Attached files
file | filename |
---|---|
EX-32.2 - Vyteris Holdings (Nevada), Inc. | v184858_ex32-2.htm |
EX-31.1 - Vyteris Holdings (Nevada), Inc. | v184858_ex31-1.htm |
EX-31.2 - Vyteris Holdings (Nevada), Inc. | v184858_ex31-2.htm |
EX-32.1 - Vyteris Holdings (Nevada), Inc. | v184858_ex32-1.htm |
EX-10.162 - Vyteris Holdings (Nevada), Inc. | v184858_ex10-162.htm |
EX-10.160 - Vyteris Holdings (Nevada), Inc. | v184858_ex10-160.htm |
EX-10.161 - Vyteris Holdings (Nevada), Inc. | v184858_ex10-161.htm |
EX-10.159 - Vyteris Holdings (Nevada), Inc. | v184858_ex10-159.htm |
EX-10.158 - Vyteris Holdings (Nevada), Inc. | v184858_ex10-158.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
T QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2010
OR
£ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission
File Number 000-32741
Vyteris,
Inc.
(Exact
name of issuer as specified in its charter)
NEVADA
|
84-1394211
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
Identification
No.)
|
13-01
POLLITT DRIVE
|
|
FAIR
LAWN, NEW JERSEY
|
07410
|
(Address
of principal executive office)
|
(Zip
Code)
|
(201)
703-2299
(Issuer’s
telephone number)
Indicate
by check mark whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past twelve 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 S NO £
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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer £ | Accelerated filer £ |
Non-accelerated filer (Do not check if a smaller reporting company) £ | Smaller reporting company S |
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) 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 Not
applicable.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES £ NO T
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date.
CLASS
|
OUTSTANDING AT MAY 2, 2010
|
|||
Common
stock, par value $0.015 share
|
62,568,817
|
|||
1
VYTERIS,
INC.
FORM
10-Q
INDEX
Page No.
|
||
PART
I
|
FINANCIAL
INFORMATION
|
3
|
|
||
Item
1.
|
Financial
Statements:
|
3
|
Condensed
Consolidated Balance Sheets as of March 31, 2010
(Unaudited)
and
December 31, 2009
|
3
|
|
Unaudited
Condensed Consolidated Statements of Operations for
the
Three
Months ended March 31, 2010 and 2009
|
4
|
|
Unaudited
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for
the
Three
Months ended March 31, 2010
|
5
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for
the
Three
Months ended March 31, 2010 and 2009
|
6
|
|
Notes
to Unaudited Condensed Consolidated Financial
Statements
|
7
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Plan of
Operations
|
18
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
29
|
Item
4T.
|
Controls
and Procedures
|
29
|
PART
II
|
OTHER
INFORMATION
|
29
|
Item
1.
|
Legal
Proceedings
|
29
|
Item
1A.
|
Risk
Factors
|
30
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
31
|
Item
3.
|
Defaults
Upon Senior Securities
|
31
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
31
|
Item
5.
|
Other
Information
|
31
|
Item
6.
|
Exhibits
|
32
|
Signature
|
32
|
Vyteris®
and LidoSite® are our trademarks. All other trademarks, servicemarks or trade
names referred to in this Quarterly Report on Form 10-Q are the property of
their respective owners.
2
ITEM
1. FINANCIAL STATEMENTS
VYTERIS
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
March
31,
2010
|
December 31,
2009
|
|||||||
ASSETS
|
(Unaudited)
|
|||||||
Current
assets:
|
||||||||
Cash
and cash
equivalents
|
$ | 1,724,668 | $ | 2,173,039 | ||||
Other
current
assets
|
92,288 | 120,527 | ||||||
Total
current
assets
|
1,816,956 | 2,293,566 | ||||||
Debt
issuance costs,
net
|
1,359,206 | — | ||||||
Property
and equipment, net
|
84,993 | 114,024 | ||||||
Other
assets
|
290,352 | 225,356 | ||||||
TOTAL
ASSETS
|
$ | 3,551,507 | $ | 2,632,946 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 2,306,373 | $ | 2,432,976 | ||||
Interest
payable and accrued expenses due to a related
party
|
137,450 | 111,560 | ||||||
Derivative
financial
instruments
|
4,363,677 | 2,634,487 | ||||||
Accrued
expenses and
other
|
3,176,923 | 3,135,013 | ||||||
Total
current
liabilities
|
9,984,423 | 8,314,036 | ||||||
Promissory
note due to a related
party
|
1,750,000 | 1,750,000 | ||||||
Senior
subordinated convertible debentures, net of
discount
|
2,994 | — | ||||||
Deferred
revenue and
other
|
796,237 | 821,237 | ||||||
Convertible
note
|
500,000 | 500,000 | ||||||
Total
liabilities
|
13,033,654 | 11,385,273 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity (deficit):
|
||||||||
Common
stock, par value $0.015 per share; 400,000,000 shares authorized, at
March
31, 2010 and December 31, 2009, 62,568,817 and
62,398,817 shares
issued
and outstanding at March 31, 2010 and December 31, 2009,
respectively
|
938,532 | 935,982 | ||||||
Additional
paid-in capital
|
207,116,835 | 204,642,912 | ||||||
Accumulated
deficit
|
(217,537,514 | ) | (214,331,221 | ) | ||||
Total
stockholders’ equity (deficit)
|
(9,482,147 | ) | (8,752,327 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
$ | 3,551,507 | $ | 2,632,946 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
VYTERIS,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Revenues:
|
||||||||
Product
development
|
$ | — | $ | 626,931 | ||||
Other
revenue
|
14,323 | 187,556 | ||||||
Total
revenues
|
14,323 | 814,487 | ||||||
Cost
and expenses:
|
||||||||
Research
and development
|
794,041 | 761,504 | ||||||
General
and administrative
|
1,704,768 | 1,077,218 | ||||||
Facilities
realignment and impairment of fixed assets
|
— | 126,609 | ||||||
Registration
rights penalty
|
— | 64,155 | ||||||
Total
cost and expenses
|
2,498,809 | 2,029,486 | ||||||
Loss
from operations
|
(2,484,486 | ) | (1,214,999 | ) | ||||
Interest
(income) expense:
|
||||||||
Interest
income
|
(202 | ) | (330 | ) | ||||
Interest
expense to related parties
|
23,726 | 388,538 | ||||||
Interest
expense
|
16,700 | 59,194 | ||||||
Interest
expense, net
|
40,224 | 447,402 | ||||||
Increase
in fair value of derivative financial instruments
|
681,583 | — | ||||||
Net
loss
|
$ | (3,206,293 | ) | $ | (1,662,401 | ) | ||
Net
loss per common share:
|
||||||||
Basic
and diluted
|
$ | (0.05 | ) | $ | (0.23 | ) | ||
Weighted
average number of common shares:
|
||||||||
Basic
and diluted
|
62,640,753 | 7,282,802 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
VYTERIS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
Additional
|
Total
|
|||||||||||||||||||
Common
Stock
|
Paid-in
|
Accumulated
|
Stockholders’
|
|||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Equity (Deficit)
|
||||||||||||||||
Balance
at December 31, 2009
|
62,398,817 | $ | 935,982 | $ | 204,642,912 | $ | (214,331,221 | ) | $ | (8,752,327 | ) | |||||||||
Non-cash
stock based compensation expense, net
|
— | — | 1,184,369 | — | 1,184,369 | |||||||||||||||
Issuance
of common stock for services rendered
|
170,000 | 2,550 | 97,850 | — | 100,400 | |||||||||||||||
Issuance
of warrants for services rendered
|
— | — | 1,181,476 | — | 1,181,476 | |||||||||||||||
Reclassification
of the fair value of warrants from an equity instrument to a liability
instrument
|
— | — | 10,228 | — | 10,228 | |||||||||||||||
Net
loss for the three months ended March 31, 2010
|
— | — | — | (3,206,293 | ) ) | (3,206,293 | ) | |||||||||||||
Balance
at March 31, 2010
|
62,568,817 | $ | 938,532 | $ | 207,116,835 | $ | (217,537,514 | ) | $ | (9,482,147 | ) | |||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
VYTERIS,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three
Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (3,206,293 | ) | $ | (1,662,401 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
expense
|
29,031 | 58,651 | ||||||
Stock
based compensation charges
|
1,184,369 | 136,895 | ||||||
Increase
in fair value of derivative financial instruments
|
681,583 | - | ||||||
Accrued
registration rights penalty
|
- | 64,155 | ||||||
Other
|
77,063 | 121,689 | ||||||
Change
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
- | (601,970 | ) | |||||
Other
assets
|
(36,757 | ) | 122,772 | |||||
Accounts
payable
|
(126,603 | ) | (44,996 | ) | ||||
Accrued
expenses and other liabilities
|
44,263 | 1,007,553 | ||||||
Interest
payable and accrued expenses to related parties
|
25,890 | 388,538 | ||||||
Net
cash (used in) operating activities
|
(1,327,454 | ) | (409,114 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Net
proceeds from senior secured subordinated convertible
debentures
|
1,060,000 | - | ||||||
Senior
subordinated convertible debentures issuance costs
|
(180,917 | ) | - | |||||
Net
proceeds from sale of manufacturing agreement
|
- | 569,712 | ||||||
Repayment
of secured convertible debentures
|
- | (250,000 | ) | |||||
Net
cash provided by financing activities
|
879,083 | 319,712 | ||||||
Net
(decrease) in cash and cash equivalents
|
(448,371 | ) | (89,402 | ) | ||||
Cash
and cash equivalents at beginning of the period
|
2,173,039 | 222,821 | ||||||
Cash
and cash equivalents at end of the period
|
$ | 1,724,668 | $ | 133,419 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid
|
$ | 1,633 | $ | 1,433 | ||||
Repayment
of secured convertible debenture in exchange for milestone
payment
|
- | 2,500,000 | ||||||
Warrants
issued to investment finders included in debt issuance
costs
|
1,181,476 | - |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
6
VYTERIS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
|
Organization
and Basis of Presentation
|
Basis
of presentation
The
accompanying condensed consolidated financial statements have been prepared
assuming that Vyteris, Inc. (formerly Vyteris Holdings (Nevada), Inc.), (the
terms “Vyteris” and the “Company” refer to each of Vyteris, Inc., its
subsidiary, Vyteris, Inc. (incorporated in the State of Delaware) and the
consolidated entity) will continue as a going concern.
In
December 2009, the Company converted $20.3 million of secured indebtedness and
preferred stock into common stock of the Company, as well as received a net cash
payment of $2.1 million from the sale of the Company’s State of New Jersey net
operating losses. In February 2010, the Company raised $1.1 million
through the sale of senior secured convertible
debentures. Nonetheless, subsequent financings will be required to
fund the Company’s operations, fund research and development for new products,
repay past due payables and pay debt service requirements.
