 382 of the Internal Revenue Code. As a result of this ownership change, our ability to utilize our net operating loss
carryforward is limited.

Risks Related to Our Intellectual Property

It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection.

Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our product
candidates, and the methods used to manufacture them, as well

26

---



Table of Contents

as
successfully defending these patents against third-party challenges. We will only be able to protect our product candidates from unauthorized making, using, selling, offering to sell or importation
by third parties to the extent that we have rights under valid and enforceable patents or trade secrets that cover these activities.

As
of March 12, 2010, we have one issued United States patent which covers composition-of-matter of SP-304 and expires in 2023. In addition, we have three issued foreign patents
which cover composition-of-matter of SP-304 and expire in 2022. These foreign patents cover Austria, Belgium, Switzerland, Cyprus, Germany, Denmark, Spain, Finland, France, United Kingdom, Greece,
Ireland,
Italy, Liechtenstein, Luxembourg, Monaco, Netherlands, Portugal, Sweden, Turkey, Hong Kong and Japan. Additionally as of March 12, 2010, we have seven pending United States patent applications
and eighteen pending foreign patent applications covering various derivatives and analogs of SP-304 and SP-333. In April 2010, two parties filed an opposition to our granted patent with the European
Patent Office. We cannot predict the final outcome of the opposition, which is likely to take several years to complete.

The
patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain
unresolved. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in the United States. The biotechnology patent situation outside the United States
is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property.
Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our licensed patents or in third-party patents.

The
degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain
or keep our competitive advantage. For example:



We
also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to
protect. While we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully
disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. In
addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and
know-how.

27

---



Table of Contents

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our
rights to, or use, our technology.

If we choose to go to court to stop someone else from using the inventions claimed in our patents, that individual or company has the
right to ask the court to rule that these patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and would consume time and other resources even if we
were successful in stopping the infringement of these patents. In addition, there is a risk that the court will decide that these patents are not valid and that we do not have the right to stop the
other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the other party on the ground that such other party's
activities do not infringe our rights to these patents.

Furthermore,
a third party may claim that we are using inventions covered by the third party's patent rights and may go to court to stop us from engaging in our normal operations and
activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical personnel.
There is a risk that a court would decide that we are infringing the third party's patents and would order us to stop the activities covered by the patents. In addition, there is a risk that a court
will order us to pay the other party
damages for having violated the other party's patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which
patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent
infringement, we would need to demonstrate that our products or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not
be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.

Because
some patent applications in the United States may be maintained in secrecy until the patents are issued, patent applications in the United States and many foreign jurisdictions
are typically not published until eighteen months after filing, and publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed
patent applications for technology covered by our issued patents or our pending applications or that we were the first to invent the technology. Our competitors may have filed, and may in the future
file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications and could further require us to obtain rights to issued
patents covering such technologies. If another party has filed a United States patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by
the United States Patent and Trademark Office, or the PTO, to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such
efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such inventions.

Some
of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any
uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by
governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and
other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent

28

---



Table of Contents

application,
resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been
the case.

We have not yet registered trademarks for SP-304 in our potential markets, and failure to secure those registrations could adversely affect our ability to market
our product candidate and our business.

We have not yet registered trademarks for SP-304 in any jurisdiction. Our trademark applications in the U.S., when filed,
and any other jurisdictions where we may file may not be allowed for registration, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may
receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the PTO and in comparable agencies in many
foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed
against our trademarks, and our trademarks may not survive such proceedings. Failure to secure such trademark registrations in the U.S. and in foreign jurisdictions could adversely affect our ability
to market our product candidates and our business.

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately
protect our intellectual property, which could limit our ability to compete.

Because we operate in the highly technical field of research and development of small molecule drugs, we rely in part on trade secret
protection in order to protect our proprietary trade secrets and unpatented know-how. However, trade secrets are difficult to protect, and we cannot be certain that others will not develop
the same or similar technologies on their own. We have taken steps, including entering into confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored
researchers and other advisors, to protect our trade secrets and unpatented know-how. These agreements generally require that the other party keep confidential and not disclose to third
parties all confidential information developed by the party or made known to the party by us during the course of the party's relationship with us. We also typically obtain agreements from these
parties which provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not
effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets or know-how is difficult, expensive and time
consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets or know-how. The failure to obtain or maintain trade
secret protection could adversely affect our competitive position.

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

As is common in the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at other
biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or
we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we
are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

29

---



Table of Contents

Risks Related to the Securities Markets and Investment in Our Common Stock

There is no existing active trading market for our common stock.

Our common stock is quoted on the OTC Bulletin Board under the symbol "SGYP." There is no active trading market for any of our
securities. Accordingly, there can be no assurance as to the liquidity of any markets that may develop for the securities, the ability of holders of the securities to sell their securities, or the
prices at which holders may be able to sell their securities.

The market price of the common stock may be volatile and adversely affected by several factors.

The market price of our common stock could fluctuate significantly in response to various factors and events,
including:



In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies.
These market fluctuations may also materially and adversely affect the market price of our common stock.

We have not paid cash dividends in the past and do not expect to pay cash dividends in the future. Any return on investment may be limited to the value of our common stock.

We have never paid cash dividends on our capital stock and do not anticipate paying cash dividends on our capital stock in the
foreseeable future. The payment of dividends on our capital stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as the board of
directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if the common stock price appreciates.

In preparing our consolidated financial statements, we identified material weaknesses in our internal control over financial reporting, and our failure to remedy the
material weaknesses identified as of December 31, 2009 could result in material misstatements in our financial statements.

Our management is responsible for establishing and maintain adequate internal control over our financial reporting, as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934. Our management identified five material weaknesses in our internal control over financial reporting as of December 31, 2009. A
material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material

30

---



Table of Contents

misstatement
of our annual or interim financial statements will not be prevented or detected on a timely basis.

The
material weaknesses identified by management as of December 31, 2009 consisted of:



As
a result of these material weaknesses, our management concluded as of December 31, 2009 that our internal control over financial reporting was not effective based on criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal ControlAn Integrated Framework(September 1992).

We
have begun to implement and continue to implement remedial measures designed to address these material weaknesses. If these remedial measures are insufficient to address these
material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, we may fail to meet our future reporting
obligations on a timely basis, our consolidated financial statements may contain material misstatements, we could be required to restate our prior period financial results, our operating results may
be harmed, we may be subject to class action litigation, and if we gain a listing on a national stock exchange, our common stock could be delisted from that exchange. Any failure to address the
identified material weaknesses or any additional material weaknesses in our internal control could also adversely affect the results of the periodic management evaluations regarding the effectiveness
of our internal control over financial reporting that is required to be included in our annual report on Form 10-K. Internal control deficiencies could also cause investors to lose confidence
in our reported financial information. We can give no assurance that the measures we plan to take in the future will remediate the material weaknesses identified or that any additional material
weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these
controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or
errors or to facilitate the fair presentation of our consolidated financial statements.

A sale of a substantial number of shares of the common stock may cause the price of our common stock to decline.

If our stockholders sell, or the market perceives that our stockholders intend to sell for various reasons, including the ending of
restriction on resale, substantial amounts of our common stock in the public market, including shares issued upon the exercise of outstanding options or warrants, the market price of our common stock
could fall. Approximately 21,203,000 shares of our common stock are subject to lock-up agreements with us that expire on August 15, 2010. Sales of a substantial number of shares of
our common stock may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

We may become involved in securities class action litigation that could divert management's attention and harm our business.

The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for
the common stock of biotechnology and biopharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to

31

---



Table of Contents

decline.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us
because biotechnology and biopharmaceutical companies have experienced significant stock price volatility in recent years. We may become involved in this type of litigation in the future. Litigation
often is expensive and diverts management's attention and resources, which could adversely affect our business.

ITEM 1B.    UNRESOLVED STAFF COMMENTS.



ITEM 2.    PROPERTIES.

Our corporate headquarters totals approximately 5,500 square feet, in two suites 1609 and 1701, located at 420 Lexington Avenue,
New York, NY. This facility is provided to us under a space sharing arrangement with Callisto Pharmaceuticals, our majority stockholder. The term of the leases at 420 Lexington Avenue expire on
June 30, 2011 and September 30, 2010. We also occupy a small laboratory and several offices, totaling approximately 1,000 square feet, in the Bucks County
Biotechnology Center in Doylestown, Pennsylvania under a lease expiring August 31, 2010.

ITEM 3.    LEGAL PROCEEDINGS.

On December 22, 2009, we through our subsidiary, Synergy Advanced Pharmaceuticals, Inc., filed a complaint in the Supreme
Court of the State of New York against Capebio, LLC, CombiMab Inc. and Per Lindell alleging that defendants intentionally breached certain non-disclosure provisions and
non-compete provisions of agreements previously entered into with us. We are requesting that the defendants be permanently restrained and enjoined from breaching such agreements and
disgorging all compensation and any and all profits. In addition, we are requesting an assignment of all patents and other intellectual property rights defendants currently hold relating to any
inventions obtained in breach of the agreements as well as compensatory, consequential and punitive damages.

ITEM 4.    RESERVED.

32

---





Table of Contents

PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUERS PURCHASES OF EQUITY SECURITES.

Market Prices

Our common stock has been quoted on the Over the Counter Bulletin Board under the symbol "SGYP.OB" since August 11, 2008, prior
to which date our securities were not traded on any public market. The following table shows the reported high and low closing prices per share for our common stock as reported on the Over the Counter
Bulletin Board since that date.

High

LowYear ended December 31, 2008Third quarter (since August 11, 2008)

$
0.95

$
0.75Fourth quarter

$
2.48

$
0.99Year ended December 31, 2009First quarter

$
2.65

$
2.55Second quarter

$
2.95

$
2.62Third quarter

$
3.08

$
2.95Fourth quarter

$
5.60

$
3.06Year ending December 31, 2010First quarter (through March 12, 2010)

$
7.20

$
5.60


Holders of Common Stock

As of March 12, 2010, we had 75 holders of record of our common stock.

Dividends

Historically, we have not declared or paid any cash dividends to the holders of our common stock and we do not expect to pay any such
dividends in the foreseeable future as we expect to retain our future earnings for use in the operation and expansion of our business.

Equity Compensation Information

The following table summarizes information about our equity compensation plans as of December 31, 2009.

Plan Category

Number of Shares of
Common Stock to be
Issued
upon Exercise of
Outstanding Options
(a)

Weighted-
Average
Exercise Price
of
Outstanding
Options

Number of Options
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(excluding securities
reflected in column (a))
(c)Equity Compensation Plans Approved by Stockholders


4,214,016

$
0.30


3,285,984Equity Compensation Plans Not Approved by Stockholders








Total


4,214,016

$
0.30


3,285,984


33

---





Table of Contents

As of December 31, 2009 there were 4,214,016 stock options outstanding under the 2008 Equity Compensation Incentive Plan, or Plan, and no options
outstanding under the 2009 Directors Option Plan, or Directors Plan, with 2,285,984 stock options available for future issuance under the Plan and 1,000,000 stock options available for future issuance
under the Directors Plan. 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
15,000,000 shares.

ITEM 6.    SELECTED FINANCIAL DATA

The following table sets forth our selected consolidated financial data and has been derived from our audited consolidated financial
statements. Consolidated balance sheets as of December 31, 2009 and 2008, as well as consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007, and the
reports thereon are included elsewhere in this Annual Report on Form 10-K. The information below should be read in conjunction with our audited consolidated financial statements and
the notes to such statements and "Managements Discussion and Analysis of Financial Condition and Results of Operations" included below in Item 7. Historical results are not necessarily
indicative of the results to be expected in the future. We had no operations for the year ended December 31, 2005.

Year ended December 31,Consolidated Statement of Operations Data:

2009

2008

2007

2006(in thousands except for weighted average shares)Revenues

$


$


$


$
Costs and Expenses:Research and development


4,257


1,909


Purchased in-process research and development





28,157


General and administrative


3,943


1,663


Loss from Operations


(8,200
)

(31,729
)

Interest and investment income


75


5


Loss from Continuing Operations


(8,125
)

(31,724
)

Net Loss from Discontinued Operations





(32
)

(20
)

(20
)Net Loss


(8,125
)

(31,756
)

(20
)

(20
)Net Loss per common share, basic and diluted


(0.11
)

(0.27
)




Weighted Average Common Shares Outstanding


73,281,327


118,600,496


165,081,215


165,081,215




December 31,Consolidated Balance Sheet Data:

2009

2008

2007

2006(in thousands)Cash and cash equivalents


7,153


216


2


2Working capital


6,487


(1,172
)

(14
)

(3
)Total assets


9,211


922


4


5Total stockholder's equity


7,484


(1,156
)

(11
)




34

---



Table of Contents

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and other
financial information appearing elsewhere in this Annual Report on Form 10-K/A. In addition to historical information, the following discussion and other parts of this Annual Report
contain forward-looking information that involves risks and uncertainties.

FINANCIAL OPERATIONS OVERVIEW

From inception through December 31, 2009, we have sustained cumulative net losses available to common stockholders of $
39,920,541. From inception through December 31, 2009, we have not generated any revenue from operations and expect to incur additional losses to perform further research and development
activities and do not currently have any commercial biopharmaceutical products. We do not expect to have such for several years, if at all.

Our
product development efforts are thus in their early stages and we cannot make estimates of the costs or the time they will take to complete. The risk of completion of any program is
high because of the many uncertainties involved in bringing new drugs to market including the long duration of clinical testing, the specific performance of proposed products under stringent clinical
trial protocols, the extended regulatory approval and review cycles, our ability to raise additional capital, the nature and
timing of research and development expenses and competing technologies being developed by organizations with significantly greater resources.

HISTORY

On July 14, 2008, Pawfect Foods Inc. ("Pawfect"), a Florida corporation incorporated on November 15, 2005,
acquired 100% of the common stock of Synergy Pharmaceuticals, Inc. and its wholly-owned subsidiary, Synergy Advanced Pharmaceuticals, Inc. (collectively "Synergy-DE"), a
Delaware corporation incorporated on September 11, 1992, under the terms of an Exchange Transaction among Pawfect, Callisto Pharmaceuticals, Inc. ("Callisto'), Synergy-DE,
and certain other holders of Synergy-DE common stock ("Exchange Transaction"). For a more detailed discussion of this exchange transaction, see Item 8. Financial
StatementsNote 4Acquisitions and Stockholders' Equity (Deficit).

On
July 21, 2008, Pawfect amended its articles of incorporation to effect the actions necessary to complete the transactions contemplated by the Exchange Transaction and changed
its name to Synergy Pharmaceuticals, Inc.

Immediately
following the Exchange Transaction Synergy discontinued its pet food business and is now exclusively focused on the development of drugs to treat GI disorders and diseases.
Synergy acquired the GI drugs and related technology in connection with the Exchange Transaction.

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods
used in the preparation of financial statements. Our accounting policies are described in Item 8. Financial StatementsNote 3Summary of Significant
Accounting Policies and New Accounting Pronouncements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses
during the reporting period. Actual results could differ from those estimates. We believe that the following discussion represents our critical accounting policies.

35

---



Table of Contents

Research and Development

We do not currently have any commercial biopharmaceutical products, and do not expect to have such for several years, if at all and
therefore our research and development costs are expensed as incurred. These include expenditures in connection with an in-house research and development laboratory, salaries and staff
costs, application and filing for regulatory approval of our proposed products, purchase of in-process research and development, regulatory and scientific consulting fees, contract
research payments to outside suppliers, facilities and universities as well as legal and professional fees associated with filing and maintaining our patent and license rights to our proposed
products. While certain of our research and development costs may have future benefits, our policy of expensing all research and development expenditures is predicated on the fact that we have no
history of successful commercialization of biopharmaceutical products to base any estimate of the number of future periods that would be benefited.

In
June 2007, the EITF of the FASB reached a consensus on ASC Topic 730,Research and Development("ASC Topic 730"). This
guidance requires that non-refundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. As the
related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided, the deferred amounts would be recognized as an expense. We adopted ASC
Topic 730 on January 1, 2008 and the adoption did not have a material effect on our consolidated financial position, results of operations or cash flows.

Stock-Based Compensation

We rely heavily on incentive compensation in the form of stock options to recruit, retain and motivate directors, executive officers,
employees and consultants. Incentive compensation in the form of stock options and restricted stock units is designed to provide long-term incentives, develop and maintain an ownership
stake and conserve cash during our development stage. Since inception through December 31, 2009 stock-based compensation expense has totaled $1,434,445.

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. We did not issue stock options until the year ended December 31, 2008.

Upon
adoption of ASC Topic 718"CompensationStock Compensation", we selected the Black-Scholes option pricing model as the
most appropriate model for determining the estimated fair value for stock-based awards. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs.
Expected volatility and option term were based on the historical volatility of similar public entities. The risk-free interest rate is based on observed interest rate appropriate for the
expected term of our employee stock options. Forfeitures are estimated, based on our historical experience, at the time of grant.

RESULTS OF OPERATIONS

On July 14, 2008, we completed the acquisition of Synergy-DE. The results of operations of Synergy-DE
are included in the accompanying consolidated financial statements from July 14, 2008. As a result of the acquisition of Synergy-DE on July 14, 2008, we decided to
discontinue our pet food business and accordingly, amounts in the consolidated statements of operations and related notes for all historical periods have been restated to reflect these operations as
discontinued. Pet food business net loss for the six months ended June 30, 2008, pre-acquisition of Synergy-DE, totaled $31,560. As a result of this mid year 2008
acquisition the comparative results discussed below for continuing operations are for the twelve months ended December 31, 2009 as compared to the period of approximately 5.5 months from
July 14, 2008 to December 31, 2008.

