Vyteris Holdings (Nevada), Inc. - FORM 10-Q

Attached files

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EX-31.1 - Vyteris Holdings (Nevada), Inc.	v223436_ex31-1.htm
EX-32.2 - Vyteris Holdings (Nevada), Inc.	v223436_ex32-2.htm
EX-32.1 - Vyteris Holdings (Nevada), Inc.	v223436_ex32-1.htm
EX-31.2 - Vyteris Holdings (Nevada), Inc.	v223436_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

¨ 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 x 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 x

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 ¨ No ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

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 16, 2010
	Common stock, par value $0.015 share		94,991,506

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, 2011 (Unaudited) and December 31, 2010	3

	Unaudited Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2011 and 2010	4

	Unaudited Condensed Consolidated Statements of Stockholders’ (Deficit) for the Three Months ended March 31, 2011	5

	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2011 and 2010	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Plan of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II	OTHER INFORMATION	33

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults Upon Senior Securities	34

Item 5.	Other Information	34

Item 6.	Exhibits	35

Signature		35

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.

ITEM 1. FINANCIAL STATEMENTS

VYTERIS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2011			December 31, 2010
	(Unaudited)
ASSETS
Current assets:
Cash	$	132,235		$	402,845
Accounts other receivables		15,000			945,930
Other current assets		109,833			123,831
Total current assets		257,068			1,472,606

Debt issuance costs, net		1,955,683			1,989,275
Property and equipment, net		21,034			25,497
Other assets		287,702			287,702
TOTAL ASSETS	$	2,521,487		$	3,775,080

LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
Current liabilities:
Accounts payable	$	2,305,875		$	2,188,012
Fair value of derivative financial instruments		6,505,162			9,835,764
Accrued expenses and other liabilities		3,311,415			3,632,308
Interest and accrued expenses due to related party		242,450			216,559
Total current liabilities		12,364,902			15,872,643

Promissory note due to a related party		1,750,000			1,750,000
Senior subordinated convertible promissory notes, net of discount of approximately $1.7 million at March 31, 2011 and December 31, 2010		79,169			48,293
Convertible note payable		500,000			500,000
Deferred revenue		696,237			721,237
Total liabilities		15,390,308			18,892,173

Commitments and contingencies

Stockholders’ (deficit):
Common stock, par value $0.015 per share; 400,000,000 shares authorized, at March 31, 2011 and December 31, 2010; 69,175,224 and 68,983,557 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		1,037,628			1,034,753
Additional paid-in capital		209,056,253			208,726,752
Accumulated deficit		(222,962,702	)		(224,878,598	)
Total stockholders’ (deficit)		(12,868,821	)		(15,117,093	)
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT)	$	2,521,487		$	3,775,080

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

VYTERIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended March 31,
	2011			2010
Revenues:
Product development revenue	$	15,000		$	14,323

Costs and expenses:
Research and development		456,788			794,041
General and administrative		880,705			1,704,768
Total costs and expenses		1,337,493			2,498,809
Loss from operations		(1,322,493	)		(2,484,486	)

Interest (income) expense:
Interest income		(364	)		(202	)
Interest expense		121,025			40,426
Interest (income) expense, net		120,661			40,224

(Decrease) increase in fair values of derivative financial instruments		(3,359,050	)		681,583
Net income (loss)	$	1,915,896		$	(3,206,293	)

Net income (loss) per common share:
Basic	$	0.03		$	(0.05	)
Diluted	$	0.02		$	(0.05	)

Weighted average number of common shares:
Basic		69,109,930			62,640,753
Diluted		85,880,312			62,640,753

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

VYTERIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT)

FOR THE THREE MONTHS ENDED MARCH 31, 2011

(UNAUDITED)

					Additional						Total
	Common Stock				Paid-in			Accumulated			Stockholders’
	Shares		Amount		Capital			Deficit			(Deficit)
Balance at December 31, 2010		68,983,557	$	1,034,753	$	208,726,752		$	(224,878,598	)	$	(15,117,093	)
Non-cash stock based compensation expense, net		—		—		305,075			—			305,075
Issuance of common stock on settlement for services rendered		191,667		2,875		52,875			—			55,750
Adjustment for warrant liability		—		—		(28,449	)		—			(28,449	)
Net income for the three months ended March 31, 2011		—		—		—			1,915,896			1,915,896
Balance at March 31, 2011		69,175,224	$	1,037,628	$	209,056,253		$	(222,962,702	)	$	(12,868,821	)

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

VYTERIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,915,896		$	(3,206,293	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation expense		4,464			29,031
Non-cash debt extinguishment		(179,615	)
Stock based compensation charges		305,075			1,184,369
(Decrease) increase in fair value of derivative financial instruments		(3,359,050	)		681,583
Other		(25,000	)		(22,649	)
Amortization of discount on promissory notes		30,876			48,283
Amortization of deferred offering related to promissory notes		33,592			51,429
Change in operating assets and liabilities:
Accounts and other receivables		930,930			-
Other assets		13,998			(36,757	)
Accounts payable		173,613			(126,603	)
Accrued expenses and other liabilities		(170,330	)		44,263
Interest and accrued expenses due to related party		54,941			25,890
Net cash (used in) operating activities		(270,610	)		(1,327,454	)
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 cash provided by financing activities		-			879,083

Net decrease in cash and cash equivalents		(270,610	)		(448,371	)
Cash at beginning of the period		402,845			2,173,039
Cash at end of the period	$	132,235		$	1,724,668

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	-		$	1,633
Warrants issued to investment finders included in debt issuance costs		-			1,181,476
Issuance of common stock on settlement for services rendered		55,750			-

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

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	Liquidity and Basis of Presentation

Business

The accompanying condensed consolidated financial statements have been prepared assuming that Vyteris, Inc. (the terms “Vyteris” 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 entity) will continue as a going concern (see discussion below).

Spencer Trask Specialty Group and one or more of its affiliates (collectively, “STSG”) own approximately 73.2% of the issued and outstanding common stock of the Company as of March 31, 2011. Due to this majority level of 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.

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 potentially be used to administer a wide variety of therapeutics either directly into the skin or into the bloodstream. There are no products being currently sold using this iontophoretic technology. 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. As stated in the subsequent event footnote 14, the Company is in the process of discontinuing its drug delivery business and will focus instead on its MediSync CRO business as further described below.

Merger Agreement

On April 1, 2011, the Company executed an Agreement and Plan of Merger (the “Merger Agreement”) with MediSync BioServices, Inc. (“MediSync”), the Company and VYHNSUB, Inc. (the “Merger Sub”), pursuant to which the Merger Sub was merged with and into MediSync, with MediSync continuing as the surviving corporation and a wholly-owned subsidiary of Company (the “Merger”). MediSync is in the business of consolidating preclinical and contract research organizations “CRO” and related businesses, including site management organizations “SMO”, which sub-contract clinical trial-related responsibilities from a CRO or pharmaceutical/biotechnology company, and post marketing surveillance companies, which monitor pharmaceutical drugs and devices after release into the market. On April 6, 2011, the Company, Merger Sub and MediSync consummated the Merger by filing a Certificate of merger with the Secretary of State of the State of Delaware. As a result of the Merger, the business of MediSync is now wholly owned and operated by the Company.

