Approximate
Date of Proposed Sale to the Public: From
time
to time after the effective date of the registration statement.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box. x:
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.o
If
this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Explanatory
Paragraph
This
post-effective amendment is being filed for the purpose of bringing current
the
information (including audited financial statements) which appeared in the
registrant's registration statement on Form SB-2 (Registration No. 333-112902)
declared effective by the Securities and Exchange Commission on August 4, 2005.
This amendment is being filed on a Form S-1 as the registrant is no longer
eligible to use a Form SB-2 registration statement.
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING
STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND THE SELLING STOCKHOLDERS ARE NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE
IS NOT PERMITTED.
The
persons listed in this Prospectus under “Selling Stockholders” may offer and
sell from time to time up to an aggregate of 15,398,004
shares of our common stock that they have acquired or will acquire from us,
including those shares that may be acquired upon exercise of warrants granted
by
us. Information on the Selling Stockholders, and the times and manner in which
they may offer and sell shares of our common stock, is provided under “Selling
Stockholders” and “Plan of Distribution” in this Prospectus.
We
will
not receive any of the proceeds from the sale of common stock by the Selling
Stockholders. We will bear the costs and expenses of registering the common
stock offered by the Selling Stockholders. Selling commissions, brokerage fees,
and applicable transfer taxes are payable by the Selling
Stockholder.
Our
common stock is listed on the Over-The-Counter Bulletin Board (“OTCBB”) under
the symbol “IYXI”. On May19,2006, the closing bid price for our common stock was $2.35
per
share.
BEFORE
PURCHASING ANY OF THE SHARES COVERED BY THIS PROSPECTUS, CAREFULLY READ AND
CONSIDER THE RISK FACTORS INCLUDED IN THE SECTION ENTITLED“RISK
FACTORS” BEGINNING ON PAGE 6. YOU SHOULD BE PREPARED TO ACCEPT ANY AND ALL OF
THE RISKS ASSOCIATED WITH PURCHASING THE SHARES, INCLUDING A LOSS OF ALL OF
YOUR
INVESTMENT.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSIONHAS
APPROVED OR DISAPPROVED THESE SECURITIES, OR PASSES UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
52
Quantitative
and Qualitative Disclosures About Market Risk
83
Management
84
Certain
Relationships and Related Transactions
92
Security
Ownership of Certain Beneficial Owners and
Management
95
Description
of Capital Stock
96
Legal
Matters
102
Experts
102
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
103
Available
Information
103
Index
to Consolidated Financial Statements
104
You
should rely only on the information contained in this Prospectus. We have not
authorized any other person to provide you with information different from
that
contained in this Prospectus. The information contained in this Prospectus
is
complete and accurate only as of the date on the front cover page of this
Prospectus, regardless of the time of delivery of this Prospectus or the sale
of
any common stock. The Prospectus is not an offer to sell, nor is it an offer
to
buy, our common stock in any jurisdiction in which the offer or sale is not
permitted.
We
have
not taken any action to permit a public offering of our shares of common stock
outside of the United States or to permit the possession or distribution of
this
Prospectus outside of the United States. Persons outside of the United States
who came into possession of this Prospectus must inform themselves about and
observe any restrictions relating to the offering of the shares of common stock
and the distribution of this Prospectus outside of the United
States.
The
following summary is qualified in its entirety by the more detailed information
and Financial Statements and related notes thereto appearing elsewhere in this
Prospectus.
Inyx,
Inc.
Inyx,
Inc. (“Inyx”, “we”, “us”, “our”, or the “Company”), through its wholly-owned
subsidiaries, Inyx USA, Ltd. (“Inyx USA”), Inyx Pharma Limited (“Inyx Pharma”),
Inyx Canada Inc. (“Inyx Canada”), Inyx Europe Limited (“Inyx Europe”), including
Inyx Europe’s wholly-owned subsidiary, Ashton Pharmaceuticals Limited (“Ashton
Pharmaceuticals” or “Ashton”) , and Exaeris Inc. (“Exaeris”), is a specialty
pharmaceutical company that focuses on the development and manufacturing of
prescription and over-the-counter (“OTC”) pharmaceutical products. We also
provide specialty pharmaceutical development and manufacturing consulting
services to the international healthcare market. By “specialty pharmaceutical”,
we mean that we specialize in developing and producing niche pharmaceutical
products and drug delivery applications for the treatment of respiratory,
allergy, dermatological, topical and cardiovascular disease conditions. We
intend to expand our product research and development activities with our own
line of prescription and OTC pharmaceuticals, but we have not yet commercialized
for sale our own products or drug delivery technologies. In late 2005, we
commenced implementation of our product marketing and distribution capabilities
and started to assemble our own sales force, which we intend to continue
building in 2006 in order to develop into a vertically integrated, specialty
pharmaceutical company.
A
material element of our growth strategy is to expand our existing business
through strategic acquisitions of pharmaceutical products and drug delivery
devices that are complementary to our expertise, including those through the
acquisition of other pharmaceutical companies. We, therefore, continually
evaluate opportunities to make strategic acquisitions of specialty
pharmaceutical products, drug delivery technologies or businesses. We completed
our first specialty pharmaceutical business acquisition, Inyx Pharma, pursuant
to a stock exchange agreement in April 2003. On March 31, 2005, we completed
the
acquisition of the business assets of Aventis Pharmaceuticals Puerto Rico,
Inc.
(“Aventis PR”), part of the Sanofi-Aventis Group, for a purchase price of
approximately $20.7 million and on August 31, 2005, we completed the acquisition
of Celltech Manufacturing Services Limited (“CMSL”) for a purchase price of
approximately $40.7 million. On September 9, 2005, we changed the “CMSL” name to
Ashton Pharmaceuticals.
Inyx
is a
Nevada corporation headquartered in the United States. Our wholly-owned
subsidiaries are:
·
Inyx
Pharma, a corporation formed under the laws of England and Wales,
with
offices and product development and manufacturing facilities in Runcorn,
Cheshire, England.
·
Inyx
Canada, a Canadian corporation, located in Toronto, Ontario, that
we
established in May 2003 to provide pharmaceutical manufacturing consulting
services to the pharmaceutical industry and administrative and business
development support to the rest of our
Company.
·
Inyx
USA, an Isle of Man company that we established to operate as an
off-shore
company in Puerto Rico, in order to manage and operate our U.S.
pharmaceutical operations, including the business assets acquired
from
Aventis PR on March 31, 2005.
·
Inyx
Europe, a corporation formed under the laws of England and Wales
with
offices in Manchester, England, that we established in May 2005 to
pursue
strategic business development activities in Europe. Inyx Europe’s
wholly-owned subsidiary, Ashton Pharmaceuticals (f/k/a CMSL), is
also a
corporation formed under the laws of England and Wales with offices
and
manufacturing facilities in Ashton, Lancashire,
England.
2
·
Exaeris
Inc., a corporation formed under the laws of Delaware, headquartered
in
Exton, Pennsylvania, a suburb of Philadelphia, which we established
in
March 2005 to manage and operate the Company’s pharmaceutical marketing
and commercial business activities.
Our
Offices
Our
corporate address is 825 Third Avenue, 40th Floor, New York, New York10022,
and
our telephone number is (212) 838-1111; fax (212) 838-0060. Our website is
www.inyxgroup.com. The information on our website is not incorporated by
reference into, and does not constitute part of, this prospectus.
The
Offering
Up
to
15,398,004 shares of our issued and outstanding common stock are being offered
and sold by the selling stockholders. We will not receive any of the proceeds
from the sale of these shares. Such shares include 3,000,000 shares sold in
a
private placement to institutions and accredited investors in October 2003;
6,626,500 shares issued upon exercise of stock purchase warrants at exercise
prices ranging from $0.81 to $3.10; and 5,771,504 shares of common stock,
including 1,971,504 shares held by our prior senior lender, Laurus
Funds.
Plan
of Distribution
Sales
of
common stock may be made by or for the account of the selling stockholders
in
the over-the-counter market or on any exchange on which our common stock may
be
listed at the time of sale. Shares may also be sold in block transactions or
private transactions or otherwise, through brokers or dealers. Brokers or
dealers may be paid commissions or receive sales discounts in connection with
such sales. The selling stockholders must pay their own commissions and absorb
the discounts. Brokers or dealers used by the selling stockholders will be
underwriters under the Securities Act of 1933. In addition, any selling
stockholders affiliated with a broker/dealer will be underwriters under the
Securities Act with respect to the common stock offered hereby. In lieu of
making sales through the use of this prospectus, the selling stockholders may
also make sales of the shares covered by this prospectus pursuant to Rule 144
or
Rule 144A under the Securities Act.
Risk
Factors
Investing
in the common stock involves certain risks. You should review these “Risk
Factors” beginning on page 6.
The
following summary consolidated financial information should be read together
with the Company’s historical consolidated financial statements and related
notes, the audited and unaudited financial statements of the acquired assets
of
Aventis PR and CMSL and the Unaudited Pro Forma Consolidated Statement of
Operations and “Management Discussion and Analysis or Plan of Operations”
included elsewhere within this Prospectus.
The
summary historical consolidated financial information for the years ended
December 31, 2005 and 2004 set forth below is derived from our audited
consolidated financial statements included elsewhere within this Prospectus.
The
summary historical consolidated information for the three months ended March31,2006 and 2005 has been derived from our unaudited consolidated financial
statements included elsewhere in this Prospectus. In the opinion of management,
the unaudited financial statements have been prepared on the same basis as
the
audited financial statements and include all adjustments, which consist only
of
normal recurring adjustments necessary for a fair presentation of the financial
statements and results of operations for the periods presented.
The
unaudited pro forma consolidated statements of operations presented herein
for
the years ended December 31, 2005 and 2004 and for the three months ended
March 31, 2005, respectively, give effect to (1) the acquisition of Celltech
Manufacturing Services (“CMSL”) by Inyx Europe, a transaction which occurred on
August 31, 2005, as if the acquisition had taken place on January 1, 2005;
and
(2) the acquisition of Aventis PR that was concluded on March 31, 2005, as
if
the acquisition had taken place on January 1, 2005.
The
unaudited pro forma consolidated summary financial information is provided
for
illustrative purposes only and is not necessarily indicative of the operations
had the acquisitions, as described in clause (1) and (2) above, taken place
on
January 1, 2005, and are also not intended to project the Company’s results of
operations for any future period. The unaudited pro forma adjustments and
certain assumptions are described in the notes below the table.
(Tabular
amounts expressed in thousands of U.S. dollars, except per share
amounts.)
Reflects
adjustments to back out certain revenues and expenses historically
recorded or incurred by Aventis PR which related to those operations
not
acquired by Inyx USA.
a.
Aventis
PR’s revenue represents all manufacturing revenues relating to the
carved-out business of Aventis PR and was derived using the actual
product
volumes of the products acquired in the acquisition on March 31,2005,
extended at the newly negotiated unit prices for each one of these
products.
(2)
Reflects
the actual revenue and expenses historically recorded by CMSL. The
figures
have been converted from GBP’s to US dollars based on average exchange
rates for each year. Adjustments were made to reduce the cost of
sale and
correspondingly increase the selling, general and administration
cost to
reflect consistent with US reporting
format.
(3)
Reflects
the following pro forma adjustments related to the Aventis PR
acquisition:
a.
Depreciation
expense was adjusted to reflect the fair value of assets acquired
as of
the closing of the acquisition on March 31, 2005, and based on valuations
provided by an independent third
party.
b.
The
amortization of intangible assets was recorded to reflect the amortization
of purchased intangible assets subject to amortization, including
customer
contract renewals and customer relationships that were acquired in
the
Aventis PR transaction on March 31, 2005, and based on valuations
provided
by an independent third party.
c.
Reflects
additional interest expense from the Westernbank credit facility
closed on
March 31, 2005 and a reduction of interest expense due to the repayment
of
the Laurus Master Funds credit facility also occurring on March 31,2005.
(4)
Reflects
the following pro forma adjustments related to the Ashton
acquisition:
a.
Depreciation
expense was adjusted to reflect the fair value of assets acquired
as of
the closing of the acquisition on August 31, 2005, based on valuations
provided by a third party.
b.
Amortization
of intangible assets was recorded to reflect the amortization of
purchased
intangible assets subject to amortization including customer contract
renewals and customer relationships acquired in the Ashton acquisition
on
August 31, 2005, and based on valuations provided by a third
party.
c.
Reflects
additional interest expense from the new Westernbank credit
facility
closed on August 31,2005.
You
should carefully review and consider the following risks as well as all other
information contained in this Prospectus or incorporated herein by reference,
including our consolidated financial statements and the notes to those
statements, before you decide to purchase our common stock. The following risks
and uncertainties are not the only ones facing us. Additional risks and
uncertainties of which we are currently unaware or which we believe are not
material also could materially adversely affect our business, financial
condition, results of operations, or cash flows. In any case, the value of
our
common stock could decline, and you could lose all or a portion of your
investment. To the extent any of the information contained in this Prospectus
constitutes forward-looking information, the risk factors set forth below are
cautionary statements identifying important factors that could cause our actual
results for various financial reporting periods to differ materially from those
expressed in any forward-looking statements made by or on behalf of Inyx, Inc.
and could materially adversely affect our financial condition, results of
operations or cash flows. See also, “A Note About Forward-Looking
Statements.”