36

---



Table of Contents

YEARS ENDED DECEMBER 31, 2009 AND DECEMBER 31, 2008

We had no revenues during the twelve months ended December 31, 2009 and 2008 because we do not have any commercial
biopharmaceutical products and we do not expect to have such products for several years, if at all.

For
the twelve months ended December 31, 2009, research and development expenses totaled $ 4,257,285 as compared to $1,909,226 during the twelve months ended
December 31, 2008. This increase in research and development expenses was entirely attributable to continuing the development of our SP-304 product candidate for the full
12 months ended December 31, 2009 as compared to the 5.5 months ended December 31, 2008. These expenses included (i) procurement of drug substance, totaling
approximately $910,000 to move our clinical trials into Phase II, as compared to $523,470 during the 5.5 months ended December 31, 2008, (ii) program expenses including
animal studies, analytical testing and clinical trial insurance of approximately $1,956,000, as compared to $540,312 during the 5.5 months ended December 31, 2008,
(iii) scientific and regulatory advisory fees and expenses of approximately $224,000, as compared to $261,808 during the 5.5 months ended December 31, 2008,
(iv) in-house staff salaries and wages, stock based compensation and employee benefits of approximately $643,000, as compared to $276,124 during the 5.5 months ended
December 31, 2008, and (v) patent related legal fees of approximately $523,000, as compared to $137,112 during the 5.5 months ended December 31, 2008.

The
fair value of the 45,464,760 shares issued in connection with the Exchange Transaction, totaled $27,278,855 on July 14, 2008, based on a per share value of $0.60, which was
the per share price of our 5,000,000 common shares sold in a private placement on that date. In addition, the net assets and liabilities of Synergy-DE, primarily cash and accounts payable,
were stated at their fair value, which totaled net liabilities acquired of $877,647. The total remaining consideration was allocated to research and development projects which had not yet reached
technological feasibility and, having no alternative use, this total amount of $28,156,502 was charged to purchased in-process research and development expense during the 5.5 months
ended December 31, 2008. There were no such expenses during the twelve months ended December 31, 2009. In addition, the purchase of all the assets and liabilities of
Synergy-DE was treated as an asset acquisition.

For
the twelve months ended December 31, 2009, general and administrative expenses were $3,942,738, as compared to $1,662,885 during the 5.5 months ended
December 31, 2008. These expenses primarily include (i) non-scientific salaries and wages, stock based compensation and related employee benefits of approximately $1,697,000,
as compared to $718,000 during the 5.5 months ended December 31, 2008. (ii) facilities cost of approximately $707,000 as compared to $277,953 during the 5.5 months ended
December 31, 2008. (iii) Independent public accounting, corporate legal and tax services of approximately $436,000, as compared to $344,224 during the 5.5 months ended
December 31, 2008, (iv) consultants and advisors of approximately $963,000, as compared to $253,754 during the 5.5 months ended December 31, 2008 and (v) travel of
approximately $138,000, as compared to $64,494 during the 5.5 months ended December 31, 2008.

Net
loss for the twelve months ended December 31, 2009 was $8,125,100 compared to a net loss of $ 31,755,180 incurred for the twelve months ended December 31, 2008 for the
reasons discussed above. In addition we had higher interest income of $74,923 on higher cash balances during the twelve months ended December 31, 2009, as compared to $4,993 for the twelve
months ended December 31, 2008.

YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007

We had no revenues during the twelve months ended December 31, 2008 and 2007 because we do not have any commercial
biopharmaceutical products and we do not expect to have such products for several years, if at all.

37

---



Table of Contents

For
the twelve months ended December 31, 2008, research and development expenses totaled $1,909,226. These research and development expenses were primarily attributable to our
SP-304 product candidate. These expenses include drug formulation of $523,470, clinical program expenses of $540,312, scientific and regulatory advisors of $261,808, in-house
staff salaries and employee benefits including stock based compensation expense of $276,124 and patent prosecution costs of $137,112. There were no such expenses during the twelve months ended
December 31, 2007 because the SP-304 product was acquired in connection with the July 14, 2008 Exchange Transaction discussed above. In addition, our pet food business was
discontinued on July 14, 2008 in connection with the Exchange Transaction.

The
fair value of the 45,464,760 shares issued in connection with the Exchange Transaction, totaled $27,278,855 on July 14, 2008, based on a per share value of $0.60, which was
the per share price of our 5,000,000 common shares sold in a private placement on that date. In addition, the assets and liabilities of Synergy-DE, primarily cash and accounts payable,
were stated at their fair value, which totaled net liabilities acquired of $877,647. The total remaining consideration was allocated to research and development projects which had not yet reached
technological feasibility and, having no alternative use, this total amount of $28,156,502 was charged to purchased in-process research and development expense during the twelve months
ended December 31, 2008. There were no such expenses during the twelve months ended December 31, 2007. In addition, the purchase of all the assets and liabilities of
Synergy-DE was treated as an asset acquisition.

In
addition to purchased in-process research and development ("IPR&D"), we acquired four full time employees and a patent related to the technologies acquired. There were no
other intangible assets acquired which required allocation of the purchase price. We did not assign a value to the acquired employees as all continuing research and development was being performed
under the supervision of Callisto employees, nor to the patent since the technology was still in an early stage. Therefore, the full purchase price accordingly was allocated to purchased IPR&D and
there was no value assigned to goodwill. The value of the IPR&D was based on the fair value of the consideration given which was the value most reliably measurable.

For
the twelve months ended December 31, 2008, general and administrative expenses were $1,662,885. These expenses primarily include non-scientific salaries and
related employee benefits including stock based compensation expense of $718,002, consultants and advisors of $253,754, travel and entertainment of $64,494, facilities cost of $277,953, accounting and
tax services of $281,250 and corporate legal of $62,974. Such expenses during the twelve months ended December 31, 2007 were exclusively devoted to our pet food business which was discontinued
on July 14, 2008 and reported as "loss from discontinued operations" in the accompanying financial statements.

Net
loss for the twelve months ended December 31, 2008 was $31,755,180 compared to a net loss of $20,043 incurred for the twelve months ended December 31, 2007.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2009 we had $7,152,568 in cash and cash equivalents, compared to $216,007 as of December 31, 2008. Net
cash used in operating activities was $8,491,318 for the twelve months ended December 31, 2009 as compared to $1,878,744 during the twelve months ended December 31, 2008. Net cash
provided by financing activities for the twelve months ended December 31, 2009 was $15,710,098, principally the net result of the private placement of 22,814,425 shares of our common stock at
$0.70 per share during the twelve months ended December 31, 2009, net of $260,002 of selling agent fees and other cost of capital.

As
of December 31, 2009 we had working capital of $ 6,487,466, as compared to a working capital deficit of $1,171,893 on December 31, 2008.

Our
working capital requirements will depend upon numerous factors including but not limited to the nature, cost and timing of pharmaceutical research and development programs. We will
be required

38

---



Table of Contents

to
raise additional capital within the next twelve months to complete the development and commercialization of current product candidates, to fund the existing working capital deficit and to continue
to fund operations at our current cash expenditure levels. To date, our sources of cash have been primarily limited to the sale of equity securities. We cannot be certain that additional funding will
be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if
available, may involve restrictive covenants that impact our ability to conduct business. If we are unable to raise additional capital when required or on acceptable terms, we may have to
(i) significantly delay, scale back or discontinue the development and/or commercialization of one or more of product candidates; (ii) seek collaborators for product candidates at an
earlier stage than otherwise would be desirable and
on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise
seek to develop or commercialize ourselves on unfavorable terms.

Our
consolidated financial statements as of December 31, 2009 have been prepared under the assumption that we will continue as a going concern. Our independent registered public
accounting firm has issued a report on our financial statements that included an explanatory paragraph referring to our recurring losses from operations and expressing substantial doubt in our ability
to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing,
attain further operating efficiencies and, ultimately, to generate revenue. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table is a summary of contractual cash obligations for the periods indicated that existed as of December 31, 2009,
and is based on information appearing in the notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Total

Less than
1 Year

1-2 Years

3-5 Years

More than
5 YearsOperating leases

$
375,656

$
241,821

$
133,835

$


$
Purchase obligationsprincipally employment and consulting services(1)


2,409,750


803,250


1,606,500





Purchase ObligationsMajor Vendors(2)


1,666,578


1,666,578Total obligations

$
4,451,984

$
2,711,649

$
1,740,335

$


$



(1)Represents
salary and bonus for remaining term of employment agreement with Gary S. Jacob, CEO and consulting fees and bonus for remaining term of
consulting agreement with Gabriele M. Cerrone, Chairman.(2)Represents
amounts that will become due upon future delivery of SP-304 drug substance from various suppliers, under open purchase orders as of
December 31, 2009.


OFF-BALANCE SHEET ARRANGEMENTS

We had no off-balance sheet arrangements as of December 31, 2009.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2009-05,
"Measuring Liabilities at Fair Value" ("ASU 2009-05"). ASU 2009-05 amends ASC Topic 820 and clarifies that, where a quoted price in an active market for the identical liability
is not available, a reporting entity is required to measure fair value using one or more of the following

39

---



Table of Contents

methods:
1) a valuation technique that uses a) the quoted price of the identical liability when traded as an asset or b) quoted prices for similar liabilities or similar
liabilities when traded as assets and/or 2) a valuation technique that is consistent with the principles of ASC Topic 820. ASU 2009-05 also clarifies that, when estimating the fair
value of a liability, a reporting entity is not required to adjust to include inputs relating to the existence of transfer restrictions on that liability. The adoption of ASU 2009-05 did
not have a material impact on our financial statements.

In
June 2009, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2009-01, "Generally Accepted Accounting Principles" (ASC Topic 105),
by the Codification which establishes the FASB Accounting Standards Codification (the "Codification" or "ASC") as the single source of authoritative GAAP. All existing accounting standards in effect
prior to the Codification were superseded. All other accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant
SEC guidance organized using the same topical structure in separate sections within the Codification. The Codification does not change GAAP and did not impact our financial statements. Beginning with
the financial statements and the notes thereto included in this quarterly report, all references to authoritative accounting literature (including references related to periods prior to the
establishment of the Codification) will be referenced in accordance with the Codification.

In
May 2009, the FASB issued guidance within ASC Topic 855, "Subsequent Events," amended by ASU 2010-09, relating to subsequent events. This guidance establishes principles and
requirements for subsequent events. This guidance defines the period after the balance sheet date during which events or transactions that may occur would be required to be disclosed in a company's
financial statements. Public entities are required to evaluate subsequent events through the date that financial statements are issued. This guidance also provides guidelines for evaluating whether or
not events or transactions occurring after the balance sheet date should be recognized in the financial statements.

In
April 2009, the FASB issued guidance within ASC Topic 825, "Financial InstrumentsOverall," concerning interim disclosures about fair value instruments. This guidance
requires that disclosures about the fair value of a company's financial instruments be made whenever summarized financial information for interim reporting periods is made. The provisions of
this guidance are effective for interim periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our financial statements

In
October 2008, the FASB issued FASB Staff Position within ASC Topic 820,Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active,("ASC Topic 820"). This guidance applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in
accordance with ASC Topic 820. This guidance clarifies the application of in determining the fair values of assets or liabilities in a market that is not active. This guidance is effective upon
issuance, including prior periods for which financial statements have not been issued. The adoption of this FSP did not have a material impact on our consolidated financial statements.

In
June 2008, the FASB ratified the consensus reached on guidance within ASC Topic 815. ,Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity's Own Stock("ASC Topic 815"). This guidance clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity's own stock,
which would qualify as a scope exception under ASC Topic 815,Accounting for Derivative Instruments and Hedging Activities. ASC Topic 815
is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of this statement did not have a material effect on our consolidated financial
position, results of operations or cash flow.

In
February 2008, the FASB issued ASC Topic 820,Partial Deferral of the Effective Date of Statement 157,("ASC Topic 820"). This guidance
delays the effective date ofFair Value Measurements("ASC Topic 820") for all nonfinancial assets and nonfinancial liabilities, except those that are

40

---



Table of Contents

recognized
or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The adoption of this statement did
not have a material effect on our consolidated financial position, results of operations or cash flow.

In
December 2007, the FASB ratified ASC Topic 808,Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual
Property,("ASC Topic 808"), which provides guidance on how the parties to a collaborative agreement should account for costs incurred and revenue generated on sales to third
parties, how sharing payments pursuant to a collaboration agreement should be presented in the income statement and certain related disclosure requirements. Asc Topic 808 is effective for fiscal years
beginning after December 15, 2008. Adoption of this statement did not have a material effect on our consolidated financial position, statement of operations or cash flow.

In
December 2007, the FASB issued ASC Topic 805,Business Combinations.The revision is intended to simplify existing guidance and
converge rulemaking under U.S. GAAP with international accounting rules. This statement applies prospectively to business combinations where the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008, and may affect the release of our valuation allowance against prior acquisition intangibles.
Adoption of this statement did not have a material effect on our consolidated financial position, statement of operations or cash flow.

In
December 2007, the FASB issued ASC Topic 810,Noncontrolling Interests in Consolidated Financial Statementsan amendment of Asc Topic
860("Asc Topic 810"). This guidance requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Its
intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and noncontrolling interests. This Statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. Adoption of this statement did not have a material effect on our consolidated financial position, statement of
operations or cash flow.

In
June 2007, the EITF of the FASB reached a consensus on ASC Topic 730,Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities("ASC Topic 730"). This guidance requires that non-refundable advance payments for goods or services that will be used or
rendered for future research and development activities should be deferred and capitalized. As the related goods are delivered or the services are performed, or when the goods or services are no
longer expected to be provided, the deferred amounts would be recognized as an expense. We adopted ASC Topic 730 on January 1, 2008 and the adoption did not have a material effect on our
consolidated financial position, results of operations or cash flows.

In
February 2007, the FASB issued Statement of Financial Accounting Standards within ASC Topic 825,The Fair Value Option for Financial Assets and
Financial Liabilities, including an Amendment to ASC Topic 320("ASC Topic 320"). The fair value option established by ASC Topic 825 permits all entities to
measure all eligible items at fair value at specified election dates. A business entity shall report all unrealized gains and losses on items for which the fair value option has been elected, in
earnings at each subsequent reporting date. We adopted ASC Topic 825 on January 1, 2008 and the adoption did not have a material effect on our consolidated financial position, results of
operations or cash flows as we did not elect this fair value option on any financial assets or liabilities.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

At December 31, 2009 and 2008, a substantial portion of our cash and cash equivalents consists of short term, highly liquid
investments in a money market fund managed by a money center bank.

41

---



Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The full text of our audited consolidated financial statements as of December 31, 2009 and 2008 and for the fiscal years ended
December 31, 2009, 2008 and 2007 and for the period from November 15, 2005 (inception) to December 31, 2009, begins on page F-1 of this Annual Report on
Form 10-K/A.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.    CONTROLS AND PROCEDURES.

Our
chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009. The term "disclosure
controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to
be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the company's management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2009, and due to the material weaknesses in our internal control over financial reporting
described in our accompanyingManagement's Report on Internal Control over Financial Reporting, our chief executive officer and chief financial officer
concluded that, as of such date, our disclosure controls and procedures were not effective.

Our
management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is defined in
Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as a process designed by, or under the supervision of, a company's principal executive and principal
financial officers and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:



42

---







Table of Contents

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

Our
chief executive officer and chief financial officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In connection with
this assessment, we identified the following material weaknesses in internal control over financial reporting as of December 31, 2009. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal ControlAn Integrated
Framework(September 1992). Because of the material weaknesses described below, management concluded that, as
of December 31, 2009, our internal control over financial reporting was not effective.

(1)Control environmentWe did not maintain an effective control environment. The control environment, which is
the responsibility of senior management, sets the tone of the organization, influences the control consciousness of its people, and is the foundation for all other components of internal control over
financial reporting. Each of the following control environment material weaknesses also contributed to the material weaknesses discussed in items (2) through (5) below. Our control environment
was ineffective because of the following material weaknesses:



The
control environment material weaknesses described above contributed to the material weaknesses related to our monitoring of internal control over financial reporting, period end
financial close and reporting, accounting for stock compensation and equity transactions described in items (2) to (5) below.

(2)Monitoring of internal control over financial reportingWe did not maintain effective monitoring controls to
determine the adequacy of our internal control over financial reporting and related policies and procedures because of the following material weaknesses:



Each
of these material weaknesses relating to the monitoring of our internal control over financial reporting contributed to the material weaknesses described in items (3) through
(5) below.

43

---



Table of Contents

(3)Period end financial close and reportingDue to a pervasive lack of proper segregation of duties within the
finance department, we did not establish and maintain effective controls over certain of our period-end financial close and reporting processes because of the following material
weaknesses:



(4)Equity TransactionsWe did not establish and maintain effective controls to ensure the correct application of
GAAP related to equity transactions. Specifically, we did not adequately review private placement agreements to identify potential derivative instruments.

(5)Cash managementWe did not establish and maintain effective controls to adequately segregate the duties over
cash management. Specifically, effective controls were not designed to prevent the misappropriation of cash.

BDO
Seidman LLP, our independent registered public accounting firm, has audited our consolidated financial statements and the effectiveness of our internal control over financial
reporting as of December 31, 2009. This report appears below.

As
previously reported in Item 9A(T) of our Annual Report on Form 10-K for the year ended December 31, 2008 we reported material weaknesses in our
internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). As a result of those material weaknesses in our internal
control over financial reporting, our principal financial officer concluded that our internal controls over financial reporting were not effective as of December 31, 2008. Those material
weaknesses included the following:



During
the quarter ended December 31, 2009, no changes other than those in conjunction with certain remediation efforts described below, were identified with respect to our
internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

44

---



Table of Contents

Management,
in coordination with the input, oversight and support of our Audit Committee, has identified the following measures to strengthen our internal control over financial
reporting and to address the material weaknesses described above. Prior to the filing of this Annual Report on Form 10-K/A, we hired a controller who will:



This
hire will allow for proper segregation of duties within our financial department. We are also considering the use of an independent GAAP advisor. While we expect these remedial
actions to be essentially implemented in calendar year 2010, some may not be in place for a sufficient period of time to help us certify that material weaknesses have been fully remediated as of the
end of calendar year 2010. We will continue to develop our remediation plans and implement additional measures during calendar year 2010 and possibly into calendar year 2011.