As of April 1, 2011 the Company has two reportable business segments – its transdermal drug delivery technology, and CRO business.

Liquidity and Going Concern

The Company does not have sufficient funds to operate its business which raises substantial doubt as to its ability to continue as a going concern. 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 acquisition of target companies for its CRO business. The Company engaged two investment bankers in the first quarter of 2011 to assist in raising capital needed to complete its business plan (see Interim Bridge Financing in Note 14 – Subsequent Events). Failure to obtain such financing will require management to cease operations, which will result in a material adverse effect on the financial position and results of operations of the Company. 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.

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Basis of Presentation

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, 2010. The condensed consolidated balance sheet as of December 31, 2010 has been derived from those audited consolidated financial statements. Operating results for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011, or for any future periods. All significant intercompany balances and transactions have been eliminated in consolidation.

2.	Significant Accounting Policies

Accounting policies

There have been no material changes in the Company’s significant accounting policies (as detailed in the Company's Annual Report on Form 10-K for the year ended December 31, 2010).

Risk and uncertainties

The Company has taken initial steps to embark on a new business plan resulting from the closed MediSync merger. The Company has no experience in consolidating businesses or in the contract research organization space. The Company may be unable to successfully combine the businesses or obtain the necessary experience to compete effectively in the contract research organization industry. The Company has generated de minimis revenues from its drug delivery business.

No assurance can be given that the Company will be successful in procuring the further financing and collaborative partners needed to continue the execution of its business plan, which includes the acquisition of target companies for its CRO business. The CRO business model is expected to provide cash flow which can assist in funding operations for the Company while it continues to develop its drug delivery technologies, of which operations were reduced due to our lack of funding and other factors. Failure to obtain such financing will require management to substantially curtail, if not cease, operations, which will result in a material adverse effect on the financial position and results of operations of the Company.

Deferred issuance costs are amortized over the term of their associated debt instruments.

Debt issuance costs are amortized over the terms of their associated debt instruments.

The Company evaluates the terms of its debt instruments to determine if any embedded derivatives or beneficial conversion features exist. Where applicable, 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. The fair value of the warrants issued to debt holders or placement agents are calculated utilizing the Black-Scholes-Merton pricing model or probability weighted binomial method depending on the terms of the warrant agreements. 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.

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Fair Value Measurements

The Company measures fair value in accordance with Statement ASC 820, Fair Value Measurements (“ASC 820”). 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.

Derivative Financial Instruments

Derivatives are recognized at fair value as required by ASC 815 “Derivatives and Hedging” (“ASC 815”). ASC 815 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 are no longer 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 either the exercise price or the shares to be issued under the respective warrant agreements. 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.

At March 31, 2011, the Company has recorded the fair value (Level 3) of the derivative liabilities of approximately $6.5 million, which consists of two components:

• the fair value of the warrant liability amounted to approximately $4.6 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 Notes 10 and 13, of the Company’s condensed consolidated financial statements for the three months ended March 31, 2011 for the valuation of stock options, except that the value of the underlying common stock has been reduced by 20% 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 promulgated under the Securities Act of 1933; and

• the fair value of the convertible debt conversion feature amounted to approximately $1.9 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 March 31, 2011. 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.

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Use of Estimates

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the revenues and expenses reported during the period. These estimates and assumptions are based on management’s judgment and available information and, consequently, actual results could differ from these estimates.

Recently issued accounting standards

In January 2010, the Financial Accounting Standards Board (“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 became effective for us with the reporting period beginning January 1, 2011. 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, 2011			December 31, 2010

Manufacturing and laboratory equipment	$	1,875,930		$	1,875,930
Furniture and fixtures		156,543			156,543
Office equipment		334,065			334,065
Leasehold improvements		367,818			367,818
Software		205,210			205,210
		2,939,566			2,939,566
Less: Accumulated depreciation and amortization		(2,918,532	)		(2,914,069	)
Property and equipment, net	$	21,034		$	25,497

Depreciation and amortization expense, included in cost and expenses in the accompanying condensed consolidated statements of operations, was approximately $0.004 million and $0.03 million for the three months ended March 31, 2011 and 2010, respectively.

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

4.	Accrued Expenses and Other

Accrued expenses and other consist of the following:	March 31, 2011		December 31, 2010

Compensation, accrued bonuses and benefits payable	$	478,626	$	439,745
Continuous motion patch machine costs and delivery		180,453		169,619
Reimbursement of development costs to Ferring (1)		1,354,566		1,354,566
Accrued insurance costs		52,241		103,518
Accounting, legal and consulting fees		567,324		671,124
Outside services		52,552		330,027
Food and drug administration fees		300,094		279,013
Other		325,559		284,696
Accrued expenses and other	$	3,311,415	$	3,632,308

(1) Represents liability for advances in 2009 of research and development costs under the License and Development Agreement with Ferring (see Note 8).

5.	Promissory Note Due to a Related Party

In December 2009, the Company issued to STSG a promissory note (“2009 Promissory Note”) with a principal amount of approximately $2.0 million, with interest accruing at the rate of 6% per year and a maturity date of 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 prospective equity or debt financing within certain parameters set forth (“Qualified Financing”).

On December 28, 2009, the Company paid STSG $0.2 million to reduce the principal amount of the 2009 Promissory Note to $1.75 million. The balance of the principal amount of the 2009 Promissory Note and all accrued and unpaid interest thereon is to be repaid upon consummation of certain Qualified Financing. This was still outstanding at March 31, 2011.

6.	Senior Subordinated Convertible Promissory Notes, Net of Discount

In February 2010 and May 2010, the Company sold to accredited investors (“Investors”) in a private placement $1.8 million principal amount of Senior Subordinated Convertible Promissory Notes due 2013 (the “2010 Notes”). These notes bear no interest and are convertible into the Company’s common stock at the option of the Investors at any time. The initial conversion price was $0.20, and automatically reduces by 1.5% after each 90 day period that they 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 2010 Notes automatically convert into the Company’s 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. The warrants contain a cashless exercise provision and “full ratchet” anti-dilution provisions. 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 2010 Notes and related warrants.

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The principal amounts of 2010 Notes sold and the number of warrants issued in conjunction therewith and the exercise price thereof are set forth below:

Offering Date	Original Note Amount		Less Converted Amount		Note Amount as of March 31, 2011		Interest Rate			Note Conversion Price (1)		Warrants Issued to Investors		Initial Exercise Price per Share

February 2010	$	1,060,000	$	25,000	$	1,035,000		0.00	%	$	0.188		5,300,000	$	0.20

May 2010		725,000		-		725,000		0.00	%	$	0.191		3,625,000	$	0.25

	$	1,785,000	$	25,000	$	1,760,000							8,925,000

(1)

Initial note conversion price was $0.20 and the rate decreases 1.5% every 90 days.