RISKS
RELATED TO OUR BUSINESS
We
depend on our customers to continue outsourcing development and manufacturing.
Our
revenues are derived from manufacturing expenditures, and production-related
compliance and testing and product development expenditures by pharmaceutical,
biotechnology and medical device companies who are our clients. As of December31, 2005, approximately 92% of our revenues were derived from contract
manufacturing of pharmaceutical products and 8% from associated product
development in support of our primary business. Our competitive position could
be adversely affected if one or more of our major customers decided to
manufacture their own products and/or move their associated product development
and support requirements in-house. A general economic decline in these
industries or a reduction in the outsourcing of research, development, testing,
or production activities by our customers would result in a loss of revenues
and
produce a material adverse effect on our business, financial condition, results
of operations and cash flows.
We
have had substantial operating losses.
We
have
experienced substantial operating losses and require additional financing.
For
the year ended December 31, 2005, we had a net loss of approximately $31.0
million compared to a net loss of $16.9 million for the year ended
December 31, 2004. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operation” for further details on our operations.
Contributing
to our net losses in both of those years were operating expenses, consisting
of
product research and development costs, and general and administrative, selling,
depreciation and amortization of intangible assets expenses, and interest and
financing costs. Although our operating expenses as a percentage of net revenues
increased by approximately fifteen percent during 2005, compared to 2004, as
a
result of the allocation of corporate overhead over a larger revenue base,
our
losses increased between the comparative years as a result of the operating
expenses and transaction costs associated with our acquisitions of the business
assets of Aventis PR on March 31, 2005, and all of the capital stock of Ashton,
on August 31, 2005. Further adding to our 2005 net loss was low manufacturing
capacity utilization at our Inyx Pharma site. This was caused by delays in
(a)
implementation of production contracts and projects resulting from the
regulatory approvals received by customers being slower than anticipated, and
(b) the receipt of acceptable supplies from approved vendors that arrived late
during 2005. In addition, at our new Inyx USA site, there were delays due to
the
extended time required for new business development in the contract
pharmaceutical sector.
6
We
need
additional funds to expand our sales and marketing activities and fully develop,
manufacture, market and sell our potential products, we may have to delay our
product development, commercialization and marketing programs if we are unable
to continue to obtain the necessary capital to fund these operations. We cannot
predict exactly when additional funds will be needed. We may obtain funds
through a public or private financing, including equity financing, debt
financing, a combination of debt and equity financing, and/or through
collaborative arrangements. Additionally, we cannot predict whether any such
financing will be available on terms commercially reasonable and acceptable
to
the Company or at all. If our funding requirements are not met, we may have
to
delay, reduce in scope or eliminate some or all of our planned sales and
marketing, and product development and commercialization
activities.
We
are highly leveraged and will need to generate positive cash flow to service
our
debt.
As
of
December 31, 2005, our total indebtedness outstanding was approximately
$99.5 million, consisting primarily of approximately $85.4 million under
two credit facilities with Westernbank Business Credit, a Division of
Westernbank Puerto Rico (“Westernbank”) related to the Ashton and Aventis PR
acquisitions made in 2005, and $14.1 million owed to UCB Pharma Ltd. (“UCB
Pharma”) related to our acquisition of Celltech Manufacturing Services Limited.
The sum owed to UCB Pharma is comprised of a non-interest bearing amount of
$9.6
million (€8.0 million) relating to deferred purchase price, to be repaid in six
monthly installments commencing May 2006 and $4.3 million (£2.6 million) for
additional net current assets acquired not considered when the purchase price
was negotiated, payable on May 31, 2006, interest on which is accrued and
payable at Barclay’s Bank base rate.
As
of the
end of 2005, our annual debt service requirements are approximately $17.0
million (includes approximately $2.5 million and $5.3 million relating to the
interest on the revolving credit facility and terms loans, respectively.) That
debt is collateralized by all the existing and future assets of the Company
and
its subsidiaries. In the event we are unable to generate sufficient cash flow
from our operations or use proceeds derived from our financing efforts including
through issuance of debt or equity securities, we may face difficulties in
servicing our substantial debt load. If we are unable to service our debt
payments, our assets are subject to forfeiture to our creditors.
Although
we believe that our current manufacturing contracts and production schedules
may
provide sufficient cash to meet our current debt service requirements, there
can
be no assurance that these contracts and planned production schedules will
result in a profitable operation or generate enough cash to meet all of our
cash
requirements.
We
currently depend on certain significant customers for most of our revenues.
For
2005,
our top three customers accounted for approximately 59% of our total net
revenues. These three customers were Kos Pharmaceuticals, accounting for
approximately $13.1 million in net revenues or approximately 26% of total
net revenues for the period; UCB Pharma Ltd., accounting for approximately
$11.9 million in net revenues or approximately 24% of total net revenues;
and Sanofi-Aventis, accounting for approximately $4.1 million in net
revenues or approximately 9% of total net revenues. In comparison, for the
year
ended December 31, 2004, our top three customers accounted for
approximately $7.5 million or approximately 48% of our total net revenues
of approximately $15.7 million. These customers were the Merck Generics
group of companies, accounting for approximately $4.2 million in net
revenues or approximately 27% of total net revenues for the reporting period;
SSL International Plc, accounting for approximately $1.8 million in net
revenues or approximately 11% of total net revenues; and Genpharm Inc.,
accounting for approximately $1.5 in net revenues or approximately 10% of total
net revenues.
Due
to
the nature of the drug development process, significant customers in any one
period may not continue to be significant customers in subsequent periods.
Some
customers may not seek our services for periods of a year or more during which
they concentrate on testing and clinical trials related to the products we
manufacture for them. We continually seek to increase our customer base as
well
as obtain new business from existing customers, whether or not significant
contracts have expired or are expected to expire in the near future. The loss
of
business from a significant customer or the failure on our part to replace
customers whose projects have been completed, either with new projects for
such
customers or any new customers, would result in a loss of revenues and produce
a
material adverse affect on our business, financial condition, results of
operations and cash flows.
7
Because
we currently operate some of our business under short-term agreements, we need
to maintain or increase the number of longer-term agreements in order to grow
our business on a sustained basis.
Although
we provide a number of our products to our customers under long-term, multi-year
agreements, we also receive some of our business under significant individual
purchase orders and short-term agreements with our customers. Our success will
depend on our continued ability to develop and maintain our relationships with
our significant customers. We need to continue to successfully negotiate an
increased number of purchase orders to replace reduced orders with new business,
and secure longer-term contracts with a larger number of clients in order to
increase our revenues to grow our business base on a sustained basis. If we
fail
to maintain our current rate of incoming orders, our revenues would be adversely
affected.
If
we are not able to develop, manufacture, market and sell our own proprietary
pharmaceutical products, our business and competitive position in the
pharmaceutical industry may suffer.
Our
business growth strategy includes the development and sales of our own
proprietary pharmaceutical products for respiratory, dermatological, topical
and
cardiovascular drug delivery applications through our own customers’
distribution channels or with strategic marketing partners. Although we have
started developing our own proprietary pharmaceutical products, we have not
yet
begun the process of obtaining regulatory approvals for our planned products
and
have derived no revenue from any such proprietary products. Proprietary products
currently under development include generic versions of non-CFC or HFA single
molecule and combination drug respiratory inhalants, non-CFC propelled oral
sprays for cardiovascular ailments, wound irrigation and cleansing sprays that
utilize novel barrier technologies, and anti-inflammatory nasal pumps. We expect
to introduce our first proprietary product, a private-label wound care aerosol
spray utilizing a barrier-pack system, by the second half of 2006. We will
compete with other pharmaceutical companies, including large pharmaceutical
companies with financial resources and capabilities substantially greater than
ours in the development and marketing of new pharmaceutical products or generic
ones. Although we are building the resources to implement such a business
strategy and grow our business, we cannot provide assurance that we will be
able
to successfully develop or commercialize our own pharmaceutical products,
whether new products or generic ones, on a timely or cost-effective basis.
Our
ability to market our own proprietary pharmaceutical products will face
regulatory obstacles.
We
anticipate manufacturing and selling both pharmaceutical products and delivery
devices for respiratory, dermatological, topical and cardiovascular
applications. These types of products are subject to intense regulatory
supervision and scrutiny, and will require significant outlays of resources
and
manpower to achieve regulatory approvals, depending on the geographic market.
Approvals of new pharmaceutical products is a time-consuming and very expensive
process involving testing, clinical trials and approvals at various stages
of
the process by the FDA, the Canadian TPD, the UK’s MHRA, the European Union’s
EMEA, and other such regulatory agencies where we manufacture or distribute
our
products or services. Although we have commenced the development of our own
proprietary pharmaceutical products, we do not now have the capital and
resources that are necessary to commence the clinical trials that are required
to obtain the regulatory approvals to commercialize our planned proprietary
products and, therefore, have not begun such development efforts. Approval
of
medical devices we create will also require approvals from the FDA, MHRA, TPD,
EMEA and other such regulatory agencies. Such medical devices may also be
subjected to patent review and possible disallowance.
8
Our
ability to obtain regulatory approval for our products will require extensive
testing, and we lack the resources to conduct such testing.
Once
products are developed, they cannot be marketed until the completion of
extensive testing and field trials. While we have the ability to perform some
of
the testing, we will require the help of other companies and consultants. In
addition, we do not presently have the capital resources to begin the process
of
conducting testing and trials necessary to obtain regulatory approval. At any
stage of the testing process, there are the risks of injury to test subjects,
and regulatory cessation of the process despite having invested significantly
in
the product, due to risk of harm, inefficacy of the products and many other
reasons. There is no assurance we can obtain all required regulatory approvals
necessary to develop and commercialize our own pharmaceutical products. Even
if
we successfully develop and commercialize a regulatory-approved pharmaceutical
product, we may not be able to generate sales sufficient to create a profit
or
otherwise avoid a loss. As a result, there is a prolonged lead-time to begin
the
development and sale of such products, and therefore these products will not
become available for sale in the foreseeable future. If we cannot successfully
develop, commercialize and market our own pharmaceutical products, including
the
failure to obtain the necessary regulatory approvals to market such products,
we
would miss a strategic opportunity to grow our business.
Our
limited sales, marketing and distribution experience could affect our ability
to
market our potential products, which could adversely affect our potential
revenues from future product sales.
Currently,
we have limited experience in developing, training or managing a sales force.
We
will incur substantial additional expenses if we have to increase these business
activities, and the costs of expanding a sales force may exceed our product
revenues. In addition, we compete with other pharmaceutical companies, including
large pharmaceutical companies which have financial resources and sales,
marketing and distribution capabilities and expertise substantially greater
than
ours. As a result, any marketing and sales efforts that we may undertake through
our subsidiary Exaeris may be unsuccessful and may deplete our limited capital
resources.
If
we cannot implement our strategy to grow our business through product and
company acquisitions, our business and competitive position in the
pharmaceutical industry will be impeded.
Our
current business is limited to contract manufacturing of pharmaceutical delivery
devices filled with pharmaceuticals we manufacture to our customers’
specifications, and the research and testing of pharmaceuticals under
development by our customers. Our business strategy includes enhancing our
competitive position in the pharmaceutical industry through acquisitions of
regulatory approved pharmaceutical products and drug delivery devices for
respiratory, dermatological, and topical and cardiovascular drug delivery
applications or such products in development, including through the acquisition
of other pharmaceutical companies. Other pharmaceutical companies, most of
which
have substantially greater financial, marketing and sales resources than we
do,
compete with us for the acquisition of such regulatory approved products,
products in development or pharmaceutical companies.
In
order
to improve our competitive position and revenue and profitability opportunities,
we are targeting pharmaceutical products or companies that are close to
generating revenues or are already generating revenues. As we have limited
resources, we need to acquire those pharmaceutical companies that have
complementary manufacturing and quality operations, skilled management teams
and
employees, and supply chain and business and information technology systems.
The
inability to effect acquisitions of such regulatory approved products, products
in development, or other pharmaceutical industry assets will limit the rate
of
growth of our business.
9
We
will face challenges in the integration of acquisitions and if we cannot
integrate the business, products or companies we acquire, our business may
suffer.
The
integration of acquired products or pharmaceutical companies into our business
will require significant management attention and may require the further
expansion of our management team or establish our own sales force. In addition,
in order to manage acquisitions effectively, we will be required to maintain
adequate operational, quality and regulatory, financial and management
information systems and motivate and effectively manage an increasing number
of
employees and sales personnel. Furthermore, any acquisition may initially have
an adverse effect upon our results of operations while the acquired business
is
integrated into our operations. Our future success will also depend in part
on
our ability to retain or hire qualified employees to develop, sell and market
our own products and to manage and operate newly acquired companies and products
in accordance with applicable regulatory standards and on an efficient and
cost-effective basis. There can be no assurance that we will be able to
successfully integrate the operations of any company or products we may acquire.
There also can be no assurance that our personnel, systems, procedures and
controls will be adequate to support our continued growth. If we cannot
integrate our acquisitions successfully, the associated costs and loss of
opportunity could have a material adverse effect on our business and financial
condition. Moreover, in the event we are unable to successfully integrate the
operations of an acquisition, we may consider available strategic
alternatives.