If
the remedial measures described above are insufficient to address any of the identified material weaknesses or are not implemented effectively, or additional deficiencies arise in the
future, material misstatements in our interim or annual financial statements may occur in the future and we may continue to be delinquent in our filings. We are currently working to improve and
simplify our internal processes and implement enhanced controls, as discussed above, to address the material weaknesses in our internal control over financial reporting and to remedy the
ineffectiveness of our disclosure controls and procedures. A key element of our remediation effort is the ability to recruit and retain qualified individuals to support our remediation efforts. While
our Audit Committee and Board of Directors have been supportive of our efforts by supporting the hiring of various individuals in our finance department as well as funding efforts to improve our
financial reporting system, improvement in internal control will be hampered if we can not recruit and retain more qualified professionals. Among other things, any unremediated material weaknesses
could result in material post-closing adjustments in future financial statements. Furthermore, any such unremediated material weaknesses could have the effects described in
"Item 1A. Risk FactorsIn preparing our consolidated financial statements, we identified material weaknesses in our internal control over financial reporting, and our failure to
effectively remedy the material weaknesses identified as of December 31, 2009 could result in material misstatements in our financial statements" in Part I of this
Form 10-K/A.

45

---



Table of Contents

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders
Synergy Pharmaceuticals, Inc.

We
have audited Synergy Pharmaceuticals, Inc. and subsidiaries' (a development stage Company) (the "Company") internal control over financial reporting as of December 31,
2009, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting (Item 9A(b)). Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses related to the following areas have been identified and
included in management's assessment:



46

---



Table of Contents



These
material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the
year ended December 31, 2009 and this report does not affect our report dated March 15, 2010 on those financial statements.

Each
of the control deficiencies described in items (1) through (5) above could result in a misstatement of the financial statement balances or disclosures that would not
be prevented or detected on a timely basis.

In
our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We
do not express an opinion or any other form of assurance on management's statements referring to any corrective actions taken by the Company after the date of management's assessment.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated balance sheets of Synergy Pharmaceuticals, Inc.
and subsidiaries as of December 31, 2009 and 2008, the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 2009 and
for the period from November 15, 2005 (inception) to December 31, 2009 and the related consolidated statement of stockholder's equity (deficit) for the period from November 15,
2005 (inception) to December 31, 2009 and our report dated March 15, 2010 expressed an unqualified opinion thereon.

/s/ BDO SEIDMAN, LLPBDO Seidman, LLP
New York, New York
March 15, 2010


ITEM 9B.    OTHER INFORMATION.

None.

47

---





Table of Contents

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The following table sets forth certain information regarding the directors and executive officers of Synergy
Pharmaceuticals, Inc. as of March 12, 2010:

Name

Age

PositionGary S. Jacob


62

President, Chief Executive Officer and DirectorKunwar Shailubhai


52

Chief Scientific OfficerBernard F. Denoyer


62

Senior Vice President, Finance, SecretaryGabriele M. Cerrone


37

Chairman, DirectorMelvin K. Spigelman


61

DirectorJohn P. Brancaccio


62

DirectorThomas H. Adams


67

DirectorChristopher McGuigan


51

DirectorAlan F. Joslyn


51

Director


Gary S. Jacob, Ph.D.has served as our President, Chief Executive Officer and a Director of the Company since July 2008 and as Chairman of
Synergy DE from October 2003 until July 2008. Dr. Jacob currently serves as Chief Executive Officer and a director of Callisto Pharmaceuticals, Inc., a principal stockholder of our
company, and a director of TrovaGene, Inc. (formerly Xenomics, Inc.), a diagnostics
company. Dr. Jacob served as Chief Scientific Officer of Synergy DE from 1999 to 2003. Dr. Jacob has over twenty-five years of experience in the pharmaceutical and
biotechnology industries across multiple disciplines including research & development, operations and business development. Prior to 1999, Dr. Jacob served as a Monsanto Science Fellow,
specializing in the field of glycobiology, and from 1997 to 1998 was Director of Functional Genomics, Corporate Science & Technology, at Monsanto Company. Dr. Jacob also served from 1990
to 1997 as Director of Glycobiology at G.D. Searle Pharmaceuticals Inc. During the period of 1986 to 1990, he was Manager of the G.D. Searle Glycobiology Group at Oxford University,
England. Dr. Jacob's broad management expertise in the pharmaceutical and biotechnology industries provides relevant experience in a number of strategic and operational areas and led to the
Board's conclusion that he should serve as a director of our company.

Kunwar Shailubhai, Ph.D.,has served as our Chief Scientific Officer since July 2008. From March 2004 until July 2008 he served as Senior
Vice President, Drug Discovery, of Synergy DE. From May 2003 until March 2004, Dr. Shailubhai served as Executive Vice President, Research and Development. From 2001 to April 2003,
Dr. Shailubhai held the position of Vice President, Drug Discovery at Synergy DE where he was chiefly responsible for the preclinical development of our GC-C agonist program for
drugs to treat colon cancer and GI inflammation. Between 1993 and 2000, he was with Monsanto Company, serving as Group Leader of the cancer chemoprevention group. Dr. Shailubhai previously
served as a Senior Staff Fellow at the National Institutes of Health, and as an Assistant Professor at the University of Maryland. Dr. Shailubhai received his Ph.D. in microbiology in 1984 from
the University of Baroda, India, and his M.B.A. in 2001 from the University of Missouri, St. Louis.

Bernard F. Denoyer, CPAhas served as our Senior Vice President, Finance and Secretary since July 2008. Since December 2007,
Mr. Denoyer has been Senior Vice President, Finance and Secretary of Callisto Pharmaceuticals, Inc. and from January 2004 to November 2007 Mr. Denoyer has served as Callisto's
Vice President, Finance and Secretary. From October 2000 to December 2003, Mr. Denoyer was an independent consultant providing interim CFO and other services to emerging technology companies,
including Callisto and certain portfolio companies of Marsh & McLennan Capital, LLC. From October 1994 until September 2000, Mr. Denoyer served as Chief Financial Officer and
Senior

48

---



Table of Contents

Vice
President at META Group, Inc., a public information technology research company, where he was instrumental in their 1995 IPO. From 1990 to 1993 he served as Vice President Finance of
Environetics, Inc., a pharmaceutical water diagnostic test business, acquired by IDEXX Laboratories, Inc.

Gabriele M. Cerronehas served as our Chairman of the Board of Directors and a consultant since July 2008. From March 1999 to January 2005
Mr. Cerrone served as a Senior Vice President of Investments of Oppenheimer & Co. Inc., a financial services firm. In May 2001, Mr. Cerrone led the restructuring of
SIGA Technologies, Inc., a biotechnology company, and served on its board of directors from May 2001 to May 2003. Mr. Cerrone co-founded TrovaGene, Inc. (formerly
Xenomics, Inc.), a diagnostics company, and served as Co-Chairman from July 2005 until November 2006. Mr. Cerrone also co-founded FermaVir
Pharmaceuticals, Inc., a biotechnology company, and served as Chairman from August 2005 to September 2007, when the company was acquired by Inhibitex, Inc., a biotechnology company.
Mr. Cerrone currently serves as a director of Inhibitex, Inc. and a consultant and a director of TrovaGene, Inc. In addition, Mr. Cerrone is Chairman and a consultant to
Callisto Pharmaceuticals, Inc. Mr. Cerrone is the managing partner of Panetta Partners Ltd.; a Colorado limited partnership that is a private investor in both public and private
venture capital in the life sciences and technology arena as well as real estate. Mr. Cerrone's experience in finance and investment banking allows him to contribute broad financial and
strategic planning expertise and led to the Board's conclusion that he should serve as a director of the company.

Melvin K. Spigelman, M.D.has served as a director of our company since August 2008. Since January 2009, Dr. Spigelman has served
as President and CEO and from June 2003 to December 2008 as Director of Research and Development for the Global Alliance for TB Drug Development, a non-profit organization which seeks to
accelerate the discovery and development of faster-acting and affordable drugs to fight tuberculosis.. Dr. Spigelman was President of Hudson-Douglas Ltd, a consulting company, from June
2001 to June 2003. From 2000 to 2001, Dr. Spigelman served as a Vice President, Global Clinical Centers at Knoll Pharmaceuticals, a pharmaceutical unit of BASF Pharma, and from 1992 to 2000,
Dr. Spigelman was the Vice President of Research and Development at Knoll. Dr. Spigelman has been a director of The Medicines Company since September 2005. Dr. Spigelman received
a B.A. in engineering from Brown University and an M.D. from The Mount Sinai School of Medicine. Dr. Spigelman's expertise in drug development and management qualifies him to serve as a
director of our company.

John P. Brancaccio,a retired CPA, has served as a director of our company since July 2008. Since April 2004, Mr. Brancaccio has
been the Chief Financial Officer of Accelerated Technologies, Inc., an incubator for medical device companies. From May 2002 until March 2004, Mr. Brancaccio was the Chief Financial
Officer of Memory Pharmaceuticals Corp., a biotechnology company. From 2000 to 2002, Mr. Brancaccio was the Chief Financial Officer/Chief Operating Officer of Eline Group, an entertainment and
media company. Mr. Brancaccio is currently a director of Alfacell Corporation as well as a director of TrovaGene, Inc. (formerly Xenomics, Inc.) and Callisto
Pharmaceuticals, Inc. Mr. Brancaccio's chief financial officer experience provides him with valuable financial and accounting expertise which the Board believes qualifies him to serve as
a director of our company.

Thomas H. Adams, Ph.Dhas served as a director of our company since July 2008. Since June 2005, Dr. Adams has served as a director
of IRIS International, Inc., a diagnostics company, and as Chief Technology Officer of IRIS since April 2006. Dr. Adams served as Chairman and Chief Executive Officer of Leucadia
Technologies, a privately held medical-device company, from 1998 to April 2006, when Leucadia was acquired by IRIS. In 1989, Dr. Adams founded Genta, Inc., a publicly held biotechnology
company in the field of antisense technology, and served as its Chief Executive Officer until 1997. Dr. Adams founded Gen-Probe, Inc. in 1984 and served as its Chief
Executive Officer and Chairman until its acquisition by Chugai Biopharmaceuticals, Inc. in 1989. Before founding Gen-Probe, Dr. Adams held management positions at Technicon
Instruments and the Hyland Division of Baxter

49

---



Table of Contents

Travenol.
He has significant public-company experience serving as a director of Biosite Diagnostics, Inc., a publicly held medical research firm, from 1989 to 1998 and as a director of
Invitrogen, a publicly held company that develops, manufactures and markets research tools and products, from 2000 to 2002. Dr. Adams currently serves as a director of Xifin, Inc., a
private lab billing company and TrovaGene, Inc.
(formerly Xenomics, Inc.) Dr. Adams holds a Ph.D. in Biochemistry from the University of California, at Riverside. Dr. Adam's executive leadership, particularly in the healthcare
field, and the extensive healthcare expertise he has developed qualifies Dr. Adams to serve as a director of our company.

Christopher McGuigan, M.Sc., Ph.D.has served as a director of our company since July 2008. Since 1995, Dr. McGuigan has been
Professor of Medicinal Chemistry, Welsh School of Pharmacy, Cardiff University, UK. He is also Deputy Pro Vice-Chancellor Cardiff University, with responsibility for research.
Dr. McGuigan is immediate past president of the International Society for Antiviral Research. Dr. McGuigan has over 200 publications and 20 patents. Dr. McGuigan has Chairman of
Departmental Research Committee and Director of Research, Head of Medicinal Chemistry. Dr. McGuigan experience in developing new drug agents from discovery to human clinical trials qualifies
him to serve as a director of our company.

Alan F. Joslyn, Ph.D.has served as a director of our company since October 2009. Dr. Joslyn has been the Chief Executive Officer
of Edusa Pharmaceuticals, a privately held biotechnology company, since August 2009. From 2007 to 2009, Dr. Joslyn served as President and Chief Executive Officer of Mt. Cook Pharma, and as
Senior Vice President of Research & Development at Penwest Pharmaceuticals from 2004 to 2007. From 1995 to 2004, Dr. Joslyn held a number of leadership positions within Johnson &
Johnson focusing on development of gastroenterology products including Propulsid®, Motilium®, Aciphex® and prucalopride. Dr. Joslyn received his B.S. in
medicinal chemistry, B.A. in biology and Ph.D. in biochemical pharmacology from the State University of New York at Buffalo. Dr. Joslyn's extensive expertise in gastroenterology and product
development qualifies Dr. Joslyn to serve as a director of our company.

Board Leadership Structure and Board's Role in Risk Oversight

Since July 2008, we have separated the roles of Chairman of the Board and Chief Executive Officer. Although the separation of roles has
been appropriate for us during that time period, in the view of the board of directors, the advisability of the separation of these roles depends upon the specific circumstances and dynamics of our
leadership.

As
Chairman of the Board, Mr. Cerrone serves as the primary liaison between the CEO and the independent directors and provides strategic input and counseling to the CEO. With
input from other members of the board of directors, committee chairs and management, he presides over meetings of the board of directors. Mr. Cerrone has developed an extensive knowledge of our
company, its challenges and opportunities and has a productive working relationship with our senior management team.

The
board of directors, as a unified body and through committee participation, organizes the execution of its monitoring and oversight roles and does not expect its Chairman to organize
those functions. Our
primary rationale for separating the positions of Board Chairman and the CEO is the recognition of the time commitments and activities required to function effectively as Chairman and as the CEO of a
company with a relatively flat management structure. The separation of roles has also permitted the board of directors to recruit senior executives into the CEO position with skills and experience
that meet the board of director's planning for the position who may not have extensive public company board experience.

The
board of directors has three standing committeesAudit, Compensation and Corporate Governance/Nominating. The membership of each of the board committees is comprised of

50

---



Table of Contents

independent
directors, with each of the committees having a separate chairman, each of whom is an independent director. Our non-management members of the board of directors meet in
executive session at each board meeting.

Risk
is inherent with every business, and how well a business manages risk can ultimately determine its success. Management is responsible for the day-to-day
management of risks the company faces, while the board of directors, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the
board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.

The
board of directors believes that establishing the right "tone at the top" and that full and open communication between executive management and the board of directors are essential
for effective risk management and oversight. Our CEO communicates frequently with members of the board to discuss strategy and challenges facing the company. Senior management usually attends our
regular quarterly board meetings and is available to address any questions or concerns raised by the board of directors on risk management-related and any other matters. Each quarter, the board of
directors receives presentations from senior management on matters involving our areas of operations.

Director Independence

Our board of directors has determined that a majority of the board consists of members are currently "independent" as that term is
defined under current listing standards of NASDAQ.

Compensation of Directors

Under the 2009 Directors Stock Option Plan, upon election to the Board, each non-employee and non-consultant
director receives a grant of stock options vesting over three years and having an exercise price equal to the fair market value of the common stock on the date of grant.

Non-employee
and non-consultant directors also receive an annual cash fee of $15,000 as well as cash compensation for serving on board committees. Chairpersons of
the Audit Committee, Compensation Committee and Corporate Governance/Nominating Committee receive $10,000, $5,000 and $3,000, respectively and members of such committees receive $7,000 $3,000 and
$1,500 respectively.

Audit Committee

The Audit Committee's responsibilities include: (i) reviewing the independence, qualifications, services, fees, and performance
of the independent registered public accountants, (ii) appointing, replacing and discharging the independent auditors, (iii) pre-approving the professional services provided
by the independent auditors, (iv) reviewing the scope of the annual audit and reports and recommendations submitted by the independent auditors, and (v) reviewing our financial reporting
and accounting policies, including any significant changes, with management and the independent auditors. The Audit Committee also prepares the Audit Committee report that is required pursuant to the
rules of the SEC.

The
Audit Committee currently consists of John P. Brancaccio, chairman of the Audit Committee, Christopher McGuigan and Melvin K. Spigelman. Our board of directors has determined that
each of Mr. Brancaccio, Mr. McGuigan and Mr. Spigelman is "independent" as that term is defined under applicable SEC and NASDAQ rules. Mr. Brancaccio is our audit committee
financial expert. The board of directors has adopted a written charter setting forth the authority and responsibilities of the Audit Committee which is available on our website at
www.synergypharma.com.

51

---



Table of Contents

Compensation Committee

The Compensation Committee has responsibility for assisting the board of directors in, among other things, evaluating and making
recommendations regarding the compensation of the executive officers and directors of our company; assuring that the executive officers are compensated effectively in a manner consistent with our
stated compensation strategy; producing an annual report on executive compensation in accordance with the rules and regulations promulgated by the SEC; periodically evaluating the terms and
administration of our incentive plans and benefit programs and monitoring of compliance with the legal prohibition on loans to our directors and executive officers.

The
Compensation Committee currently consists of Thomas H. Adams, chairman of the Compensation Committee, Melvin K. Spigelman and John P. Brancaccio. Our board of directors has
determined that all of the members are "independent" under the current listing standards of NASDAQ. The board of directors has adopted a written charter setting forth the authority and
responsibilities of the Compensation Committee which is available on our web site at www.synergypharma.com.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee is an officer or employee of our company. None of our executive officers currently
serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or
compensation committee.