The Company received net proceeds of $0.8 million and $0.6 million from the 2010 Notes, after payment of commissions and expense allowances to Spencer Trask Ventures, Inc. (“STVI”), a related party to STSG, a principal stockholder of the Company, to other finders and other offering related costs. STVI and other finders also received in the aggregate warrants to purchase 3,570,000 shares of the Company’s common stock bearing substantially the same terms as the Investor warrants. The Company incurred total debt issuance costs of $2.1 million, representing the fair value of warrants issued to finders of $1.8 million at issuance and other costs totaling $0.3 million. Such costs have been classified as deferred costs in accordance with accounting for debt issue costs (ASC 835) and are being amortized over the life of the corresponding debt, using the effective interest method.

The following is a summary of debt issuance costs for the February 2010 and May 2010 financings:

Offering Date	Value of Finder Warrants Issued		Cash Commission		Total Debt Issuance Costs
February 2010	$	1,181,476	$	180,917	$	1,362,393
May 2010		605,593		104,850		710,443

	$	1,787,069	$	285,767	$	2,072,836

The following is a summary of amortization of debt issuance costs for the February 2010 and May 2010 financings:

Offering Date	Total Debt Issuance Costs		Less: Accumulated Amortization of Debt Issuance Costs as of December 31, 2010		Less: Amortization of Debt Issuance Costs for the three months ended March 31, 2011		Net Debt Issuance Costs at March 31, 2011
February 2010	$	1,362,393	$	66,641	$	21,883	$	1,273,869
May 2010		710,443		16,920		11,709		681,814

	$	2,072,836	$	83,561	$	33,592	$	1,955,683

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Upon consummation of the sale of the 2010 Notes, the Company determined the fair value of the aforementioned instruments and recorded debt discount in accordance with accounting for convertible instruments issued with detachable warrants (ASC 470). The following is a summary of the debt discount for the February 2010 and May 2010 financings recorded on the condensed consolidated balance sheet as of March 31, 2011:

Offering Date	Face Amount		Less: Notes Debt Discount at inception		Plus: Accumulated Amortization of Note Debt Discount as of December 31, 2010		Plus: Amortization of Note Debt Discount for the three months ended March 31, 2011		Carrying Value
February 2010	$	1,035,000	$	1,035,000	$	9,829	$	19,046	$	28,875
May 2010		725,000		725,000		38,465		11,829		50,294
	$	1,760,000	$	1,760,000	$	48,294	$	30,875	$	79,169

In addition, the Company determined the aforementioned instruments also contain features that require derivative liability accounting treatment. At March 31, 2011, the Company remeasured the fair value of these derivative liabilities and determined the fair value of the warrant liability. See Note 2 for description of the Company’s accounting policies on valuing such instruments. As a result of this remeasurement, the Company recognized income on these derivative financial instruments of approximately $3.3 million for the three month period ended March 31, 2011, and expense of approximately $0.7 million for the three month period ended March 31, 2010, on the condensed consolidated statement of operations, summarized as follows:

	Beneficial Conversion Feature				Warrants With “Ratchet” Anti-Dilution Provisions
Offering Date	Fair Value of Derivative at Issuance		Fair Value of Derivative as of March 31, 2011		Cumulative change in Fair Value of Derivative as of March 31, 2011		Fair Value at Issuance		Fair Value as of March 31, 2011		Cumulative change in Fair Value as of March 31, 2011
February-2010 (a)	$	254,942	$	1,096,845	$	841,903	$	780,058	$	823,125	$	43,067
May-2010		237,083		786,372		549,289		487,917		637,486		149,569

Finders Warrants
February-2010		-		-		-		1,153,611		329,250		(824,361	)
May-2010		-		-		-		605,593		242,472		(363,121	)
	$	492,025	$	1,883,217	$	1,391,192	$	3,027,179	$	2,032,333	$	(994,846	)

(a) Original amount was $279,942, subsequently converted $25,000.

See roll forward of fair value of derivative instruments table in Note 13 Warrants and Derivative Instruments.

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

7. June 2010 Subordinated Convertible Promissory Notes and Conversion into Common Stock

On June 30, 2010, the Company consummated a private placement to accredited investors (“June Investors”) of $1.2 million principal amount of Subordinated Convertible Promissory Notes due September 30, 2010 (the “June 2010 Notes”). The sale of the June 2010 Notes also included issuance to June Investors of five-year warrants to purchase an aggregate of 2,300,000 shares of the Company’s common stock with an exercise price of $0.25 per share. The warrants contain a cashless exercise provision and “full ratchet” anti-dilution provisions. STVI acted as finder in connection with the private placement. At date of issuance, the fair value of the warrants was approximately $0.8 million. In connection with the closing, the Company received net proceeds of $1.2 million, as the payment of cash finder fees were deferred until the next offering of equity instruments by the Company. The Company incurred debt issuance costs with STVI, in its capacity as a finder for this transaction, in the amount of $0.3 million, which is included in deferred offering cost on the condensed consolidated balance sheets. Such costs represent the fair value of the initial 460,000 warrants issued to STVI of $0.2 million and accrued finders fees of approximately $0.1 million, representing cash commission of up to 10% and a 3% expense allowance and warrants. The Company issued additional warrants to investors and STVI, based on the conversion on September 30, 2010. The Company determined that the warrants contain features which require liability accounting treatment.

On September 30, 2010, the June Investors elected to convert the principal amount of the June 2010 Notes, and $17,392 of accrued and previously unpaid interest, into the Company’s common stock. For each $0.20 of principal and interest converted, the June Investors received both a share of the Company’s common stock and a warrant to purchase one share of common stock at an exercise price of $0.25 per share with a term of five years. Based on the conversion of the June 2010 Notes, the Company issued additional warrants to STVI for conversion consideration. The conversion consideration to STVI consists of 1,150,000 warrants to purchase shares of common stock at an exercise price of $0.20 per share and 1,150,000 warrants to purchase shares of common stock at an exercise price of $0.25 per share, with all 2,300,000 warrants expiring in 5 years.

In the aggregate, the Company issued 5,836,250 shares of its common stock to investors, 8,136,250 warrants to investors to purchase its common stock, and 2,300,000 warrants to STVI to purchase its common stock, in connection with the conversion of the June 2010 Notes. The fair value of the warrants upon conversion was approximately $2.6 million. Upon conversion of the June 2010 Notes, the Company recorded $0.3 million in interest expense on the consolidated statement of operations from the write-off of the remaining deferred offering costs. The fair value of the 10,096,250 warrants (which include 460,000 warrants issued to finders from initial June Note offering date) was $1.9 million, as of March 31, 2011. As a result, the Company recognized a gain on derivative financial instruments of $0.8 million for the three months ended March 31, 2011 (using the weighted average probabilities of potential down-round scenarios and other assumptions utilizing a unmodified binomial model), on the consolidated statement of operations. This private placement 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.

See roll forward of fair value of derivative instruments table in Note 13 Warrants and Derivative Instruments.