The
acquisitions of Aventis PR and Ashton were completed on March 31 and August31,2005, respectively, and have substantially expanded our existing business,
facilities and staff. We are facing challenges in managing the integration
of
our Puerto Rico facilities and employees into our Company. These include
integrating those facilities, information systems, supply chain procurement
and
customer invoicing procedures into our overall operations. Our acquisition
of
Ashton involves similar challenges. There will be continuing challenges to
integrate the cultures of our United Kingdom and Puerto Rico business units,
and
to build operational and business synergies between our operations. To date,
all
of the integration activities are progressing satisfactorily. If we have any
significant delays in integrating our recent acquisitions into our business,
there is no assurance that we can operate these facilities profitably.
We
may be unable to obtain financing for the acquisitions that are available to
us.
We
will
attempt to obtain financing for acquisition opportunities through a combination
of loans and equity investments from commercial sources, seller debt financing,
issuance of our equity securities as part of the purchase price, and other
sources. Commercial sources will tend to come from investment funds, private
equity funds and other non-traditional sources, usually at a very high borrowing
cost. Use of our equity securities could result in material dilution to our
existing stockholders. There can be no assurance that we will be able to obtain
adequate financing for further acquisitions or that, if available, such
financing will be on favorable terms. We raised capital to fund the acquisition
of Ashton and the business assets of Aventis PR through asset-based secured
borrowings, which will significantly increase our debt-service obligations
in
advance of receiving steady revenues, which may place a substantial strain
on
our limited working capital.
If
we fail to meet governmental regulations, we may not be able to sell our
pharmaceutical products or services.
We
must
ensure that our products and services continuously comply with strict
requirements designed to ensure the quality and integrity of pharmaceutical
products. These requirements include the United States Federal Food, Drug and
Cosmetic Act governed by the FDA and FDA-administered cGMP regulations for
pharmaceutical manufacturers. Our products and services must also continuously
comply with the requirements of the regulatory agencies where we distribute
our
products or services, including the UK’s MHRA, the European Union’s EMEA and the
Canadian TPD. These regulations apply to all phases of our business, including
drug testing and manufacturing; record keeping; personnel management; management
and operations of facilities and equipment; control of materials, processes
and
laboratories; and packaging, labeling and distribution.
10
To
date,
we have been able to comply with these governmental regulations; however, the
U.S. Congress, the FDA, the TPD, the MHRA, the EMEA or the pharmaceutical
regulatory agency of any other country where we distribute our products or
services could impose stricter regulations in the future. Because we have a
small staff with regulatory expertise, we may have difficulty in quickly
changing our methods to comply with stricter regulations. If we fail to comply
with any of the regulations governed by a particular pharmaceutical regulatory
agency, the regulators can disqualify any data we collect in our product
development process for that country or bar us from manufacturing pharmaceutical
products or terminate our ongoing pharmaceutical product research for that
country. If we violate regulations, we could face other forms of regulatory
sanctions including fines and civil penalties, the recall of affected products,
or restrictions on our operations. In severe cases, the authorities could close
our facilities. If the authorities were to disqualify our data, bar our products
or close our facilities, even for a short period of time, our reputation could
be severely damaged. This would make it difficult for us to obtain new purchase
orders and contracts and could have a materially adverse effect on our business,
financial condition, results of operations and cash flows.
We
face potential liability for injuries to persons who use our products.
We
develop, formulate, test and produce pharmaceutical products for others intended
for use by the public. Such activities could expose us to risk of liability
for
personal injury or death to persons using such products, notwithstanding that
we
do not commercially market or sell products of our own directly to the public.
In contracts for the production of FDA-approved products for commercial sale,
we
seek to reduce our potential liability through measures such as contractual
indemnification provisions with customers (the scope of which may vary from
customer to customer and the performance of which are not assured) and by the
insurance maintained by us and our customers. Development services are typically
undertaken pursuant to purchase orders that do not include specific
indemnification or insurance provisions. Although we believe that this practice
is typical in the industry, we could be materially adversely affected if we
were
required to pay damages or incur defense costs in connection with a claim for
which no indemnity agreement is applicable; that is outside the scope of any
applicable indemnity agreement; if the indemnity, although applicable, is not
performed in accordance with its terms; or if our liability exceeds the amount
of applicable insurance or indemnity. We currently maintain product liability
insurance with coverage limits of $10 million per occurrence on claims made
basis with a maximum $10 million aggregate per policy year for products
manufactured at our Inyx USA and Inyx Pharma facilities. At our Ashton location
we currently maintain product liability insurance with coverage limits of $20
million per occurrence on claims made basis with a maximum $20 million aggregate
per policy year. We believe such coverage is adequate for our present level
of
operations.
We
will be subject to the risks of doing business in developing countries.
We
are
marketing and selling our consulting services to customers in developing
countries including those in Latin America. Accordingly, we will be subject
to
all the risks of doing business with customers in such countries, including
dealing with:
·
trade
protection measures and import or export licensing
requirements
legal
uncertainty regarding liability, tax, tariffs and other trade
barriers
·
foreign
exchange controls and other currency
risks
·
inflation
·
challenges
to credit and collections
·
expropriation
·
government
instability, war, riots, insurrections and other political
events.
11
Although
we may seek to obtain political risk insurance covering some of the events
listed above, insurance proceeds under such policies would likely not cover
all
losses, and such insurance may not be available on commercially reasonable
terms, or at all to us.
Any
delays or difficulties in the manufacture of our own products or our customers’
products may reduce our revenues, profit margins, limit the sales of our
products, or harm our reputation.
We
manufacture all of our customers’ products, and intend to manufacture the
significant majority of the pharmaceutical products we plan to develop or are
presently developing proprietarily, at our Inyx Pharma Runcorn facility in
the
United Kingdom, our Ashton facility, also in the United Kingdom, and at our
Inyx
USA Puerto Rican facility. Many of our production processes are complex and
require specialized and expensive equipment. Any unforeseen delays or
interruptions in our manufacturing operations may reduce our revenues and profit
margins. Additionally, our facilities utilize gases that are considered to
be
explosive; therefore, exposed flames and other sources of ignition represent
a
significant risk to manufacturing capability. We believe we have taken the
necessary preventative measures to mitigate such risk. All electrical circuits
are flame-proofed and all sources of ignition are strictly prohibited from
the
facility. However, there can be no assurance that such safety features will
prevent significant damage to our facilities due to accidents. In addition,
our
manufacturing output may decline as a result of other accidents, power outages,
supply shortages, natural disasters, or other disruptions of the manufacturing
process.
Any
inability to resume manufacturing after an interruption would have a significant
material adverse effect on our business. A long delay in the resumption of
the
manufacturing operation may cause growing demand for our customers’ products or
our planned products, which may exceed our ability to supply the demand if
we
are successful in resuming our manufacturing operations. If such a situation
were to occur, it may be necessary for us to seek an alternative manufacturing
source, which could materially adversely impact our ability to meet our
customers’ demands or our own requirements, or meet our customers’ and our own
pricing and distribution requirements. We cannot provide assurance that we
may
be able to find or utilize another facility in a timely or cost-effective manner
to continue to manufacture products for us and our customers. Even though we
carry business interruption insurance policies, we may suffer losses as a result
of business interruptions that exceed the coverage available under our insurance
policies.
Any
delays or difficulties in the supply of key materials or components for our
own
products or our customers’ products may reduce our revenues, profit margins,
limit the sales of our products, or harm our reputation.
We
utilize a variety of suppliers as indicated by our customers’ requirements and
our own product development and manufacturing needs. We depend on eight critical
suppliers for certain products. These suppliers are: Cebal, which provides
us
with cans; Perfect Valois, which provides valves for aerosol pharmaceutical
products; Lablabo, which provides actuators for steroidal foam products; Bespak,
which provides valves for pharmaceutical respiratory inhaler devices; Precision
Valve which provides us with aerosol valves; Nussbaum & Guhl, which
provides us with cans; Eurand SpA which provides tablets; and Innovata Biomed
plc which provides machinery for use in the DPI facility. We also utilize three
of these suppliers (Cebal, Perfect Valois and Bespak) at our Inyx USA Puerto
Rican facility. As we are dependant on these suppliers in order to deliver
goods
and services to our customers, any interruptions, delays, or the loss of any
of
these suppliers could have a material adverse affect on our business and
operations in which we may be forced to seek an alternative source, thereby
delaying the delivery of our products and services to our customers. In such
an
event, our reputation with our customers could be severely damaged, which may
make it difficult for us to maintain our current purchase orders and contracts
with affected customers or obtain new purchase orders and contracts from that
customer. We do not have long term supply contracts with our suppliers other
than routine purchase orders. This generally serves to reduce our commitment
risk but does expose us to supply risk and to price increases that we may not
be
able to pass on to our customers.
12
As
a public company, we may incur increased costs as a result of recently enacted
and proposed changes in laws and regulations relating to corporate governance
matters and public disclosure.
Recently
enacted and proposed changes in the laws and regulations affecting public
companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules
adopted or proposed by the SEC, and by our principal trading market, will result
in increased costs to us as we evaluate the implications of these laws,
regulations and standards and respond to their requirements. These laws and
regulations could make it more difficult or more costly for us to obtain certain
types of insurance, including director and officer liability insurance, and
we
may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. The impact
of
these events could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, our board committees
or as
executive officers. We cannot estimate the amount or timing of additional costs
we may incur as a result of these laws and regulations.
We
must maintain and add key management and personnel.
Our
success is heavily dependent on the performance of our executive officers and
managers. We have entered into employment agreements with these individuals,
including Jack Kachkar, our Chairman and Chief Executive Officer, Steven
Handley, our President and Chief Production Officer, and Colin Hunter, our
Chief
Scientific and Regulatory Officer. None of such persons has signified any
intention to retire or leave the Company. Our growth and future success will
depend, in large part, on the continued contributions of these key individuals
as well as our ability to motivate and retain these personnel. In addition,
our
proposed plan of development will require an increase in management, scientific
and sales and marketing personnel, and investment in the professional
development of the expertise of our existing employees and management. We are
currently seeking additional senior management executives and sales and
marketing executives to join our Company. Although we have been able to hire
and
retain qualified personnel, due to our limited financial resources, there can
be
no assurance that we will be successful in recruiting and retaining all such
key
personnel to integrate our operations as required and to successfully implement
our growth strategy.
Foreign
exchange risks may result in losses due to fluctuations in the rates of currency
exchange.
The
Company’s functional currency is the United States dollar. Currently, most of
our sales occur outside the U.S. market and are denominated in foreign
currencies, principally, the Great Britain Pound sterling (“GBP”) (£) and the
Euro dollar (“Euro”) (€). However our non U.S. subsidiaries maintain both assets
and liabilities in local currencies. Therefore, foreign exchange risk is
generally limited to net assets or liabilities denominated in those foreign
currencies. The principle currencies creating foreign exchange risk are
the GBP, the Euro and to a lesser extent, the Canadian dollar. In 2005, more
than 64% of our consolidated sales were realized in British pounds. While
we
incur expenses in those currencies, the impact of these expenses does not
fully
offset the impact of currency exchange rates on our revenues. As a result,
currency exchange rate movements can have a considerable impact on our earnings.
For example, at December 31, 2005, the exchange rate of the GBP to the USD
was
$1.72 compared with $1.93 at December 31, 2004, and the exchange rate between
of
the Euro to USD was $1.18 at December 31, 2005 compared with $1.38 at December31, 2004 .We do not currently engage in any hedging activities designed to
stabilize the risks of foreign currency fluctuations. However, we intend
to
implement hedging transactions in the future as we may require. Such
fluctuations could adversely affect the value of our revenues and the results
of
our operations stated in U.S. dollars.
13
RISKS
RELATED TO OUR INDUSTRY
We
face significant competition from pharmaceutical companies and others, which
may
cause us to lower prices or lose business.
We
compete directly with several pharmaceutical product development organizations,
contract manufacturers of pharmaceutical products and university research
laboratories. Most companies who produce pharmaceutical products do not engage
in product development. Historically, most companies who provide product
development services do not also have the equipment or expertise to manufacture
products. However, many of our competitors, particularly large established
pharmaceutical and biotechnology companies, have significantly greater resources
than we do. If any of these current competitors, or new competitors, decide
to
provide the same services that we provide at lower prices, we may be forced
to
lower our prices or lose business. In addition, in some situations our customers
and potential customers may determine to retain the manufacture of devices
to
deliver their products, depriving us of the potential business from these
services. Upon the happening of any of these events, our revenues and
profitability will decrease. Because many of our competitors have substantially
greater financial resources, they would be able to sustain these pricing
pressures better than we could. We are a small company with limited financial
resources, so such pricing pressure could have a greater adverse effect on
our
business than it could on a larger, better capitalized company.
Our
revenues may be adversely affected by generic competition to our customers’
branded products or branded products that we develop or acquire.
As
we
receive revenues for the contract development and manufacturing of our
customers’ branded pharmaceutical products, these revenues, and the potential
revenues from the commercialization and marketing of our own proprietary branded
products, may be adversely affected if such branded products begin to face
generic competition. In addition to the generic competition that our own
potential products may face, if the entry of a generic product negatively
affects a particular branded product’s market share, our customers’ product
requirements for these branded products may decline thereby adversely affecting
our business with these customers. Additionally, our customers’ market share for
their branded products may be reduced due to governmental and other pressures
to
reduce costs through the increased use of generic substitutes. Also, our
potential branded products or our customers’ branded products for which there is
no generic form available may face competition from different therapeutic agents
used for the same indications for which such branded products are used.