Corporate Governance/Nominating Committee

The Corporate Governance/Nominating Committee has responsibility for assisting the board of directors in, among other things, effecting
board organization, membership and function including identifying qualified board nominees; effecting the organization, membership and function of board committees including composition and
recommendation of qualified candidates; establishment of and subsequent periodic evaluation of successor planning for the chief executive officer and other executive officers; development and
evaluation of criteria for Board membership such as overall qualifications, term limits, age limits and independence; and oversight of compliance with the Corporate Governance Guidelines. The
Corporate Governance/Nominating Committee shall identify and evaluate the qualifications of all candidates for nomination for election as directors. Potential nominees are identified by the Board of
Directors based on the criteria, skills and qualifications that
have been recognized by the Corporate Governance/Nominating Committee. While our nomination and corporate governance policy does not prescribe specific diversity standards, the Corporate
Governance/Nominating Committee and its independent members seek to identify nominees that have a variety of perspectives, professional experience, education, differences in viewpoints and skills, and
personal qualities that will result in a well-rounded Board of Directors.

The
Corporate Governance/Nominating Committee currently consists of Alan Joslyn, chairman of the Corporate Governance/Nominating Committee, Thomas Adams and Christopher McGuigan. The
Board of Directors has determined that all of the members are "independent" under the current listing standards of NASDAQ. The Board of Directors has adopted a written charter setting forth the
authority and responsibilities of the Corporate Governance/Nominating Committee. A copy of this charter is available at our web site www.synergypharma.com.

Scientific Advisory Board

Michael Camilleri, M.D., Ph.D.is a Professor of Physiology and Medicine at the Mayo Clinic, Minnesota, MN. He has contributed extensively
to the fields of enteric neurosciences, motility, and inflammatory bowel diseases (IBD). Dr. Camilleri is on the editorial boards of a number of prestigious

52

---



Table of Contents

journals
including Neurogastroenterology and Motility and American Neurogastroenterology. He has been President Elect of the American Neurogastroenterology and Motility Society 2007.

Lin Chang, M.D.is a Professor of Medicine in the Division of Digestive Diseases and Department of Medicine at the David Geffen School of
Medicine at UCLA. She is the Co-Director and Head of the Clinical Program at the Center for Neurovisceral Sciences & Women's Health and Director of the Women's Digestive Health
Center at UCLA. Dr. Chang is the Co-chair of the Rome III subcommittee on Gender, Age and Cultural Influences on Functional Bowel Disorders. She is currently serving on the FDA GI
Advisory Committee.

Douglas Drossman, M.D.is a Professor of Medicine and Psychiatry, UNC School of Medicine, Division of Gastroenterology &
Hepatology, and Co-Director of the UNC Center for Functional GI & Motility Disorders. He is President of the Rome Foundation and Scientific Director and member of the Board of the
International Foundation for Functional GI Disorders (IFFGD). He has published extensively in the field of gastroenterology, including the textbook Functional GI Disorders (Rome I, Rome II and Rome
III)

Scott Plevy, M.D.is an Associate Professor of Medicine, Microbiology and Immunology at the University of North Carolina School of
Medicine, Division of Gastroenterology & Hepatology. He is the Core Director of the Immunotechnology Core in the Center for Gastrointestinal Biology and Disease as well as the Director of the
University of North Carolina Federation of Clinical Immunology Societies. Dr. Plevy has contributed significantly to the medical literature on Crohn's disease and ulcerative colitis, and
has been the principal investigator on numerous ulcerative colitis and Crohn's disease clinical trials.

Code of Business Conduct and Ethics

We have adopted a formal Code of Business Conduct and Ethics applicable to all Board members, executive officers and employees. A copy
of our Code of Business Conduct and Ethics will be provided free of charge upon request to: Secretary, Synergy Pharmaceuticals, Inc. 420 Lexington Avenue, Suite 1609, New York, NY 10170.

ITEM 11.    EXECUTIVE COMPENSATION

Compensation Committee Report

Under the rules of the SEC, this Compensation Committee Report is not deemed to be incorporated by reference by
any general statement incorporating this Annual Report by reference into any filings with the SEC.

The
Compensation Committee has reviewed and discussed the following Compensation Discussion and Analysis with management. Based on this review and these discussions, the Compensation
Committee recommended to the Board of Directors that the following Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.



Compensation Discussion and Analysis

Overview

We compete with many other biotechnology companies in seeking to attract and retain a skilled work force. To meet this challenge, we
have developed our compensation structure to enable our management to make decisions regarding our compensation programs, to manage these programs, and to effectively communicate the goals of these
programs to our employees and stockholders.

53

---



Table of Contents

Our compensation philosophy is to offer our employees compensation and benefits that are competitive and that meet our goals of attracting, retaining and
motivating highly skilled employees so that we can achieve our financial and strategic objectives.

Utilizing
this philosophy, our compensation programs are designed to:



In
addition, as we administer our compensation programs, we plan to:



Elements of Our Compensation Program

As a total rewards package, we design our compensation program to enable us to attract and retain talented personnel. The individual
elements of our compensation program serve to satisfy this larger goal in specific ways as described below.

We
design base pay to provide the essential reward for an employee's work, and is required to be competitive in attracting talent. Once base pay levels are initially determined,
increases in base pay are provided to recognize an employee's specific performance achievements. Consistent with our compensation philosophy, we implement a "pay for performance" approach that
provides higher levels of compensation to individual employees whose results merit greater rewards. Our managers typically make performance assessments throughout the year, and provide ongoing
feedback to employees, provide resources and maximize individual and team performance levels.

We
design equity-based compensation, including stock options, to ensure that we have the ability to retain talent over a longer period of time, and to provide optionees with a form of
reward that aligns their interests with those of our stockholders. Employees whose skills and results we deem to be critical to our long-term success are eligible to receive higher levels
of equity-based compensation.

We
also utilize various forms of variable compensation, including cash bonuses that allow us to remain competitive with other companies while providing upside potential to those
employees who achieve outstanding results.

Core
benefits, such as our basic health benefits, are designed to provide a stable array of support to employees and their families throughout various stages of their careers, and are
provided to all employees regardless of their individual performance levels.

54

---



Table of Contents

The
four key elements of our compensation structure are:



Consistent
with our compensation philosophy, we have structured each element of our rewards package as follows:



We create a set of base pay structures that are both affordable and competitive in relation to the market. We continuously monitor base
pay levels within the market and make adjustments to our structures as needed. In general, an employee's base pay level should reflect the employee's overall sustained performance level and
contribution to our company over time. We seek to structure the base pay for our top performers to be aggressive in relation to the market.

Our
base pay structure originated as an outgrowth of the base pay already in effect for key Callisto Pharmaceuticals' employees who transferred to Synergy Pharmaceuticals at the time it
was separated from Callisto Pharmaceuticals in July, 2008. The personnel involved in this process include all of the present top management positions within SynergyChairman,
Mr. Gabriele Cerrone; CEO, Dr. Gary S. Jacob; Senior Vice President of Finance, Mr. Bernard Denoyer; Chief Scientific Officer, Dr. Kunwar Shailubhai; and Executive
Director, Clinical Operations, Dr. Craig Talluto. Our Compensation Committee also used information made available to us by one of our board members. This information includes an independent
Executive Compensation Assessment report prepared in March 2006 by Buck Consultants, an ACS company which provided useful comparative data for analyzing how our salaries compared with other peer
companies, recognizing that the comparison of salaries needed to take into account an adjustment for the 2006 data collected for that report. Our comparison was based on a list of sixteen peer public
biotechnology companies with market capitalizations ranging from $59.8 million to $403.6 million. These companies consisted of the following comparable biotechnology companies:
Acusphere, Inc., Barrier Therapueutics, Inc., Corgentech Inc., Dendreon Corp., Emisphere Technologies, Inc., EpIX Pharmaceuticals, Inc., Favrille, Inc.,
Genta, Inc.,
Insmed, Inc., Isis Pharmaceuticals, Inc., Kosan Biosciences, Inc. Neurogen corporation, Praecis Pharmaceuticals, Inc., Rigel Pharmaceuticals, Inc., Sirna
Therapeutics, Inc., Vion Pharmaceuticals, Inc.

The
independent Executive Compensation Assessment report that was used by the Compensation Committee for its analysis of internal compensation was prepared on March 16, 2006. Cash
compensation data contained in the report had a common effective date of July 1, 2006. The Compensation Committee computed an adjustment to the data to bring it to "present day" using a 4.1%
annual update factor. The "present day" data were then used for the subsequent comparative analyses of executive compensation for our management.

Based
on data from the Executive Compensation Assessment report, the Compensation Committee was able to compare the overall compensation for the top management positions described above.
This included the following compensation variables: 1) Base Salary, 2) Target Incentive (% of Salary), 3) Target Incentive ($), 4) Total Cash Compensation,
5) Long-term Incentives, and 6) Total Direct Compensation. The Compensation Committee chose to use the aggregate of the compensation variables for each management position
that the comparative analysis was performed on. Using the data from the independent Executive Compensation Assessment report that covered the compensation variables, our Compensation Committee was
able to compare those data with the overall compensation for our members of top management. This included separate analyses for: Chairman, CEO, Senior VP

55

---



Table of Contents

of
Finance, Chief Scientific Officer and Executive Director, respectively. The analyses were guided by the principle that the Compensation Committee would position Company compensation levels to be at
or below the 50th percentile relative to the compensation levels in the "peer group". Analyses showed this to be the case for all five members of the management team.

All
of our named executive officers were found to have overall compensation levels below those of the peer group.



We design our variable pay programs to be both affordable and competitive in relation to the market. We monitor the market and adjust
our variable pay programs as needed. Our variable pay programs, such as our bonus program, are designed to motivate employees to achieve overall goals. Our programs are designed to avoid entitlements,
to align actual payouts with the actual results achieved and to be easy to understand and administer.



We design our equity programs to be both affordable and competitive in relation to the market. We monitor the market and applicable
accounting, corporate, securities and tax laws and regulations and adjust our equity programs as needed. Stock options and other forms of equity compensation are designed to reflect and reward a high
level of sustained individual performance over time. We design our equity programs to align employees' interests with those of our stockholders.



We design our benefits programs to be both affordable and competitive in relation to the market while conforming with local laws and
practices. We monitor the market, local laws and practices and adjust our benefits programs as needed. We design our benefits programs to provide an element of core benefits, and to the extent
possible, offer options for additional benefits, be tax-effective for employees in each country and balance costs and cost sharing between us and our employees.

Determining the Amount of Each Element of Compensation

Base Pay.We provide our executive officers and other employees with base salary to compensate them for services rendered during the
fiscal year. The
Compensation Committee intends to compensate our executive officers competitively within the industry. The Compensation Committee considered the scope of and accountability associated with each
executive officer's position and such factors as the performance and experience of each executive officer when setting base salary levels for fiscal year 2009. With respect to executive officers other
than Dr. Jacob, who is discussed below, the Compensation Committee targeted base salaries to be competitive with our peers within the biotechnology industry. In some circumstances it is
necessary to provide compensation above these levels; these circumstances include the need to retain key individuals, to recognize roles that were larger in scope or accountability than standard
market positions and/or to reward individual performance.

Salary
levels are typically reviewed annually as part of our performance review process as well as upon a promotion or other change in job responsibility.

Variable Pay.The Compensation Committee and the executive officer work together to establish targets and goals for the executive
officer. Upon
completion of the fiscal year, the Compensation Committee assesses the executive officer's performance and with input from management determines the amount of variable pay to be awarded within the
parameters of the executive officer's agreement with us.

56

---



Table of Contents

Equity-Based Pay.The Compensation Committee may provide our executive officers with long-term incentive awards through grants of stock
options. The Compensation Committee is responsible for determining who will receive awards, when awards will be granted, the exercise price of each stock option grant, and the number of shares of our
common stock subject to each option. The Compensation Committee considers grants of long-term incentive awards to executive officers each fiscal year. Stock options enhance the link
between the creation of stockholder value and long-term executive incentive compensation. Stock options provide our executive officers with the opportunity to purchase and maintain an
equity interest in our company and to share in the appreciation of the value of our common stock. Additionally, stock options maintain a competitive level of total compensation. The Compensation
Committee believes that stock options are inherently performance-based and are a form of at-risk compensation, as the optionee does not receive any benefit unless our stock price rises
after the date that the option is granted, thus providing direct incentive for future performance. Stock option award levels are determined based on prevailing market practice and market data and vary
among participants based on their positions within our company.

Our
stock options typically have annual vesting over a three-year period and a term of ten years, in order to encourage a long-term perspective and to encourage
key employees to remain with us. We also use performance based vesting in our option grants. Generally, vesting and exercise rights cease upon termination of employment. Prior to the exercise of an
option, the holder has no rights as a stockholder with respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents.

Timing of Equity Awards

Only the Compensation Committee may approve stock option grants to our executive officers. Stock options are generally granted at
predetermined meetings of the Compensation Committee. On limited occasions, grants may occur upon unanimous written consent of the Compensation Committee, which occurs primarily for the purpose of
approving a compensation package for newly hired or promoted executive. The exercise price of a newly granted option is the closing price of our common stock on the date of grant.

Executive Equity Ownership

We encourage our executives to hold a significant equity interest in our company. However, we do not have specific share retention and
ownership guidelines for our executives.

Performance-Based Compensation and Financial Restatement

We have not considered or implemented a policy regarding retroactive adjustments to any cash or equity-based incentive compensation
paid to our executives and other employees where such payments were predicated upon the achievement of certain financial results that were subsequently the subject of a financial restatement.

Severance and Change in Control Arrangements

Several of our executives have employment and other agreements which provide for severance payment arrangements and/or acceleration of
stock option vesting that would be triggered by an acquisition or other change in control of our company. See "Employment Agreements and Change of Control Arrangements" below for a
description of the severance and change in control arrangements for our named executive officers.

57

---



Table of Contents

Effect of Accounting and Tax Treatment on Compensation Decisions

In the review and establishment of our compensation programs, we consider the anticipated accounting and tax implications to us and our
executives.

Section 162(m)
of the Internal Revenue Code imposes a limit on the amount of compensation that we may deduct in any one year with respect to our chief executive officer and each
of our next four most highly compensated executive officers, unless certain specific and detailed criteria are satisfied. Performance-based compensation, as defined in the Internal Revenue Code, is
fully deductible if the programs are approved by stockholders and meet other requirements. We believe that grants of equity awards under our existing stock plans qualify as performance-based for
purposes of satisfying the conditions of Section 162(m), thereby permitting us to receive a federal income tax deduction in connection with such awards. In general, we have determined that we
will not seek to limit executive compensation so that it is deductible under Section 162(m). However, from time to time, we monitor whether it might be in our interests to structure our
compensation programs to satisfy the requirements of Section 162(m). We seek to maintain flexibility in compensating our executives in a manner designed to promote our corporate goals and
therefore our compensation committee has not adopted a policy requiring all compensation to be deductible. Our compensation committee will continue to assess the impact of Section 162(m) on our
compensation practices and determine what further action, if any, is appropriate.

Role of Executives in Executive Compensation Decisions

Our board of directors and our Compensation Committee generally seek input from our Chief Executive Officer, Gary S. Jacob, when
discussing the performance of, and compensation levels for executives other than himself. The Compensation Committee also works with Dr. Jacob and our Senior Vice President, Finance evaluating
the financial, accounting, tax and retention implications of our various compensation programs. Neither Dr. Jacob nor any of our other executives participates in deliberations relating to his
or her compensation.

Chief Executive Officer Compensation for Fiscal Year 2009

On February 1, 2010, Dr. Jacob entered into an Amended and Restated Executive Employment Agreement with us as approved by
the Compensation Committee which extended the term under his employment agreement to December 31, 2012. In addition, in the agreement we deleted the bonus provision which provided for a bonus
if we engaged in a merger or sale of our company with a minimum value of $150 million, $200 million and $250 million during the first, second and third year of the agreement and
replaced it with a bonus of 2.5% of the value of the company if there is a merger or sale of the company and the value of the company at the time of the merger or sale equals or exceeds
$400 million. The Compensation Committee believes that the amendments to Dr. Jacob's employment agreement incentivize Dr. Jacob to the maximum extent possible to obtain the
highest price possible for shareholders in the event of a sale or merger of our company.

2009 Bonus Payments and Option Awards

On February 25, 2010, the Compensation Committee approved a 5% increase in base salary for Dr. Jacob and a 5% increase in
base compensation for Mr. Cerrone as well as a bonus of $150,000 for each of Dr. Jacob and Mr. Cerrone. In addition the Compensation Committee approved a grant to each of
Dr. Jacob and Mr. Cerrone of stock options to purchase 1,800,000 shares of common stock pursuant to our equity incentive plan at an exercise price equal to $0.70 per share which is only
exercisable upon a change of control of our company.

For
2009, Dr. Jacob's and Mr. Cerrone's bonus payments and option awards were in large part, dependent upon us meeting certain performance objectives. These performance
objectives consisted of

58

---



Table of Contents

(i) clinical,
business development and manufacturing milestones for SP-304, (ii) research milestones related to our second generation drug, SP-333,
(iii) financial fund raising milestones and (iv) recruitment of qualified individuals to join our management team. Dr. Jacob's and Mr. Cerrone's performance evaluations
were based primarily on the achievement of these performance objectives.