8.	Termination of the Ferring Agreement

On December 21, 2009, the Company received notice from Ferring of its termination without cause of the License and Development Agreement, dated September 30, 2004, by and between the Company and Ferring (the “LDA”), effective 30 days from the date of the notice. Pursuant to the terms of the LDA, following its termination without cause of the LDA, Ferring is required to, among other things, convert all licenses and other rights granted to the Company to develop, make, have made, use, sell, offer to sell, lease, distribute, import and export the product to exclusive, worldwide, irrevocable, perpetual, sub-licensable licenses and the Company is entitled to terminate all licenses and other rights granted to Ferring under the LDA, with limited exclusions not pertaining to the practice by Ferring of such rights in the field of the iontophoretic administration of the infertility hormone.

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

To date, however, Ferring has not complied with its contractual obligations to dispose of the intellectual property under the LDA. On or about July 1, 2010, the Company commenced litigation in the Superior Court of New Jersey against Ferring. Through the litigation, the Company sought an order requiring Ferring to abide by the terms of the LDA and dispose of the intellectual property as required. The Company also sought the recovery of damages from Ferring. Ferring filed a motion to compel arbitration, which was granted by the court on November 19, 2010. The Company is pursuing negotiations with Ferring aimed at resolving all issues in dispute between the Company and Ferring, including resolution of amounts owed by the Company to Ferring under a March 2009 financing arrangement. Should a negotiated resolution not be reached, the Company intends to pursue its claims against Ferring in arbitration, as required by the court’s November 19, 2010 order.

As of March 31, 2011 and December 31, 2010, the Company recorded approximately $1.4 million in accrued expense and other in the condensed consolidated balance sheets for estimated amounts due to Ferring.

9.	Related Party Transaction

In addition to the Promissory Note due to a Related Party described in Note 5 and finder’s fees described in Note 6 and Note 7, the MediSync transaction and the Interim Bridge Financing described in Note 14, the Company accrued consulting fees for Russell Potts, one of its directors, in the amount of $1,413 for the three months ended March 31, 2011, for consulting services and out of pocket expenses.

10.	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 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 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.

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 replaces 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. As of March 31, 2011, the Company issued 4,745,245 options to purchase shares of the Company’s common stock under the 2010 Directors’ Incentive Plan.

Stock option activity for all plans for the three month period ended March 31, 2011 is as follows:

	Number of Shares			Exercise Price Per Share		Weighted Average Exercise Price		Intrinsic Value
Outstanding at December 31, 2010		16,727,510			0.25 - 45.60	$	0.81	$	380,116
Granted		-			-		-		-
Exercised		-			-		-		-
Forfeited/Expired		(209,727	)		0.29 - 45.60		15.23		-
Outstanding at March 31, 2011		16,517,783			0.25 - 45.60		0.72	$	53,540
Exercisable at March 31, 2011		10,251,352		$	0.25 - $45.60	$	0.87	$	40,160

The following table summarizes information about stock options outstanding and exercisable under all plans at March 31, 2011:

	Options Outstanding at March 31, 2011						Options Exercisable at March 31, 2011
Exercise Price	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Number of Shares		Weighted Average Exercise Price
$0.25-0.30		3,066,969	$	0.27		8.16		2,313,716	$	0.27
$0.31-0.35		5,747,637		0.35		8.83		3,265,292		0.35
$0.36-0.55		1,585,518		0.51		7.91		1,036,991		0.52
$0.56-0.65		5,747,637		0.65		8.84		3,265,292		0.65
$0.66-45.60		370,022		12.23		4.69		370,061		12.23
		16,517,783	$	0.72		8.81		10,251,352	$	0.87

The following table summarizes the Company’s unvested stock awards (see Note 11 – employment agreements for discussion of awards to certain officers) under all plans as of March 31, 2011 and 2010:

	As of March 31, 2011					As of December 31, 2010
Unvested Stock Option Awards	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Unvested at January 1,		7,557,535		$	0.57		1,757,308		$	0.69
Awards		-			-		12,594,724		$	1.00
Forfeitures		(100,000	)	$	0.30		-			-
Vestings		(1,291,104	)	$	0.49		(6,794,497	)	$	0.49
Unvested at March 31,		6,266,431		$	0.57		7,557,535		$	0.57

Stock options available for grant under all stock option plans covered a total of 13,360,296 shares of common stock at March 31, 2011. Stock options available for grant under the 2005 Stock Option Plan covered 8,105,541 shares of stock, and the 2010 Outside Director Stock Incentive Plans covered 5,254,755 shares of stock at March 31, 2011.

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The fair value of stock-based awards was estimated using the Black-Scholes-Merton option-pricing 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 the three month periods ended March 31, 2011 and 2010.

	Three Months Ended March 31,
	2011			2010
Expected holding period (years)		5.0			5.0
Risk-free interest rate		2.38	%		2.38	%
Dividend yield		0	%		0	%
Fair value of options granted	$	0.36		$	0.36
Expected volatility		91.86	%		91.86	%
Forfeiture rate		15.38	%		15.38	%

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, 2011 and 2010:

	Years Ended March 31,
	2011		2010
Research and development	$	44,244	$	209,195
General and administrative		260,831		975,174
Stock-based compensation expense before income taxes		305,075		1,184,369
Income tax benefit		-		-
Total stock-based compensation expense after income taxes	$	305,075	$	1,184,369

As of March 31, 2011, $1.8 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.9 years.

11.	Material Agreements

Senior Executive Employment Agreements

On November 21, 2008, the Company entered into an employment agreement with Dr. Hartounian, its Chief Executive Officer, effective as of May 1, 2008, which was renewed on April 7, 2010, 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 two grants totaling 5,196,780 options having been issued as of February 2, 2010, and 2,227,190 options to be granted upon raising $7.0 million, in aggregate, 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, its Chief Financial Officer, effective as of May 1, 2008, which was renewed on April 7, 2010, and 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 two grants totaling 1,559,034 options having been issued as of February 2, 2010, and 668,157 options to be granted upon raising $7.0 million, in aggregate, by the Company. All options granted shall vest as follows: 35% immediately upon issuance and 65% quarterly over three years from date of grant.

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 its 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.

12.	Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) attributable to common stockholders per share for the three month periods ended March 31, 2011 and 2010.

	Three Months Ended March 31,
	2011		2010
Numerator:
Net income (loss)	$	1,915,896	$	(3,206,293	)

Denominator:
Weighted average shares:
Basic		69,109,930		62,640,753
Diluted		85,880,312		62,640,753

Net income (loss) per share:
Basic	$	0.03	$	(0.05	)
Diluted	$	0.02	$	(0.05	)

The reconciliation of the denominators used to calculate basic EPS and diluted EPS for the three month periods ended March 31, 2011 and 2010, respectively, are as follows:

	March 31,
	2011		2010
Weighted average shares outstanding-basic		69,109,930		62,640,753
Plus: Common share equivalents
Convertible debt		9,151,287		-
Warrants		7,284,423		-
Options		334,672		-
Weighted average shares outstanding-diluted		85,880,312		62,640,753

The following table shows 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.