As a
result of the conversion of $20.3 million of secured indebtedness and preferred
stock into common stock of the Company, Spencer Trask Specialty Group and
Affiliates (“STSG”) owned 82.8% of the issued and outstanding common stock of
the Company as of March 31, 2010. Due to this stock ownership, the Company is
controlled by STSG and is deemed a “controlled corporation”. STSG may influence
the Company to take actions that conflict with the interests of other
shareholders. In December 2009, Ferring Pharmaceuticals, Inc.
(“Ferring”) terminated its License Agreement with the Company and thus
discontinued its collaborative effort with the Company for their joint
infertility project. The Company is in negotiations with Ferring regarding final
disposition of matters including sums owed by the Company to Ferring and release
of liens on intellectual property owned by the Company subject to Ferring’s
lien. As of March 31, 2010, the Company recorded $1.4 million in
accrued expenses and other in the condensed consolidated balance sheets for the
estimated amounts due to Ferring.
No
assurance can be given that the Company will be successful in procuring the
further financing needed to continue the execution of its business plan, which
includes the development of new products. Failure to obtain such financing would
require management to substantially curtail, if not cease, operations, which
would result in a material adverse effect on the financial position and results
of operations of the Company. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. The report of the independent
registered public accounting firm relating to the audit of the Company's
consolidated financial statements for the year ended December 31, 2009 contains
an explanatory paragraph expressing uncertainty regarding the Company’s ability
to continue as a going concern because of its operating losses and its
continuing need for additional capital in order to continue operations. The
condensed consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that might occur if the
Company is unable to continue in business as a going concern.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
8-03 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2009. The condensed consolidated balance sheet as of December
31, 2009 has been derived from those audited consolidated financial statements.
Operating results for the three month period ended March 31, 2010 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2010. All significant intercompany balances and transactions
have been eliminated in consolidation.
7
VYTERIS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Business
The
Company developed and produced the first FDA-approved electronically controlled
transdermal drug delivery system that delivers drugs through the skin
comfortably, without needles. This platform technology can be used to administer
a wide variety of therapeutics either directly into the skin or into the
bloodstream. The Company holds U.S. and foreign patents relating to the delivery
of drugs across the skin using an electronically controlled “smart patch” device
with electric current. The Company has discontinued activity with respect to its
LidoSite product, although it is still seeking a buyer or joint venture partner
for the product. Given the termination of the Ferring agreement, none of
the Company products are currently in collaborative development; however, the
Company is currently seeking collaborative partners for several of its
projects.
2.
|
Significant
Accounting Policies
|
Accounting
policies
There
have been no significant changes in the Company’s accounting policies (as
detailed in the Company's Annual Report on Form 10-K for the year ended December
31, 2009). The following significant accounting policies are included
herein.
Risk and
uncertainties
The
Company purchases some raw materials and components from single-source
suppliers. Some of those materials or components are custom-made and are the
result of long periods of collaboration with suppliers. Although the Company has
not experienced significant supply delays attributable to supply changes, the
Company believes that, for electrode subcomponents and hydrogel in particular,
alternative sources of supply would be difficult to develop over a short period
of time. Because the Company has no direct control over its third-party
suppliers, interruptions or delays in the products and services provided by
these third parties may be difficult to remedy in a timely fashion. In addition,
if such suppliers are unable or unwilling to deliver the necessary parts or
products, the Company may be unable to redesign or adapt its technology to work
without such parts or find alternative suppliers or manufacturers. In such
events, the Company could experience interruptions, delays, increased costs, or
quality control problems.
Income Taxes
The
Company accounts for income taxes as codified in ASC 740-10-05. Deferred tax
assets or liabilities are recorded to reflect the future tax consequences of
temporary differences between the financial reporting basis of assets and
liabilities and their tax basis at each year-end. These amounts are adjusted, as
appropriate, to reflect enacted changes in tax rates expected to be in effect
when the temporary differences reverse.
The
Company records deferred tax assets and liabilities based on the differences
between the financial statement and tax bases of assets and liabilities and on
operating loss carryforwards using enacted tax rates in effect for the year in
which the differences are expected to reverse. A valuation allowance is provided
when it is more likely than not that some portion or all of a deferred tax asset
will not be realized.
Financial
Instruments
Cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
other liabilities reported in the consolidated balance sheets equal or
approximate their fair value due to their short term to maturity. The Company
recorded all outstanding debt instruments at their full value. Due to the lack
of market conditions and unique features of the instruments, the fair value of
the Company’s debt instruments is not readily determinable.
8
VYTERIS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Debt
instruments, offering costs and the associated features and instruments
contained therein
Deferred
financing costs are amortized over the term of their associated debt
instruments. The Company evaluates the terms of the debt instruments to
determine if any embedded derivatives or beneficial conversion features exist.
The Company allocates the aggregate proceeds of the debt instrument between the
warrants and the debt based on their relative fair values as codified in ASC
470-20-25. The fair value of the warrants issued to debt holders or placement
agents are calculated utilizing the Black-Scholes-Merton option-pricing model.
The Company amortizes the resultant discount or other features over the terms of
the debt through its earliest maturity date using the effective interest method.
Under this method, the interest expense recognized each period will increase
significantly as the instrument approaches its maturity date. If the maturity of
the debt is accelerated because of defaults or conversions, then the
amortization is accelerated.
Warrants
The
Company adopted Emerging Issues Task Force Issue No. 07-5, “Determining Whether
an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF
07-5”) effective January 1, 2009. The adoption of EITF 07-5 affects the
accounting for warrants and many convertible instruments with provisions that
protect holders from a decline in the stock price (or “down-round” provisions).
For example, warrants with such provisions will no longer be recorded in equity.
Down-round provisions reduce the exercise price of a warrant or convertible
instrument if a company either issues equity shares for a price that is lower
than the exercise price of those instruments or issues new warrants or
convertible instruments that have a lower exercise price. The Company evaluated
whether its warrants contain provisions that protect holders from declines in
its stock price or otherwise could result in modification of the exercise price
and/or shares to be issued under the respective warrant agreements based on a
variable that is not an input to the fair value of a “fixed-for-fixed” option.
The Company determined that a portion of its outstanding warrants contained such
provisions thereby concluding they were not indexed to the Company’s own
stock.
Derivative
Financial Instruments
The
Company’s objectives in using debt-related derivative financial instruments are
to obtain the lowest cash cost source of funds within a targeted range of
variable-to fixed-rate debt obligations. Derivatives are recognized in the
condensed consolidated balance sheets at fair value as required by ASC topic 815
“Derivatives and Hedging” (“ASC Topic 815”). The estimated fair value of the
derivative liabilities is calculated using the Black-Scholes method where
applicable and such estimates are revalued at each balance sheet date, with
changes in value recorded as other income or expense in the condensed
consolidated statement of operations. As a result of the Company’s adoption of
ASC Topic 815, effective January 1, 2009, outstanding warrants that the Company
classified as derivative financial instruments as were accounted for as
derivatives.
Fair
Value Measurements
The
Company measures fair value in accordance with Statement ASC 820 (formerly SFAS
No. 157), Fair Value Measurements. ASC 820 defines fair value, establishes a
framework and gives guidance regarding the methods used for measuring fair
value, and expands disclosures about fair value measurements. ASC 820 clarifies
that fair value is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would
use in pricing an asset or liability. As a basis for considering such
assumptions, there exists a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value as follows:
• Level 1
- unadjusted quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access as of the measurement
date.
• Level 2
- inputs other than quoted prices included within Level 1 that are directly
observable for the asset or liability or indirectly observable through
corroboration with observable market data.
• Level 3
- unobservable inputs for the asset or liability only used when there is little,
if any, market activity for the asset or liability at the measurement
date.
This
hierarchy requires the Company to use observable market data, when available,
and to minimize the use of unobservable inputs when determining fair
value.
Recently
issued accounting standards
In
September 2009, the FASB ratified final Emerging Issues Task Force (“EITF”)
Issue 08-01, Revenue Arrangements with Multiple Deliverables (“EITF 08-01”).
EITF 08-1 will enable entities to separately account for individual deliverables
for many more revenue arrangements. By removing the criterion that entities must
use objective and reliable evidence of fair value in separately accounting for
deliverables, the EITF expects the recognition of revenue to more closely align
with the economics of certain revenue arrangements. EITF 08-1 applies
to all deliverables in contractual arrangements in all industries in which a
vendor will perform multiple revenue-generating activities, except when some or
all deliverables in a multiple deliverable arrangement are within the scope of
other, more specific sections of the Codification and other sections of ASC 605
on revenue recognition. Specifically, EITF 08-01 addresses the unit
of accounting for arrangements involving multiple deliverables. It
also addresses how arrangement consideration should be allocated to the separate
units of accounting, when applicable. EITF 08-01 requires a vendor to evaluate
all deliverables in an arrangement to determine whether they represent separate
units of accounting. This evaluation must be performed at the
inception of an arrangement and as each item in the arrangement is delivered.
The adoption of this guidance will not have a material impact on the Company’s
condensed consolidated financial statements.
9
VYTERIS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities
on purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance became effective for us with the reporting period
beginning January 1, 2010, except for the disclosure on the roll forward
activities for Level 3 fair value measurements, which will become effective for
us with the reporting period beginning July 1, 2011. Other than requiring
additional disclosures, adoption of this new guidance did not have a material
impact on the Company’s condensed consolidated financial
statements.
3.
|
Property
and Equipment, net
|
Property
and equipment, net, consist of the following:
March 31,
2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Manufacturing
and laboratory equipment
|
$ | 1,875,930 | $ | 1,875,930 | ||||
Furniture
and
fixtures
|
156,543 | 156,543 | ||||||
Office
equipment
|
345,423 | 345,423 | ||||||
Leasehold
improvements
|
367,818 | 367,818 | ||||||
Software
|
205,210 | 205,210 | ||||||
2,950,924 | 2,950,924 | |||||||
Less:
Accumulated depreciation and amortization
|
(2,865,931 | ) | (2,836,900 | ) | ||||
Property
and equipment,
net
|
$ | 84,993 | $ | 114,024 |
Depreciation
and amortization expense, included in cost and expenses in the accompanying
condensed consolidated statements of operations, was approximately $0.03 million
and $0.06 million for the three months ended March 31, 2010 and 2009,
respectively.