The
following is a summary of the 2009 performance objectives for each of Dr. Jacob and Mr. Cerrone:

Named Executive Officer

Performance ObjectiveGary Jacob

Met enrollment goals for SP-304 in
Phase I clinical trial and presented data at June 2009 Digestive Disease Week ConferenceAdvanced SP-304 towards Phase IIa 14-day clinical trial in CC patientsCommitted to immediate manufacture of SP-304 to support 90-day IBS-C clinical trialAccelerated all non-clinical studies to achieve Phase IIb start dates for SP-304 in early 2011
for CC and IBS-CAdvanced development of SP-333Presented to institutional investors and other funding sources and assisted in
successfully raising over $15 million to fund operationsAssisted in successfully recruiting additional members of management and the boardGabriele Cerrone

Prepared Synergy in its transformation
from a private company to a public companyAssisted in
successfully raising over $15 million to fund operationsSuccessfully negotiated with manufacturing sources and suppliersAssisted in successfully recruiting additional members of management and the board


In
making its determination as to whether Dr. Jacob and Mr. Cerrone achieved their performance objectives for awarding bonus payments for 2009, the Compensation Committee
looked at the above-mentioned performance objectives in totality and what the achievement of those performance objectives meant to us and our business. The Compensation Committee did not assign actual
levels of achievement to each objective. With respect to the option grant of 1,800,000 stock options to each of Dr. Jacob and Mr. Cerrone, the Compensation Committee took into account
our cash position and the equity holdings of each of Dr. Jacob and Mr. Cerrone as well as the Compensation Committee's belief that the achievement of the 2009 performance objectives were
so vital to us that a significant option grant was warranted.

Compensation Risk Management

We have considered the risk associated with our compensation policies and practices for all employees, and we believe we have designed
our compensation policies and practices in a manner that does not create incentives that could lead to excessive risk taking that would have a material adverse effect on us.

59

---



Table of Contents

Summary Compensation Table

The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Chief Executive
Officer, Principal Financial Officer and two other highest paid executive officers whose total annual salary and bonus exceeded $100,000 (collectively, the "named executive officers") for fiscal year
2009.

Name & Principal Position(2)

Year

Salary

Bonus

Option and
Restricted
Stock
Awards(1)

TotalGabriele M. Cerrone

2009

$
187,761




$


$
187,761Chairman

2008


63,021





697,625


760,646Gary S. Jacob

2009


243,937








243,937President, Chief Executive Officer and Director

2008


98,437





710,327


808,764Bernard Denoyer

2009


125,687








125,687Senior Vice President, Principal Financial Officer

2008


41,562





76,660


118,222Kunwar Shailubhai

2009


176,250







$
176,250Chief Scientific Officer

2008

$
117,083

$
8,813

$
522,038

$
647,934


(1)Amounts
represent the aggregate grant date fair value in accordance with FASB ASC Topic 718 as discussed in Item 8. Financial
StatementsNote 3Summary of Significant Accounting Policies and New Accounting Pronouncements.


Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information for the named executive officers regarding the number of shares subject to both exercisable
and unexercisable stock options and restricted stock, as well as the exercise prices and expiration dates thereof, as of December 31, 2009.

Name

Number of
Securities
Underlying
Unexercised
Options (#)
exercisable

Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable(1)

Option
Exercise
Price

Option
Expiration
Date

Number of Shares
or Units of
Restricted Stock
That Have Not
Vested (#)(2)

Market Value of
Shares or Units of
Stock That Have
Not Vested ($)(3)Stock OptionsGabriele Cerrone


308,354


616,709
(1)
$
0.25

July 3, 2018


187,470

$
1,049,829Gary S. Jacob


316,641


633,281
(1)
$
0.25

July 3, 2018


187,470

$
1,049,829Bernard F. Denoyer


50,011


100,023
(1)
$
0.25

July 3, 2018





Kunwar Shailubhai


291,684


583,368
(1)
$
0.25

July 3, 2018


62,441

$
349,670


(1)The
unexercisable options vest ratably on July 3, 2010 and 2011.(2)The
restricted stock awards vest fully on July 3, 2010.(3)The
last closing price of our common stock on the OTC Bulletin Board on December 31, 2009 was $5.60 per share.


60

---



Table of Contents




Director Compensation

The following table sets forth summary information concerning the total compensation paid to our non-employee directors in
2009 for services to our company.

Name

Fees Earned or Paid
in Cash

Option
Awards(1)

TotalMelvin K. Spigelman(2)

$
75,833

$
103,999

$
179,832John P. Brancaccio(3)

$
29,125

$
121,332

$
150,457Thomas H. Adams(4)

$
24,875

$
93,165

$
118,040Christopher McGuigan(5)

$
18,625

$
97,471

$
116,096Alan Joslyn(6)

$
4,500

$
13,000

$
17,500


(1)Amounts
represent the aggregate grant date fair value for fiscal year 2009 of stock options granted in 2009 under ASC Topic 718 as discussed in
Item 8. Financial StatementsNote 3Summary of Significant Accounting Policies and New Accounting Pronouncements.(2)As
of December 31, 2009, 324,000 stock options were outstanding, of which 100,000 were exercisable.(3)As
of December 31, 2009, 228,045 stock options were outstanding, of which 66,682 were exercisable.(4)As
of December 31, 2009, 221,545 stock options were outstanding, of which 66,682 were exercisable.(5)As
of December 31, 2009, 222,545 stock options were outstanding, of which 66,682 were exercisable.(6)As
of December 31, 2009, 53,000 stock options were outstanding, of which none were exercisable.


Employment Agreements and Change in Control Agreements

On February 1, 2010, Dr. Gary Jacob entered into an amended and restated employment agreement with us in which he agreed
to serve as Chief Executive Officer and President. The term of the agreement was effective as of August 1, 2008 and continues until December 31, 2012 and is automatically renewed for
successive one year periods at the end of each term. Dr. Jacob's salary is $300,000 per year. Dr. Jacob is eligible to receive a cash bonus of up to 50% of his base salary per year based
on meeting certain performance objectives and bonus criteria. Such performance objectives and bonus criteria had not been determined as of December 31, 2009. Dr. Jacob
is also eligible to receive a realization bonus in the event that we enter into an out-license agreement for our technology or enter into a joint venture in which we contribute such rights
to the joint venture where the enterprise value equals or exceeds a minimum of $150 million, $200 million and $250 million in the first, second or third years of the term of the
agreement or any years beyond the third term of the agreement, respectively, or the license fees we contract to receive equals or exceeds $50 million. The realization bonus will be equal to the
enterprise value in the case of a joint venture or the sum of the license fees actually received in the case of an out license, multiplied by 0.5%. In addition, in the event we engage in a merger
transaction or a sale of substantially all of our assets where the enterprise value equals or exceeds $400 million, Dr. Jacob shall receive a bonus in an amount determined by multiplying
the enterprise value by 2.5%.

61

---





Table of Contents

If the employment agreement is terminated by us other than for cause or as a result of Dr. Jacob's death or permanent disability or if Dr. Jacob
terminates his employment for good reason which includes a change of control, Dr. Jacob shall receive (i) a severance payment equal to the higher of the aggregate amount of his base
salary for the then remaining term of the agreement or twelve times the average monthly base salary paid or accrued during the three full calendar months preceding the termination, (ii) expense
compensation in an amount equal to twelve times the sum of his average base salary during the three full months preceding the termination, (iii) immediate vesting of all unvested stock options
and the extension of the exercise period of such options to the later of the longest period permitted by our stock option plans or ten years following the termination date, (iv) payment in
respect of compensation earned but not yet paid and (v) payment of the cost of medical insurance for a period of twelve months following termination. In the event Dr. Jacob's employment
was terminated upon a change of control as of December 31, 2009, he would have been entitled to receive a lump sum payment of $900,000, less applicable withholding.

On
February 1, 2010, Gabriele M. Cerrone, our Chairman of the Board, entered into an amended and restated consulting agreement with us. The term of the agreement was effective as
of August 1, 2008 and continues until December 31, 2012 and is automatically renewed for successive one year periods at the end of each term. Pursuant to the agreement,
Mr. Cerrone's compensation is $295,000 per year. Mr. Cerrone is eligible to receive a cash bonus of up to 50% of his base compensation per year based on meeting certain performance
objectives and bonus criteria. Such performance objectives and bonus criteria had not been determined as of December 31, 2009. Mr. Cerrone is also eligible to receive a realization bonus
in the event that we enter into an out-license agreement for our technology or enter into a joint venture in which we contribute such rights to the joint venture where the enterprise value
equals or exceeds a minimum of $150 million, $200 million and $250 million in the
first, second or third years of the term of the agreement or any years beyond the third term of the agreement, respectively, and in the case of a financing transaction, we receive not less than
$20 million of gross proceeds; or the license fees we contract to receive equals or exceeds $50 million. The realization bonus will be equal to the enterprise value in the case of a
joint venture or financing or the sum of the license fees actually received multiplied by 0.5%. In addition, in the event we engage in a merger transaction or a sale of substantially all of our assets
where the enterprise value equals or exceeds $400 million, Mr. Cerrone shall receive a bonus in an amount determined by multiplying the enterprise value by 2.5%.

If
the consulting agreement is terminated by us other than for cause or as a result of Mr. Cerrone's death or permanent disability or if Mr. Cerrone terminates the
agreement for good reason which includes a change of control, Mr. Cerrone shall receive (i) a severance payment equal to the higher of the aggregate amount of his base compensation for
the then remaining term of the agreement or twelve times the average monthly base compensation paid or accrued during the three full calendar months preceding the termination, (ii) expense
compensation in an amount equal to twelve times the sum of his average base compensation during the three full months preceding the termination, (iii) immediate vesting of all unvested stock
options and the extension of the exercise period of such options to the later of the longest period permitted by our stock option plans or ten years following the termination date, (iv) payment
in respect of compensation earned but not yet paid and (v) payment of the cost of medical insurance for a period of twelve months following termination. In the event Mr. Cerrone's
employment was terminated upon a change of control as of December 31, 2009, he would have been entitled to receive a lump sum payment of $885,000 less applicable withholding.

On
August 21, 2008, the Board of Synergy appointed Melvin K. Spigelman, M.D. as a Director of the Company. In addition, the Board appointed Dr. Spigelman Chairman of
Synergy's Clinical Oversight Committee as well as a member of the Compensation and Audit Committees. In connection therewith, the Board approved the payment of an annual fee of $90,000 to
Dr. Spigelman for his

62

---



Table of Contents

service
on the Board and the Committees. Additionally, the Board approved a grant of 300,000 stock options to Dr. Spigelman with an exercise price of $0.60 per share. Such options vest in
100,000 increments over a period of 3 years. During 2009, the Clinical Oversight Board was disbanded and Dr. Spigelman is paid a director fee comparable to the other independent Board
members.

On
April 6, 2004, Kunwar Shailubhai, Ph.D. entered into an employment agreement with Synergy-DE in which he agreed to serve as Senior Vice President, Drug Discovery.
Dr. Shailubhai's employment agreement was for a term of 12 months beginning April 6, 2004 and was automatically renewed for successive one year periods at the end of each term. On
July 9, 2008, Dr. Shailubhai was appointed Chief Scientific Officer of Synergy, his salary is currently $200,000 per year and he is eligible to receive a discretionary performance bonus
of up to 15% of his salary per year.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information regarding beneficial ownership of shares of our common stock as of March 12,
2010 by (i) each person known to beneficially own more than 5% of our outstanding common stock, (ii) each of our directors, (iii) our named executive officers and (iv) all
directors and executive officers as a group. Except as otherwise indicated, the persons named in the table have sole voting and investment power with respect to all shares beneficially owned, subject
to community property laws, where applicable. Unless otherwise indicated, the address of each beneficial owner listed below is c/o Synergy Pharmaceuticals, Inc., 420 Lexington Avenue,
Suite 1609, New York, NY 10170.

Name of Beneficial Owner

Number of
Shares

Percentage(1)Executive officers and directors:Gabriele M. Cerrone


683,293
(2)

*Gary S. Jacob, Ph.D.


691,580
(3)

*Kunwar Shailubhai, Ph.D.


416,566
(4)

*Bernard Denoyer


50,011
(5)

*John Brancaccio


66,682
(6)

*Chris McGuigan


66,682
(7)

*Thomas Adams


66,682
(8)

*Melvin K. Spigelman, M.D.


100,000
(9)

*Alan F. Joslyn


0


All Officers and Directors as a Group (9 persons)


2,141,496
(10)

2.45% or greater holders:Callisto Pharmaceuticals, Inc.
420 Lexington Avenue, Suite 1609
New York, NY 10170


44,590,000


50.4


*less
than 1%(1)Based
on 88,423,359 shares outstanding on March 12, 2010.(2)Includes
374,939 shares of common stock which are subject to a Repurchase Agreement with us dated July 3, 2008 pursuant to which such shares are
subject to repurchase by us in the event the holder is no longer an employee, officer, director or consultant to us. 50% of the shares are released from the repurchase option after one year from the
date of the Repurchase Agreement and the remaining 50% are released from the repurchase option after two years from the date of


63

---



Table of Contents

the
Repurchase Agreement. Also includes 308,354 shares of common stock issuable upon exercise of stock options. (3)Includes
374,939 shares of common stock which are subject to a Repurchase Agreement with us dated July 3, 2008 pursuant to which such shares are
subject to repurchase by us in the event the holder is no longer an employee, officer, director or consultant to us. 50% of the shares are released from the repurchase option after one year from the
date of the Repurchase Agreement and the remaining 50% are released from the repurchase option after two years from the date of the Repurchase Agreement. Also includes 316,641 shares of common stock
issuable upon exercise of stock options.(4)Includes124,882
shares of common stock which are subject to a Repurchase Agreement with us dated July 3, 2008 pursuant to which such shares are
subject to repurchase by us in the event the holder is no longer an employee, officer, director or consultant to us. 50% of the shares are released from the repurchase option after one year from the
date of the Repurchase Agreement and the remaining 50% are released from the repurchase option after two years from the date of the Repurchase Agreement. Also includes 291,684 shares of common stock
issuable upon exercise of stock options.(5)Consists
of 50,011 shares of common stock issuable upon exercise of stock options.(6)Consists
of 66,682 shares of common stock issuable upon exercise of stock options.(7)Consists
of 66,682 shares of common stock issuable upon exercise of stock options.(8)Consists
of 66,682 shares of common stock issuable upon exercise of stock options.(9)Consists
of 100,000 shares of common stock issuable upon exercise of stock options.(10)Includes
1,266,736 shares of common stock issuable upon exercise of stock options.


Beneficial
ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting and investment power with respect to securities.
Beneficial ownership determined in this manner may not constitute ownership of such securities for other purposes or indicate that such person has an economic interest in such securities.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

As of December 31, 2009, we had advanced Callisto Pharmaceuticals, Inc., our principal stockholder, $972,552 which is
Callisto's share of our payments for common operating costs since July 2008. This indebtedness is evidenced by an unsecured promissory note which bears interest at 6% per annum and is due on
December 19, 2010.

On
February 1, 2010, Gabriele M. Cerrone, our Chairman of the Board, entered into an amended and restated consulting agreement with us. The term of the agreement was effective as
of August 1, 2008 and continues until December 31, 2012 and is automatically renewed for successive one year periods at the end of each term. Pursuant to the agreement,
Mr. Cerrone's compensation is $295,000 per year. Mr. Cerrone is eligible to receive a cash bonus of up to 50% of his base salary per year based on meeting certain performance objectives
and bonus criteria. Such performance objectives and bonus criteria had not been determined as of December 31, 2009 and therefore not met or earned. Mr. Cerrone is also eligible to
receive a realization bonus in the event that we enter into an out-license agreement for our technology or enter into a joint venture in which we contribute such rights to the joint
venture where the enterprise value equals or exceeds a minimum of $150 million, $200 million and $250 million in the first, second or third years of the term of the agreement or
any years beyond the third term of the agreement, respectively, and in the case of a financing transaction, we receive not

64

---



Table of Contents

less
than $20 million of gross proceeds; or the license fees we contract to receive equals or exceeds $50 million. The realization bonus will be equal to the enterprise value in the case
of a joint venture or financing or the sum of the license fees actually received multiplied by 0.5%. In addition, in the event we engage in a merger transaction or a sale of substantially all of our
assets where the enterprise value equals or exceeds $400 million, Mr. Cerrone shall receive a bonus in an amount determined by multiplying the enterprise value by 2.5%.

If
the consulting agreement is terminated by us other than for cause or as a result of Mr. Cerrone's death or permanent disability or if Mr. Cerrone terminates the
agreement for good reason which includes a change of control, Mr. Cerrone shall receive (i) a severance payment equal to the higher of the aggregate amount of his base compensation for
the then remaining term of the agreement or twelve times the average monthly base compensation paid or accrued during the three full calendar months preceding the termination, (ii) expense
compensation in an amount equal to twelve times the sum of his average base compensation during the three full months preceding the termination, (iii) immediate vesting of all unvested stock
options and the extension of the exercise period of such options to the later of the longest period permitted by our stock option plans or ten years following the termination date, (iv) payment
in respect of compensation earned but not yet paid and (v) payment of the cost of medical insurance for a period of twelve months following termination.

Conflicts of Interest

Gabriele Cerrone and his affiliates are subject to certain potential conflicts of interests. His consulting agreement expressly
recognizes that he may provide consulting services to others. In addition, from time to time, he or his affiliates may be presented with business opportunities which could be suitable for our business
and Mr. Cerrone is not subject to any restrictions with respect to other business activities, except to the extent such activities are in violation of our Code of Conduct and Ethics or violate
general confidentiality provisions of his consulting agreement. In instances where there is potential conflict of interest or business opportunity, with respect to any officer
or director, including Mr. Cerrone, our Audit Committee has both the authority and responsibility to review such matters and take appropriate actions.

Any
future transactions with officers, directors or 5% stockholders will be on terms no less favorable to us than could be obtained from independent parties. Any affiliated transactions
must be approved by a majority of our independent and disinterested directors who have access to our counsel or independent legal counsel at our expense.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

The aggregate fees billed and unbilled for the fiscal years ended December 31, 2009 and December 31, 2008 for
professional services rendered by our principal accountants for the audits of our annual financial statements, the review of our financial statements included in our quarterly reports on
Form 10-Q and consultations and consents were approximately $176,000 and $174,000.