	March 31,
	2011		2010
Convertible debt		333,333		333,333
Warrants		6,048,263		16,498,089
Options		13,600,817		15,992,824
Total		19,982,413		32,824,246

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

13.	Warrants and Derivative Instruments

Warrant transactions for the three months ended March 31, 2011, are as follows:

	Number of Shares		Exercise Price Per Share		Weighted Average Exercise Price
Outstanding and exercisable at December 31, 2010		33,639,513	$	0.20–$143.25	$	1.17
Granted		-		-		-
Exercised		-		-		-
Forfeited		-		-		-
Outstanding and exercisable at March 31, 2011		33,639,513	$	0.20–$143.25	$	1.17

The following table summarizes information about warrants outstanding, and exercisable, of which 28,765,469 are classified as liability instruments, at March 31, 2011:

Exercise Price	Number of Shares		Weighted Average Exercise Price		Expiration Dates	Fair Value of Warrants Classified As Derivative Liabilities
$ 0.10-0.20		13,495,000	$	0.20	2012 -2015	$	2,092,475
$ 0.21-0.25		14,177,390		0.25	2014- 2015		2,525,413
$ 0.26-3.75		3,915,992		2.50	2011- 2015		-
$ 3.76-143.25		2,051,131		18.72	2010- 2014		4,058
$ 0.10-143.25		33,639,513	$	1.17	2010-2015	$	4,621,946

The following table summarizes the fair value of warrants classified as liability instruments and beneficial conversion features classified as liability instruments, recorded on the condensed consolidated balance sheet as of March 31, 2011 and December 31, 2010:

Offering Date	Total Fair Value of Derivative as of March 31, 2011		Total Fair Value of Derivative as of December 31, 2010

October 2009 Financing	$	637,168	$	951,644
February 2010 (Note 6)		2,249,221		3,654,369
May 2010 (Note 6)		1,666,331		2,571,631
June 2010 (Note 7)		1,948,385		2,639,434
Other		4,057		18,686

	$	6,505,162	$	9,835,764

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following table summarizes the change in fair value of derivative instruments, recorded on the condensed consolidated balance sheets during 2010 and through March 31, 2011.

	Fair value of warrants			Fair value of beneficial conversion features			Total
Balance December 31, 2009	$	2,634,487		$	-		$	2,634,487

Fair value at date of issuance:
February 2010 Notes (Note 7)		1,933,669			279,942			2,213,611
May 2010 Notes (Note 7)		1,093,510			237,083			1,330,593
June 2010 Notes (Note 8)		3,408,507			-			3,408,507
	$	6,435,686		$	517,025		$	6,952,711
Conversion of derivative instruments:
February 2010 Notes (Note 7)	$	-		$	(25,000	)	$	(25,000	)

(Increase) decrease in fair value of derivative instruments, 2010:
2008 and prior warrants	$	(275,981	)	$	-		$	(275,981	)
October 2009 stock and warrant issuance		(1,388,176	)		-			(1,388,176	)
February 2010 Notes (Note 7)		(224,076	)		1,689,834			1,465,758
May 2010 Notes (Note 7)		113,881			1,127,158			1,241,038
June 2010 Notes (Note 8)		(769,073	)		-			(769,073	)
	$	(2,543,426	)	$	2,816,992		$	273,566

Balance December 31, 2010	$	6,526,747		$	3,309,017		$	9,835,764

(Increase) decrease in fair value of derivative instruments, January 1, 2011 through March 31, 2011:
2008 and prior warrants	$	(14,628	)	$	-		$	(14,628	)
October 2009 stock and warrant issuance		(314,476	)		-			(314,476	)
February 2010 Notes (Note 7)		(557,217	)		(847,931	)		(1,405,148	)
May 2010 Notes (Note 7)		(327,431	)		(577,869	)		(905,300	)
June 2010 Notes (Note 8)		(691,049	)		-			(691,049	)
	$	(1,904,802	)	$	(1,425,800	)	$	(3,330,602	)

Balance March 31, 2011	$	4,621,945		$	1,883,217		$	6,505,162

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

14.	Subsequent Events

Merger with MediSync

On April 1, 2011, the Company executed the Merger Agreement as more specifically described above in Note 1. The merger will be accounted for as a purchase. The purchase price will be allocated to the fair value of the net tangible and identifiable intangible assets acquired. Any excess of the purchase over the net tangible and identifiable intangible assets, will be allocated to goodwill. The following is a summary of certain terms and conditions set forth in the Merger Agreement.

Purchase Price

The Company paid the following consideration, consisting of common stock and warrants and options to purchase common stock of Vyteris, to the holders of debt and equity securities of MediSync in connection with the Merger:

To the holders of MediSync common stock, five shares of the Company’s common stock for each share of MediSync’s common stock.

To the holders of convertible notes and other indebtedness of MediSync, five shares of the Company’s common stock for each $1.00 of MediSync debt.

To the holders of MediSync warrants, warrants to purchase five shares of the Company’s common stock, at a $0.20 exercise price and with a five year term, for each MediSync warrant to purchase (i) a share of MediSync common stock and (ii) $1 of convertible note to be issued by MediSync.

To the holders of MediSync options, options to purchase five shares of the Company’s common stock, at a $.20 exercise price and with a 10 year term, for each option to purchase a share of MediSync common stock.

In total, (i) 25,816,283 shares of unregistered Company common stock were issued to holders of MediSync common stock, convertible notes and other indebtedness, (ii) warrants to purchase 2,090,000 shares of Company common stock (with an exercise price of $0.20 and a five year term) were issued to holders of MediSync warrants, and (iii) options to purchase 1,683,750 shares of Company common stock were issued to holders of MediSync options. The consideration to be received for issuance of: (i) the 25,816,283 shares of Company common stock was 2,989,805 shares of MediSync common stock and forgiveness of $2,173,452 of convertible notes and other indebtedness; (ii) the warrants to purchase 2,090,000 shares of Company common stock was 418,000 warrants to purchase MediSync common stock; and (iii) the options to purchase 1,683,750 shares of Company common stock was 336,750 MediSync options.

The following table summarizes the preliminary allocation of the purchase price:

Assets:
Current assets	$	42,680
Property and equipment and Other		19,407
Intangible asset, contractual rights		7,788,868
Total Assets Acquired	$	7,850,955

Liabilities:
Current liabilities	$	679,871
Total Liabilities Assumed	$	679,871

Net Assets Acquired	$	7,171,084

Total preliminary estimated purchase price	$	7,171,084

VYTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

By agreement of the Boards of Directors of the parties, each share of MediSync common stock, and all warrants, options and convertible indebtedness of MediSync, were valued at $1.00 per share of MediSync common stock, and each share of the Company common stock was valued at $0.20 (which was the per share conversion price in the June 2010 convertible note financing transaction consummated by the Company and the most recent private placement transaction by the Company prior to the August 2010 negotiations regarding the purchase price for the acquisition of MediSync). The transaction was approved by both Boards of Directors in March 2011.