4. Accrued
Expenses and Other
Accrued
expenses and other consist of the following:
March
31,
2010
|
December
31,
2009
|
|||||||
(Unaudited)
|
||||||||
Compensation,
accrued bonuses and benefits payable
|
$ | 419,517 | $ | 413,743 | ||||
Continuous
motion patch machine costs and delivery
|
172,198 | 183,452 | ||||||
Reimbursement
of development costs to Ferring
|
1,386,918 | 1,386,919 | ||||||
Accrued
insurance
costs
|
51,099 | 101,224 | ||||||
Accounting,
legal and consulting
fees
|
400,551 | 334,095 | ||||||
Outside
services
|
341,253 | 371,243 | ||||||
Food
and drug administration
fees
|
214,602 | 193,521 | ||||||
Other
|
190,785 | 150,816 | ||||||
Accrued
expenses and
other
|
$ | 3,176,923 | $ | 3,135,013 |
5. Promissory
Note Due to a Related Party
In
December 2009, the Company issued STSG a Promissory Note (“2009 Promissory
Note”) with a principal amount of $2.0 million with interest accruing at the
rate of 6% per year and with the same duration as the first debt security to
expire pursuant to a Qualified Financing, or if it does not involve the sale of
debt securities, December 24, 2012. As promissory notes with respect
to a Qualified Financing were issued by the Company on February 2, 2010, which
expire on February 2, 2013, the 2009 Promissory Note shall expire on February 2,
2013. The 2009 Promissory Note is secured by a lien on the
Company’s assets, subordinate to the lien of any existing creditors that have a
lien senior to that of STSG and to any liens resulting from a Qualified
Financing.
10
VYTERIS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
On
December 28, 2009, the Company paid STSG $0.3 million to reduce the principal
amount of the 2009 Promissory Note to $1.8 million as of December 31, 2009. Upon
consummation of a Qualified Financing with gross proceeds in excess of $3.0
million, the Company is required to make another prepayment of $0.5 million.
Upon consummation of a Qualified Financing with gross proceeds in excess of $5.0
million, the Company is required to make another prepayment of 50% of the net
proceeds from any Qualified Financing in excess of $5.0 million.
6. February
2010 Senior Subordinated Convertible Promissory Notes
On
February 2, 2010, the Company sold to accredited investors (“Investors”) in
a private placement $1.1 million principal amount of Senior Subordinated
Convertible Promissory Notes due 2013 (the “February 2010
Notes”). The February 2010 Notes bear no interest and are convertible
into our common stock at the option of the Investors anytime at an initial
conversion price of $0.20 per share. The conversion price
automatically reduces by 1.5% of the conversion price after each 90 day period
that February 2010 Notes are outstanding, and additionally, the conversion price
resets in the event of a subsequent issuance of stock at a lower price than the
then effective conversion price. In addition, the February 2010 notes
automatically convert into our common stock if the closing bid price of the
Company’s common stock equals or exceeds 300% of the conversion price for a
period of twenty consecutive trading days. In connection with the
sale of the February 2010 Notes, the Company also issued five-year warrants to
purchase an aggregate of 5,300,000 shares of the Company’s common stock with an
exercise price of $0.20 per share. In conjunction therewith, the Company
provided customary “piggyback” registration rights for a 24-month period to the
Investors with respect to the shares of common stock underlying the notes and
warrants. This private placement transaction is exempt from registration under
the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof and
Regulation D, promulgated thereunder.
The
Company received net proceeds of $0.9 million after payment of an aggregate of
$0.1 of commissions and expense allowance to Spencer Trask Ventures, Inc.
(“STVI”) a related party to STSG, a principal stockholder of the Company, as
well as one finder, and approximately $43,000 of other offering and related
costs. STVI and the finders also received in the aggregate warrants
to purchase 2,120,000 shares of the Company’s common stock bearing substantially
the same terms as the Investor warrants.
In
accordance with accounting for convertible instruments issued with detachable
warrants (ASC 470-20), the Company determined the relative fair value of the
aforementioned instruments and recorded debt discount at February 2010 totaling
$1.1 million (representing the extent of the debt and corresponding derivative
liabilities of $0.3 million for the convertible debt conversion feature and $0.8
million for the warrant). At March 31, 2010, the Company adjusted the fair value
of the derivative liabilities and determined the fair value of the warrant
liability amounted to $1.7 million (a level 3 market value based on a Black
Scholes pricing model) and the fair value of the convertible debt conversion
feature amounted to $2.1 million (a level 3 market value based on pricing
methodologies used to determine conversion features, which encompass the fair
value of the Company’s stock as of March 31, 2010.) As a
result of this adjustment, the Company recognized a $2.8 million loss on
derivative financial instruments for the three month period ended March 31, 2010
consisting of $1.9 million charge for the convertible debt conversion feature
and a $0.9 million charge for the revaluation of the warrant liability on the
condensed consolidated statement of operations. For the quarter ended March
31, 2010, the Company recorded a charge of approximately $0.7 million for
changes in the value of derivative instruments, which included the above
mentioned $2.8 million charge, offset by favorable changes in the valuation of
other outstanding warrants of approximately $2.1 million.
The
Company recorded amortization of the aforementioned debt discount of $2,994
for three month period ended March 31, 2010 as interest expense, using the
effective interest method on the condensed consolidated statement of
operations. Unamortized debt discount at March 31, 2010 totaled $1.1
million.
As of the
February 2010 closing date, the Company incurred debt issuance costs of $1.4
million, representing warrants issued to purchase 2,120,000 shares with a fair
value of $1.2 million as a fee to STVI, in its capacity as a placement agent for
the transaction and other costs totaling $0.2 million. Such costs
have been classified as other assets in accordance with accounting for debt
issue costs (ASC 835-30) and are being amortized over the life of the
corresponding debt using the effective interest method. As of and for
the quarter ended March 31, 2010, amortization of such costs amounted to $3,187
as a charge to interest expense on the condensed consolidated statement of
operations.
11
VYTERIS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
7.
|
Termination
of Ferring Agreement
|
On
December 21, 2009, the Company received notice from Ferring of its termination
of the License and Development Agreement by and between the Company and Ferring
(“Agreement”), effective January 21, 2010. Pursuant to the
Agreement, upon a termination by Ferring, the following disposition of
intellectual property associated with the Agreement shall occur:
a)
|
all
licenses and other rights granted to the Company shall, subject to the
continued payment to Ferring of certain royalty payments under the
Agreement, be converted to and continue as exclusive, worldwide
irrevocable, perpetual, sub-licensable licenses to develop, make, have
made, use, sell, offer to sell, lease, distribute, import and export the
Product;
|
b)
|
all
licenses and other rights granted to Ferring under the Agreement shall be
terminated as of the effective date of the
termination;
|
c)
|
Ferring
shall grant to the Company an irrevocable, perpetual, exclusive,
royalty-free, sub-licensable license to practice certain intellectual
property jointly developed under the Agreement with respect to the
iontophoretic administration of infertility
hormone;
|
d)
|
Ferring
shall cease to use and shall assign to the Company all of its rights,
title and interest in and to all clinical, technical and other relevant
reports, records, data, information and materials relating exclusively to
the Product and all regulatory filings (including any NDA, 510(k) or
similar regulatory filing) relating exclusively to the Product and provide
the Company one copy of each physical embodiment of the aforementioned
items within thirty (30) days after such termination;
and
|
e)
|
Ferring
shall cease to use any Know-How, Information or Materials arising under
this Agreement to the extent such Know-How, Information or Materials is
owned by Ferring and shall promptly return to the Company all such
materials.
|
The
Company is in negotiations with Ferring regarding final disposition of matters
including sums owed by the Company to Ferring and release of liens on
intellectual property owned by the Company subject to Ferring’s
lien. As of March 31, 2010, the Company recorded $1.4 million in
accrued expenses and other in the condensed consolidated balance sheets for the
estimated amounts due to Ferring (see Subsequent Events Note 12).
8.
|
Related
Party Transactions
|
In
addition to the Promissory Note Due to a Related Party described in Note 5,
finders fees described in Note 6 and placement agent fees described in Note 12,
the Company had the following related party transactions:
·
|
At
March 31, 2010 and December 31, 2009, approximately $0.2 million is
included in interest payable and accrued expenses due to related party in
the accompanying condensed consolidated balance sheets for amounts owed to
STSG and STVI for certain expenses paid on behalf of the Company. There
were no such payments in 2010.
|
·
|
The
Company paid Russell Potts, one of its directors, approximately $5,400 for
the three months ended March 31, 2010, for consulting services and out of
pocket expenses.
|
12
VYTERIS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
9.
|
Stock-Based
Compensation
|
2005
Stock Option Plans
In April
2005, the Board of Directors and stockholders of the Company approved the 2005
Stock Option Plan (the “2005 Stock Option Plan”). Under the 2005 Stock Option
Plan, incentive stock options and non-qualified stock options to purchase shares
of the Company’s common stock may be granted to directors, officers, employees
and consultants. At adoption, a total of 193,460 shares of the Company’s common
stock were available for issuance pursuant to the 2005 Stock Option
Plan. On May 31, 2007, the Company’s Board of Directors voted unanimously
to increase the number of shares of Company stock available for issuance under
the Plan to 973,417.
Effective
as of March 31, 2010, the Company amended its 2005 Stock Option Plan to increase
the number of options available for grant under the plan pursuant to
authorization provided by the unanimous consent of its Board of
Directors. Specifically, the number of options available in its
2005 Stock Option Plan was increased to 20,000,000 options available to
grant.
Options
granted under the 2005 Stock Option Plan vest as determined by the Compensation
Committee of the Board of Directors (the “Compensation Committee”) and terminate
after the earliest of the following events: expiration of the option as provided
in the option agreement, termination of the employee, or ten years from the date
of grant (five years from the date of grant for incentive options granted to an
employee who owns more than 10% of the total combined voting power of all
classes of the Company stock at the date of grant). In some
instances, granted stock options are immediately exercisable into restricted
shares of common stock, which vest in accordance with the original terms of the
related options. If an optionee’s status as an employee or consultant changes
due to termination, the Company has the right, but not the obligation, to
purchase from the optionee all unvested shares at the original option exercise
price. The Company recognizes compensation expense ratably over the
requisite service period.
The
option price of each share of common stock shall be determined by the
Compensation Committee, provided that with respect to incentive stock options,
the option price per share shall in all cases be equal to or greater than 100%
of the fair value of a share of common stock on the date of the grant, except an
incentive option granted under the 2005 Stock Option Plan to a shareholder that
owns more than 10% of the total combined voting power of all classes of the
Company stock, shall have an exercise price of not less than 110% of the fair
value of a share of common stock on the date of grant. No participant may be
granted incentive stock options, which would result in shares with an aggregate
fair value of more than $100,000 first becoming exercisable in one calendar
year.
Outside
Director Stock Incentive Plans
2007
Directors’ Incentive Plan
On August
1, 2007, the Company formally adopted its 2007 Outside Director Cash
Compensation and Stock Incentive Plan (the “2007 Directors’ Incentive Plan”).
The 2007 Directors’ Incentive Plan, which replaced the 2005 Directors’ Incentive
Plan, increases the number of authorized shares under the 2007 Directors’
Incentive Plan to 333,333. As of December 31, 2009, the Company amended the 2007
Directors’ Incentive Plan pursuant to authorization provided by the unanimous
consent of its Board of Directors to increase the number of authorized shares
from 333,333 options to 2,583,333 options. As of March 31, 2010, the
Company issued 1,265,374 options to purchase shares of the Company’s common
stock under the 2007 Directors’ Incentive Plan. The 2007 Directors’ Incentive
Plan is being replaced with the 2010 Directors’ Incentive Plan in April
2010.
