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Vyteris,
Inc.
13-01
Pollitt Drive
Fair
Lawn, NJ 07410
November
8, 2010
VIA
EDGAR
Jim B.
Rosenberg
Senior
Assistant Chief Accountant
United
States Securities and Exchange Commission
Washington,
D.C. 20549
Form 10-K for the Fiscal Year Ended
December 31, 2009
Filed March 25, 2010
Form 10-Q for the Period Ended June 30,
2010
File Number: 000-32741
Dear Mr.
Rosenberg:
We are in receipt of comments given
telephonically to our counsel, Jolie Kahn, by Tabatha Akens, on October 25,
2010. We thank you for taking the time to review the filings and
provide your comments, in our efforts to fully comply with SEC regulations and
also to improve the quality of our disclosure documents.
In order to fully respond to your
letter and for ease of reference, we have included your comments (bolded) and
each of our responses to your comments.
1.
Please refer to your response to prior comment 1.
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Please provide proposed
revisions to your disclosure clarifying the information provided in your
response.
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Additionally, state that the
impact of the down round protection and the lack of marketability discount
is 5% - 10%. Please clarify how this range
was determined.
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Lastly, please confirm, if
true, that using the correct assumptions would not have a material impact
on your operations for the year ended December 31, 2009 and the period
ended June 30, 2010.
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As to the
first
bullet point,
the proposed disclosure, subject to completion of the SAS No. 100 review
by our auditors, is as follows:
At
September 30, 2010, the Company has recorded the fair value of the derivative
liabilities of $10.2 million, which consists of two components:
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the
fair value of the warrant liability amounted to $5.5 million based on a
binomial pricing model of weighted average probabilities of potential
down-round scenarios for our securities using similar assumptions as noted
in Footnote 10 of our condensed consolidated financial statements for the
period ended September 30, 2010 for the valuation of stock options, except
that the value of the underlying common stock has been reduced by 10% to
reflect a “lack of marketability” discount arising since the underlying
shares issuable upon exercise of the warrant are restricted from resale
under Section 5 of the Securities Act of 1933 and subject to legend
removal under Rule 144; and
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the
fair value of the convertible debt conversion feature amounted to $4.7
million utilizing a level 3 market value based on pricing methodologies
used to determine conversion features, which includes determining the fair
value of the Company’s stock as of September 30, 2010. Since the
shares underlying the convertible debt may be subject to legend removal
under Rule 144 by “tacking back” to the date of the original note
issuance, it is not appropriate to apply a “lack of marketability”
discount to the quoted stock price at the end of the measurement
period.
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As a
result of the change in the fair value of derivative instruments, the Company
recognized a $0.5 million and $10.2 million loss on derivative financial
instruments for the three and nine month periods ended September 30, 2010,
respectively, on the condensed consolidated statement of
operations.
As to
the second
bullet point, we determined the
incremental value of the down round protection feature of the warrants at June
30, 2010 as follows:
At June
30, 2010, the Company recorded the fair value of derivative liabilities,
including liabilities for warrants that incorporate down-round
protection. Subsequently, the Company worked with an
external specialist to estimate the fair value of the warrants as of that date,
giving consideration to the impact on value of both the down-round
protection rights of the warrants and the restricted (or non-marketable) nature
of the underlying common stock. These factors had not been taken into
consideration in the Company’s original fair value estimates.
The
Company and the specialist used a probability weighted expected
return method to value the warrants, incorporating information from Company
management regarding the probability and timing of down-round financing as of
the measurement date. Specifically, for each warrant class, call
option values were developed under three scenarios: (1) no down-round financing
(assigned a 70% probability); (2) down-round financing at $0.20 per share
(assigned a 15% probability); (3) down-round financing at $0.15 per share
(assigned a 15% probability). The probability of outcomes was determined
based upon management's good faith estimates of possible pricing levels based
upon the 12 months trading history of Vyteris' common stock of $0.21 to $0.85.