Increased competition from the sale of generic pharmaceutical products or from
different therapeutic agents used for the same indications for which such
branded products are used may cause a decrease in revenue from the development,
manufacturing and sale of these branded products.
We
may face product development competition from pharmaceutical companies and
others.
Our
business growth strategy includes the development and sales of our own
pharmaceutical products for respiratory, dermatological and topical drug
delivery applications. We will compete with other pharmaceutical companies,
including large pharmaceutical companies with financial resources and
capabilities substantially greater than ours, in the development and marketing
of new pharmaceutical products or generic ones. We may therefore face
competition from such companies that may develop products or acquire
technologies for the development of products that are the same as or similar
to
the products we presently have in development or plan to develop. Because there
is rapid technological change in the industry and because many other companies
may have more financial resources than we do, such companies may develop or
license their products more rapidly than we can, complete the applicable
regulatory approval process sooner than we can, market their products before
we
can market our products or offer these new products at prices lower than our
prices. Additionally, technological developments or the regulatory approval
of
new therapeutic indications for existing products may make the products we
are
developing or planning to develop difficult to market successfully or obsolete.
Such events may have a negative impact on the sales of our newly developed
products and result in a depletion of the capital we have available to pursue
these products.
14
Our
business involves environmental risks and we may incur significant costs
complying with environmental laws and regulations.
We
utilize a variety of chemicals in our business, many of which are dangerous
if
used or handled improperly. A substantial number of the chemicals we handle
are
classified as dangerous due to their toxicity, corrosiveness, ability to cause
irritation or flammability. Wastes from our manufacturing and testing processes
are either collected in drums and removed by a waste contractor or discharged
into public sewers pursuant to a Trade Effluent Discharge Consent. The Company
takes stringent precautions in the storage and use of these materials and
constantly trains its personnel in their use. Because of this, we have not
caused any release of hazardous materials into the environment or exposed any
of
our employees to health risks. We maintain liability and product liability
insurance covering the risks of such exposure, in amounts we deem to be
adequate.
Under
government regulations governed by the Montreal Protocol on Substances That
Deplete the Ozone Layer, chlorofluorocarbon (“CFC”) compounds are being phased
out because of environmental concerns. We presently manufacture respiratory
inhalers that utilize CFC gas as a propellant. Although we have expertise in
converting such products to non-CFC based respiratory inhalers and manufacture
non-CFC or hydrofluoroalkane (“HFA”) respiratory inhalers, a small number of our
customers continue to require CFC respiratory inhalers. These customers sell
these products in a number of countries that still allow the import and
marketing of CFC-based respiratory inhalers. As the CFC gas is sold to us under
strict European Union guidelines and quotas, if customer demand exceeds our
present quota, our ability to manufacture CFC-based respiratory inhalers can
be
materially adversely affected, which could result in lost sales opportunities.
Presently, our quota is sufficient to meet our customers’ demand.
RISKS
RELATED TO OUR STOCK
We
do not expect to pay dividends.
We
do not
intend to pay cash dividends on our Common Stock in the foreseeable future.
Furthermore, for the foreseeable future, we intend to retain profits, if any,
to
fund our planned growth and expansion
Shares
that may be eligible for future sale may adversely affect the market price
of
our Common Stock.
Sales
of
substantial amounts of Common Stock by shareholders in the public market, or
even the potential for such sales, are likely to adversely affect the market
price of the Common Stock and could impair our ability to raise capital by
selling equity securities. As of May 19, 2006, we believe that 37,799,866 of
the
50,389,860 shares of Common Stock currently issued and outstanding are freely
transferable without restriction or further registration under the securities
laws, unless held by “affiliates” of the Company, as that term is defined under
the securities laws.
Our
company is substantially controlled by our management team.
As
of May19, 2006, the executive officers, key employees and directors of our Company
and
their family members, associates and their affiliates beneficially owned
approximately 38.0% of the issued and outstanding shares of our common stock.
Accordingly, and because there is no cumulative voting for directors, our
executive officers and directors will be in a position to influence the election
of all the directors of the Company and to control through their stock ownership
the business of the Company. The management of the Company is controlled by
our
Board of Directors, comprised of two independent directors and three executive
directors consisting of the Chairman and Chief Executive Officer of the Company,
the President of the Company, and the Executive Vice President and Chief
Scientific Officer of the Company.
15
We
have certain anti-takeover provisions that may entrench management and make
their removal from office more difficult.
Our
Articles of Incorporation and Bylaws make it difficult to effect a change in
control of the Company and replace incumbent management. Our Articles of
Incorporation authorize the Board of Directors to issue preferred stock in
classes or series, and to determine voting, redemption and conversion rights
and
other rights related to such class or series of preferred stock that, in some
circumstances, could have the effect of preventing a merger, tender offer or
other takeover attempt which the Board of Directors opposes. Such provisions
could also exert a negative influence on the value of the common stock and
of a
shareholder’s ability to receive the highest value for the common stock in a
transaction that may be hindered by the operation of these provisions. The
Company’s directors may be elected for three-year terms, with approximately
one-third of the Board of Directors standing for election each year, which
may
make it difficult to effect a change of incumbent management and control. In
addition, directors may be removed only for “cause” as defined in our Articles
of Incorporation and Bylaws, and our Bylaws require an action by more than
two-thirds of shares outstanding to call a special meeting of shareholders.
All
of these features may also serve to entrench management and make their removal
more difficult.
There
is potential volatility in the price of our stock.
The
market price of the shares of our common stock, like the securities of many
other Over-The-Counter traded companies may be highly volatile. As of May 19,2006, such price has ranged from $0.30 to $3.01 since late 2002 when there
was
limited activity in the company. See “Price Range of Common Stock and Dividend
Policy.” Factors such as developments in our relationships with our customers,
material adverse events to our customers, changes in U.S. FDA and other
governmental regulations, market changes in the pharmaceutical industry, loss
of
key company executives, sales of large numbers of shares of our common stock
by
existing stockholders and general market conditions may have a significant
effect on the market price of our common stock. In addition, U.S. stock markets
have experienced extreme price and volume fluctuations in the past. This
volatility has significantly affected the market prices of securities of many
pharmaceutical and biotechnology companies, and companies such as ours in
related industries, for reasons frequently unrelated or disproportionate to
the
operating performance of the specific companies. These broad market fluctuations
may adversely affect the market price of our common stock.
If
outstanding options and warrants are converted, the value of those shares of
common stock outstanding just prior to the conversion will be diluted.
As
of
March 31, 2006, there were outstanding options and warrants to purchase
21,935,176 shares of common stock, with exercise prices ranging from $0.80
to
$3.10 per share. If the holders exercise a significant number of these
securities at any one time, the market price of the common stock could fall.
The
value of the common stock held by other shareholders will be diluted. The
holders of the options and warrants have the opportunity to profit if the market
price for the common stock exceeds the exercise price of their respective
securities, without assuming the risk of ownership. If the market price of
the
common stock does not rise above the exercise price of these securities, then
they will expire without exercise. The holders of these options and warrants
may
also exercise their securities if we are able to raise capital privately or
from
the public on terms more favorable than those provided in these securities.
We
cannot predict exactly if, or when, such a financing will be needed or obtained.
Furthermore, we cannot predict whether any such financing will be available
on
acceptable terms, or at all.
This
Prospectus and the documents incorporated by reference into it contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, such as statements relating to our financial condition, results of
operations, plans, objectives, future performance and business operations.
These
statements relate to expectations concerning matters that are not historical
fact. Accordingly, statements that are based on management’s projections,
estimates, assumptions, and judgments are forward-looking statements. These
forward-looking statements are typically identified by words or phrases such
as
“believes,”“expects,”“anticipates,”“plans,”“estimates,”“approximately,”“intend,” and other similar words and phrases, or future or conditional verbs
such as “should,”“would,”“could,” and “may.” These forward-looking statements
are based largely on our current expectations, assumptions, estimates,
judgments, and projections about our business and our industry, and they involve
inherent risks and uncertainties. Although we believe our expectations are
based
on reasonable assumptions, judgments, and estimates, forward-looking statements
involve known and unknown risks, uncertainties, contingencies, and other factors
that could cause our or our industry’s actual results, level of activity,
performance or achievement to differ materially from those discussed in or
implied by any forward-looking statements made by or on behalf of Inyx, Inc.
and
could cause our financial condition, results of operations, or cash flows to
be
materially adversely affected. In evaluating these statements, some of the
factors that you should consider include those described under “Risk Factors”
and elsewhere in this Prospectus or incorporated herein by
reference.
We
will
not receive any of the proceeds from the sale of the common stock offered by
this Prospectus. The Selling Stockholders will receive all of the
proceeds.
We,
however, will receive funds upon any exercise of the warrants held by the
Selling Stockholders. If any of such warrants are exercised, we will receive
the
exercise price of the warrants. Any funds received upon exercise of the warrants
will be applied to our working capital needs. There can be no assurance that
any
of the warrants will be exercised.
18
SELLING
STOCKHOLDERS
This
Prospectus relates to the resale of shares of our common stock by the selling
stockholders and the issuance of shares to the holders of the above-described
notes in lieu of the repayment of debt or debt service with cash. The table
below sets forth information with respect to the resale of shares of our
common
stock by the selling stockholders. We will not receive any proceeds from
the
resale of common stock by the selling stockholders, although we would receive
proceeds from the exercise of warrants and we will benefit from the reduction
of
indebtedness if we elect to repay debt service to Laurus Funds in additional
shares of common stock. Assuming all of the shares of our common stock
registered below are sold by the respective selling stockholders, such selling
stockholders will continue to own shares of our common stock as set forth
below.
Any relationship between each selling stockholder and the Company is noted
below. As to each entity that holds more than 1% of our Company’s outstanding
common stock, the footnote for such entity identifies the natural person
who
exercises voting and dispositive rights as to such shares.
Name
of Selling Stockholder
Maximum
Number of Shares of Common Stock Beneficially Owned Prior to
the
Offering
Maximum
Number of Shares Sold Hereby
Number
of Shares of Common Stock Owned Following the Offering Assuming
Sale of
All Shares Offered Hereby
Shares
Warrants
Ron
Hodgson
(1)
1,100,000
—
1,100,000
—
JEM
Family Trust
(2)
7,600,000
—
2,600,000
5,000,000
J.
Douglas Brown
(3)
100,000
850,000
200,000
750,000
The
Garrard Group(4)
—
200,000
200,000
—
Capital
Financial Media, Inc.
(5)
—
100,000
100,000
—
MW
Crow Family L.P. (6)
—
795,000
795,000
—
Robert
MacGregor (6)
—
30,000
30,000
—
Gary
Geraci
—
150,000
150,000
—
National
Financial
Communications
Corp.
(7)
—
150,000
150,000
—
Rick
Iler
—
20,000
20,000
—
Laurus
Master Fund, Ltd. (8)
1,971,504
3,581,500
5,553,004
—
October
30 Private Placement:
Alpha
Capital AG (9)
300,000
150,000
450,000
—
Renaissance
US Growth
Investment
Trust PLC
(10)
300,000
150,000
450,000
—
Renaissance
Capital Growth &
Income
Fund III
(10)
300,000
150,000
450,000
—
FBO
BFS US Special
Opportunities
Trust
(10)
300,000
150,000
450,000
—
Insiders
Trend Fund, LP (11)
100,000
50,000
150,000
—
Richard
Molinsky
100,000
50,000
150,000
—
Otape
Investments, LLC (12)
250,000
125,000
375,000
—
Bridges
& Pipes, LLC (13)
200,000
100,000
300,000
—
Gryphon
Master Fund, LP
(14)
600,000
300,000
900,000
—
Porter
Partners, LP (15)
150,000
75,000
225,000
—
Gamma
Opportunity Capital
Partners,
LP (16)
200,000
100,000
300,000
—
Wayne
Saker
50,000
25,000
75,000
—
Kenneth
Greif
150,000
75,000
225,000
—
Total
13,771,504
7,376500
15,398,004
5,750,000
(1)
Ron
Hodgson is a former director of the Company who resigned in
2003.
(2)
JEM
Family Trust is a discretionary family trust for the benefit of
Dr. Jack
Kachkar and his immediate family members. Dr. Kachkar, the Company’s
Chairman and CEO, is a beneficiary of the Trust along with his
spouse and
two children. Dr. Kachkar and the other beneficiaries of the JEM
Family
Trust possess no right to vote, dispose of, or otherwise control
any
shares held by the Trust and therefore have no direct beneficial
ownership
of shares held by the Trustee, Mr. Larry Stockhamer. Mr. Stockhamer
is
also the Trustee for First Jemini Trust, a family trust also for
the
benefit of Kachkar family members. First Jemini Trust holds five-year
warrants to purchase 1,500,000 shares of the Company’s common stock
exercisable at $0.90 per share. The common shares issuable upon
exercise
of such warrants are not being registered
hereby.
(3)
J.
Douglas Brown is a director of the Company. In addition to 100,000
shares
of common stock owned of record and beneficially held, Mr. Brown
also
holds a three-year warrant to purchase 100,000 shares of common
stock
exercisable at $1.50 per share; a five-year warrant to purchase
300,000
shares of common stock exercisable at $0.90 per share; a five-year
warrant
to purchase 450,000 shares of common stock exercisable at $0.95
per
shares;
(4)
Voting
and dispositive power held by Pat
Garrard.