13
VYTERIS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
2010
Directors’ Incentive Plan
In March
2010, the Company’s Board of Directors unanimously approved the Company’s 2010
Outside Director Cash Compensation and Stock Incentive Plan (the “2010
Directors’ Incentive Plan”). The 2010 Directors’ Incentive Plan,
which is replacing the 2007 Directors’ Incentive Plan, increases the number of
authorized options under the Directors’ Incentive Plan from 2,583,333 options to
10,000,000 options.
Stock
option activity for all plans for the three month period ended March 31, 2010 is
as follows:
Number
of
Shares
|
Exercise
Price
Per Share
|
Weighted
Average
Exercise Price
|
Intrinsic
Value
|
|||||||||||||
Outstanding
at January 1, 2010
|
4,293,442 | 0.25 - 45.60 | 0.84 | - | ||||||||||||
Granted
|
11,744,723 | 0.35 – 0.65 | 0.50 | |||||||||||||
Exercised
|
- | - | - | |||||||||||||
Forfeited
|
(45,341 | ) | 0.29 - 45.60 | 0.74 | ||||||||||||
Outstanding
at March 31, 2010
|
15,992,824 | 0.25 - 45.60 | 0.79 | $ | 678,993 | |||||||||||
Exercisable
at March 31, 2010
|
5,568,960 | $ | 0.25 - $45.60 | $ | 1.37 | $ | 306,447 |
The
following table summarizes information about stock options outstanding and
exercisable under all plans at March 31, 2010:
Options
Outstanding at
March 31,
2010
|
Options
Exercisable at
March 31,
2010
|
|||||||||||||||||||||
Exercise Price
|
Number
of
Shares
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining
Contractual Life (years) |
Number
of
Shares
|
Weighted
Average
Exercise Price
|
|||||||||||||||||
$ | 0.25-18.60 | 15,807,262 | $ | 0.51 | 8.79 | 5,384,613 | $ | 0.59 | ||||||||||||||
$ | 18.61-21.75 | 86,536 | 19.73 | 2.14 | 86,542 | 19.73 | ||||||||||||||||
$ | 21.76-24.00 | 20,267 | 23.26 | 7.41 | 19,020 | 23.26 | ||||||||||||||||
$ | 24.01-31.50 | 17,016 | 29.65 | 4.06 | 17,036 | 29.65 | ||||||||||||||||
$ | 31.51-45.60 | 61,743 | 42.19 | 5.62 | 61,749 | 42.19 | ||||||||||||||||
15,992,824 | $ | 0.79 | 7.05 | 5,568,960 | $ | 1.37 |
The
following table summarizes the Company’s unvested stock awards under all plans
as of March 31, 2010 and 2009:
As of
March 31, 2010
|
As of
March 31, 2009
|
|||||||||||||||
Unvested
Stock Option Awards
|
Shares
|
Weighted
Average
Grant Date Fair Value
|
Shares
|
Weighted
Average
Grant Date Fair Value
|
||||||||||||
Unvested
at January 1,
|
1,757,308 | $ | 0.57 | 1,240,078 | $ | 0.69 | ||||||||||
Awards
|
11,744,723 | $ | 1.00 | - | - | |||||||||||
Forfeitures
|
- | - | (35,937 | ) | $ | 1.22 | ||||||||||
Vestings
|
(3,078,167 | ) | $ | 0.50 | (103,628 | ) | $ | 1.85 | ||||||||
Unvested
at March 31,
|
10,423,864 | $ | 0.57 | 1,100,513 | $ | 0.57 |
Stock
options available for grant under all stock option plans covered a total of
13,985,250 shares of common stock at March 31, 2010. Stock options
available for grant under the 2005 Stock Option Plan covered 8,680,499 shares of
stock, and the 2010 Outside Director Stock Incentive Plans covered 5,304,751
shares of stock at March 31, 2010.
14
VYTERIS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
The fair
value of stock-based awards was estimated using the Black-Scholes-Merton model,
or in the case of awards with market or performance based conditions, the
binomial model with the following weighted-average assumptions for stock options
granted in three month periods ended March 31, 2010 and 2009 is as
follows:
March
31,
|
||||||||
2010
|
2009
|
|||||||
(1)
|
||||||||
Expected
holding period
(years)
|
5.0 | - | ||||||
Risk-free
interest
rate
|
2.38 | % | - | |||||
Dividend
yield
|
0 | % | - | |||||
Fair
value of options
granted
|
$ | 0.36 | - | |||||
Expected
volatility
|
91.86 | % | - | |||||
Forfeiture
rate
|
15.38 | % | - |
(1) The
Company did not grant stock options in the three months ended March 31,
2009
The
Company’s computation of expected life is based on historical exercise and
forfeiture patterns. The interest rate for periods within the contractual life
of the award is based on the U.S. Treasury yield curve in effect at the time of
grant. The key factors in the Company’s determination of expected volatility are
historical and market-based implied volatility, comparable companies with longer
stock trading periods than the Company and industry benchmarks. The following
table sets forth the total stock-based compensation expense resulting from stock
options in the Company’s condensed consolidated statements of operations for the
three month periods ended March 31, 2010 and 2009:
March
31,
|
||||||||
2010
|
2009
|
|||||||
Research
and
development
|
$ | 209,195 | $ | 23,732 | ||||
General
and
administrative
|
966,430 | 105,719 | ||||||
Sales
and
marketing
|
8,744 | 7,444 | ||||||
Stock-based
compensation expense before income taxes
|
1,184,369 | 136,895 | ||||||
Income
tax
benefit
|
- | - | ||||||
Total
stock-based compensation expense after income taxes
|
$ | 1,184,369 | $ | 136,895 |
As of
March 31, 2010, $2.2 million of total unrecognized compensation cost related to
stock options is expected to be recognized over a weighted-average period of 1.4
years.
10.
|
Material
Agreements
|
Senior
Executive Employment Agreements
On
November 21, 2008, the Company entered into an employment agreement with Dr.
Hartounian effective as of effective as of May 1, 2008 with a term
expiring December 1, 2009, which was renewed and is currently set to
expire on November 30, 2011. Dr. Hartounian’s base salary is
$0.3 million per year and he is eligible for a bonus of up to 40% of his salary
payable in cash. In connection with the extension of the term of the
employment agreement, Dr. Hartounian is to be granted up to 7,423,970 options to
purchase Company common stock, with 2,598,390 options granted each immediately
and upon raising of $1.0 million by the Company (with the initial 5,196,780
options having been granted) and 2,227,191 options to be granted upon raising of
$7.0 million by the Company. All options granted shall vest as
follows: 35% immediately upon issuance and 65% quarterly over three
years from date of grant.
On
November 21, 2008, the Company entered into an employment agreement with Joseph
N. Himy effective as of May 1, 2008 with a term expiring December 1, 2009, which
is currently set to expire on November 30, 2011. Mr. Himy’s base
salary is $0.2 million per year and he is eligible for a bonus of up to 25% of
his salary payable in cash or stock. Mr. Himy is to be granted up to
2,227,191 options, with 779,517 options granted each immediately and upon
raising of $1.0 million by the Company (with the initial 1,559,034 options
having been granted) and 668,157 options to be granted upon raising of $7.0
million by the Company. All options granted shall vest as
follows: 35% immediately upon issuance and 65% quarterly over three
years from date of grant.
15
VYTERIS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Convertible
Note
On
September 30, 2009, the Company entered into a Settlement and Release Agreement
with 17-01 Pollitt Drive, L.L.C. (“Landlord”) with respect to this lease. Under
the settlement agreement the Company is to pay Landlord $0.5 million, which is
evidenced by the issuance of a five year interest only balloon note with
interest accruing at the rate of 6% per year. Upon a default by the Company
under this promissory note, the principal amount is increased to $0.6 million.
The note is convertible at the Landlord’s sole discretion into unregistered
common stock of the Company at the conversion price of $1.50 per
share. In exchange for the note, Landlord released the Company from
its obligations under the Company’s lease between Landlord and the
Company.
Other
11.
|
Loss
Per Share and Warrant Information
|
The
following table sets forth the computation of basic and diluted net loss
attributable to common stockholders per share for the three month periods ended
March 31, 2010 and 2009.
Three
Months Ended
March
31,
|
||||||||
2010
|
2009
|
|||||||
Numerator:
|
||||||||
Net
loss
|
$ | (3,206,293 | ) | $ | (1,662,401 | ) | ||
Denominator:
|
||||||||
Weighted
average shares:
|
||||||||
Basic
and diluted
|
62,640,753 | 7,282,801 | ||||||
Net
income (loss) per share:
|
||||||||
Basic
and diluted
|
$ | (0.05 | ) | $ | (0.23 | ) |
The
following table shows dilutive common share equivalents outstanding, which are
not included in the above historical calculations, as the effect of their
inclusion is anti-dilutive during each period.
As of March 31,
|
||||||||
2010
|
2009
|
|||||||
Convertible
preferred stock
|
- | 500,000 | ||||||
Convertible
debt
|
333,333 | 365,180 | ||||||
Warrants
|
16,498,089 | 4,008,377 | ||||||
Options
|
15,992,824 | 2,316,594 | ||||||
Total
|
32,824,246 | 7,190,151 |
16
VYTERIS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
The
following table summarizes information about warrants outstanding and
exercisable at March 31, 2010:
Warrants
Outstanding and Exercisable
At March
31, 2010
|
||||||||||||
Exercise Price
|
Number
of
Shares
|
Weighted
Average
Exercise Price
|
Expiration Dates
|
|||||||||
$
0.10-6.75
|
15,043,800 | $ | 2.35 | 2010 -2015 | ||||||||
$
6.79-11.25
|
852,706 | 7.46 | 2011- 2014 | |||||||||
$
15.90-18.75
|
7,500 | 18.75 | 2010- 2010 | |||||||||
$
13.49-22.50
|
566,681 | 20.06 | 2011- 2012 | |||||||||
$
28.50-45.00
|
26,005 | 38.07 | 2010-2013 | |||||||||
$
67.05-143.25
|
1,397 | 143.25 | 2010-2010 | |||||||||
$
0.10-143.25
|
16,498,089 | 1.71 | 2010-2014 |
12. Subsequent
Events
On April
9, 2010, the Company received notice from Ferring that it is in breach of its
obligations under the arrangements between the two entities for failure to
make payments to Ferring with respect to development costs, and Ferring demanded
payment in the amount of $1.7 million by April 30, 2010. Ferring has
agreed to forbear from exercising any remedies against us for a period of 30
days from April 30, 2010, thus extending the date by which payment must be made
to May 30, 2010. The Company intends to continue to work with Ferring to
arrive at a mutually acceptable resolution to the outstanding matters between
the two entities.