The option pricing method used in each of the three scenarios was an
unmodified binomial model. Option pricing inputs were the same
as those used by the Company in its valuation of the warrants as of June 30,
2010, and disclosed by the Company in connection with its valuation of employee
stock options, except that a discount of 10% was applied to the stock price
input, to reflect the lack of marketability of the unregistered common shares
(to reflect the fact that the
shares are not freely tradable until the expiration of the Rule 144 holding
period ) underlying the warrants. The 10% discount was
estimated based the specific restrictions applying to the subject shares and
market data reflecting discounted sales prices of comparable restricted
stocks.
Using
these methods, inputs and assumptions, the concluded fair values of the warrant
classes with $0.20 exercise prices, were approximately 10% lower than the values
calculated by the Company for the corresponding warrants as of June 30, 2010
using a different methodology. The concluded fair values of the
warrant classes with $0.25 exercise prices were approximately 3% higher than the
values calculated by the Company as of June 30, 2010, using a different
valuation methodology. Taken in the aggregate, the differences in
fair value of the warrants were not material for financial reporting
purposes.
As to
the third
bullet point,
our evaluation of the valuation of the warrants with the down-round
protection using the appropriate methodology (using the probability weighted
average of down round assumptions versus a static binomial pricing model) has
yielded the conclusion that the warrants have been historically undervalued by
approximately 10% (8.7%), and that the valuation using the proper assumption of
the underlying share valuation (using a 10% discount to reflect the fact that
the shares are not freely tradable until the expiration of the Rule 144 holding
period) yielded the conclusion that the warrants have been historically
overvalued by approximately 10%. Thus, given that these two differences
essentially offset (difference of 1.3%) and the resultant immateriality of the
difference in the valuations had we used the correct assumptions, we have
concluded that using the correct assumptions and methodology would not have had
a material impact on the results of operations for the periods ended December
31, 2009 or June 30, 2010. However, commencing with our Form 10-Q for the
period ending September 30, 2010, we will utilize a binomial valuation model in
valuing these warrants and any future securities that may contain a “down round”
protection feature, and report the value of those securities as a result of the
binomial valuation. We will also adjust the market value assumption to
reflect the lack of marketability, as applicable.
As noted
above, we have concluded the impact of the down round protection and the lack of
marketability discount factors has not been material to previously presented
financial statements, therefore we would suggest including the disclosures in
future filings.
2.
With respect to your response to our prior comment 2, please provide the
proposed revisions to your disclosure that you intend to include assuming the
deficiencies noted in your response exist.
During
the quarter ended September 30, 2010, there have been no changes in our internal
controls or in other factors that could affect any corrective actions with
regard to deficiencies and material weaknesses with respect to internal controls
over financial reporting. As there has been no change in our internal
controls since disclosure in our Form 10-K for the year ending December 31,
2009, filed with the Securities and Exchange Commission, on March 25, 201,0 with
regard to segregation of accounting duties, we reiterate the following material
weakness which also existed as of December 31, 2009.
Segregation of
Duties
We
currently have accounting staff limited to our chief financial officer and two
support staff members. Limited resources in this area may not provide
sufficient staffing for internal control purposes. This resulted in a
couple of proposed journal entries resulting from the audit process to correct
the recorded balances in our general ledger. In order to correct this
deficiency, we are in the process of augmenting our finance staff through the
prospective hire of additional accounting staff as needed to ensure adequate
resources.
We
monitor this situation closely and have plans to add consulting support as
needed in the Information Technology and complex accounting area and as
resources permit.
I, on
behalf of the Company, acknowledge that:
(i) the Company is responsible for the
adequacy and accuracy of the disclosure in the filing;
(ii) staff comments or changes to
disclosure in response to staff comments do not foreclose the Commission from
taking any action with respect to the filing; and
(iii) the Company may not assert staff
comments as a defense in any proceeding initiated by the Commission or any
person under the federal securities laws of the United States.
Again, thank you very much for
providing your comments, and I apologize for the delay in
response. Please feel free to contact either myself or our counsel,
Jolie Kahn (at joliekahnlaw@sbcglobal.net
or (212) 422-4910) with any further comments regarding the foregoing or if we
can be of any further assistance.
Very
truly yours,
/s/
Joseph Himy
Joseph
Himy
cc: Jolie
Kahn, Esq.