Audit-Related Fees

There were no aggregate fees billed for the fiscal year ended December 31, 2009 and 2008 for assurance and related services
rendered by our principal accountants related to the performance of the audit or review of our financial statements, specifically accounting research.

Tax and Other Fees

The aggregate fees billed for the fiscal year ended December 31, 2009 and December 31, 2008 for professional services
rendered by our principal accountants for tax related research and advice were $12,000 and $15,000, respectively.

65

---





Table of Contents

Consistent with SEC policies and guidelines regarding audit independence, the Audit Committee is responsible for the pre-approval of all audit and
permissible non-audit services provided by our principal accountants on a case-by-case basis. Our Audit Committee has established a policy regarding approval of all
audit and permissible non-audit services provided by our principal accountants. Our Audit Committee pre-approves these services by category and service. Our Audit Committee has
pre-approved all of the services provided by our principal accountants.

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)List of Documents Filed as a Part of This Report:



Index to Consolidated Financial Statements


F-1Report of Independent Registered Public Accounting Firm


F-2Consolidated Balance Sheets as of December 31, 2009 and 2008


F-3Consolidated Statement of Operations for each of the three years ended December 31, 2009, 2008 and 2007 and for
the period November 15, 2005 (inception) to December 31, 2009


F-4Consolidated Statement of Changes in Stockholder's Equity (Deficit) for the period November 15, 2005 (inception) to
December 31, 2009


F-5Consolidated Statements of Cash Flows for each of the three years ended December 31, 2009, 2008 and 2007 and for
the period November 15, 2005 (inception) to December 31, 2009


F-6Notes to Consolidated Financial Statements


F-7


(2)Index to Financial Statement Schedules:

All
schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.

(3)Index to Exhibits

Exhibit Index

The Exhibits listed below are identified by numbers corresponding to the Exhibit Table of Item 601 of
Regulation S-K. The Exhibits designated by an asterisk (*) are management contracts or compensatory plans or arrangements required to be filed pursuant to Item 15.

Exhibit No.

Description3.1

Amended and Restated Articles of Incorporation of Synergy Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K filed December 7, 2009)3.2

Amended and Restated Bylaws.4.1

2008 Equity Compensation Incentive Plan (incorporated by reference to Exhibit 4.1 to Form 8-K filed July 18, 2008)*4.2

2009 Directors Stock Option Plan*4.3

Form of Stock Certificate of the Registrant (incorporated by reference to Exhibit 4.6 to Form S-3 filed November 24, 2009).10.1

Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K filed July 18, 2008)*10.2

Form of Executive Non-statutory Stock Option Agreement (incorporated by reference to Exhibit 10.4 to Form 8-K filed July 18, 2008)*


66

---



Table of Contents

Exhibit No.

Description10.3

Form of Non-Executive Non-statutory Stock Option Agreement (incorporated by reference to Exhibit 10.5 to Form 8-K filed July 18, 2008)*10.4

Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to Form 10-Q filed August 14, 2009)10.5

Amended and Restated Executive Employment Agreement dated as of February 1, 2010 between Synergy Pharmaceuticals, Inc. and Gary S. Jacob (incorporated by reference to Exhibit 10.1 to Form 8-K filed
February 5, 2010)*10.6

Amended and Restated Consulting Agreement dated as of February 1, 2010 between Synergy Pharmaceuticals, Inc. and Gabriele M. Cerrone (incorporated by reference to Exhibit 10.2 to Form 8-K filed
February 5, 2010)*14

Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14 to Form 10-K filed April 15, 2009)21

List of Subsidiaries (incorporated by reference to Exhibit 21 to Form 10-K filed April 15, 2009)23

Consent of BDO Seidman, LLP31.1

Certification of Chief Executive Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act31.2

Certification of Principal Financial Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


---

67

---





Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
Amendment No. 1 to this Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.

SYNERGY PHARMACEUTICALS, INC.
(Registrant)Date: November 8, 2010

By:

/s/ GARY S. JACOB Gary S. Jacob, President and Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, this Amendment No. 1 to this Annual Report on Form 10-K/A has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature

Title

Date/s/ GARY S. JACOB Gary S. Jacob

President and Chief Executive Officer (Principal Executive Officer)

November 8, 2010/s/ BERNARD F. DENOYER Bernard F. Denoyer

Senior Vice President, Finance (Principal Financial and Accounting Officer)

November 8, 2010/s/ GABRIELE M. CERRONE Gabriele M. Cerrone

Chairman of the Board

November 8, 2010/s/ MELVIN K. SPIGELMAN Melvin K. Spigelman

Director

November 8, 2010/s/ ALAN JOSLYN Alan Joslyn

Director

November 8, 2010/s/ THOMAS H. ADAMS Thomas H. Adams

Director

November 8, 2010


68

---



Table of Contents

Signature

Title

Date/s/ JOHN BRANCACCIO John Brancaccio

Director

November 8, 2010/s/ CHRISTOPHER MCGUIGAN Chris McGuigan

Director

November 8, 2010


69

---





Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

SYNERGY PHARMACEUTICALS, INC.  (A development stage company)

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm

F-2Consolidated Balance Sheets as of December 31, 2009 and 2008

F-3Consolidated Statements of Operations for the three years ended December 31, 2009, 2008 and 2007 and
November 15, 2005 (inception) to December 31, 2009

F-4Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the period November 15, 2005 (Inception) to
December 31, 2009

F-5Consolidated Statements of Cash Flows for the three years ended December 31, 2009, 2008 and 2007, and for the
period November 15, 2005 (Inception) to December 31, 2009

F-6Notes to the Consolidated Financial Statements

F-7


F-1

---





Table of Contents

Report of Independent Registered Public Accounting Firm

Board
of Directors and Stockholders
Synergy Pharmaceuticals, Inc.
New York, New York

We
have audited the accompanying consolidated balance sheets of Synergy Pharmaceuticals, Inc. and Subsidiaries (a development stage company) (the "Company") as of
December 31, 2009 and 2008, the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 2009 and for the period from
November 15, 2005 (inception) to December 31, 2009 and the related consolidated statement of stockholders' equity (deficit) for the period from November 15, 2005 (inception) to
December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Synergy Pharmaceuticals, Inc. and
Subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 and for the
period from November 15, 2005 (inception) to December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the
Company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2009, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 15, 2010 expressed an adverse opinion thereon.

/s/
BDO SEIDMAN, LLP

BDO
Seidman, LLP
New York, New York
March 15, 2010

F-2

---





Table of Contents



SYNERGY PHARMACEUTICALS, INC.  (A development stage company)        CONSOLIDATED BALANCE SHEETS

December 31,
2009

December 31,
2008ASSETSCurrent Assets:Cash and cash equivalents

$
7,152,568

$
216,007Note receivable from majority shareholder





690,333Prepaid expenses and other current assets


1,061,630


Total Current Assets


8,214,198


906,340Property and equipment, net


9,725


11,701Security deposits


14,025


4,400Due from majority shareholder


972,552


$
9,210,500

$
922,441LIABILITIES AND STOCKHOLDERS' DEFICITCurrent Liabilities:Accounts payable

$
1,283,466

$
2,000,220Accrued expenses


443,266


78,013Total Current Liabilities


1,726,732


2,078,233Stockholders' Equity Deficit:Common stock, par value of $.0001 Authorized 200,000,000 and 150,000,000 shares at December 31, 2009 and 2008, respectively; Outstanding 88,423,359
and 65,606,434 shares at December 31, 2009 and 2008, respectively


8,844


6,560Preferred stock, Authorized 20,000,000 shares and 0 shares outstanding at December 31, 2009 and 2008, respectively





Additional paid-in capital


47,395,465


30,633,089Deficit accumulated during development stage


(39,920,541
)

(31,795,441
)Total Stockholders' Equity (Deficit)


7,483,768


(1,155,792
)$
9,210,500

$
922,441


The
accompanying notes are an integral part of these consolidated financial statements.

F-3

---





Table of Contents



SYNERGY PHARMACEUTICALS, INC.  (A development stage company)        CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,

For the period
November 15, 2005
(inception) to
December 31, 20092009

2008

2007Revenues

$


$


$


$
Costs and Expenses:Research and development


4,257,285


1,909,226





6,166,511Purchased in-process research and development





28,156,502





28,156,502General and administrative


3,942,738


1,662,885





5,605,623Loss from Operations


(8,200,023
)

(31,728,613
)




(39,928,636
)Interest and investment income


74,923


4,993





79,916Loss from Continuing Operations


(8,125,100
)

(31,723,620
)




(39,848,720
)Loss from discontinued operations





(31,560
)

(20,043
)

(71,821
)Net loss

$
(8,125,100
)
$
(31,755,180
)
$
(20,043
)
$
(39,920,541
)Weighted Average Common Shares OutstandingBasic and Diluted (restated for stock split)


73,281,327


118,600,496


165,081,215Net Loss per Common Share, Basic and DilutedNet Loss from Continuing Operations


(0.11
)

(0.27
)

.00Discontinued Operations:Loss from discontinued operations


0.00


.00


.00Net Loss per Common Share, Basic and Diluted

$
(0.11
)
$
(0.27
)
$
.00


The
accompanying notes are an integral part of these consolidated financial statements.

F-4

---





Table of Contents



SYNERGY PHARMACEUTICALS, INC.  (A development stage company)        CONSOLIDATED STATEMENTS OF CHANGES IN  STOCKHOLDERS' EQUITY (DEFICIT)

Common
Shares

Common
Stock,
Par Value

Additional
Paid
in Capital

Deficit
Accumulated
during the
Development
Stage

Total
Stockholders'
Equity
(Deficit)Balance at inception, November 15, 2005Sale of unregistered common stock to founder


151,381,215

$
15,138

$
(13,138
)
$


$
2,000Sale of common stock


13,700,000


1,370


16,730





18,100Net loss for the year











(16
)

(16
)Balance, December 31, 2005


165,081,215


16,508


3,592


(16
)

20,084Net loss for the year











(20,202
)

(20,202
)Balance, December 31, 2006


165,081,215


16,508


3,592


(20,218
)

(118
)Capital contribution by shareholders








8,893





8,893Net loss for the year











(20,043
)

(20,043
)Balance, December 31, 2007


165,081,215


16,508


12,485


(40,261
)

(11,268
)Cancellation of unregistered founder shares


(149,981,208
)

(14,998
)

14,998





Common stock issued via Exchange Transaction


45,464,760


4,546


27,274,315





27,278,861Common stock issued via private placementJuly 14, 2008


5,000,000


500


2,999,500





3,000,000Common stock issued via private placementAugust 25, 2008


41,667


4


24,996





25,000Fees and expenses related to private placements








(73,088
)




(73,088
)Stock based compensation expense








379,883





379,883Net loss for the period











(31,755,180
)

(31,755,180
)Balance, December 31, 2008


65,606,434

$
6,560

$
30,633,089

$
(31,795,441
)
$
(1,155,792
)Common stock issued via private placements


22,814,425


2,282


15,967,818





15,970,100Fees and expenses related to private placements








(260,002
)




(260,002
)Common Stocks Issued for services rendered


2,500


2


1,498





1,500Stock based compensation expense








1,053,062





1,053,062Net loss for the period











(8,125,100
)

(8,125,100
)Balance, December 31, 2009


88,423,359


8,844


47,395,465


(39,920,541
)

7,483,768


The accompanying notes are an integral part of these consolidated financial statements.

F-5

---





Table of Contents



SYNERGY PHARMACEUTICALS, INC.  (A development stage company)        CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

Period from
November 15, 2005
(Inception) to
December 31, 20092009

2008

2007Cash Flows From Operating Activities:Net loss

$
(8,125,100
)
$
(31,755,180
)
$
(20,043
)
$
(39,920,541
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


1,976


494


672


3,198Stock-based compensation expense


1,054,562


379,883





1,434,445Purchased in-process research and development





28,156,502





28,156,502Changes in operating assets and liabilities:Security deposit


(9,625
)

(4,400
)




(14,025
)Accounts payable and accrued expenses


(351,501
)

1,343,957


6,233


1,003,689Prepaid expenses and other current assets


(1,061,630
)







(1,061,630
)Total Adjustments


(366,218
)

29,876,436


6,905


29,552,179Net Cash Used in Operating Activities


(8,491,318
)

(1,878,744
)

(13,138
)

(10,398,362
)Cash Flows From Investing Activities:Net cash paid on Exchange Transaction





(155,326
)




(155,326
)Loans from (to) related parties


(282,219
)

(694,833
)

4,500


(972,552
)Additions to property and equipment





(8,809
)




(12,195
)Net Cash (used in)/ provided by Investing Activities


(282,219
)

(858,968
)

4,500


(1,140,073
)Cash Flows From Financing Activities:Capital contribution by shareholders








8,893


8,893Issuance of common stock











2,000Proceeds of private placement of common stock


15,970,100


3,025,000





18,995,100Proceeds from sale of unregistered common stock to founders











18,100Fees and expenses related to private placements


(260,002
)

(73,088
)




(333,090
)Net Cash Provided by Financing Activities


15,710,098


2,951,912


8,893


18,691,003Net increase in cash and cash equivalents


6,936,561


214,200


255


7,152,568Cash and cash equivalents at beginning of period


216,007


1,807


1,552


Cash and cash equivalents at end of period

$
7,152,568

$
216,007

$
1,807

$
7,152,568Supplementary disclosure of cash flow information:Cash paid for taxes

$
6,289

$
632

$


$
6,921Value of common stock issued via Exchange Transaction

$


$
27,278,861

$


$
27,278,861


Cash flow activities for the twelve months ended December 31, 2008 include discontinued operations
of Synergy's pet food business prior to July 14, 2008 and cash flow activities for the twelve months ended December 31, 2007 represent the discontinued operations of Synergy's pet food
business.

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-6

---





Table of Contents



SYNERGY PHARMACEUTICALS, INC.  (A development stage company)        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business Overview

BUSINESS OVERVIEW

We are a biopharmaceutical company focused primarily on the development of drugs to treat gastrointestinal, or GI, disorders and
diseases. Our lead drug candidate is SP-304, a guanylyl cyclase C, or GC-C, receptor agonist, to treat GI disorders, primarily chronic constipation, or CC, and
constipation-predominant irritable bowel syndrome, or IBS-C. CC and IBS-C are functional gastrointestinal disorders that afflict millions of sufferers worldwide. CC is
primarily characterized by constipation symptoms but a majority of these patients report experiencing bloating and abdominal discomfort as among their most bothersome symptoms. IBS-C is
characterized by frequent and recurrent abdominal pain and/or discomfort associated with chronic constipation.

In
December 2008, we completed a Phase 1 clinical trial of SP-304 which showed that SP-304 was well tolerated at all doses studied (0.1 mg to 48.6 mg) and
exhibited gastrointestinal pharmacodynamic activity in healthy volunteers with no detectable systemic absorption of SP-304 in the blood. The data obtained from this trial supported
advancing SP-304 for further clinical studies in patients with CC and IBS-C. In February, 2010, a Phase 2a 14-day, repeated-oral-dose
trial of SP-304 in CC patients opened for enrollment and is actively recruiting patients.

2. Basis of Presentation and Going Concern

On July 14, 2008, Pawfect Foods Inc. ("Pawfect"), a Florida corporation incorporated on November 15, 2005, acquired 100% of the common stock of Synergy
Pharmaceuticals, Inc., a Delaware corporation incorporated on September 11, 1992, and its wholly-owned subsidiary, Synergy Advanced Pharmaceuticals, Inc., (collectively
"Synergy-DE"), under the terms of an Exchange Agreement among Pawfect, Callisto Pharmaceuticals, Inc. ("Callisto'), Synergy-DE, and certain other holders of
Synergy-DE common stock ("Exchange Transaction"). For a more detailed discussion of this Exchange Transaction, see Note 4,Acquisition and Stockholders'
Equity (Deficit)below.

On
July 14, 2008, Synergy discontinued its pet food business and is now exclusively focused on the development of drugs to treat gastrointestinal ("GI") disorders and diseases.
Synergy acquired the GI drugs and related technology in connection with the Exchange Transaction. On July 21, 2008, Pawfect amended its articles of incorporation to effect the actions necessary
to complete the transactions contemplated by the Exchange Transaction and changed its name to Synergy Pharmaceuticals, Inc. ("Synergy" or "the Company").

The
acquisition of Synergy-DE was treated as an asset acquisition, since Synergy-DE is a development stage company and does not have the necessary inputs and
outputs to meet the definition of a business. The results of operations of Synergy-DE are included in the accompanying consolidated financial statements from the date of acquisition. As a
result of the acquisition of Synergy-DE on July 14, 2008, the Company decided to discontinue its pet food business and accordingly, amounts in the consolidated statements of
operations and related notes for all historical periods have been restated to reflect these operations as discontinued. For a more detailed discussion of this acquisition, see Note 4, Acquisition and Stockholders' Equity
(Deficit)below.

All
intercompany balances and transactions have been eliminated. These consolidated financial statements include Synergy and subsidiaries: (1) Synergy-DE,
(2) Synergy Advanced Pharmaceuticals, Inc. and (3) IgX, Ltd (Irelandinactive)). These consolidated financial statements as of December 31, 2009 have been
prepared under the assumption that we will continue as a going concern. Synergy's independent registered public accounting firm has issued a report on our financial statements that

F-7

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Basis of Presentation and Going Concern (Continued)

included
an explanatory paragraph referring to our recurring losses from operations and expressing substantial doubt in Synergy's ability to continue as a going concern without additional capital
becoming available. Synergy's ability to continue as a going concern is dependent upon its ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately,
to generate revenue. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As
of December 31, 2009, Synergy had an accumulated deficit of $ 39,920,541 resulting primarily from acquired in-process research and development valued at $28,156,502
and expensed upon the acquisition of Synergy on July 14, 2008. Synergy expects to incur significant and increasing operating losses for the next several years as Synergy expands its research
and development, continues clinical trials of SP-304 for the treatment of GI disorders, acquires or licenses technologies, advances other product candidates into clinical development,
seeks regulatory approval and, if FDA approval is received, commercializes products. Because of the numerous risks and uncertainties associated with product development efforts, Synergy is unable to
predict the extent of any future losses or when Synergy will become profitable, if at all.