On May 6,
2010, the Company consummated a private placement to accredited investors
(“Investors”) of $0.7 million principal amount of Senior Subordinated
Convertible Promissory Notes due 2013 (the “2010 Notes”). The sale of
the 2010 Notes also included issuance to Investors of five-year warrants to
purchase an aggregate of 3,625,000 shares of our common stock with an exercise
price of $0.25 per share. Spencer Trask Ventures, Inc. acted as
placement agent in connection with the private placement. The 2010
Notes have the same terms as those issued in the February 2010 private
placement. This private placement transaction to accredited investors
is exempt from registration under the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof and Regulation D, promulgated
thereunder.
In
connection with the final closing, the Company received net proceeds of $0.6
million, after payment of an aggregate of $0.1 million of commissions and
expense allowance to the placement agent and other offering and related
costs. The placement agent also received warrants to purchase
1,450,000 shares of our common stock (725,000 warrants at an exercise price of
$0.20 and 725,000 warrants at an exercise price of $0.25) bearing substantially
the same terms as the Investor warrants.
17
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and
analysis should be read in conjunction with the other financial information and
condensed consolidated financial statements and related notes appearing elsewhere in
this Quarterly Report on Form 10-Q. This discussion contains
forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of a variety of factors,
including those discussed in “Risk Factors” and elsewhere in this Quarterly Report
on Form 10-Q.
Overview
Introduction
Vyteris,
Inc. (formerly Vyteris Holdings (Nevada), Inc.; the terms “Vyteris”, “we”,
“our”, “us” and the “Company” refer to each of Vyteris, Inc. incorporated in the
State of Nevada, its subsidiary, Vyteris, Inc. (incorporated in the State of
Delaware) and the consolidated company) has developed and produced the first
FDA-approved electronically controlled transdermal drug delivery system that
transports drugs through the skin comfortably, without needles. This platform
technology can be used to administer a wide variety of therapeutics either
directly into the skin or into the bloodstream. We hold approximately 50 U.S.
and 70 foreign patents relating to the delivery of drugs across the skin using
an electronically controlled “smart patch” device with electric
current.
Our
Technology
Our
active transdermal drug delivery technology is based upon a process known as
electrotransport, or more specifically, iontophoresis, the ability to transport
drugs, including peptides, through the skin by applying a low-level electrical
current. Our active patch patented technology works by applying a charge to the
drug-holding reservoir of the patch. This process differs significantly from
passive transdermal drug delivery which relies on the slow, steady diffusion of
drugs through the skin. A significantly greater number of drugs can be delivered
through active transdermal delivery than is possible with passive transdermal
delivery. Our technology can also be used in conjunction with
complementary technologies to further enhance the ability to deliver drugs
transdermally.
Market
Opportunity
We
believe there are a significant number of pharmaceutical drugs with substantial
annual sales for which the patents are due to expire by 2012. Based on our
analysis, there are currently a significant number of these and other
FDA-approved drugs that may be relatively easily formulated for transdermal
delivery and thus made eligible for new patent protection. We believe that the
application of our novel drug delivery technologies to such existing
therapeutics is an attractive means of prolonging the commercial viability of
many currently marketed drugs.
Liquidity
On March
31, 2010, our cash position was $1.7 million, and we had a working capital
deficit of $8.2 million. There is substantial doubt about our ability to
continue as a going concern. We implemented several cost reduction measures in
2009, including headcount and salary reductions, reducing the level of effort
spent on research and development programs, general decrease in overhead costs
and renegotiation of our cost structures with our vendors. In December 2009,
Ferring discontinued its collaborative effort with us for our joint infertility
project. On April 9, 2010, we received notice from Ferring that we
are in breach of our obligations under the arrangements between the two
entities for failure to make payments to Ferring with respect to
development costs and demanded payment in the amount of $1.7 million by April
30, 2010. We do not concur as to the calculation of the amount owed and
will endeavor to resolve the sum due with Ferring. Ferring has agreed
to forbear from exercising any remedies against us for a period of 30 days from
April 30, 2010, thus extending the date by which payment must be made to May 30,
2010. We intend to continue to work with Ferring to arrive at a mutually
acceptable resolution to the outstanding matters between the two
entities.
18
In March
2009, we sold (and then leased-back) our PMK 150 patch manufacturing machine to
Ferring for $1.0 million, of which $0.5 million was made available to us to
assist in funding operations. On October 30, 2009, the Company issued
3,000,000 shares of its common stock and 3,000,000 warrants to purchase its
common stock to an investor in a private placement transaction for a purchase
price of $0.6 million. In December 2009, we converted over $20.3
million of secured indebtedness and preferred stock into our common stock, and
we received a net cash payment of $2.1 million from the sale of our State of New
Jersey income tax credits resulting from our net operating losses. In
February 2010, we raised $1.1 million through the sale of senior secured
convertible debentures and warrants.
However,
unless we are able to raise additional funding, we may be unable to continue
operations. Especially in the current economic climate, additional
funding may not be available on favorable terms or at all. Failure to obtain
such financing would require management to substantially curtail operations,
which would result in a material adverse effect on our financial position and
results of operations. In the event that we do raise additional capital through
a borrowing, the covenants associated with existing debt instruments may impose
substantial impediments on us.
Business
Model
Our long
term viability is linked to our ability to successfully pursue new opportunities
with products that can be delivered by means of our smart patch technology, such
as those facing patent expiration. In addition to extended patent and clinical
usage, our platform may also be a useful tool for pharmaceutical and
biotechnology companies to reduce their research and development investment and
protect their brands against generics. Based upon these tenets, our
business model for achieving corporate growth focuses on three
areas: commercialization and revenue-development strategies,
technology initiatives and acquisition opportunities. By focusing on
all three areas during the balance of 2010, we seek to expand our capabilities
to generate revenues over the next several years.
Our
commercialization strategy is to develop near-term and future market
opportunities utilizing FDA-approved and marketed drugs (primarily peptides and
small molecule drugs) with our proprietary delivery technology. By targeting
compounds that may qualify for accelerated development and regulatory pathways
such as those implemented under Section 505(b)(2) of the Federal Food, Drug and
Cosmetic Act, we strive to develop and commercialize products that can reach the
market faster and at a reduced cost than the traditional development and
regulatory approval processes for new drugs.
Technology
initiatives are also under way to expand our drug delivery capabilities so that
we may be able to utilize our technology for a wider variety of pharmaceutical
applications. We are also looking for growth opportunities through
the acquisition of a late development-stage or revenue-generating complementary
business. We believe that there may be small private drug development and
delivery companies that would have an interest in the benefits of becoming part
of a public company, such as Vyteris, including access to the capital markets as
a public company and stockholder liquidity.
Given the
December 2009 termination by Ferring of its joint collaborative infertility
project with us, we have reevaluated our business strategy. We seek
to continue to streamline our operations and focus our resources on a narrow
breadth of projects geared to determine viability and/or sale and license of our
current in-house projects. We will also evaluate a finite number of
licensing and/or acquisition opportunities in an effort to bring in a technology
or product which is closer to commercialization, such as a complementary
technology appropriate for Phase III testing. Our business plan will
continue to evolve over the next few fiscal quarters as we evaluate in-house
projects as well as review appropriate outside opportunities.
Technology
Overview
of Electrotransport, or Active Transdermal Drug Delivery
Our
active transdermal drug delivery technology (also referred to as our smart patch
technology) is based on a process known as electrotransport, or more
specifically, iontophoresis, a process that transports drugs through the skin by
applying a low-level electrical current. Our patented technology works by
applying a charge to the drug-holding reservoir of the patch. A positive charge
is applied to a reservoir where a positively charged drug molecule is
held. Because like-charges repel, the drug molecules are forced out
of the reservoir and into the skin (the same process can occur when a negative
charge is applied to a reservoir containing a negatively charged drug
molecule).
19
Our
Approach to Iontophoresis
We have
developed a proprietary technology encompassing a series of significant
improvements to drug formulation and commercial manufacturing. We
used this technology with our first product LidoSite, and are currently in
various stages of testing this technology to deliver peptides and small
molecules. Many of our innovations center on the way we approach designing and
formulating electronically controlled drug delivery patches. Our
patches are pre-filled with the proper dosage of drug during the manufacturing
process. They are designed to be disposable after a single
application and are discreet in appearance. Further, we designed our
patches so that they can be quickly and cost-effectively mass-produced using
automated manufacturing processes.
To
complement our patch design, we approached the design of electronic controllers
with the goal of being small, wearable, simple to operate and programmable to
handle simple, as well as complex, drug delivery profiles. The dose
controller contains a miniature battery and circuitry, controlling delivery
rate, and is capable of recording information on the amount and time of drug
delivered. We believe the controllability and programmability offered by our
technology are distinct competitive advantages that will enable our products to
deliver more consistent and predicable results for a broad range of existing and
new drugs.
Significant
Accounting Policies
Our
discussion and analysis of our financial position and results of operations are
based upon our condensed consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. Our
significant accounting policies are more fully described in our Annual Report on
Form 10-K for the year ended December 31, 2009. The preparation of
these condensed consolidated financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported revenues and expenses during
the period.
We
consider certain accounting policies related to revenue recognition, accrued
expenses, stock-based compensation and deferred financing and other debt-related
costs to be significant to our business operations and the understanding of our
results of operations.
Revenue
Product
development revenue
In
accordance with ASC 605-45-15, we recognize revenues for the reimbursement of
development costs when it bears all the risk for selection of and payment to
vendors and employees.
Licensing
revenue
We use
revenue recognition criteria outlined in ASC 605-25.
Accordingly,
revenues from licensing agreements are recognized based on the performance
requirements of the agreement. Non-refundable up-front fees, where we have an
ongoing involvement or performance obligation, are generally recorded as
deferred revenue in the balance sheet and amortized into license fees in the
statement of operations over the term of the performance obligation. Subsequent
milestone payments received are either recognized immediately or ratably, over a
development period, depending on the nature of the milestone collaborative
agreement terms and accounting guidance for collaborative
transactions.
20
Accrued
Expenses
As part
of the process of preparing our consolidated financial statements, we are
required to estimate certain expenses. This process involves identifying
services that have been performed on our behalf and estimating the level of
service performed and the associated cost incurred for such service as of each
balance sheet date in our financial statements. Examples of estimated expenses
for which we accrue include professional service fees, contract service fees and
fees paid to contract research organizations in connection with the conducting
of clinical trials. Our estimates are most affected by our understanding of the
status and timing of services provided relative to the actual levels of services
incurred by such service providers. In the event that we do not identify certain
costs which have begun to be incurred or we under-estimate or over-estimate the
level of services performed or the costs of such services for a period, our
reported expenses for such period would be too low or too high. The date on
which certain services commence, the level of services performed on or before a
given date and the cost of such services are often estimated. We make these
estimates based upon the facts and circumstances known to us in accordance with
accounting principles generally accepted in the United States of
America.