(5)
Voting
and dispositive power held by Brian Sodi and Kyle
Hodgens.
(6)
Transferee
from Duncan Capital, LLC. M.W. Crow holds voting and dispositive
power for Duncan Capital.
(7)
Voting
and dispositive power held by Geoff
Eiten.
(8)
Consists
of 1,971,504 shares and five-year warrants to purchase 3,581,500
shares of
the Company’s common stock at exercise prices ranging from $0.81 to $2.57
per share. According to the Company’s agreements with Laurus Fund, Laurus
Funds cannot hold more than 4.99% of the Company’s total issued and
outstanding stock at one time. Laurus Funds’ voting and dispositive power
is held by Eugene Grin and his brother David
Grin.
(9)
Voting
and dispositive power held by Konrad Ackerman and Ranier
Posch.
(10)
Voting
and dispositive power held by Russell Cleveland. FBO BFS US Special
Opportunities Trust’s shares and warrants were formerly held by BFS US
Special Options PLS. There was no change to the beneficial ownership
of
such shares.
(11)
Voting
and dispositive power held by Anthony
Marchese.
(12)
Voting
and dispositive power held by Ira M.
Leventhal.
(13)
Voting
and dispositive power held by Gryphon Partners, L.P., a Bermuda
limited
partnership, whose principal is E.B. Lyon
IV.
(14)
Voting
and dispositive power held by Jeffrey H.
Porter.
19
PLAN
OF DISTRIBUTION
The
Selling Stockholders and any of their pledgees, assignees, and
successors-in-interest (including distributees) may, from time to time, sell
any
or all of their shares of common stock of INYX offered hereby on any stock
exchange, market or trading facility on which such shares are traded or in
private transactions. These sales may be at fixed or negotiated prices. The
Selling Stockholders may use anyone or more of, or a combination of, the
following methods when selling shares
·
ordinary
brokerage transactions and transactions in which a broker/dealer
solicits
purchasers;
·
block
trades in which a broker/dealer will attempt to sell the shares as
agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
·
purchases
by a broker/dealer as principal and resale by the broker/dealer for
its
account; an exchange distribution in accordance with the rules of
any
applicable exchange;
·
privately
negotiated transactions;
·
settlement
of short sales;
·
broker/dealers
may agree with the Selling Stockholders to sell a specified number
of such
shares at a stipulated price per
share;
·
a
combination of any such methods of sale;
and
·
any
other method permitted pursuant to applicable
law.
The
Selling Stockholders also may sell shares under Rule 144 under the Securities
Act if available, rather than under this Prospectus.
Broker/dealers
engaged by the Selling Stockholders may arrange for other broker/dealers to
participate in sales. Broker/dealers may receive commissions or discounts from
the Selling Stockholders (or, if any broker/dealer acts as agent for the
purchaser of shares from the purchaser) in amounts to be negotiated. The Selling
Stockholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved.
The
Selling Stockholders may from time to time pledge or grant a security interest
in some or all of the shares or warrants or shares of common stock issuable
upon
exercise of warrants owned by them and, if they default in the performance
of
their secured obligations, the pledgees or secured parties may offer and sell
the shares of common stock from time to time under this Prospectus, or under
an
amendment to this Prospectus under the applicable provision of the Securities
Act amending the list of Selling Stockholders to include the pledgee, transferee
or other successors in interest as Selling Stockholders under this
Prospectus.
The
Selling Stockholders and any broker/dealers or agents that are involved in
selling the shares may be deemed to be “underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker/dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. The Selling Stockholders have informed
the
Company that they do not have any agreement or understanding, directly or
indirectly, with any persons to distribute the common stock.
We
are
required to pay all fees and expenses incident to the registration of the
shares. We have agreed to indemnify the Selling Stockholders against certain
losses, claims, damages and liabilities, including liabilities under the
Securities Act.
UNDER
THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), ANY PERSON
ENGAGED IN THE DISTRIBUTION OF THE SHARES OF COMMON STOCK MAY NOT SIMULTANEOUSLY
ENGAGE IN MARKET-MAKING ACTIVITIES WITH RESPECT TO THE COMMON STOCK FOR
SPECIFIED PERIODS OF TIME PRIOR TO THE START OF THE DISTRIBUTION. IN ADDITION,
EACH SELLING STOCKHOLDER AND ANY OTHER PERSON PARTICIPATING IN A DISTRIBUTION
WILL BE SUBJECT TO THE EXCHANGE ACT, WHICH MAY LIMIT THE TIMING OF PURCHASES
AND
SALES OF COMMON STOCK BY THE SELLING STOCKHOLDER OR ANY SUCH OTHER
PERSON.
Our
common stock is traded in the over-the-counter market on the NASDAQ OTC Bulletin
Board under the symbol IYXI. The following table sets forth the high and low
bid
and asks prices of the Company's common stock for each full quarterly period
within the last two fiscal years. These market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
As
of
March 31, 2006, 47,996,994 common shares of the Company's common stock net
of
600,366 treasury stock were held of record by 224 holders of record, and an
unknown number of beneficial stockholders.
Dividends
We
have
never paid any dividends, and we do not anticipate any stock or cash dividends
on our common stock in the foreseeable future.
Inyx, Inc. (“Inyx”, “we”, “us”, “our”, or the “Company”), through its
wholly-owned subsidiaries, Inyx USA, Ltd. (“Inyx USA”), Inyx Pharma Limited
(“Inyx Pharma”), Inyx Canada Inc. (“Inyx Canada”), Inyx Europe Limited (“Inyx
Europe”), including Inyx Europe's wholly-owned subsidiary, Ashton
Pharmaceuticals Limited (“Ashton Pharmaceuticals” or “Ashton”) , and Exaeris
Inc. (“Exaeris”), is a specialty pharmaceutical company that focuses on the
development and manufacturing of prescription and over-the-counter (“OTC”)
pharmaceutical products. We also provide specialty pharmaceutical development
and manufacturing consulting services to the international healthcare market.
By
“specialty pharmaceutical”, we mean that we specialize in developing and
producing niche pharmaceutical products and drug delivery applications for
the
treatment of respiratory, allergy, dermatological, topical and cardiovascular
disease conditions. We intend to expand our product research and development
activities with our own line of prescription and OTC pharmaceuticals, but
we
have not yet commercialized for sale our own products or drug delivery
technologies. In late 2005, we commenced implementation of our product marketing
and distribution capabilities and started to assemble our own sales force,
which
we will continue building in 2006.
A material element of our growth strategy is to expand our existing business
through strategic acquisitions of pharmaceutical products and drug delivery
devices that are complementary to our expertise, including those through
the
acquisition of other pharmaceutical companies. We, therefore, continually
evaluate opportunities to make strategic acquisitions of specialty
pharmaceutical products, drug delivery technologies or businesses. We completed
our first specialty pharmaceutical business acquisition, Inyx Pharma, pursuant
to a stock exchange agreement in April 2003. On March 31, 2005, we completed
the
acquisition of the business assets of Aventis Pharmaceuticals Puerto Rico,
Inc.
(“Aventis PR”), part of the Sanofi-Aventis Group, for a purchase price of
approximately $20.7 million and on August 31, 2005, we completed the acquisition
of Celltech Manufacturing Services Limited (“CMSL”) for a purchase price of
approximately $40.7 million. On September 9, 2005, we changed the “CMSL” name to
Ashton Pharmaceuticals.
22
Inyx is a Nevada corporation headquartered in the United States. Our corporate
address is 825 Third Avenue, 40th Floor, New York, New York10022, and our
telephone number is (212) 838-1111; fax (212) 838-0060. Our wholly-owned
subsidiaries are:
·
Inyx
Pharma, a corporation formed under the laws of England and Wales,
with
offices and product development and manufacturing facilities in
Runcorn,
Cheshire, England.
·
Inyx
Canada, a Canadian corporation, located in Toronto, Ontario, that
we
established in May 2003 to provide pharmaceutical manufacturing
consulting
services to the pharmaceutical industry and administrative and
business
development support to the rest of our Company.
·
Inyx
USA, an Isle of Man company that we established to operate as an
off-shore
company in Puerto Rico, in order to manage and operate our U.S.
pharmaceutical operations, including the business assets acquired
from
Aventis PR on March 31, 2005.
·
Inyx
Europe, a corporation formed under the laws of England and Wales
with
offices in Manchester, England, that we established in May 2005
to pursue
strategic business development activities in Europe. Inyx Europe’s
wholly-owned subsidiary, Ashton Pharmaceuticals (f/k/a CMSL), is
also a
corporation formed under the laws of England and Wales with offices
and
manufacturing facilities in Ashton, Lancashire,
England.
·
Exaeris
Inc., a corporation formed under the laws of Delaware, headquartered
in
Exton, Pennsylvania, a suburb of Philadelphia, which we established
in
March 2005 to manage and operate the Company’s pharmaceutical marketing
and commercial business activities.
The
following diagram sets forth the direct and indirect percentage ownership
by the
Company of each of its subsidiaries:
Most
monetary amounts described herein are stated in either United States dollars
($)
or Great Britain pounds (£). The exchange rate between the two currencies on
December 31, 2005, was approximately £1 = $1.72, and the average exchange rate
for the period from January 1, 2005, through December 31, 2005, was
approximately £1 = $1.82. The exchange rate between the two currencies on
December 31, 2004, was approximately £1= $1.93, and the average exchange
rate for the period from January 1, 2004, through December 31, 2004, was
approximately £1 = $1.83.
23
Company
History
Inyx
was formerly known as Doblique, Inc. (“Doblique”). Doblique was incorporated
under the laws of Nevada in March 2000. In July 2002, Doblique became a
publicly-traded company when we completed a registration statement for the
sale,
by our principal stockholder, of 2,450,000 shares of common stock. At that
time,
Doblique was in the business of owning and racing thoroughbred
horses.
On March 24, 2003, in accordance with the terms of a stock exchange
agreement, our controlling stockholder at the time accepted an unsolicited
offer
to sell a controlling block of 2,250,000 shares of our common stock,
representing approximately 45% of our Company's issued and outstanding shares,
to Medira Investments LLC (“Medira”). Medira subsequently transferred such
shares to its principal, Ms. Viktoria Benkovitch, the wife of Dr. Jack
Kachkar, our Company's Chairman and CEO. Also, as part of the sale of shares
to
Medira, our controlling stockholder released and discharged all liabilities
of
the Company to her. Prior to that transaction, on March 6, 2003, all of
Doblique's prior business was sold to a third party.
On April 22, 2003, we announced that we had agreed to acquire all of the
issued and outstanding securities of Inyx Pharma. Previously, on March 7,2003, Inyx Pharma had purchased the majority of the pharmaceutical business
assets of Miza Pharmaceuticals (UK) Ltd. (“Miza UK”) out of Administration (a
United Kingdom form of bankruptcy protection and reorganization) for a purchase
price of approximately $8.3 million. The Miza UK assets acquired by Inyx
Pharma
consisted of one aerosol manufacturing site and a pharmaceutical development
operation. As such, Inyx Pharma received all of the property, plant, machinery
and equipment, inventory, customer base, employees, and know-how and
intellectual property to continue to manage and run those acquired parts
of the
Miza UK operation as a going concern.
On
April 28, 2003, we acquired Inyx Pharma. The transaction consisted of an
exchange of 100% of the outstanding common stock of Inyx Pharma for 16,000,000
shares of our restricted common stock, representing approximately 64% of
the
approximately 25,000,000 shares issued and outstanding in our Company after
the
exchange. As a result of this exchange, Inyx Pharma became our wholly-owned
subsidiary.
The Inyx Pharma acquisition was our first pharmaceutical acquisition. As
such,
to reflect our new operating business, we changed our corporate name on
May 6, 2003 from Doblique to Inyx. Our principal business following this
acquisition was the activity of Inyx Pharma and its related pharmaceutical
industry operations. Inyx Pharma focuses its expertise on development-led
manufacturing in the sterile pharmaceutical, finished-dosage form, outsourcing
sector. It specializes in niche products and technologies for the treatment
of
respiratory, allergy, dermatological, and topical and cardiovascular conditions.
Inyx Pharma's client base is comprised of blue-chip ethical pharmaceutical
companies, branded generic firms and biotechnology groups.
On
March31, 2005, Inyx USA acquired the business assets of Aventis PR from the
Sanofi-Aventis Group. The acquisition was accounted for as a business
combination in accordance with Statement of Financial Accounting Standard
No.
141“Business
Combinations”
(“SFAS
No. 141”).
In
connection with this acquisition, Inyx USA paid approximately $20.7 million
as a
total purchase price comprising of a cash payment of approximately $19.7
million
paid upon closing, approximately $2.7 million in direct transaction costs
(including approximately $90,000 of additional transaction costs incurred
subsequent to closing), a subsequent purchase price adjustment of approximately
$570,000 paid to Aventis PR in August 2005, and received a purchase price
reduction amounting to approximately $2.3 million relating to the final value
assigned to the commercial contracts transferred to the Company on acquisition
as agreed by the Company and Aventis PR, pursuant to a purchase price settlement
adjustment in November 2005. Aventis PR is a pharmaceutical manufacturing
operation producing dermatological, respiratory and allergy products under
contract manufacturing agreements with third party customers. The results
of
operations of the acquired Aventis PR business assets are included in the
Company's consolidated results of operations effective April 1, 2005 (the
day
after completion of the acquisition of such business assets).