Interim Bridge Financing

In April 2011, we raised $0.2 million in funding from the Company directors ("Initial Bridge Funding"). The notes issued in connection with this Initial Bridge Funding mature on June 30, 2011, and bear interest at the rate of 6% per annume. This Initial Bridge Funding is insufficient to fund the Company’s operations beyond May 2011, and during that time, the Company will not pay for any nonessential services, including salaries for its management team, and it will continue to incur payables, as well as be unable to pay other payables which are already in arrears. The Company is currently in negotiations with an investment banking firm with respect its acting as a selling agent for a longer term bridge financing expected to be launched on or about May 23, 2011, and the notes issued in conjunction with the Initial Bridge Funding will be converted on a dollar-for-dollar basis into the securities issued in this next round of bridge funding on the same terms.

Even if the Company is successful in raising the bridge financing set forth above, no inference can be made that this is an indication of potential success in raising equity financing needed to complete its business plan The bridge capital is intended as a short term financing mechanism, and without successful completion of a larger financing by the Company, management willbe requied to curtail, if not cease, operations, which will 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.

Discontinuance of Drug Delivery Operation

In May 2011, the Company’s Board of Directors elected to implement a strategy to transform the Company into a diversified specialty contract research organization (CRO) organization. This decision follows on the previously consummated merger with the MediSync. The Company will now focus all its efforts on consolidating opportunistic specialty businesses in the CRO, site management organization (SMO), and related services industry. As a result, the Company is currently discontinuing its drug delivery business and plans to attempt to monetize its proprietary active transdermal drug-delivery assets as soon as possible.

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. (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), its subsidiary, MediSync BioServices, Inc. (“MediSync”) (incorporated in the State of Delaware) and the consolidated company) developed and produced the first FDA-approved, electronically controlled transdermal drug delivery system that transports drugs through the skin comfortably, without needles. We believe that this platform technology can be used to administer a wide variety of therapeutics either directly into the skin or into the bloodstream although we are not currently manufacturing or marketing any iontophoretic products. 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. This Management’s Discussion and Analysis contains information as of March 31, 2011 and as of the date of filing of this Form 10-Q.

On April 6, 2011, MediSync was merged into Vyteris (“Merger”), and is now our wholly owned subsidiary. MediSync’s business plan contemplates the acquisition and operation of contract research organizations (CROs) and related service businesses, and through the Merger, we have embarked upon our initial venture into the CRO space. MediSync engaged in one acquisition of a CRO in 2009, and we have entered into preliminary agreements with, and/or are negotiating arrangements with, several other target businesses.

Our CRO Business

MediSync is a Delaware corporation formed in 2006 for the purpose of consolidating preclinical and CROs and related businesses, including site management organizations (SMOs), which sub-contract clinical trial-related responsibilities from a CRO or pharmaceutical/biotechnology company, and post marketing surveillance companies, which monitors pharmaceutical drugs or devices after release into the market. MediSync believes that its future operations may provide added value to the pharmaceutical and biomedical industries, resulting in increased value to its shareholders. MediSync further believes that each CRO and related business that it acquires (each, an “Acquired Business”) may benefit from (a) potential cost savings and efficiencies proposed by its consolidation model, (b) the sharing of, and collaboration on, clinical research studies among the Acquired Businesses and (c) new services offered by other Acquired Businesses through the building of relationships between the employees and consultants of the various businesses.

Our Drug Delivery Technology

The Company is in the process of discontinuing its drug delivery operation. 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.

Liquidity

On March 31, 2011, our cash position was $0.1 million, and we had a working capital deficit of $12.1 million. There is substantial doubt about our ability to continue as a going concern. We implemented several cost reduction measures in 2010 which continued into 2011, 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. Especially in the current economic climate and given that 73.2% of our common stock is controlled by a single entity, 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.

In April 2011, we raised $0.2 million in funding from our directors ("Initial Bridge Funding"). This Initial Bridge Funding is insufficient to fund our operations for more than a few weeks, and during that time, we will not pay for any nonessential services, including salaries for our management team, and we will continue to incur payables, as well as be unable to pay other payables which are already in arrears. We are currently in negotiations with an investment banking firm with respect its acting as a selling agent for a longer term bridge financing into which the notes issued in the Initial Bridge Funding will be convertible on a pari passu basis. Our objective is to launch this bridge financing before May 23, 2011. Additionally, we engaged two other investment bankers in the first quarter of 2011 to assist in raising equity capital needed to complete our business plan.

Even if we are successful in raising the bridge financing set forth above, no inference can be made that this is an indication of potential success in raising equity capital needed to complete its business plan The bridge financing is intended as short term, interim financing, and without successful completion of a larger financing, management will be required to substantially curtail, if not cease, operations, which will 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.

However, unless we are able to raise additional funding, we may be unable to continue operations, including the need to raise funds necessary to closing on MediSync acquisition targets. Especially in the current economic climate, additional funding may not be available on favorable terms or at all. Failure to obtain such financing will require management to substantially curtail operations, which will result in a material adverse effect on our cash flows, financial position, and results of operations.

Our CRO Business

MediSync is a Delaware corporation formed in 2006 for the purpose of consolidating preclinical and CROs and related businesses, including SMOs, which sub-contract clinical trial-related responsibilities from a CRO or pharmaceutical/biotechnology company, and post marketing surveillance companies, which monitors pharmaceutical drugs or devices after release into the market. MediSync believes that its future operations may provide added value to the pharmaceutical and biomedical industries, resulting in increased value to its shareholders. MediSync further believes that each CRO and related business that it acquires (each, an “Acquired Business”) may benefit from (a) potential cost savings and efficiencies proposed by its consolidation model, (b) the sharing of, and collaboration on, clinical research studies among the Acquired Businesses and (c) new services offered by other Acquired Businesses through the building of relationships between the employees and consultants of the various businesses.

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, 2010. 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, the Company recognizes revenues for the reimbursement of development costs when it bears all the risk for selection of and payment to vendors and employees. Costs associated with such activities are included in research and development expenses on the consolidated statements of operations.

Licensing revenue: The Company uses revenue recognition criteria outlined in ASC 605-25 (formerly SAB No. 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force, EITF, Issue 00-21 Revenue Arrangements with Multiple Deliverables). Accordingly, revenues from licensing agreements are recognized based on the performance requirements of the agreement. Non-refundable up-front fees, where the Company has an ongoing involvement or performance obligation, are generally recorded as deferred revenue in the balance sheet and amortized into license fees in the consolidated statement of operations over the term of the performance obligation.

Stock-based Compensation

We account for our stock based employee compensation plans under ASC 718 and ASC 505. ASC 718 and ASC 505 address the accounting for share 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 and ASC 505 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 and ASC 505. 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 Issuance and Other Debt-Related Costs

Deferred issuance 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. The fair value of the warrants issued to note holders or placement agents are calculated utilizing the weighted average probability option-pricing model or probability weighted outcomes using a binomial model, depending on the terms of the instruments. 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.