Stock-based
Compensation
We
account for our stock based employee compensation plans under ASC 718-10 and ASC
505-50. ASC 718-10 and ASC 505-50 address the accounting for shared based
payment transactions in which an enterprise receives employee services for
equity instruments of the enterprise or liabilities that are based on the fair
value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. ASC 718-10 and ASC 505-50
require that such transactions be accounted for using a fair value based
method.
In
considering the fair value of the underlying stock when we grant options or
restricted stock, we consider several factors, including third party valuations
and the fair values established by market transactions. Stock-based compensation
includes estimates of when stock options might be exercised, forfeiture rates
and stock price volatility. The timing for exercise of options is out of our
control and will depend, among other things, upon a variety of factors,
including our market value and the financial objectives of the holders of the
options. We have limited historical data to determine volatility in accordance
with Black-Scholes-Merton modeling or other acceptable valuation models under
ASC 718-10 and ASC 505-50. In addition, future volatility is inherently
uncertain and the valuation models have its limitations. These estimates can
have a material impact on stock-based compensation expense in our consolidated
statements of operations but will have no impact on our cash flows. Therefore
determining the fair value of our common stock involves significant estimates
and judgments.
Deferred
Financing and Other Debt-Related Costs
Deferred
financing costs are amortized over the term of its associated debt
instrument. We evaluate the terms of the debt instruments to
determine if any embedded derivatives or beneficial conversion features
exist. We allocate the aggregate proceeds of the notes payable
between the warrants and the notes based on their relative fair values in
accordance with ASC 470-20-25. The fair value of the warrants issued
to note holders or placement agents are calculated utilizing the
Black-Scholes-Merton option-pricing model. We amortize the resultant
discount or other features over the terms of the notes through its earliest
maturity date using the effective interest method. Under this method, interest
expense recognized each period will increase significantly as the instrument
approaches its maturity date. If the maturity of the debt is
accelerated because of defaults or conversions, then the amortization is
accelerated.
Recently
Issued Accounting Standards
In
September 2009, the FASB ratified final Emerging Issues Task Force (“EITF”)
Issue 08-01, Revenue Arrangements with Multiple Deliverables (“EITF 08-01”).
EITF 08-1 will enable entities to separately account for individual deliverables
for many more revenue arrangements. By removing the criterion that entities must
use objective and reliable evidence of fair value in separately accounting for
deliverables, the EITF expects the recognition of revenue to more closely align
with the economics of certain revenue arrangements. EITF 08-01
applies to all deliverables in contractual arrangements in all industries in
which a vendor will perform multiple revenue-generating activities, except when
some or all deliverables in a multiple deliverable arrangement are within the
scope of other, more specific sections of the Codification and other sections of
ASC 605 on revenue recognition. Specifically, EITF 08-01 addresses
the unit of accounting for arrangements involving multiple
deliverables. It also addresses how arrangement consideration should
be allocated to the separate units of accounting, when applicable. EITF 08-01
requires a vendor to evaluate all deliverables in an arrangement to determine
whether they represent separate units of accounting. This evaluation
must be performed at the inception of an arrangement and as each item in the
arrangement is delivered. The adoption of this guidance will not have a material
impact on our condensed consolidated financial statements.
21
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities
on purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance became effective for us with the reporting period
beginning January 1, 2010, except for the disclosure on the roll forward
activities for Level 3 fair value measurements, which will become effective for
us with the reporting period beginning July 1, 2011. Other than requiring
additional disclosures, adoption of this new guidance did not have a material
impact on our condensed consolidated financial statements.
Consolidated
Results of Operations
The
following table sets forth the percentage increases or (decreases) in certain
line items on our condensed consolidated statements of operations for the three
months ended March 31, 2010:
Three
months ended
March 31,
2010
Versus
March 31,
2009
|
||||
Revenues
|
(98.2 | )% | ||
Research
and development
|
4.3 | % | ||
General
and
administrative
|
58.3 | % | ||
Facilities
realignment and impairment of fixed assets
|
(100.0 | )% | ||
Registration
rights penalty
|
(100.0 | )% | ||
Interest
(income) expense, net
|
(91.0 | )% | ||
Increase
in fair value of derivative financial instruments
|
100.0 | % | ||
Net
loss
|
(92.9 | )% |
Comparison
of the Three Month Periods Ended March 31, 2010 and 2009
Revenues
Revenues
were $14,000 for the three months ended March 31, 2010, compared to $0.8 million
for the comparable period in 2009, a decrease of 98.2% or $0.8 million. Our
revenue for the three-month period ended March 31, 2009 was primarily derived
from reimbursement of product development costs from Ferring. This decrease is
primarily attributable to the termination by Ferring of its License Agreement
with us in December 2009.
We are
currently reviewing the results of the Phase II clinical trials of the
infertility product to determine what degree of success was achieved based on
the goals of the trial; whether an additional Phase II trial may be needed; and
the feasibility of progressing to Phase III trials. We anticipate that any such
additional trials would be conducted by a strategic partner pursuant to a
development and marketing agreement.
22
Research
and development
Research
and development expenses were $0.8 million for both the three months ended March
31, 2010 and 2009. Research and development expenses for the three months ended
March 31, 2010; include a non-cash charge of $0.2 million for the fair value of
employee share-based payments as compared to approximately $23,000 for the
comparative period in the prior year.
General
and administrative
General
and administrative expenses totaled $1.7 million for the three months ended
March 31, 2010, as compared to $1.1 million for the comparable period in 2009,
an increase of 58.3%, or $0.6 million. General and administrative expense for
the three months ended March 31, 2010, included a non-cash charge of $1.0
million for the fair value of employee and director share-based payments as
compared to approximately $0.1 million for the comparative period in the prior
year.The decrease in general and administrative expenses, net of the non-cash
charge of $1.0 million, is primarily attributable to a reduction in investor
relations costs, legal fees, consulting costs and personnel costs, which include
reductions in salary, benefits and severance payments, consistent with
management’s strategy to reduce operating expenses in 2010.
Facilities
realignment and impairment of fixed assets
Expenses
for facilities realignment and impairment of fixed assets totaled $0.1 million
for the three months ended March 31, 2009. On September 30, 2009, we entered
into a Settlement and Release Agreement with the landlord of this facility and
accordingly we did not incur facility realignment expense in the three month
period ended March 31, 2010.
Registration
rights penalty
The
registration rights penalty for failure to register common stock issued totaled
$0.1 million for the three months ended March 31, 2009. On October
30, 2009, we entered into an Amendment and Waiver (“Amendment”) to the
Registration Rights Agreement dated September 29, 2004 among the Company,
Spencer Trask Ventures, Inc., a related party, Rodman & Renshaw, LLC, and
various shareholders. The Amendment required us to compensate investors for
registration rights penalties incurred of approximately $2.6 million. We issued
1,250,000 restricted shares of our common stock with a fair value of $0.8
million and warrants to purchase up to 1,250,000 restricted shares of our common
stock at an exercise price of $0.75 per share with an expiration date of October
30, 2012 in order to settle the accrued liquidated damages. Accordingly we did
not incur registration right penalty expense in the three month period ended
March 31, 2010.
Interest
(income) expense, net
Interest
(income) expense, net, was approximately $40,000 and $0.4 million for the
three-month periods ended March 31, 2010 and 2009, respectively. Third party
interest was de minimis for the three-month periods ended March 31, 2010 and
2009 as we converted approximately $20.3 million in senior secured convertible
debt and preferred stock into common stock in December. Interest
expense to related parties was de minimis in the three month period ended March
31, 2010 and totaled $0.4 million in the three month period ended March 31,
2009. There was de minimis interest expense due to third parties in the
three-month period ended March 31, 2010 as compared to $0.06 million for the
same period in the prior year.
During
three-month periods ended March 31, 2010 and 2009, interest expense was
consisted of the following:
Three
Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Non-cash
interest expense,
net
|
$ | 36,409 | $ | - | ||||
Coupon
and other
interest
|
4,017 | 297,732 | ||||||
Interest
on Series B convertible redeemable preferred stock
|
- | 150,000 | ||||||
Total
interest
expense
|
$ | 40,426 | $ | 447,732 |
23
Increase
in fair value of derivative financial instruments
We
performed an evaluation to determine whether our equity-linked financial
instruments (or embedded features) are indexed to our stock, including
evaluating the instruments contingent exercise and settlement provisions in
accordance with ASC Topic 815-10. This requirement affects the
accounting for our warrants that protect holders from a decline in the stock
price (or “down-round” provisions). This also affects the beneficial conversion
feature of the February 2010 Notes, which have an initial conversion price of
$0.20 per share (but such price decreases by 1.5% each 90 period that the
instrument is outstanding, and contains a reset provision in the event
subsequent equity raises are at a lower value). For the period ended March 31,
2010, we recorded an expense of $0.7 million in the condensed consolidated
statement of operations due to the changes in the fair value of our issued
warrants that contain such anti-dilution provisions and the variable beneficial
conversion feature, using the Black-Scholes-Merton option-pricing
model.
Liquidity
and Capital Resources
The
condensed consolidated financial statements have been prepared assuming that we
will continue as a going concern; however, we had cash and cash equivalents of
$1.7 million and a working capital deficit of $8.2 million, as of March 31,
2010, which are not sufficient to allow us to continue operations without
additional funding, especially given the fact that the Company has approximately
$2.2 million in accounts payable which are more than 60 days past due, with
increasing numbers of creditors either making claims and/or commencing
litigation against us. No assurance can be given that we will be successful in
arranging additional financing needed to continue the execution of our business
plan, which includes the development of new products. Failure to obtain such
financing may require management to substantially curtail operations, cease
operating our business or file for bankruptcy, which would result in a material
adverse effect on our financial position and results of operations. Since
February 2008, our primary source of financing has been loans, development fees
and milestone payments from our collaborative partner, Ferring. In December
2009, Ferring terminated its License Agreement with us and thus discontinued its
collaborative effort for their joint infertility project. These factors raise
substantial doubt about our ability to continue as a going concern. The
condensed consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that might occur if we
are unable to continue in business as a going concern.
Cash
flows from operating activities
For the
three-month period ended March 31, 2010, net cash used in operating activities
was $1.3 million, as compared to $0.4 million of net cash used in operating
activities in the comparable period in the prior year. The increase in net cash
used in operating activities for the three month period ended March
31, 2010 as compared to same period in the prior year is primarily due to
Ferring’s termination of its License Agreement with us in December 2009 and
discontinuance of reimbursement of our product development expenditures under
the Agreement. We received $1.0 million of such reimbursement of
product development expenses in the three month period ended March 31,
2009.
During
the three-month period ended March 31, 2010, we had a net loss of $3.2 million
and a $0.1 million increase in operating assets and liabilities which was
partially offset by an increase of $1.9 million of non-cash items resulting in
net cash used in operating activities of $1.3 million. During the three-month
period ended March 31, 2009, we had a net loss of $1.7 million partially offset
by approximately $0.4 million of non-cash items and a $0.9 million increase in
operating assets and liabilities resulting in net cash used in operating
activities of $0.8 million. The increase in operating assets and liabilities is
primarily due to a $1.0 million increase in accrued expenses and other
liabilities, $0.4 million increase in interest payable and accrued expenses to
related parties partially offset by an increase in accounts receivable of $0.6
million.