24
As a result of the purchase of the business assets of Aventis PR, Inyx owns
all
of the plant, machinery, equipment, land and buildings, tangible assets,
books
and records, permits and pharmaceutical, technical and regulatory know-how
and
computer software, data and documentation related to the Aventis PR operation
in
Manatí, Puerto Rico.
On
August31, 2005, the Company through its wholly-owned United Kingdom subsidiary,
Inyx
Europe, completed the purchase of all of the outstanding shares of Celltech
Manufacturing Services Limited (“CMSL”), a United Kingdom pharmaceutical
manufacturing company, from UCB Pharma Limited (“UCB Pharma”), for approximately
$40.7 million comprised of an initial deposit of approximately $610,000,
a cash
payment at closing of approximately $23.2 million, a purchase price deferral
of
approximately $9.8 million payable in six installments, an amount equivalent
to
$4.6 million representing the excess working capital over the targeted working
capital at closing agreed to between the parties and acquisition costs of
approximately $2.4 million, and thereby assumed possession and control of
the
operations of CMSL effective September 1, 2005. On September 9, 2005, the
Company changed the “CMSL” name to Ashton Pharmaceuticals Limited. Ashton
currently operates as a wholly-owned subsidiary of Inyx Europe, and its
operating results are included in the Company’s consolidated results of
operations effective September 1, 2005 (the day after completion of the
acquisition of all of the outstanding stock of Ashton).
On March 29, 2005, we incorporated Exaeris Inc. (“Exaeris”), a wholly-owned
Delaware corporation, to manage and operate our pharmaceutical marketing
and
commercial activities, including those through collaborative agreements with
other companies. By being headquartered in Exton, Pennsylvania, a suburb
of
Philadelphia, we believe that Exaeris may benefit from Pennsylvania's
progressive programs that support emerging pharmaceutical and biotech
organizations, as well as gain access to a significant base of pharmaceutical
talent and development initiatives in the area.
Exaeris commenced formal operations in January 2006 as our marketing and
commercial arm in North America. Our strategy is to have Exaeris focus on
the
sales and marketing of niche or enhanced generic pharmaceutical products,
including our clients' products and our own planned proprietary products
in the
respiratory, allergy, dermatological, topical and cardiovascular treatment
market sectors. Although it operates independently of our client manufacturing
operations, we believe that Exaeris will create more possibilities for business
collaborations and greater opportunities to commercialize both client’s products
and our own planned proprietary products in the United States and Canada.
Exaeris will also seek to capitalize on opportunities to acquire products
of
other pharmaceutical companies which are no longer core assets. Exaeris’ focus
is on the sales and marketing of niche or enhanced pharmaceutical products
in
the respiratory, allergy, dermatological, topical and cardiovascular treatment
market sectors. Exaeris is presently organizing its management team and sales
force, which is being established initially through a commercial relationship
with a pharmaceutical contract sales representative organization.
In
addition to continuing to develop a sales force, Exaeris' management team's
initial primary focus will be to provide the sales, marketing and product
promotion support required for our product development, manufacturing and
marketing collaboration agreements with King Pharmaceuticals, Inc. (“King”)
regarding King's Intal®
and
Tilade®
products.
Intal®
and
Tilade®
are
non-steroidal, anti-inflammatory agents for the management of asthma. Such
multi-year agreements were signed on September 8, 2005 and include the formation
of an Alliance Management Committee (“AMC”), comprised of three senior
executives from each company who will plan, administer and monitor the
activities of parties under the noted agreements. Under the King marketing
and
collaboration agreements, Exaeris commenced co-promoting and marketing
Intal®
and
Tilade®
in
2006.
Exaeris
is pursuing other collaborative product marketing and promotion agreements
as
such opportunities arise. We believe that Exaeris provides the commercial
and
marketing resources to complement Inyx’s development and manufacturing
operations, making our Company a vertically integrated, specialty pharmaceutical
company.
25
Business
Operations
Our
Company is focused on the development and contract manufacturing of prescription
and over-the-counter (“OTC”) pharmaceutical products to our clients in the
respiratory, allergy, dermatological, topical and cardiovascular markets.
We
also provide pharmaceutical development and manufacturing consulting and
research services in these market sectors. We intend to expand our product
research and development activities into our own lines of prescription and
OTC
pharmaceutical products, but we have not yet commercialized or marketed any
of
our own products or drug delivery applications. We are continuously attempting
to complement our organic growth opportunities through strategic acquisitions
of
pharmaceutical products and drug delivery devices that are complementary
with
our expertise, including those through the acquisition of other pharmaceutical
companies.
All
of
our material sales in 2005 were derived from one business segment: the contract
manufacturing of pharmaceutical products. Although we also perform product
research and development activities, at this time these business activities
and
our manufacturing consulting services primarily support our manufacturing
operations for the benefit of our customers. By the end of 2006, we expect
to be
operating in three business segments: manufacturing outsourcing services,
commercial marketing and distribution, and the sale of our own proprietary
products.
Although
we have started developing our own proprietary pharmaceutical products, we
have
not yet commenced the marketing or sale of any such products. We believe
that
once we have commercialized and started to market our own product lines,
such
products should offer greater profit margins than those provided by our contract
manufacturing services. We are currently focusing our own research and
development activities on inhalation-therapy drug delivery devices and
inhalation methods, and generic prescription and over-the-counter aerosol
pharmaceutical products for respiratory, allergy, dermatological, and topical
and cardiovascular applications. Proprietary products under development include
generic versions of non-chlorofluorocarbon (“CFC”) or hydrofluoroalkane (“HFA”)
single molecule and combination drug respiratory inhalants, including those
utilizing the lipid-binding matrix technology acquired from Phares, non-CFC
propelled oral sprays for cardiovascular ailments, wound irrigation and
cleansing sprays that utilize novel barrier technologies, and anti-inflammatory
nasal pumps.
While
we
do not currently derive any revenues from the sale of our own products, it
is
anticipated that our first proprietary product should be ready for commercial
marketing by the second half of 2006 (see “Product Development”). We plan to
distribute our proprietary products through our own sales force, our customers'
distribution channels and/or in collaboration with strategic marketing partners,
although we do not yet have any distribution agreements for our planned products
formally finalized.
The
Pharmaceutical Manufacturing Outsourcing Sector
According
to an August 2005 report by Frost and Sullivan (the “Frost and Sullivan
Report”), pharmaceutical companies are outsourcing their manufacturing and
packaging requirements increasingly, allowing them to focus on core competencies
such as the research and development of new drug products. During 2004, the
secondary manufacturing outsourcing sector, which relates to the processing
of
active pharmaceutical ingredients (“API”) into finished dosage-form
pharmaceutical products (and where our Company's client manufacturing services
focus), accounted for approximately $12.4 billion of revenues. The Frost
and
Sullivan report highlights that while outsourcing in the primary manufacturing
segment, which refers to the manufacture of API in bulk, is a mature industry
with relatively limited growth opportunities, secondary manufacturing
outsourcing is a newer trend in the pharmaceutical industry. The Frost and
Sullivan Report also states that demand in the secondary manufacturing
outsourcing sector emerged mainly from escalating drug research, development
and
regulatory costs, and the need to access manufacturing capacity.
26
Market
Sectors
The
market sectors our company is focusing on include some of the fastest-growing
today in the pharmaceutical industry and also sectors with high barriers
to
entry due to regulatory scrutiny.
Asthma
and Other Respiratory
According
to publicly available reports, the respiratory patient population is one
of the
fastest growing segments in the healthcare market. Over 600 million people
worldwide are affected by chronic obstructive pulmonary disease (“COPD”), which
includes chronic bronchitis and emphysema, and up to 300 million people suffer
from asthma, according to the World Health Organization and others. A
respiratory market report by the industry research group Datamonitor estimated
that the global market for asthma/COPD prescription drugs will grow from
$13.3
billion in 2003 to $19 billion by 2009. The prescription market for other
respiratory ailments - allergies, hay fever, rhinitis and sporadic bronchitis
-
is estimated to exceed $12 billion annually and the pace is expected to
grow.
According
to Datamonitor, the United States is the largest national market, accounting
for
approximately 35% of the global asthma market. The U.S. market is followed
by
the Japanese market, which accounts for approximately 13% of the global asthma
market. However, the United Kingdom has the largest market size per capita,
due
to high diagnosis and treatment rates and higher product prices there.
Additionally, due to the Montreal Protocol regarding the ban on ozone-depleting
CFC sprays, there are new regulations that require companies to phase out
CFC-containing inhalers and replace them with CFC-free inhalers, propelled
by
substances such as HFAs. Many countries, including the United States, have
not
yet implemented the phase-out of CFC propellants for medical products, whereas
the European Community, Canada and Australia have generally phased out the
use
of CFC pharmaceuticals.
We
believe that we are one the few pharmaceutical companies in the world that
has
both CFC and HFA manufacturing capabilities. We also believe that we are
one of
a small number of companies that have the development capabilities to assist
our
clients in the transition from CFC to HFA inhaler applications. In addition
to
CFC and HFA, our Company also has expertise in isobutane propelled aerosol
pharmaceuticals products as well as nasal and oral forced air and mechanical
pump sprays, and hydrocarbon aerosol foam or mousse formulations for
dermatological and other topical pharmaceuticals.
Inhalation
Drug Delivery (Non-respiratory and Respiratory)
The
inhalation delivery technology industry is estimated to currently generate
$22.6
billion in annual revenues and is expected to grow to approximately $40 billion
by 2013, led by growing use of inhalation therapy for non-respiratory medical
conditions, according to industry reports by Frost & Sullivan and
Datamonitor.
Traditionally,
the vast majority of medicines have been administered orally, either in
solid/tablet or liquid form. Not all drugs can be taken effectively through
the
digestive tract and, therefore, must be administered parenterally, usually
by
injection. The inherent draw back to injections is in patient compliance
and
risk of infection when utilizing needle devices. Drugs administered through
the
lungs and nasal passage, however, also reach the circulatory system very
quickly, bypassing the digestive track the same way as an injection. Because
there is no pain or reluctance associated with needle use, patient compliance
should be much higher with inhalation delivery.
According
to publicly available documents regarding the biotechnology industry, with
the
recent mapping of the human genome there has been an explosion in new drug
discovery targeted for specific disease states. These new drugs tend to be
large
peptides and proteins. If these types of complex molecules were to be taken
orally, the environment encountered in the human digestive tract would degrade
them and render them ineffectual. As such, many of these new drugs may be
excellent candidates for delivery through the lungs. In addition, some of
these
large molecule drugs may also be candidates to be administered
nasally.
27
As
a
result, for treatment of acute and systemic conditions where speed and ease
of
delivery are important - from cardiovascular conditions to pain management
to
insulin for diabetes - inhalation therapy is seen as an attractive alternative
to injections and pills. Based on our experience in pulmonary and nasal drug
delivery systems, combined with our development capabilities in these areas,
we
believe that we are in an excellent position to capitalize on working with
new
molecules that lend themselves to these types of drug delivery
systems.
Dermatological
and Other Topical
We
estimate the worldwide retail market for dermatological prescription products
to
be approximately $9 billion in annual revenues, and growing at 5% to 10%
per
year. The market is normally subdivided into five categories: retinoids (any
of
various synthetic or naturally occurring analogues of vitamin A), steroids,
antifungals, antibiotics and other products. Such products are widely used
to
treat skin conditions, including acne and atopic dermatitis, fungal infections,
inflammation and psoriasis, baldness and for hair removal. In addition, such
drugs are used for diagnostic procedures and to treat symptoms of aging,
photo-damage and photosensitivity.
According
to publicly available reports, skin conditions requiring the use of medications
often tend to be of a chronic nature with causes unknown. The drugs are often
used in order to relieve symptoms rather than as a permanent cure. The result
is
a constant demand for continuing drug therapy from the patient base. Until
recently, this market has lacked innovation in its drug delivery sector.
Drugs
were normally administered only in creams and ointments. Some patients are
reluctant to use treatments that leave visible sticky or greasy spots on
themselves or their clothing. With the advent of hydrocarbon aerosol technology,
drugs can be delivered in a foam or mousse formulation that allows the active
ingredient to be quickly absorbed into the skin leaving no residues. Foam
can
also be formulated in an odorless mode. This may result in better patient
compliance and, in turn, greater usage and demand for the drugs administered
in
this fashion. In addition, foam formulations also provide an added marketing
benefit by serving as “line extensions” to existing cream and lotion
products.
We
believe that with our hydrocarbon aerosol manufacturing capabilities, we
are
well positioned to take advantage of this trend in the dermatology marketplace.
In addition, we possess the development capabilities to assist new clients
to
transition their drugs into hydrocarbon foam delivery.
Competition
According
to the Frost and Sullivan Report and other publicly available documents,
the
global contract service industry was comprised of more than 5,000 contract
manufacturing organizations (“CMOs”) and contract research organizations
(“CROs”) combined. These reports further indicate that over 650 of these firms
operate in North America and Europe, but fewer than 20 of these CMOs and
CROs
are major participants in the pharmaceutical outsourcing industry. The majority
of such competitors provide contract manufacturing services to third parties
only if manufacturing capacity is available. In some cases, these competitors
may also present acquisition opportunities as consolidation in the
pharmaceutical industry continues.