Fair Value of Liabilities for Warrant and Embedded Conversion Option Derivative Instruments

Under applicable accounting guidance, an evaluation of outstanding warrants is made to determine whether warrants issued are required to be classified as either equity or a liability. Because certain warrants we have issued in connection with past financings contain certain provisions that may result in an adjustment to their exercise price, we classify them as derivative liabilities, and accordingly, we are then required to estimate the fair value of such warrants, at the end of each quarter. We use the weighted average probabilities of potential down-round scenarios and other assumptions utilizing an unmodified binomial model to estimate such fair value, which requires the use of numerous assumptions, including, among others, expected life, volatility of the underlying equity security, fair value of the underlying common stock, expectations of pricing of the future financing rounds, a risk-free interest rate and expected dividends. The use of different values by management in connection with these assumptions in the weighted average probabilities of potential down-round scenarios and other assumptions utilizing an unmodified binomial model could produce substantially different results. Because we record changes in the fair value of warrants or other features classified as liabilities as either a charge or credit in our consolidated statement of operations, significant changes in the underlying assumptions could have a material effect on our results of operations

Recently Issued Accounting Standards

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 January 1, 2011. Adoption of this new guidance did not have a material impact 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, 2011 as compared to the three months ended March 31, 2010:

Revenues	4.7	%
Research and development	(42.5	)%
General and administrative	(48.3	)%
Interest (income) expense, net	200.0	%
Decrease in fair value of derivative financial instruments	588.7	%
Net income (loss)	159.8	%

Comparison of the Three Month Periods Ended March 30, 2011 and 2010

Revenues

Revenues were $15,000 for the three months ended March 31, 2011, compared to $14,323 for the comparable period in 2010, a decrease of 4.7% or $677. Our revenue for the three months ended March 31, 2011 was mainly attributable to feasibility studies, of which will more likely than not, cease in the third quarter of 2011, with the Company focusing on its CRO segment. Our revenue for the three months ended March 31, 2010 was primarily derived from reimbursement of product development costs from Ferring. We continue to seek other revenue sources; however, we cannot predict when and if we will be able derive new revenue sources in the near future or at all.

Research and development

Research and development expenses were $0.5 million for the three months ended March 31, 2011, compared to $0.8 million for the comparable period in 2010, a decrease of 42.5% or $0.3 million. Due to the termination of the Ferring project, we have instead allocated our research and development resources to internal development projects in the areas of therapeutic peptides and small molecules. Non-cash charges for the fair value of employee share-based payments included in research and development expense decreased by $0.2 million for the three months ended March 31, 2011 compared to comparable period in the prior year.

General and administrative

General and administrative expenses totaled $0.9 million for the three months ended March 31, 2011, as compared to $1.7 million for the comparable period in 2010, a decrease of 48.3%, or $0.8 million. The decrease in general and administrative expense is primarily attributable to the reduction in non-cash charge for the fair value of employee and director share-based payments of $0.1 million for the three months ended March 31, 2011 as compared to approximately $1.0 million for the comparative period in the prior year, partially offset by $0.2 million in acquisition costs associated with the MediSync merger.

Interest (income) expense, net

Interest (income) expense, net totaled $120,661 for the three months ended March 31, 2011, as compared to $40,224 for the comparable period in 2010, an increase of approximately $80,437 or 200.0%. The increase in interest (income) expense, net, for the three months ended March 31, 2011 is primarily attributable to the non-cash warrant expense and offering costs issued to investors in the February 2010 and May 2010 debt financings.

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. 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 2010 Notes, which have an initial conversion price of $0.20 per share (but such price decreases by 1.5% each 90 day period that the instrument is outstanding, and contains a reset provision in the event subsequent equity raises are at a lower value). For the three month periods ended March 31, 2011 and 2010, we recorded a credit $(3.3) million and an expense of $0.7 million, respectively, in the condensed consolidated statement of operations due to the changes in the fair value of our issued warrants that contain such down-round provisions and the variable beneficial conversion feature, using the weighted average probabilities of potential down-round scenarios and other assumptions utilizing a unmodified binomial 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 $0.1 million and a working capital deficit of $12.1 million, as of March 31, 2011, which are not sufficient to allow us to continue operations without additional funding, especially given the fact that the Company has approximately $1.9 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. Our need for liquidity and capital resources has greatly increased as a result of the consummation of the Merger and integration of the MediSync business with its separate capital requirements. We need to raise capital to fund acquisitions of CROs as part of the MediSync business plan. We also require additional funding to support our integration efforts and increased business operations.

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 integration of MediSync and funding of MediSync’s acquisition activities and 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 January 2009, our primary source of financing has been sales of our common stock, loans, development fees and milestone payments from our collaborative partner, Ferring. In December 2009, Ferring terminated its License Agreement with us and thus we are no longer receiving any payments from Ferring. 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.

As described below, we consummated our Initial Bridge Funding in April and have further capital raise plans under way for the second quarter of 2011.

Even if we are successful in raising the bridge capital set forth above, no inference can be made that this is an indication of potential success in raising equity capital needed to complete its business plan The bridge capital is intended as short term, interim financing, and without successful completion of the larger financing by our investment bankers, management will, more likely than not, be required to substantially curtail, if not cease, operations, which will result in a material adverse effect on the financial position and results of operations of the Company. These conditions raise substantial doubt about our ability to continue as a going concern.

Cash flows from operating activities

For the three-month period ended March 31, 2011, net cash used in operating activities was $0.3 million, as compared to $1.3 million of net cash used in operating activities in the comparable period in the prior year. The decrease in net cash used in operating activities for the three month period ended March 31, 2011 as compared to same period in the prior year is primarily related to the collection of $0.9 million in other receivables that were outstanding as of December 31, 2010.

Cash flows from investing activities

For the three-month periods ended March 30, 2011 and 2010, we did not incur any cash expenditures in investing activities as we significantly reduced variable spending as part of our cost reduction initiatives.

Cash flows from financing activities

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.

We will remain almost wholly dependent upon financing activities to cover our operating and expansion costs until we are able to consummate acquisitions of MediSync targets which generate significant cash flow. We may also in the future be able to receive funding from development transactions stemming from our drug delivery technology; however, such sources of potential revenue are a much longer term prospect and are dependent on our decision to continue development of this technology, if we so decide, and our ability to consummate any significant development or other agreements with our pharma product.

Financing History 2011 and 2010

Senior subordinated convertible promissory notes, net of discount

In February 2010 and May 2010, we sold to accredited investors (“Investors”) in a private placement $1.1 million and $0.7 million, respectively, principal amount of Senior Subordinated Convertible Promissory Notes due 2013 (the “2010 Notes”). The 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 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 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.

In connection with the sale of the 2010 Notes, we also issued five-year warrants to purchase an aggregate of 5,300,000 shares with an exercise price of $0.20 per share and 3,625,000 shares of our common stock with an exercise price of $0.25 per share, respectively. 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.