24
Until our
business development activities are successful, we shall continue to utilize
more cash in operating activities than is generated, and this trend may increase
in the future as we engage in increased business development activities.
Therefore, we will be dependent upon cash flows from financing activities to
fund our operations for the foreseeable future.
Cash
flows from investing activities
For the
three-month period ended March 31, 2010 and 2009, we did not incur any cash
expenditures in investing activities as we significantly reduced variable
spending as part our cost reduction initiatives.
Cash
flows from financing activities
For the
three-month period ended March 31, 2010, net cash provided by financing
activities was $0.9 million, as compared to $0.3 million of net cash provided by
financing activities in the comparable period in the prior year. During the
three-month period ended March 31, 2009, we received net proceeds of $0.6
million from the sale of our PMK 150 Patch manufacturing machine which was
partially offset by the repayment of $0.3 million of senior secure convertible
debentures due to Ferring. During the three-month period ended March 31,
2010, we sold to accredited investors $1.1 million principal amount
of Senior Subordinated Convertible Promissory Notes due 2013 which
was partially offset by $0.2 million in related debt issuance
costs.
Until our
business development efforts are sufficiently successful to yield a transaction
that provides us with significant milestone payments and research and
development expense reimbursements, we will be largely dependent upon financing
activities to cover our operating costs.
Financing
History 2009 and 2010
In March
2009, we entered into a transaction with Ferring whereby they agreed to fund the
first half of the 2009 development budget up to $3.3 million, in exchange for
which we granted Ferring a senior security interest in our assets (which Ferring
has agreed to subordinate to the security interest of new third party lenders
for a value of over $3.3 million) and which security interest expires at the
earlier of the date when we deliver patches required for Phase III testing and
May 31, 2010.
Ferring
also agreed to buy our PMK 150 machine for $1.0 million, of which
$0.5 million was paid at closing (half to satisfy outstanding senior
secured convertible debentures due to Ferring) and $0.3 million was paid on May
14, 2009 (part to satisfy accrued and unpaid interest on loans from Ferring) and
which has been leased back to us at a rental amount of $1,000 per month. We
account for the lease of the PMK 150 machine as an operating lease and are
recognizing the deferred gain on the sale of the machine over the 10 year
lease.
Termination
of Ferring Agreement
On
December 21, 2009, we received notice from Ferring of its termination of the
License and Development Agreement by and between us and Ferring (“Agreement”),
effective January 21, 2010.
Pursuant
to the Agreement, upon a termination by Ferring, the following disposition of
intellectual property associated with the Agreement shall occur:
1)
|
all
licenses and other rights granted to the Company shall, subject to the
continued payment to Ferring of certain royalty payments under the
Agreement, be converted to and continue as exclusive, worldwide
irrevocable, perpetual, sub-licensable licenses to develop, make, have
made, use, sell, offer to sell, lease, distribute, import and export the
Product;
|
2)
|
all
licenses and other rights granted to Ferring under the Agreement shall be
terminated as of the effective date of the
termination,
|
25
3)
|
Ferring
shall grant to the Company an irrevocable, perpetual, exclusive,
royalty-free, sub-licensable license to practice certain intellectual
property jointly developed under the Agreement with respect to the
iontophoretic administration of infertility
hormone;
|
4)
|
Ferring
shall cease to use and shall assign to us all of its right, title and
interest in and to all clinical, technical and other relevant reports,
records, data, information and materials relating exclusively to the
Product and all regulatory filings (including any NDA, 510(k) or similar
regulatory filing) relating exclusively to the Product and provide to us
one copy of each physical embodiment of the aforementioned items within
thirty (30) days after such termination;
and
|
5)
|
Ferring
shall cease to use any Know-How, Information or Materials arising under
this Agreement to the extent such Know-How, Information or Materials is
owned by Ferring and shall promptly return to us all such
materials.
|
On April
9, 2010, we received notice from Ferring that we are in breach of our
obligations under the arrangements between the two entities for failure to
make payments to Ferring with respect to development costs, and Ferring demanded
payment in the amount of $1.7 million by April 30, 2010. Ferring has
agreed to forbear from exercising any remedies against us for a period of 30
days from April 30, 2010, thus extending the date by which payment must be made
to May 30, 2010. We intend to continue to work with Ferring to arrive at a
mutually acceptable resolution to the outstanding matters between the two
entities.
Other
Financings
October
30, 2009 Private Placement
On
October 30, 2009, we issued 3,000,000 shares of our common stock and 3,000,000
warrants to purchase our common stock to an investor for a purchase price of
$0.6 million in a transaction exempt from registration under Section 4(2) of the
Securities Act of 1933. The warrants are exercisable into shares of our common
stock at an exercise price of $0.20 per share, and bear a term of five years
from the date of closing. The warrants contain a cashless exercise
provision and “full ratchet” anti-dilution provisions. We paid fees in the
amount of $0.1 million and issued a total of 1,200,000 warrants allocated as
follows: (i) 600,000 warrants representing 20% of the common stock issued to
investors and (ii) 600,000 warrants representing 20% of the warrants issued to
investors in connection with this private placement recorded as a reduction of
equity as a cost of the transaction. All warrants issued contain terms identical
to the terms of the warrants issued to the investors.
Proceeds
from previously approved sale of State of New Jersey net operating tax
losses
On
December 23, 2009, we consummated a non-dilutive capital raise in the net amount
of $2.1 million. The State of New Jersey approved the sale of our prior year’s
state net operating tax losses and research tax credits through the New Jersey
Economic Development Authority (NJEDA). The funding will be used for operations
and capital expenditures in accordance with rules, regulations and stipulations
set forth by the New Jersey program.
February
2010 Senior Subordinated Convertible Promissory Notes
On
February 2, 2010, we sold to accredited investors (“Investors”) $1.1
million principal amount of Senior Subordinated Convertible Promissory Notes due
2013 (the “February 2010 Notes”). The February 2010 Notes bear no
interest and are convertible into our common stock at the option of the
Investors anytime at an initial conversion price of $0.20 per
share. The conversion price automatically reduces by 1.5% of the
conversion price after each 90 day period that the February 2010 Notes are
outstanding, and additionally, the conversion price resets in the event of a
subsequent issuance of stock at a lower price than the then effective conversion
price. In addition, the February 2010 Notes automatically convert into our
common stock if the closing bid price of our common stock equals or exceeds 300%
of the conversion price for a period of twenty consecutive trading
days. The sale of the February 2010 Notes also included issuance to
Investors of five-year warrants to purchase an aggregate of 5,300,000 shares of
our common stock with an exercise price of $0.20 per share. In conjunction
therewith, we provided customary “piggyback” registration rights for a 24-month
period to the Investors with respect to the shares of common stock underlying
the notes and warrants. This private placement transaction to accredited
investors is exempt from registration under the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof and Regulation D, promulgated
thereunder.
26
We
received net proceeds of $0.9 million after payment of an aggregate of $0.1 of
commissions and expense allowance to Spencer Trask Ventures, Inc. (“STVI”) a
related-person of STSG, a principal stockholder of the Company, as well as one
finder, and approximately $43,000 of other offering and related
costs. STVI and the finders also received in the aggregate warrants
to purchase 2,120,000 shares of our common stock bearing substantially the same
terms as the Investor warrants.
May
2010 Senior Subordinated Convertible Promissory Notes
On May 6,
2010, we consummated a private placement to accredited investors (“Investors”)
of $0.7 million principal amount of Senior Subordinated Convertible Promissory
Notes due 2013 (the “2010 Notes”). The sale of the 2010 Notes also
included issuance to Investors of five-year warrants to purchase an aggregate of
3,625,000 shares of our common stock with an exercise price of $0.25 per
share. Spencer Trask Ventures, Inc. acted as placement agent in
connection with the private placement. The 2010 Notes have the same
terms as those issued in the February 2010 private placement. This
private placement transaction to accredited investors is exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof and Regulation D, promulgated thereunder.
In
connection with the final closing, we received net proceeds of $0.6 million,
after payment of an aggregate of $0.1 million of commissions and expense
allowance to the placement agent and other offering and related
costs. The placement agent also received warrants to purchase
1,450,000 shares of our common stock (725,000 warrants at an exercise price of
$0.20 and 725,000 warrants at an exercise price of $0.25) bearing substantially
the same terms as the Investor warrants.
Cash
Position
See
“Liquidity and Capital Resources” under “Management’s Discussion and Analysis of
Financial Condition And Results of Operations” for information on our cash
position.
Contractual
Obligations and Other Commitments
Our
contractual obligations and commitments include obligations associated with
capital and operating leases, manufacturing equipment, and employee agreements
as set forth in the table below:
Payments due by Period as of March
31, 2010
|
||||||||||||||||||||
Total
|
Less
than
1 Year
|
1-3 Years
|
3-5 Years
|
More
than 5 Years
|
||||||||||||||||
Operating
lease obligations
|
$ | 706,484 | $ | 404,263 | $ | 302,221 | $ | — | $ | — | ||||||||||
New
patch manufacturing machine
|
172,198 | 172,198 | — | — | — | |||||||||||||||
Capital
leases obligations
|
51,099 | 51,099 | — | — | — | |||||||||||||||
Distribution
agreement
|
91,775 | 91,775 | — | — | — | |||||||||||||||
Due
to consultant
|
108,333 | 108,333 | — | — | — | |||||||||||||||
PMK
150 lease agreement
|
107,000 | 12,000 | 24,000 | 24,000 | 47,000 | |||||||||||||||
Debt
obligations (1)
|
3,310,000 | 1,750,000 | 1,060,000 | — | 500,000 | |||||||||||||||
Advisory
agreement
|
67,500 | 67,500 | — | — | — | |||||||||||||||
Total
|
$ | 4,614,389 | $ | 2,657,168 | $ | 1,386,221 | $ | 24,000 | $ | 547,000 |
(1)
Debt obligations are summarized as follows:
27
Lender
|
Amount
|
Due Date
|
Interest Rate
|
||||||
Senior
subordinated convertible
debentures
|
$ | 1,060,000 |
February
2013
|
- | |||||
Spencer
Trask (subordinated
convertible
notes)
|
1,750,000 |
December
2012
|
6 | % | |||||
Convertible
notes
|
500,000 |
August
2014
|
6 | % | |||||
Total
|
$ | 3,310,000 |
We are
required to pay Becton Dickinson a royalty in respect of sales of each
iontophoresis product stemming from intellectual property received by us from
Becton Dickinson as part of our formation. For each such product, on
a country-by-country basis, that obligation continues until the later of 10
years after the date of the first commercial sale of such product in a country
and the date of the original expiration of the last-to-expire patent related to
such product granted in such country. The royalty, which is to be
calculated semi-annually, will be equal to the greater of 5% of all direct
revenues, as defined below, or 20% of all royalty revenues, with respect to the
worldwide sales on a product-by-product basis. “Direct revenues” are
the gross revenues actually received by us from the commercial sale of any
iontophoresis product, including upfront payments, less amounts paid for taxes,
duties, discounts, rebates, freight, shipping and handling charges or certain
other expenses. “Royalty revenues” are the gross revenues actually
received by us from any licensing or other fees directly relating to the
licensing of any iontophoresis product, including upfront payments, less amounts
paid for taxes, duties, discounts, rebates, freight, shipping and handling
charges and certain other expenses. There was no accrued royalty in the
condensed consolidated balance sheet as of March 31, 2010.