We
believe that our major competition comes from in-house producers; i.e., those
pharmaceutical companies that decide to commercialize and/or manufacture
their
required products at their own facility. These include major pharmaceutical
companies, generic drug manufacturers and consumer health product companies.
In
the specialty pharmaceutical sector, we compete directly with several large
and
small pharmaceutical product development and manufacturing organizations.
Many
of our competitors, particularly large established pharmaceutical and
biotechnology companies, have significantly greater financial,
research and development and personnel
resources than we do.
We
believe that we are able to compete effectively because we provide our customers
with a spectrum of products and services in specialized niche areas but on
a
broad scale. Additionally, by leveraging integrated scale-up and pilot
facilities, we can assist clients in developing sterile-fill manufacturing
processes to commercialize new or innovative products in the aerosol drug
delivery market.
28
We
believe that we are a leader in the development, commercialization and
production of respiratory, dermatological and topical aerosols. We also believe
that by focusing on selected niche sectors of the pharmaceutical market,
we can
effectively compete with our competitors by leveraging our experience, expertise
and customer distribution channels on specialty pharmaceutical products that
are
positioned at a price point that is attractive to the payer community, including
managed care, government formularies and the specialist physician
population.
Production
Focus
Today,
our Company develops and manufactures five types of complementary aerosol
pharmaceutical products for our customers. In each case, we formulate the
pharmaceuticals to our customers' specifications and fill and package the
delivery devices to produce a finished product. In addition, as a result
of our
acquisition of the Aventis PR operation, we now have the capabilities of
developing and manufacturing dermatological creams, lotions and ointments.
As a
result of our Ashton acquisition, we also manufacture solid-dose products
(tablets and capsules) as well as injectable pharmaceutical
products.
Metered
Dose Inhalers (“MDIs”)
We
develop and manufacture metered dose inhalers (“MDIs”), used primarily for
respiratory conditions, which employ both chlorofluorocarbon (“CFC”) and
hydrofluoroalkane (“HFA”) propellant technologies. CFC-based products include
albuterol (which is referred to as “salbutamol” outside the United States), the
primary rescue medicine for asthma, and beclomethasone, a corticosteroid
used as
an anti-inflammatory for respiratory disease. HFA products include MDIs for
respiratory ailments and a metered dose oral (“MDO”) spray, such as a “GTN”
spray, which is a nitrate propelled HFA aerosol that is used for prescription
and over the counter products, primarily for cardiac ailments. Such products
may
provide certain therapeutic advantages because they are absorbed directly
into
the systemic circulation and bypass the gastrointestinal tract, which provides
faster onset and also may reduce the dose requirements for the
patient.
In
the
past, our CFC-propelled MDIs were sold throughout Europe, Australia, Canada
and
South America. Given growing global restrictions on ozone-depleting CFC
pharmaceutical products, their use has been significantly curtailed around
the
world and the use of non-ozone-depleting HFA products is increasing.
Specifically, we are now developing several HFA-MDIs for a number of our
clients. Further, we plan to exploit the MDO-spray HFA product through sales
to
our primary customer in this area, Genpharm Inc., a Canadian-based subsidiary
of
the generic pharmaceutical division of Merck KGaA (“Merck
Generics”).
Utilizing
client-funded product and process development applications, we plan to continue
changing to HFA MDI production in 2006, while continuing to utilize CFC-MDI
manufacturing capabilities and CFC allocations for markets that have not
yet
banned CFC use. This includes capitalizing on our relationships with a number
of
our clients which have extensive distribution channels for such products
in
South America, Africa and the Middle East. We believe we have a competitive
advantage in this sector as one of the few pharmaceutical companies with
the
capabilities to both develop and manufacture HFA-based inhalants.
Dry
Powdered Inhalers (“DPIs”)
We
assist
in the development and production of dry powder inhalers (“DPIs”), which today
are primarily used for respiratory ailments such as asthma. Specific products
in
this area include salbutamol (known as “albuterol” in the United States), which
we believe is the leading generic product in the area, and beclomethasone,
which
we believe is the second leading generic product in the area. Our major
customers in the DPI area have licensed a DPI device (the “Clickhaler”) that we
currently manufacture under a license agreement from a U.K.-based biotechnology
company. For example, we have recently commenced production of a formoterol
Clickhaler and a budesonide Clickhaler for our client Merck Respiratory.
Our DPI
capabilities have been significantly enhanced by our Ashton acquisition in
August 2005.
29
Based
on
increasing consumer acceptance and the growth in diagnoses and incidences
of
asthma, we believe that DPIs are expected to grow in use. We also believe
that
manufacturing revenue opportunities in this product category will continue
to
expand, because inhalation delivery is beginning to enjoy increased use for
non-respiratory systemic conditions where ease and speed of drug delivery
are
important, such as insulin for diabetes and pain management drugs.
Metered
Dose Pump Sprays (“MDPSs”)
We
develop and produce metered dose nasal and throat pumps and sprays (“MDPSs”) for
nasal decongestion, anti-allergic and anti-inflammatory applications. Specific
products within these areas include corticosteroid products such as a
beclomethasone dipropionate for the treatment of allergy conditions. Allergy
pump sprays are a seasonal product with the largest consumer use coming in
the
spring and late summer months. We plan to leverage the manufacturing upgrades
that the previous owners of our U.K.-based manufacturing site performed on
the
pump spray filling line. We believe that such upgrades will provide us with
an
improved production base to maintain our existing customer volumes, while
developing new business in the growing seasonal allergy market sector. Further,
we intend to capitalize on growth opportunities in this area by expanding
product development and marketing activities that may lead to manufacturing
opportunities. Such opportunities include pump sprays for complex proteins,
pain
medications, hormone applications and vaccines.
Hydrocarbon
Aerosols
We
develop and manufacture hydrocarbon aerosols as a delivery system for
dermatological and topical drug applications. The drug (usually a corticosteroid
or similar anti-inflammatory agent specifically formulated with excipients)
is
kept under pressure in a can with liquid hydrocarbons. These hydrocarbons
are
normally a mixture of propane, iso-butane and butane. As the product is
dispensed and released from the can, the hydrocarbons spontaneously vaporize,
turning the resulting mixture into a mousse or foam (depending on the exact
formulation). This results in the drug taking a form suitable for rapid
absorption into the skin, leaving no greasy residue on skin or clothing as
conventional creams and lotions often do. In addition, the hydrocarbons used
are
deodorized, so the administration of the drug leaves no smell on the skin.
We
currently utilize two hydrocarbon aerosol filling lines. These manufacturing
lines are equipped with fire suppressant equipment, protected gassing of
hydrocarbons, remote safety monitoring equipment, and dedicated manufacturing
areas.
Based
upon our knowledge of the United Kingdom pharmaceutical industry, we believe
that our contract share of the United Kingdom prescription and over-the-counter
hydrocarbon aerosol market is substantial. In some instances, depending upon
the
product's medical application (e.g., topical foams), we may be the only contract
manufacturer for such products. Additionally, we believe that the specialized
nature of the topical hydrocarbon aerosols market, which we believe has limited
competition, will allow us to continue to maintain and expand our current
market
share in this sector.
We
intend
to expand our expertise and know-how in this area in order to be recognized
as a
leader in hydrocarbon aerosols for pharmaceutical applications. In addition
to
our growing business base and the recent rise of new hydrocarbon aerosol
business in the pharmaceutical industry, we believe that there are significant
growth opportunities in aseptic hydrocarbon applications for other existing
or
potential customers as the use of this technology continues to grow. With
significant experience in this area and regulatory compliant hydrocarbon
aerosol
filling lines, we believe we are well positioned to expand our contract market
share in this sector. Additionally, as development runs for the introduction of
new products vary, we believe that we have sufficient manufacturing flexibility
to take on new products while addressing our customers' volume
requirements.
30
Dermatological/Topical
Creams, Lotions and Ointments
In
addition to hydrocarbon aerosols, we also have the capabilities of developing
and manufacturing creams, lotions and ointments for dermatological and other
topical drug applications. These drugs are usually a corticosteroid or similar
anti-inflammatory agent specifically formulated with excipients and manufactured
in different strengths depending on the potency required. Such corticosteroid
creams and ointments are also absorbed at different rates from different
parts
of the body.
Sterile
Salines & Injectables
We
believe that we may now be one of the largest combined manufacturers of both
sterile saline and alcohol aerosols in the United Kingdom. We develop and
manufacture products that are nitrogen propelled, buffered and non-buffered
normal aerosols for eye and wound care. These include the
water-for-injection/alcohol aerosols and non-alcohol based disinfectant
aerosols. We use automated filling equipment to aseptically fill both aqueous
and oil-based solutions and have the capability to automatically or manually
inspect products. We also offer a variety of fully and semi-automated packaging
lines for a full range of presentations. In addition, we are actively pursuing
new technologies such as a “bag-in-can” wound spray that may provide enhanced
spraying parameters for sterile wound aerosols.
Ashton
also has expanded our development and production capabilities into sterile
injectable pharmaceutical products. We fill ampoules and vials in batch sizes
from sub 1 liter through 200 liters (soon to increase up to 400 liters).
We also
have the capability to automatically or manually inspect products.
Solid
Dose (Tablets and Capsules)
Ashton
also has expanded our development and production capabilities into solid
dose,
including sustained-release capsules. At Ashton, we have computer controlled
compression machines capable of producing up to 200,000 tablets per hour.
We
also have film tablet coating areas that process aqueous and solvent
formulations as well as sugar coating, and we have specialized facilities
for
handling potent and steroid materials. In addition, we have specialized
packaging equipment that enables us to pack a wide range of formats and
materials, including blister packaging that is becoming increasingly demanded
for the proper daily dosing of tablet and capsule medications.
Product
Rights
The
processes we use to develop and commercialize our clients' products utilize
technologies are proprietary to our Company and can therefore be used to
support
other customer activities. Such technologies consist of the process of filling
and packaging pharmaceutical products and the associated operating procedures
and methods. However, specific product formulations and specifications supplied
by the client, including such data acquired through acquisition of a
pharmaceutical business, are deemed confidential to the providing client
and are
therefore not available for us to use in any other application.
Major
Customers
Our
revenues are currently derived from pharmaceutical manufacturing and associated
product formulation and development outsourcing services, including product
stability, commercial scale-up, and validation and regulatory support for
our
clients' products. These contract revenues are dependent upon our customers'
maintaining or obtaining the necessary regulatory approvals and product
specifications for the commercialization of their products in designated
markets, and our vendors/suppliers being able to provide us with required
raw
materials and components to manufacture our clients' products on a timely
basis,
and in line with our customers' requirements and demands.
31
We
have
been actively marketing our capabilities to our own customer base and the
pharmaceutical industry in general. In addition to the business we acquired
as a
result of our acquisitions of Ashton and the assets of Aventis PR, we have
signed and commenced a number of new customer contracts and purchase orders.
For
the year ended December 31, 2005 our top three customers accounted for
approximately $29.2 million in net revenues or approximately 59% of total
net
revenues. In comparison, for the year ended December 31, 2004, our top
three customers accounted for $7.5 million in net revenues or approximately
48%
of total net revenues.
For
the
year ended December 31, 2005, our top three customers were Kos Pharmaceuticals,
Inc. (“Kos”), a specialty pharmaceutical company headquartered in Cranbury, New
Jersey; UCB Pharma Ltd., a UK subsidiary of UCB Group, a global
biopharmaceutical firm headquartered in Brussels, Belgium; and Sanofi-Aventis
Group (“Sanofi-Aventis”), the third largest pharmaceutical company in the world,
headquartered in Paris, France.
Our
roster of top customers changed in 2005 as a result of the acquisitions of
Ashton and the assets of Aventis PR during the year. In 2004, our three largest
customers were the Merck Generics group of companies (“Merck Generics”), that
are part of an international pharmaceutical and chemical company (Merck KGaA)
headquartered in Darmstadt, Germany; SSL International Plc (“SSL
International”), a healthcare company headquartered in London, England; and
Genpharm Inc., a generic drug company headquartered in Toronto, Canada. Each
of
these companies continues to be an important client to Inyx.
As
part
of our strategic growth objectives in the contract manufacturing area, we
are
continuing our efforts to broaden our relationship with these customers and
others, and to generate revenues from our own product development and
commercialization program to mitigate the risk of our economic dependence
on any
one client. We also believe that by utilizing our existing or potential
customers' distribution channels to distribute our own proprietary products,
once we have completed the development and regulatory approval of such products,
we can broaden and strengthen our relationship with such clients. Our top
three customers in 2005 were as follows:
Kos
Pharmaceuticals, Inc.
Last
year, our largest customer was Kos Pharmaceuticals, Inc. (“Kos”), headquartered
in Cranbury, New Jersey, a fully integrated specialty pharmaceutical company
engaged in the development of proprietary prescription pharmaceutical products,
principally for the treatment of cardiovascular, respiratory and metabolic
diseases. According to its website, Kos' principal product development strategy
is to reformulate existing pharmaceutical products with large market potential
to improve safety, effectiveness and patient compliance. Kos currently markets
several proprietary drugs for the treatment of various disorders, including
an
anti-inflammatory drug for asthma (Azmacort).
Pursuant
to our March 31, 2005 acquisition of the business assets of Aventis PR, a
manufacturing and supply agreement for the production of a CFC-version of
Azmacort by Aventis PR for Aeropharm Technology, Inc. now Aeropharm Technology
LLC., (“Aeropharm”), a Kos subsidiary, was assigned to our subsidiary, Inyx USA
by Aventis PR (the “Aeropharm Supply Agreement”).