Net
cash used in operating activities was $8,491,318 for the twelve months ended December 31, 2009. As of December 31, 2009 Synergy has $7,152,568 of cash. During the
twelve months ended December 31, 2009, Synergy incurred net losses from continuing operations of $8,125,100. To date, Synergy's sources of cash have been primarily limited to private placements
of common stock. Net cash provided by financing activities for the twelve months ended December 31, 2009 was $15,710,098.

As
of December 31, 2009 Synergy had working capital of $6,487,466. During the twelve months ended December 31, 2009 Synergy sold 22,814,425 shares of unregistered common
stock at $0.70 per share to private investors for aggregate proceeds of $15,970,100 and Synergy paid an aggregate $260,002 to selling agents and legal fees in connection with certain of its private
placements.. Recently worldwide economic conditions and the international equity and credit markets have significantly deteriorated and may remain depressed for the foreseeable future. These
developments will make it more difficult to obtain additional equity or credit financing, when needed. Synergy has accordingly taken steps to conserve cash which include extending payment terms to our
suppliers as well as substantial management and staff salary cuts and deferrals. These actions may not be sufficient to allow the Company time to raise additional capital.

Synergy
will be required to raise additional capital within the next year to complete the development and commercialization of current product candidates and to continue to fund
operations at the current cash expenditure levels. Synergy cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that Synergy raises additional
funds by issuing equity securities, Synergy's stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact Synergy's ability to
conduct business. If Synergy is unable to raise additional capital when required or on acceptable terms, Synergy may have to (i) significantly delay, scale back or discontinue the development
and/or commercialization of one or more product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less
favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that Synergy would otherwise seek to develop or
commercialize ourselves on unfavorable terms.

F-8

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Summary of Significant Accounting Policies and New Accounting Pronouncements

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of checking accounts and short-term money market funds as of December 31, 2009 and
December 31, 2008 on deposit with U.S. commercial banks, which at any point in time, may exceed federally insured limits.

Fair Value of Financial Instruments

Financial instruments consist of cash and accounts payable. These financial instruments are stated at their respective historical
carrying amounts which approximate to fair value due to their short term nature.

Property, equipment and depreciation

Expenditures for additions, renewals and improvements are capitalized at cost. Depreciation is generally computed on a
straight-line method based on the estimated useful lives of the related assets. The estimated useful lives of the major classes of depreciable assets are 2 to 5 years for equipment
and furniture and fixtures. Expenditures for repairs and maintenance are charged to operations as incurred. Synergy periodically evaluates whether current events or circumstances indicate that the
carrying value of its depreciable assets may not be recoverable.

Income Taxes

Income taxes have been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes result from differences between the financial
statement and tax bases of Synergy's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a
tax benefit will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgments.

Contingencies

In the normal course of business, Synergy is subject to loss contingencies, such as legal proceedings and claims arising out of its
business, that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and tax matters. In accordance with FASB
ASC Topic 450,Accounting for Contingencies, ("ASC Topic 450"), Synergy records accruals for such loss contingencies when it is probable that a
liability will be incurred and the amount of loss can be reasonably estimated. Synergy, in accordance with this guidance, does not recognize gain contingencies until realized. For a discussion of
contingencies, see Note 7,Commitments and Contingenciesbelow.

F-9

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Summary of Significant Accounting Policies and New Accounting Pronouncements (Continued)

Research and Development

Research and development costs include expenditures in connection with an in-house research and development laboratory,
salaries and staff costs, application and filing for regulatory approval of proposed products, patent filing and maintenance expenses, purchased in-process research and development,
regulatory and scientific consulting fees, as well as contract research, patient costs, drug formulation and tableting, data collection, monitoring, insurance and FDA consultants. In accordance with
FASB ASC Topic 730-10-55,Research and Development, Synergy recorded prepaid research and development expense of
$1 million for nonrefundable deposits on production of drug substance of its drug candidate SP-304 by two of its vendors. In accordance with this guidance, Synergy expenses these
advance payments when drug compound is delivered.

Loss Per Share

Basic and diluted net loss per share is presented in conformity with ASC Topic 260,Earnings per
Share, ("ASC Topic 260") for all periods presented. In accordance with this guide, basic and diluted net loss per common share was determined by dividing net loss applicable
to common stockholders by the weighted-average common shares outstanding during the period. Diluted weighted-average shares are the same as basic weighted-average shares because shares issuable
pursuant to the exercise of stock options would have been antidilutive. For the years ended December 31, 2009 and December 31, 2008 the effect of 4,214,016 and 4,080,016 outstanding
stock options and other common stock equivalents were excluded from the calculation of diluted loss per share because the effect was antidilutive. As of December 31, 2007 there were no
outstanding stock options and other common stock equivalents.

Recent Accounting Pronouncements

In August 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2009-05,
"Measuring Liabilities at Fair Value" ("ASU 2009-05"). ASU 2009-05 amends ASC Topic 820 and clarifies that, where a quoted price in an active market for the identical liability
is not available, a reporting entity is required to measure fair value using one or more of the following methods: 1) a valuation technique that uses a) the quoted price of the identical
liability when traded as an asset or b) quoted prices for similar liabilities or similar liabilities when traded as assets and/or 2) a valuation technique that is consistent with the
principles of ASC Topic 820. ASU 2009-05 also clarifies that, when estimating the fair value of a liability, a reporting entity is not required to adjust to include inputs relating to the
existence of transfer restrictions on that liability. The adoption of ASU 2009-05 did not have a material impact on the Company's financial statements.

In
June 2009, FASB issued Accounting Standards Update No. 2009-01, "Generally Accepted Accounting Principles" (ASC Topic 105), by the Codification which establishes
the FASB Accounting Standards Codification (the "Codification" or "ASC") as the single source of authoritative GAAP. All existing accounting standards in effect prior to the Codification were
superseded. All other accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant SEC guidance organized using
the same topical structure in separate sections within the Codification. The Codification does not change GAAP and did not impact the Company's financial statements. All references to authoritative
accounting literature (including references related to period's prior to the establishment of the Codification) have been referenced in accordance with the Codification.

F-10

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Summary of Significant Accounting Policies and New Accounting Pronouncements (Continued)

In
May 2009, the FASB issued guidance within ASC Topic 855,Subsequent Events, amended by ASU 2010-09 relating to subsequent
events. This guidance establishes principles and requirements for subsequent events. This guidance defines the period after the balance sheet date during which events or transactions that may occur
would be required to be disclosed in a company's financial statements. Public entities are required to evaluate subsequent events through the date that financial statements are issued. This guidance
also provides guidelines for evaluating whether or not events or transactions occurring after the balance sheet date should be recognized in the financial statements.

In
June 2008, the FASB ratified the consensus reached on guidance within ASC Topic 815. ,Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity's Own Stock("ASC Topic 815"). This guidance clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity's own stock, which
would qualify as a scope exception under ASC Topic 815,Accounting for Derivative Instruments and Hedging Activities. ASC Topic 815 was effective for
financial statements issued for fiscal years beginning after December 15, 2008. Adoption of this statement did not have a material effect on our consolidated financial position, results of
operations or cashflow.

In
February 2008, the FASB issued ASC Topic 820,Partial Deferral of the Effective Date of Statement 157,("ASC Topic 820"). This guidance
delays the effective date ofFair Value Measurements("ASC Topic 820") for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. Adoption of this statement did not
have a material effect on our consolidated financial position, results of operations or cashflow.

In
December 2007, the FASB ratified ASC Topic 808,Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual
Property,("ASC Topic 808"), which provides guidance on how the parties to a collaborative agreement should account for costs incurred and revenue generated on sales to third
parties, how sharing payments pursuant to a collaboration agreement should be presented in the income statement and certain related disclosure requirements. ASC Topic 808 was effective for fiscal
years beginning after December 15, 2008. Adoption of this statement did not have a material effect on our consolidated financial position, results of operations or cashflow.

In
December 2007, the FASB issued ASC Topic 805,Business Combinations.The revision is intended to simplify existing guidance and
converge rulemaking under U.S. GAAP with international accounting rules. This statement applies prospectively to business combinations where the acquisition date was on or after the beginning
of the first annual reporting period beginning on or after December 15, 2008.
Adoption of this statement did not have a material effect on our consolidated financial position, results of operations or cashflow.

F-11

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Summary of Significant Accounting Policies and New Accounting Pronouncements (Continued)

In December 2007, the FASB issued ASC Topic 810,Noncontrolling Interests in Consolidated Financial Statementsan amendment of ASC Topic
860. This guidance requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Its intention is to
eliminate the diversity in practice regarding the accounting for transactions between an entity and noncontrolling interests. This Statement was effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Adoption of this statement did not have a material effect on our consolidated financial position, results of operations or cashflow.

4. Acquisition and Stockholders' Equity (Deficit)

On July 14, 2008, Pawfect acquired 100% of the common stock of Synergy-DE from Callisto and certain other holders of Synergy-DE shares, in exchange for
45,464,760 unregistered shares of Pawfect's common stock. This represented approximately 70% of Pawfect's outstanding common stock after giving effect to (i) a 75.69060773 for one stock split,
(ii) cancellation of 149,981,208 of 151,381,215 unregistered shares owned by Pawfect's principal stockholder and (iii) a $3,000,000 private placement of 5,000,000 unregistered shares of
Pawfect's common stock to private investors. Fees and expenses directly related to the closing of this private placement totaled $73,088, yielding net proceeds of $2,926,912. The stock split and
change in par value, from $0.001 to $0.0001, resulted in the restatement of all historical common stock and additional paid-in capital amounts presented in the accompanying financial
statements.

These
transactions were completed under the terms of an Exchange Agreement dated as of July 11, 2008, as amended and effective on July 14, 2008 among Pawfect, Callisto,
Synergy-DE, and certain other holders of Synergy-DE common stock. Callisto received 44,590,000 of the 45,464,760 shares of Pawfect's common stock exchanged for ownership of
Synergy-DE, and Callisto which represented 68% of Pawfect's outstanding common stock. See Note 5,Accounting for Share-Based Paymentsbelow for shares issued to other holders.

The
Exchange Transaction was treated as an asset acquisition by Pawfect for accounting purposes. Under this method of accounting, Pawfect is treated as the acquiring entity, issuing
stock for the assets and liabilities of Synergy-DE. The assets and liabilities of Synergy-DE, primarily cash and accounts payable, were stated at their fair value. Net
liabilities acquired totaled $877,646. The fair value of the 45,464,760 shares issued in connection with the Exchange Transaction, totaled $27,278,856 on July 14, 2008, based on a per share
value of $0.60, which was the per share price the Company's 5,000,000 common shares sold for in a private placement on that date. The total consideration of $28,156,502 was allocated in full to the
Synergy research and development projects which had not yet reached technological feasibility and, having no alternative use, this amount was charged to purchased in-process research and
development ("IPR&D") expense as of the date of the Exchange Transaction.

In
addition to purchased IPR&D, the Company retained four full time employees and acquired a patent related to the technologies acquired. There were no other intangible assets acquired
which required allocation of the purchase price. The Company did not assign a value to the acquired employees as all continuing research and development is being performed under the supervision of
other Company employees, nor the patent since the technology is still in an early stage. Therefore, the full purchase price accordingly allocated to purchased in-process research and
development and there

F-12

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Acquisition and Stockholders' Equity (Deficit) (Continued)

was
no value assigned to goodwill. The value of the IPR&D was based on the fair value of the consideration given which was the value most reliably measurable.

Net
liabilities assumed in excess of Synergy-DE assets acquired in connection with the Exchange Transaction on July 14, 2008 were as follows:

AssetsCash

$
194,674Total assets acquired


194,674LiabilitiesAccounts payable and other liabilities


(722,320
)Due to Callisto


(350,000
)Total liabilities assumed


(1,072,320
)Net liabilities assumed in excess of assets acquired


(877,646
)Fair value of shares issued to Synergy-DE shareholders


(27,278,856
)Total consideration paid by Pawfect to acquire Synergy-DE

$
(28,156,502
)


On
July 14, 2008, Synergy discontinued its pet food business and is now exclusively focused on continuing the development of drugs to treat GI disorders and diseases acquired in
connection with the Exchange Transaction.

On
July 21, 2008, Pawfect amended its articles of incorporation in the State of Florida to effect the actions necessary to complete the transactions contemplated by the Exchange
Transaction, including: (i) an increase in the authorized number of common shares from 50,000,000 to 150,000,000 (ii) authorized 20,000,000 shares of preferred stock (iii) changed
the common stock par value per share from $0.001 to $0.0001and (iv) changed its name to Synergy Pharmaceuticals, Inc.

During
the twelve months ended December 31, 2009 Synergy sold 22,814,425 shares of unregistered common stock at $0.70 per share to private investors, pursuant to a Securities
Purchase Agreement, for aggregate proceeds of $15,970,100. There were no warrants issued in connection with these transactions. Synergy incurred $260,002 in fees to selling agents and attorneys in
connection with these transactions. Pursuant to the Securities Purchase Agreement the investors agreed to be subject to a lock-up until August 15, 2010 and Synergy agreed to price
protection for the investors in the event of subsequent sales of equity securities as defined, until February 15, 2011. In accordance with the guidance contained in ASC Topic
815-40, the Company has determined that the price protection provisions are embedded derivatives that require bifurcation and recognition at fair value in the company's financial
statements. The Company has determined that the fair value of the derivatives is de minimus.

On
November 20, 2009, the number of common shares authorized increased from 150,000,000 to 200,000,000.

As
of December 31, 2009 Synergy's majority shareholder, Callisto, owns 50.4% of its outstanding shares. As of December 31, 2009 and 2008 the balance due from its majority
shareholder amounted to $972,552 and $690,333, respectively. This balance represents Callisto's share of Synergy payments for

F-13

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Acquisition and Stockholders' Equity (Deficit) (Continued)

common
operating costs since the inception. Due to the uncertainty surrounding Callisto's ability to raise capital Synergy is unable to determine when this balance will be repaid and accordingly
Synergy has classified it as a long term asset as of December 31, 2009.

5. 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. Synergy did not issue stock options until 2008.

Synergy
adopted the 2008 Equity Compensation Incentive Plan (the "Plan") on July 3, 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 periodically issues stock options to employees and non-employees and has adopted ASC Topic 718 for employee
awards on July 3, 2008 concurrently with adoption of the Plan. Prior to that date Synergy had not issued any stock options. 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 whereas the value of the stock compensation 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.

Stock-based
compensation, including all options and restricted stock units, has been recognized in operating results as follow:

November 15,
2005
(inception) to
December 31,
2009Years Ended December 31,2009

2008

2007Employeesincluded in research and development

$
252,541

$
79,530

$


$
332,071Employeesincluded in general and administrative


358,167


112,728





470,895Subtotal employee stock based compensation


610,708


192,258





802,966Non-employeesincluded in research and development


33,913


8,548





42,461Non-employeesincluded in general and administrative


409,941


179,077





589,018Subtotal non-employee stock based compensation


443,854


187,625





631,479Total stock-based compensation expense

$
1,054,562

$
379,883

$


$
1,434,445


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, 2009. The unrecognized compensation cost related to non-vested employee stock options and restricted stock awards outstanding at December 31,
2009, net of expected forfeitures, was

F-14

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Accounting for Shared-Based Payments (Continued)

$1,010,250
to be recognized over a weighted-average remaining vesting period of approximately one year.

Years Ended December 31,2009

2008

2007Risk-free interest rate

2.20%

2.67% - 3.28%


N/ADividend yield






N/AExpected volatility

90%

90%


N/AExpected term (in years)

6.0 yrs

6.0 yrs


N/A


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 comparable publicly traded stocks.

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 718requires 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 historical experience of its majority-owned shareholder, Callisto.

The
weighted-average fair value per share of all options granted during the twelve months ended December 31, 2009 and December 31, 2008 estimated as of the grant date using
the Black-Scholes option valuation model was $0.70 and $0.51 per share.

F-15

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Accounting for Shared-Based Payments (Continued)

The
unrecognized compensation cost related to non-vested employee stock options outstanding at December 31, 2009 and December 31, 2008 was $1,010,250 and
$1,290,122, to be recognized over a weighted-average remaining vesting period of approximately 1.3 year and 2.5 years. There were no options outstanding at December 31, 2007.

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

Number of
Options

Exercise Price
Per Share

Weighted
Average
Exercise
Price Per Share

Intrinsic Value
as of
December 31,
2009Balance outstanding, December 31, 2008


4,080,016

$
025-0.95

$
0.29

$
8,933,935Granted


149,000

$
0.70

$
0.70Exercised








Forfeited


(15,000
)
$
0.25-0.95

$
0.72Balance outstanding, December 31, 2009


4,214,016

$
0.25 - 0.95

$
0.30

$
22,320,436Exercisable at December 31, 2009


1,417,420

$
0.25-0.95

$
0.29

$
7,521,947


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 tax benefits have been recognized in the cash flow statement

Restricted Stock Units

Restricted stock units, which entitle the holder to receive, at the end of a vesting term, a specified number of shares of Synergy
common stock are accounted for as stock based compensation in accordance with ASC Topic 718 in the same manner as stock options using fair value at the date of grant. Subject to a repurchase agreement
assumed by Synergy pursuant to the Exchange Transaction, 50% of the units vest after 1 year of continuous service and the remaining 50% vest after 2 years of continuous service from the
grant date. The total fair value is being expensed ratably by month over the 2 year service period.