28
Forward-Looking
Information
This
Quarterly Report on Form 10-Q contains
forward-looking statements (within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended). When used in this Quarterly Report on Form 10-Q, the words
“anticipate,” “believe,” “estimate,” “will,” “plan,” “seeks,” “intend,” and
“expect” and similar expressions identify forward-looking statements. Although
we believe that our plans, intentions, and expectations reflected in any
forward-looking statements are reasonable, these plans, intentions, or
expectations may not be achieved. Our actual results, performance, or
achievements could differ materially from those contemplated, expressed, or
implied, by the forward-looking statements contained in this Quarterly Report
on Form 10-Q.
Important factors that could cause actual results to differ materially from our
forward looking statements are set forth in this Quarterly Report on Form 10-Q, including
under the heading “Risk Factors.” All forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements set forth in this Quarterly Report on Form 10-Q. Except as
required by federal securities laws, we are under no obligation to update any
forward-looking statement, whether as a result of new information, future
events, or otherwise.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
exposure to market risk for changes in interest rates relates primarily to the
market-driven increase or decrease in interest rates, and the impact of those
changes on the our ability to realize a return on invested or available funds.
We ensure the safety and preservation of our invested principal funds by
limiting default risk, market risk and reinvestment risk. We mitigate default
risk by investing in commercial checking and savings accounts.
ITEM
4T. CONTROLS AND PROCEDURES
A.
|
Disclosure
|
As of the
end of the period covered by this Quarterly Report on Form 10-Q, management
performed, with the participation of our Principal Executive Officer and
Principal Accounting Officer, an evaluation of the effectiveness of our
disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act. Our disclosure controls and procedures are designed to
ensure that information required to be disclosed in the report we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the SEC’s forms, and that such information is
accumulated and communicated to our management including our Principal Executive
Officer and our Principal Accounting Officer, to allow timely decisions
regarding required disclosures. Based on the evaluation above, our Principal
Executive Officer and our Principal Accounting Officer concluded that, as of
March 31, 2010, our disclosure controls and procedures were not
effective.
B.
|
Changes
in Internal Control Over Financial
Reporting
|
During
the quarter ended March 31, 2010, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
From time
to time, we are involved in lawsuits, claims, investigations and proceedings,
including pending opposition proceedings involving patents that arise in the
ordinary course of business. There are no matters pending that we expect to have
a material adverse impact on our business, results of operations, financial
condition or cash flows except for approximately $0.7 million in accounts
payable collection claims and litigation. Unless we are able to
obtain sufficient funds to commence settlement of outstanding accounts payable,
these numbers of claims and litigation are likely to
increase.
29
ITEM
1A. RISK FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this report, as well as all other information
included in all other filings, incorporated herein by reference, when evaluating
the Company and its business. We only state those risk factors which may have
changed from our 10-K filed for the year ended December 31, 2009. If
any of the following risks actually occurs, our business, financial condition,
and results of operations could suffer. In that case, the price of our common
stock could decline and our stockholders may lose all or part of their
investment.
RISKS
RELATED TO OUR BUSINESS
We
continue to experience a severe, continuing cash shortage and without sufficient
additional financing we may be required to cease operations, and this
demonstrates uncertainty as to our ability to continue as a going
concern.
As of
March 31, 2010, our cash and cash equivalents amounted to $1.7 million. Our
revenue has been de minimis, other than product development expense
reimbursement from Ferring (which was discontinued in December 2009), and we
have been dependent upon such reimbursement of development expenses to fund our
operations. As of March 31, 2010, our current liabilities exceeded
our current assets by approximately $8.2 million, and we have approximately $2.2
million in outstanding accounts payable which are over 60 days past due. If we do not
continue to raise capital until we generate sufficient cash flow from operations
to cover this working capital deficit, we may be required to discontinue or
further substantially modify our business, in addition to the substantial cost
cutting measures that have been implemented in the last two years. We
cannot be certain that additional financing will be available to us on favorable
terms when required, if at all. The failure to raise needed funds could
have a material adverse effect on our business, financial condition, operating
results and prospects. Additionally, we face mounting claims and
litigation from our vendors and other parties to which we owe money, and we do
not have sufficient funds to pay such payables and/or to defend litigation which
may arise from nonpayment. These factors raise substantial doubt about our
ability to continue as a going concern. The report of the independent registered
public accounting firm relating to the audit of our consolidated financial
statements for the year ended December 31, 2009 contains an explanatory
paragraph expressing uncertainty regarding our ability to continue as a going
concern because of our operating losses and our need for additional capital.
Such explanatory paragraph could make it more difficult for us to raise
additional capital and may materially and adversely affect the terms of any
future financing that we may obtain.
We
have never been profitable, we may never be profitable, and, if we become
profitable, we may be unable to sustain profitability.
From
November 2000 through March 31, 2010, we incurred net losses in excess of $217.5
million, as we have been engaged primarily in clinical testing and development
activities. We have never been profitable, we may never be profitable, and, if
we become profitable, we may be unable to sustain profitability. We expect to
continue to incur significant losses for the foreseeable future and will
endeavor to finance our operations through sales of securities and incurrence of
indebtedness, of which there can be no assurance.
Ferring’s
recent termination of its License and Development Agreement with us could have a
material adverse effect on us.
Ferring’s
recent termination of its License and Development Agreement with us presents
several risks.
(i) Advances
made to us by Ferring pursuant to various Ferring agreements were our principal
source of revenues since 2006. Unless we are able to secure another
source of revenues, we will be dependent upon proceeds from financings to fund
our operations until alternative sources of revenue develop.
(ii) Unless
we are able to secure an alternative development partner for our drug delivery
product for female infertility or are otherwise able to continue development of
this product on our own, we will in all likelihood have to abandon this product
line, which would likely have a material adverse effect on us both with respect
to our ability to derive a stream of revenues and our ability to bring a product
to market within the time frames previously anticipated by us.
30
(iii)
On April 9, 2010, we received notice from Ferring that we are in breach of our
obligations under the arrangements between the two entities for failure to
make payments to Ferring with respect to development costs, and Ferring demanded
payment in the amount of $1.7 million by April 30, 2010. Ferring has
agreed to forbear from exercising any remedies against us for a period of 30
days from April 30, 2010, thus extending the date by which payment must be made
to May 30, 2010. We intend to continue to work with Ferring to arrive at a
mutually acceptable resolution to the outstanding matters between the two
entities. Due to the March 2009 financing with Ferring, we granted
Ferring a first lien on all of our assets. If we are not able to pay
Ferring the amounts due by May 30, 2010 or arrive at another mutually acceptable
arrangement, Ferring could exercise legal remedies against us, including, but
not limited to, foreclosing on our assets.
Our
sale of a significant number of shares of our common stock, convertible
securities or warrants or the issuance or exercise of stock options could
depress the market price of our stock.
The
market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market or the perception
that substantial sales could occur because of our sale of common stock,
convertible securities or warrants, or the issuance or exercise of stock
options. These sales also might make it difficult for us to sell equity
securities in the future at a time when, and at a price which, we deem
appropriate.
As of
March 31, 2010, we had stock options to purchase 15,992,737 shares of our common
stock outstanding, of which options to purchase 5,568,960 shares were
exercisable. Also outstanding as of the same date were warrants exercisable
for 16,498,089 shares of common stock. Exercise of any current or
future outstanding stock options or warrants could harm the market price of our
common stock.
We
are a controlled company and our majority shareholder may take actions adverse
to the interests of other shareholders
As of
March 31, 2010, Spencer Trask Specialty Group, LLC or STSG, beneficially owned
approximately 82.8% of our issued and outstanding common stock on a fully
diluted basis. Due to this stock ownership, we are controlled by STSG and deemed
a “controlled corporation”. This control occurred as a result of the December
22, 2009 restructuring and conversion into common stock of over $20.3 million of
preferred stock and senior secured debt that we owed to STSG. STSG
may take actions that conflict with the interests of other
shareholders. Due to STSG’s voting control of our common stock, STSG
has substantial control over us and has substantial power to elect directors and
to generally approve all actions requiring the approval of the holders of our
voting stock.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
|
None.
|
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
31
ITEM
6. EXHIBITS
Item
6(a)
|
Exhibits
|
10.158
|
2010
Outside Directors Cash Compensation and Stock Incentive
Plan
|
10.159
|
Form
of Subscription Agreement for 0% Senior Subordinated Convertible
Promissory Notes
|
|
|
10.160
|
Form
of 0% Senior Subordinated Convertible Promissory Note
|
10.161
|
Form
of Warrant issued in connection with Form of 0% Senior Subordinated
Convertible Promissory Notes
|
10.162
|
Form
of Security Agreement for 0% Senior Subordinated Convertible Promissory
Notes
|
31.1
|
Certification
by the Principal Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
|
31.2
|
Certification
by the Principal Accounting Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
|
32.1
|
Certification
by the Principal Executive Officer pursuant to 18 U.S.C. Section
1350.
|
32.2
|
Certification
by the Principal Accounting Officer pursuant to 18 U.S.C. Section
1350.
|
SIGNATURE
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
Vyteris,
Inc.
|
|||
Date: May
14,
2010
|
|
/s/ Haro Hartounian | |
Haro Hartounian | |||
Principal Executive Officer | |||
May 14, 2010 | /s/ Joseph Himy | ||
Joseph Himy | |||
Principal Accounting Officer |
32
EXHIBIT
INDEX
Item
No.
|
Description
|
10.158
|
2010
Outside Directors Cash Compensation and Stock Incentive
Plan
|
10.159
|
Form
of Subscription Agreement for 0% Senior Subordinated Convertible
Promissory Notes
|
|
|
10.160
|
Form
of 0% Senior Subordinated Convertible Promissory Note
|
10.161
|
Form
of Warrant issued in connection with Form of 0% Senior Subordinated
Convertible Promissory Notes
|
10.162
|
Form
of Security Agreement for 0% Senior Subordinated Convertible Promissory
Notes
|
31.1
|
Certification
by the Principal Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
|
31.2
|
Certification
by the Principal Accounting Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
|
32.1
|
Certification
by the Principal Executive Officer pursuant to 18 U.S.C. Section
1350.
|
32.2
|
Certification
by the Principal Accounting Officer pursuant to 18 U.S.C. Section
1350.
|
33