Subordinated convertible promissory notes, net of discount

On June 30, 2010, we consummated a private placement to accredited investors (“June Investors”) of $1.2 million principal amount of Subordinated Convertible Promissory Notes due September 30, 2010 (the “June 2010 Notes”). The sale of the June 2010 Notes also included issuance to Investors of five-year warrants to purchase an aggregate of 2,300,000 shares of our common stock with an exercise price of $0.25 per share. As of September 30, 2010, the Investors converted the June 2010 Notes into 5,836,250 shares of our common stock and 5,836,250 warrants to purchase our common stock with an exercise price of $0.25 per share.

Qualifying Therapeutic Discovery Project (QTDP) program

In November 2010, we were awarded two equal grants totaling $0.5 million under the IRS QTDP program. The grants will be used to advance our smart patch technology for the delivery of therapeutic medicines planned for use to treat female infertility and diabetes. The QTDP program was created by the U.S. Congress as part of the Patient Protection and Affordable Care Act passed on March 23, 2010. Eligibility for the grant requires that a project have the potential to develop new treatments that address "unmet medical needs" or chronic and acute diseases; reduce long-term health care costs; or represent a significant advance in finding a cure for cancer.

Sale of State Net Operating Tax Losses

On December 23, 2009, we consummated a non-dilutive capital raise in the net amount of $0.4 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.

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.

Subsequent events

Merger with MediSync

On April 1, 2011, the Company executed the Merger Agreement as more specifically described above in Note 1. The merger will be accounted for as a purchase. The purchase price will be allocated to the fair value of the net tangible and identifiable intangible, assets acquired. Any excess of the purchase over the net tangible and identifiable intangible, assets, will be allocated to goodwill. The following is a summary of certain terms and conditions set forth in the Merger Agreement.

Purchase Price

To the holders of MediSync common stock, five shares of the Company’s common stock for each share of MediSync’s common stock.

To the holders of convertible notes and other indebtedness of MediSync, five shares of the Company’s common stock for each $1.00 of MediSync debt.

In total, (i) 25,816,283 shares of Company common stock were issued to holders of MediSync common stock, convertible notes and other indebtedness, (ii) warrants to purchase 2,090,000 shares of Company common stock (with an exercise price of $0.20 and a five year term) were issued to holders of MediSync warrants, and (iii) options to purchase 1,683,750 shares of Company common stock were issued to holders of MediSync options. The consideration to be received for issuance of: (i) the 25,816,283 shares of Company common stock was 2,989,805 shares of MediSync common stock and forgiveness of $2,173,452 of convertible notes and other indebtedness; (ii) the warrants to purchase 2,090,000 shares of Company common stock was 418,000 warrants to purchase MediSync common stock; and (iii) the options to purchase 1,683,750 shares of Company common stock was 336,750 MediSync options.

The following table summarizes the preliminary allocation of the purchase price:

Assets:
Current assets	$	42,680
Property and equipment and Other		19,407
Intangible asset, contractual rights		7,788,868
Total Assets Acquired	$	7,850,955

Liabilities:
Current liabilities	$	679,871
Total Liabilities Assumed	$	679,871

Net Assets Acquired	$	7,171,084

Total preliminary estimated purchase price	$	7,171,084

Interim Bridge Financing

In April 2011, we raised $0.2 million in funding from the Company directors ("Initial Bridge Funding"). The Initial Bridge matures on June 30, 2011, with a 6% annual interest rate. This Initial Bridge Funding is insufficient to fund the Company’s operations beyond May 2011, and during that time, the Company will not pay for any nonessential services, including salaries for its management team, and it will continue to incur payables, as well as be unable to pay other payables which are already in arrears. The Company is currently in negotiations with an investment banking firm with respect its acting as a selling agent for a longer term bridge financing expected to be launched on or about May 23, 2011, and the notes issued in conjunction with the Initial Bridge Funding will be converted on a dollar-for-dollar basis into the securities issued in this next round of bridge funding on the same terms.

Even if the Company is successful in raising the bridge financing set forth above, no inference can be made that this is an indication of potential success in raising equity financing needed to complete its business plan The bridge capital is intended as short term, interim finances, and without successful completion of a larger financing by the Company’s investment bankers, management will, more likely than not, be required to substantially curtail, if not cease, operations, which will 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.

Discontinuance of Drug Delivery Operation

In May 2011, the Company’s Board of Directors elected to implement a strategy to transform the Company into a diversified specialty contract research organization (CRO) organization. This decision follows on the previously consummated merger with the MediSync. The Company will now focus all its efforts on consolidating opportunistic specialty businesses in the CRO, site management organization (SMO), and related services industry. As a result, the Company is currently discontinuing its drug delivery business and plans to monetize its proprietary active transdermal drug-delivery assets as soon as possible.

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 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 4. CONTROLS AND PROCEDURES

A. Changes in Internal Control Over Financial Reporting

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, 2011, our disclosure controls and procedures were not effective.

B. Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2011, 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, 2010, filed with the Securities and Exchange Commission, on April 15, 2011 with regard to segregation of accounting duties, we reiterate the following material weakness which also existed as of December 31, 2010.

Segregation of Duties

As of March 31, 2011 we had an accounting staff limited to our Chief Financial Officer and two support staff members. Limited resources in this area do not provide sufficient staffing for internal control purposes. We monitor this situation closely and have ongoing plans to add support as needed in this area and as resources permit. In the first quarter of 2011, we eliminated one support staff position and engaged an experienced consultant. Due to the consummation of the Merger, we will need additional technical resources and support staff to integrate the new CRO business as well as winding down the drug delivery business.

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. Except (i) as set forth below and (ii) for approximately $0.8 million in accounts payable collection claims and litigation, 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. 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.

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 Form 10-K, filed for the year ended December 31, 2010. 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.

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, 2011, our cash and cash equivalents amounted to $0.1 million. In 2010, we have had minimal revenue, and we have been dependent upon proceeds from financing activities to fund our operations. As of March 31, 2011, our current liabilities exceeded our current assets by approximately $12.1 million, and we have approximately $1.9 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, 2010 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, 2011, we incurred net losses in excess of $222.9 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.

Our sale of a significant number of shares of our common stock, convertible securities or warrants or the issuance or exercise of stock options or warrants 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 or warrants. 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, 2011, we had stock options to purchase 16,517,783 shares of our common stock outstanding, of which options to purchase 10,251,352 shares were exercisable. Also outstanding as of the same date were warrants exercisable for 33,639,513 shares of our common stock and senior secured debentures that can convert into 9,767,442 shares of our 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, 2011, Spencer Trask Specialty Group, LLC or STSG, beneficially owned approximately 73.2% of our issued and outstanding common stock. 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.

MediSync Risks (reference should be made to the Vyteris, Inc 2010 form 10-K for a description of the risk factors related to the MediSync business and acquisition)

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Item 6(a)		Exhibits

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 19, 2011		/s/ Haro Hartounian
		Haro Hartounian
		Principal Executive Officer

Date: May 19, 2011		/s/ Joseph Himy
		Joseph Himy
		Principal Financial Officer and Principal Accounting Officer

EXHIBIT INDEX

Item No.		Description

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

Attached files

Vyteris Holdings (Nevada), Inc. Reports

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