On
July 3, 2008, 874,760 restricted stock units were granted by Synergy-DE and assumed by Synergy as part of the Exchange Transaction and are subject to a repurchase
agreement, as defined. These restricted stock units were issued to certain officers and a consultant of Synergy. The fair value of each restricted stock unit is estimated on the grant date based on
the price paid by shareholders participating in the Company's July 14, 2008 private placement. Accordingly, the weighted-average grant date fair value per share of the 874,760 shares issued
during the twelve months ended December 31, 2008 was determined to be $0.60. As of December 31, 2009 there were 874,760 restricted stock units outstanding, included in shares
outstanding. The fair value of the 874,760 restricted stock units on the date of grant was $524,856 of which $361,104 was recorded as stock-based compensation expense during the twelve months ended
December 31, 2009. The intrinsic value of the 437,380 shares which vested during the twelve months ended December 31, 2009 was $2,449,328.

F-16

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Income Taxes

At December 31, 2009, Synergy-DE has net operating loss carryforwards ("NOLs") aggregating approximately $30 million, which, if not used, beginning in 2010 and
expiring through 2029. The utilization of these NOLs is subject to limitations based on past and future changes in ownership of Synergy pursuant to Internal Revenue Code Section 382. The
Company has determined that an ownership change occurred for Internal Revenue Code Section 382 purposes. As a result of this ownership change, the ability of the Company to utilize its NOLs is
limited. The Company has no other material deferred tax items. Synergy records a valuation allowance against deferred tax assets to the
extent that it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Due to the substantial doubt related to Synergy's ability to continue as a going
concern and utilize its deferred tax assets, a valuation allowance for the full amount of the deferred tax assets has been established at December 31, 2009. As a result of this valuation
allowance there are no income tax benefits reflected in the accompanying consolidated statements of operations to offset pre-tax losses.

The
provisions of FASB ASC Topic 740-10-30-7,Accounting for Income Taxeswere adopted by Synergy on
January 1, 2007 and had no effect on Synergy's financial position, cash flows or results of operations upon adoption, as Synergy did not have any unrecognized tax benefits. Synergy's practice
is to recognize interest and/or penalties related to income tax matters in income tax expense and none have been incurred to date.

Synergy
has no uncertain tax positions subject to examination by the relevant tax authorities as of December 31, 2009. Synergy files U.S. and state income tax returns in
jurisdictions with varying statutes of limitations. The 2005 through 2008 tax years generally remain subject to examination by federal and most state tax authorities.

On
July 14, 2008, Synergy engaged in a tax-free reorganization pursuant to the Internal Revenue Code Section 368(a)(1)(B) thereby acquiring 100% of shares in
Synergy-DE, from Callisto, a Delaware corporation, and other restricted holders of Synergy-DE shares, in exchange for 45,464,760 shares of the Company's common stock (or
approximately 70% of the Company's outstanding common stock). The transaction was characterized as a tax-free type "B" reorganization resulting in no gain or loss recognition to the
Company, for federal tax purposes.

7. Commitments and Contingencies

Employment and Consulting Agreements



On February 1, 2010, Dr. Gary Jacob entered into an amended and restated employment agreement with us in which he agreed
to serve as Chief Executive Officer and President. The term of the agreement was effective as of August 1, 2008 and continues until December 31, 2012 and is automatically renewed for
successive one year periods at the end of each term. Dr. Jacob's salary is $300,000 per year. Dr. Jacob is eligible to receive a cash bonus of up to 50% of his base salary per year based
on meeting certain performance objectives and bonus criteria. Such performance objectives and bonus criteria had not been determined as of December 31, 2009 and therefore not met or earned.
Dr. Jacob is also eligible to receive a realization bonus in the event that we enter into an out-license agreement for our technology or enter into a joint venture in which we
contribute such rights to the joint venture where the enterprise value equals or exceeds a minimum of $150 million, $200 million

F-17

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Commitments and Contingencies (Continued)

and
$250 million in the first, second or third years of the term of the agreement or any years beyond the third term of the agreement, respectively, or the license fees we contract to receive
equals or exceeds $50 million. The realization bonus will be equal to the enterprise value in the case of a joint venture or the sum of the license fees actually received in the case of an out
license, multiplied by 0.5%. In addition, in the event we engage in a merger transaction or a sale of substantially all of our assets where the enterprise value equals or exceeds $400 million,
Dr. Jacob shall receive a bonus in an amount determined by multiplying the enterprise value by 2.5%.

If
the employment agreement is terminated by us other than for cause or as a result of Dr. Jacob's death or permanent disability or if Dr. Jacob terminates his employment
for good reason which includes a change of control, Dr. Jacob shall receive (i) a severance payment equal to the higher of the aggregate amount of his base salary for the then remaining
term of the agreement or twelve times the average monthly base salary paid or accrued during the three full calendar months preceding the termination, (ii) expense compensation in an amount
equal to twelve times the sum of his average base salary during the three full months preceding the termination, (iii) immediate vesting of all unvested stock options and the extension of the
exercise period of such options to the later of the longest period permitted by our stock option plans or ten years following the termination date, (iv) payment in respect of compensation
earned but not yet paid and (v) payment of the cost of medical insurance for a period of twelve months following termination. In the event Dr. Jacob's employment was terminated upon a
change of control as of December 31, 2009, he would have been entitled to receive a lump sum payment of $900,000, less applicable withholding.



On February 1, 2010, Gabriele M. Cerrone, our Chairman of the Board, entered into an amended and restated consulting agreement
with us. The term of the agreement was effective as of August 1, 2008 and continues until December 31, 2012 and is automatically renewed for successive one year periods at the end of
each term. Pursuant to the agreement, Mr. Cerrone's compensation is $295,000 per year. Mr. Cerrone is eligible to receive a cash bonus of up to 50% of his base salary per year based on
meeting certain performance objectives and bonus criteria. Such performance objectives and bonus criteria had not been determined as of December 31, 2009 and therefore not met or earned.
Mr. Cerrone is also eligible to receive a realization bonus in the event that we enter into an out-license agreement for our technology or enter into a joint venture in which we
contribute such rights to the joint venture where the enterprise value equals or exceeds a minimum of $150 million, $200 million and $250 million in the first, second or third
years of the term of the agreement or any years beyond the third term of the agreement, respectively, and in the case of a financing transaction, we receive not less than $20 million of gross
proceeds; or the license fees we contract to receive equals or exceeds $50 million. The realization bonus will be equal to the enterprise value in the case of a joint venture or financing or
the sum of the license fees actually received multiplied by 0.5%. In addition, in the event we engage in a merger transaction or a sale of substantially all of our assets where the enterprise value
equals or exceeds $400 million, Mr. Cerrone shall receive a bonus in an amount determined by multiplying the enterprise value by 2.5%.

If
the consulting agreement is terminated by us other than for cause or as a result of Mr. Cerrone's death or permanent disability or if Mr. Cerrone terminates the
agreement for good reason which includes a change of control, Mr. Cerrone shall receive (i) a severance payment equal to

F-18

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Commitments and Contingencies (Continued)

the
higher of the aggregate amount of his base compensation for the then remaining term of the agreement or twelve times the average monthly base compensation paid or accrued during the three full
calendar months preceding the termination, (ii) expense compensation in an amount equal to twelve times the sum of his average base compensation during the three full months preceding the
termination, (iii) immediate vesting of all unvested stock options and the extension of the exercise period of such options to the later of the longest period permitted by our stock option
plans or ten years following the termination date, (iv) payment in respect of compensation earned but not yet paid and (v) payment of the cost of medical insurance for a period of twelve
months following termination. In the event Mr. Cerrone's employment was terminated upon a change of control as of December 31, 2009, he would have been entitled to receive a lump sum
payment of $885,000 less applicable withholding.

On
August 21, 2008, the Board of Directors ("the Board") of Synergy appointed Melvin K. Spigelman, M.D. as a Director of the Company. In addition, the Board of Directors appointed
Dr. Spigelman Chairman of Synergy's Clinical Oversight Committee ("the Committee") as well as a member of the
Compensation and Audit Committees. In connection therewith, the Board of Directors approved the payment of an annual fee of $90,000 to Dr. Spigelman for his service on the Board and the
Committees. Additionally, the Board approved a grant of 300,000 stock options to Dr. Spigelman with an exercise price of $0.60 per share. Such options vest in 100,000 increments over a period
of 3 years. The fair value of the 300,000 options on the date of grant was $135,655 of which $33,914 was recorded as stock-based compensation expense during the twelve months ended
December 31, 2009. . During 2009, the Clinical Oversight Board was disbanded and Dr. Spigelman is paid a director fee comparable to the other independent Board members.



On April 6, 2004, Kunwar Shailubhai, Ph.D. entered into an employment agreement with Synergy-DE in which he agreed
to serve as Senior Vice President, Drug Discovery. Dr. Shailubhai's employment agreement was for a term of 12 months beginning April 6, 2004 and was automatically renewed for
successive one year periods at the end of each term. On July 9, 2008, Dr. Shailubhai was appointed Chief Scientific Officer of Synergy. His salary is currently $200,000 per year and he
is eligible to receive a discretionary performance bonus of up to 15% of his salary per year.

Lease agreements

The Company's corporate headquarters totals approximately 5,500 square feet, in two suites, located at 420 Lexington Avenue, New York,
New York. The New York corporate office is provided to it under a space sharing arrangement with Callisto, the Company's majority stockholder. The term of the leases at 420 Lexington Avenue expire on
June 30, 2011 and September 30, 2010. The Company also occupies a small laboratory and several offices, totaling approximately 1,000 square feet, in the Bucks County Biotechnology Center
in Doylestown, Pennsylvania under a lease expiring August 31, 2010. Rent expense for the twelve months ended December 31, 2009 totaled $236,634.

F-19

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Commitments and Contingencies (Continued)

Commitments Prior to Exchange Transaction

The Company had retained Mr. Pietro Gattini as President, Chairman and Chief Executive Officer. Prior to the Exchange
Transaction, Mr. Gattini was the only director, officer and employee of the Company. Compensation has been accrued at a rate of $500 per month. On July 14, 2008, Mr. Gattini
resigned as Chief Executive Officer and sole director of the Company and all compensation due him was paid from the net proceeds of the private placement. For a more detailed discussion of the private
placement, see Note 4,Acquisition and Stockholders' Equity (Deficit)above.

The
Company leased approximately 70 square feet of office space on a month-to-month basis from Steinway Group, LLC in Long Island City, New York. This
facility served as the Company's principal executive and administrative office. Rent for the facility was $2,400 per annum payable in equal monthly installments. On August 5, 2008, the Company
terminated the lease with Steinway Group, LLC. For a more detailed discussion of the private placement, see Note 4,Acquisition and Stockholders' Equity
(Deficit)above.



On September 25, 2007, Synergy Advanced Pharmaceuticals, Inc. entered into a Service Agreement with Capebio, LLC
("Capebio") to provide research and development services for the commercialization of non-oncology related GI pharmaceutical products under the SP-304 patent (the "Service
Agreement"). The Service Agreement was for a minimum term of eleven months starting October 1, 2007 during which period Synergy Advanced Pharmaceuticals, Inc. paid an initial fee of
$55,000 and was obligated to pay $26,000 per month through August 31, 2008. This Service Agreement was terminated on July 2, 2008 and all amounts due were paid.

8. Property and Equipment

Equipment consists of laboratory, testing and computer equipment and furniture and fixtures consists of office furniture, both stated at cost, with useful lives ranging from
2-4 years, depreciated on a straight line basis. Depreciation expense for the years ended December 31, 2009, 2008, 2007 and from November 15, 2005 (inception) to
December 31, 2009 were $1976, $494, $672, respectively.

December 31,
2009

December 31,
2008Furniture and fixtures

$
38,343

$
38,343Machinery and equipment


12,195


12,195Less accumulated depreciation


(40,813
)

(38,837
)Property and equipment, net

$
9,725

$
11,701


9. Related Parties

As of December 31, 2009, Synergy's majority shareholder, Callisto, owns 50.4% of its outstanding shares. Synergy occupies corporate office space in New York City under a month to
month sharing arrangement with Callisto, its majority shareholder. Rent is allocated from Callisto monthly based on

F-20

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Related Parties (Continued)

the
square footage of office space occupied by Synergy. Such rent totaled approximately $132,000 during the twelve months ended December 31, 2009.

As
of December 31, 2009 Synergy had advanced Callisto $972,552 which is Callisto's share of Synergy payments for common operating costs since July 2008. This indebtedness is
evidenced by an unsecured promissory note which bears interest at 6% per annum. Due to the uncertainty surrounding Callisto's ability to raise capital Synergy is unable to determine when this balance
will be repaid and accordingly Synergy has classified it as a long term asset.

10. Quarterly Consolidated Financial Data (Unaudited)

Quarter EndedMarch 31,
2009

June 30,
2009

September 30,
2009

December 31,
2009(DOLLARS in THOUSANDS,
EXCEPT PER SHARE DATA)Revenues

$


$


$


$
Costs and expenses:Research and Development


333


1,115


1,164


1,645Acquisition-related in-process research and development charges











General and administrative


664


860


1,059


1,360Loss from operations


(997
)

(1,975
)

(2,223
)

(3,005
)Interest and investment income








11


64Loss from continuing operations


(997
)

(1,975
)

(2,212
)

(2,941
)Loss from discontinued operations











Net Loss

$
(997
)
$
(1,975
)
$
(2,212
)
$
(2,941
)Weighted average common shares outstandingbasic and diluted


65,743


67,360


75,769


84,108Earnings per common sharebasic and diluted(a):Loss from continuing operations

$
(0.02
)
$
(0.03
)
$
(0.03
)
$
(0.03
)Discontinued operation











Net per common share

$
(0.02
)
$
(0.03
)
$
(0.03
)
$
(0.03
)


(a)Basic
and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not agree to the
total for the year.


F-21

---



Table of Contents

SYNERGY PHARMACEUTICALS, INC.
(A development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Quarterly Consolidated Financial Data (Unaudited) (Continued)

Quarter EndedMarch 31,
2008

June 30,
2008

September 30,
2008

December 31,
2008(DOLLARS in THOUSANDS,
EXCEPT PER SHARE DATA)Revenues

$


$


$


$
Costs and expenses:











Research and Development








709


1,200Acquisition-related in-process research and development charges








28,157


General and administrative








940


723Loss from operations








(29,806
)

(1,923
)Interest and investment income








(2
)

7Loss from continuing operations








(29,808
)

(1,916
)Loss from discontinued operations


(7
)

(25
)




(31
)Net Loss

$
(7
)
$
(25
)
$
(29,808
)
$
(1,947
)Weighted average common shares outstandingbasic and diluted


165,081


165,081


79,644


65,606Earnings per common sharebasic and diluted(a):Loss from continuing operations

$


$


$
(0.37
)
$
(0.03
)Discontinued operation











Net per common share

$


$


$
(0.37
)
$
(0.03
)


(a)Basic
and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not agree to the
total for the year.


11. Subsequent Events

On February 1, 2010, the Compensation Committee of the Board of Directors of Synergy Pharmaceuticals, Inc. (the "Company") approved and the Company entered into an Amended
and
Restated Executive Employment Agreement with Gary S. Jacob, its President and Chief Executive Officer and an Amended and Restated Consulting Agreement with Gabriele Cerrone, its Chairman. Each
agreement was modified by (i) extending the term to December 31, 2012 from December 31, 2011 and (ii) deleting the bonus provision which provided for a bonus if there is a
merger or sale of the Company with a minimum value of $150 million, $200 million and $250 million during the first, second and third year of the agreement and replacing it with a
bonus of 2.5% of the value of the Company if there is a merger or sale of the Company and the value of the Company at the time of the merger or sale equals or exceeds $400 million.

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 15,000,000
shares.

F-22

---





Table of Contents

Exhibit Index

The Exhibits listed below are identified by numbers corresponding to the Exhibit Table of Item 601 of
Regulation S-K. The Exhibits designated by an asterisk (*) are management contracts or compensatory plans or arrangements required to be filed pursuant to Item 15.

Exhibit No.

Description3.1

Amended and Restated Articles of Incorporation of Synergy Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K filed December 7, 2009)3.2

Amended and Restated Bylaws.4.1

2008 Equity Compensation Incentive Plan (incorporated by reference to Exhibit 4.1 to Form 8-K filed July 18, 2008)*4.2

2009 Directors Stock Option Plan*4.3

Form of Stock Certificate of the Registrant (incorporated by reference to Exhibit 4.6 to Form S-3 filed November 24, 2009).10.1

Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K filed July 18, 2008)*10.2

Form of Executive Non-statutory Stock Option Agreement (incorporated by reference to Exhibit 10.4 to Form 8-K filed July 18, 2008)*10.3

Form of Non-Executive Non-statutory Stock Option Agreement (incorporated by reference to Exhibit 10.5 to Form 8-K filed July 18, 2008)*10.4

Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to Form 10-Q filed August 14, 2009)10.5

Amended and Restated Executive Employment Agreement dated as of February 1, 2010 between Synergy Pharmaceuticals, Inc. and Gary S. Jacob (incorporated by reference to Exhibit 10.1 to Form 8-K filed
February 5, 2010)*10.6

Amended and Restated Consulting Agreement dated as of February 1, 2010 between Synergy Pharmaceuticals, Inc. and Gabriele M. Cerrone (incorporated by reference to Exhibit 10.2 to Form 8-K filed
February 5, 2010)*14

Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14 to Form 10-K filed April 15, 2009)21

List of Subsidiaries (incorporated by reference to Exhibit 21 to Form 10-K filed April 15, 2009)23

Consent of BDO Seidman, LLP31.1

Certification of Chief Executive Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act31.2

Certification of Principal Financial Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*Indicates
a management contract or compensatory plan or arrangement.Previously
filed.


---