Under
the
Aeropharm Supply Agreement, we manufacture and supply to Aeropharm commercial
and sample units of Kos' Azmacort in a CFC gas-propelled metered dose inhaler
(“MDI”) for respiratory inhalation. The original Aeropharm Supply Agreement was
entered into between Aventis PR and Aeropharm on March 5, 2004, carried a
five-year term and had a minimum annual volume of 1.5 million units. On April15, 2005, Aeropharm and Inyx agreed to amend the Aeropharm Supply Agreement
to
expand the product and supply agreement to include an HFA version of Azmacort
and to increase the term of the agreement to ten years. As a result of this
Amendment and based on Aeropharm's production requirements of at least 2.2
million units per year, we believe that this contract will generate revenues
of
approximately $10 million annually, at a gross profit of approximately 20%.
A
minimum annual volume of 1.5 million units was provided.
32
For
the
year ended December 31, 2005, Kos accounted for $13.1 million in net revenues
or
approximately 26% of total net revenues for the year.
UCB
Pharma Ltd.
UCB
Pharma Ltd. (“UCB Pharma”) is a United Kingdom subsidiary of UCB Group, a
biopharmaceutical company that develops, manufactures and markets pharmaceutical
products for the therapy of severe diseases treated by specialists.
Headquartered in Brussels, Belgium, UCB Group employs over 8,500 people in
more
than 40 countries across the world, with annual revenues in excess of €3
billion.
Pursuant
to our August 31, 2005 acquisition of Ashton, we received a five-year
manufacturing contract from UCB Pharma as well as a long-term product support
and services contract. For the year ending December 31, 2005, UCB Pharma
was our
second largest customer, generating $11.9 million in revenues for the four
months subsequent to the Ashton acquisition, or approximately 24% of our
Company's total net revenues for the year.
We
are
producing approximately 70 products for UCB Pharma across three production
streams: solid dose (tablets/capsules), sterile solutions and dry powder
inhalers. In solid dose, the largest volume products are: Pregaday, an iron
and
folic acid supplement designed for use by pregnant women; Dexedrine, a central
nervous system stimulant available in tablet or sustained-release capsule
form,
which is prescribed to treat attention deficit hyperactivity disorder (“ADHD”)
and narcolepsy; and Equasym, another stimulant to treat ADHD. The largest
volume
products in the sterile solution category are: Predsol, a corticosteroid
and
antibiotic combination used to treat inflammatory eye and ear infections;
Betnesol, another corticosteroid for short-term inflammation in the eye or
ear;
and a generic morphine sulphate narcotic analgesic in a pre-filled injectable
product designed for use in emergency medical kits to treat severe pain from
catastrophic injuries. Among dry powder inhalers the largest volume
products are: Asmasal, in the generic drug class known as salbutamol (called
“albuterol” in the United States), the primary rescue medicine for asthma and
chronic bronchitis; and Asmabec (beclomethasone), a corticosteroid used to
reduce inflammation in the lungs caused by asthma.
Sanofi-Aventis
Group
According
to their website, the Sanofi-Aventis Group is the largest pharmaceutical
company
in Europe and the third largest in the world. Headquartered in Paris, France,
Sanofi-Aventis has over 100,000 employees worldwide with revenues in 2005
totaling in excess of €27 billion. Sanofi-Aventis was created as a result of the
acquisition of Aventis Pharmaceuticals by Sanofi-Synthélabo in
2004.
On
March31, 2005, we also entered into a long-term manufacturing and supply agreement
with Aventis to manufacture and supply dermatological creams, lotions and
ointments to Aventis from the Manatí, Puerto Rico manufacturing facility we
acquired from Aventis PR (the “Aventis Supply Agreement”). The Aventis Supply
Agreement was established to allow Sanofi-Aventis to transition their production
requirements into their other manufacturing sites while allowing them to
continue utilizing the Manatí site as a back-up production site and for those
products that they chose not to move. The agreement is for an initial period
of
three years with two successive automatic one year renewals, thereby creating
a
five year agreement in total. Under the Aventis Supply Agreement, Inyx, through
its subsidiary Inyx USA, is to manufacture and supply to Aventis various
dermatological products marketed by Aventis including Sulfacet lotion, Hytone
lotion and cream, Benzagel wash, Vytone cream and Klaron lotion. There are
no
minimum quantity provisions or guarantees under the Aventis Supply
Agreement.
For
the
year ended December 31, 2005, Sanofi-Aventis was our third largest customer,
and
accounted for $4.1 million in net revenues, or approximately 9% of our Company's
total net revenues for the year.
33
Product
Development
Inyx's
business strategy also includes the development and sales of our own proprietary
products, including both drug delivery devices and pharmaceutical products
which
are complementary to our manufacturing technologies. Although we have started
developing our own proprietary pharmaceutical products, we have not yet
commenced the marketing or sale of any such products. It is our plan that
our
first proprietary product, a consumer health pharmaceutical aerosol product,
will be ready for commercial marketing in 2006.
We
are
focusing our own research and development activities on inhalation-therapy
drug
delivery devices and inhalation methods, and generic prescription and
over-the-counter aerosol pharmaceutical products for respiratory,
dermatological, topical and cardiovascular applications. Proprietary products
under development include generic versions of non-CFC or HFA single molecule
and
combination drug respiratory inhalants, non-CFC propelled oral sprays for
cardiovascular ailments, wound irrigation and cleansing sprays that utilize
novel barrier technologies, and anti-inflammatory nasal pumps.
We
plan
to distribute our proprietary products through our own sales force under
Exaeris, our customers' distribution channels and/or in collaboration with
strategic marketing partners, although we do not yet have any distribution
agreements for our planned products finalized.
Currently,
we are primarily focusing our product development efforts on generic versions
or
extensions of established and non-patented products and barrier delivery
systems
that overcome present product and propellant incompatibility and consumer
use
issues in the aerosol pharmaceutical sector. As such, our initial proprietary
product will be a private-label wound care and wound irrigation spray utilizing
a barrier-pack technology which allows a hermetical seal between the product
and
the propellant. This type of barrier may overcome any incompatibility issues
between a particular drug product and propellant. Wound cleansing products
contain ingredients that absorb drainage and/or deodorize a wound, and are
utilized to cleanse a wound before the application of a dressing. Wound
irrigation and cleansing sprays also remove dead tissue while keeping healthy
tissue intact. We expect to have our wound-care product ready for commercial
launch in Europe in 2006. We are currently testing our developed formulation
for
stability in a barrier pack container.
We
are
also developing both saline and steroidal plastic container nasal pump sprays
for the treatment of allergic and non-allergic rhinitis, disorders characterized
by inflammation of the mucous membranes lining the nasal passages. Both nasal
sprays are being developed to help reduce the inflammation of the nasal passages
and bring relief from the effects of rhinitis including sneezing, nasal itch,
and obstruction and rhinorrhea. We expect to have these nasal pump sprays
ready
for distribution by the end of 2006. The formulation work on these products
has
been completed and we are currently performing compatibility studies on various
pump sprays to be utilized in the plastic container.
We
are
also undertaking early stage feasibility studies on anti-inflammatory
corticosteroid molecules, as single molecule or as combination drugs, for
use as
inhalant therapies in the treatment of asthma and sublingual aerosol pump
sprays
for the cardiovascular market. We plan to develop such inhalants as metered
dose
inhalers utilizing non-CFC propellants. If our feasibility studies are
successful, we expect to be in a position to commence the commercialization
of a
single molecule corticosteroid anti-inflammatory for the treatment of asthma
in
2006, with commercial marketing launch planned for 2009. Feasibility studies
include formulation stability and optimization, pre and post-formulation
pharmaceutical analysis, and analytical method development and
validation.
In
September 2004, we announced that we completed the acquisition of a
patented platform technology in order to enable us to more readily develop
inhalation-therapy drugs, including combination drugs, intended to be delivered
in aerosol formats. The technology is based on the utilization of a
lipid-binding matrix for delivering incompatible or unstable drug substances.
We
acquired the technology from Phares Technology B.V., the parent company of
Phares Drug Delivery AG of Muttenz, Switzerland (“Phares”), which developed and
originally patented the technology. As part of their agreement with us, Phares
will provide related product development and technology support for a fee.
We
intend to immediately apply this acquired technology in our respiratory inhalant
product development program to improve the delivery of inhalation-therapy drugs
and overcome aerosol delivery incompatibility for combination
drugs.
34
We
plan
to market our proprietary products in developed countries within the Western
Hemisphere and Europe. In order to meet the regulatory requirements of such
markets, our planned products must meet the regulatory requirements of the
pharmaceutical regulatory agencies of the U.S. Food and Drug Administration
(“FDA”), the United Kingdom Medicines and Healthcare Regulatory Agency (“MHRA”),
the European Community Evaluation Agency (“EMEA”), and the Canadian Therapeutic
Products Directorate (“TPD”). Each of these agencies publishes the regulatory
requirements for respiratory drugs administered via oral, inhalation and/or
nasal routes, and topical and dermatological applications. Our product
development programs are designed to meet the combined requirements for these
agencies. While the principal pharmaceutical standard and approval process
requirements are similar, there are aspects of the regulatory requirements
that
are different. Therefore, in order to also meet the individual regulations
of
each respective regulatory agency, our development team conducts product
development activities in parallel to ensure that each respective regulatory
body's approval requirements are met.
We
have
submitted amended filings to the MHRA for two products under review, and
we
anticipate that we will make additional filings within the next 12 months.
We
also possess a number of approved product licenses within the United Kingdom
(see “Product Licenses” below). These products comply with the requirements of
the MHRA. We presently are marketing some of these products, and we intend
to
commence marketing on the other products in the United Kingdom within the
next
12 months.
We
also
believe that we can enhance our competitive position through the continuous
acquisition of regulatory-approved pharmaceutical products and drug delivery
devices for respiratory, dermatological and topical drug delivery applications
or such products in development, including those through the acquisition
of
other pharmaceutical companies. We are presently analyzing a number of such
product or drug delivery acquisitions, although no formal agreements have
been
finalized.
Our
product development capabilities are located at our Inyx Pharma development
and
manufacturing facilities in the United Kingdom. Additionally, as a result
of our
March 2005 acquisition of the Aventis PR operation, we will be implementing
capabilities at that site for product development support (including scale-up
and analytical work and stability support services) to better serve Western
Hemisphere markets.
We
have
now also commenced enhancing our manufacturing and product development
capabilities in our focus areas. This includes improving our manufacturing
technologies for barrier pack aerosol sprays and CFC-free metered dose inhalers,
and building out our laboratories and expanding our product development staff
to
implement this business strategy.
We
anticipate that the development and commercialization of our HFA nitroglycerin
(GTN) spray product will be delayed into late 2006 as a result of transferring
that development and manufacturing work to our operations in Puerto Rico.
We
believe that our facility's strategic location in Puerto Rico, its staffing
levels and skill set and current regulatory status with the FDA will allow
us to
more readily capitalize on pharmaceutical product development and scale-up
activities for the U.S. market.
Manufacturing
Facilities
Our
existing manufacturing facilities are located at Astmoor, Runcorn, Cheshire,
in
the United Kingdom; Ashton, Lancashire, also in the United Kingdom; and Manatí,
Puerto Rico.
Our
Runcorn production facility is operated by our UK subsidiary, Inyx Pharma.
At
that facility, we manufacture sterile aerosol products, including metered
dose
and dry powder respiratory inhalers, pump sprays, and saline and topical
aerosols. Our Runcorn manufacturing operation consists of over 60,000 square
feet of manufacturing, laboratory and warehouse space and we currently have
103
employees working at the facility. Among this personnel are 18 members of
management, 15 members of our clerical staff and 70 employed in development,
production and distribution. Highlights of our manufacturing operation include:
two cGMP-compliant regulatory approved hydrocarbon aerosol manufacturing
and
filling lines; an HFA metered dose inhaler manufacturing and filling line,
which
is regulatory compliant and fully validated; and an innovative dry powder
inhaler production facility.
35
Our
recently acquired Ashton Pharmaceuticals Limited (“Ashton”) operation is a
152,000 square foot cGMP plant which is compliant with United Kingdom, Europe,
and Asia regulatory requirements. This site is located in North West England
near Manchester and is about an hour drive from the Inyx Pharma facility
in
Runcorn. The Ashton facility, which has benefited from £15 million in capital
investment over the past five years from its previous owners, focuses on
three
production streams: dry powder inhalation, sterile injectable and solid-dose
pharmaceutical products. This site employs 308 people, which includes 72
members
of management and clerical staff and 236 production personnel.
Our
Puerto Rico operation is a 140,000 square foot pharmaceutical manufacturing
facility consisting of five buildings extending over 9.5 acres. The site
is
located in the town of Manatí, in north central Puerto Rico, about 30 miles
outside of San Juan. The Manatí site manufactures respiratory inhalers,
utilizing both CFC and HFA propellants, nasal and allergy pumps and
dermatological creams, lotions and ointments. All raw materials, components
and
finished goods produced are stored on site in an approximately 27,000 square
foot warehouse housed in one of the five buildings. We employ 144 persons
at
this site, 111 production personnel, 9 members of clerical staff and 24
managers.
With
respect to metered dose inhalers, we employ two filling lines at our Runcorn
facility and a third line at our Puerto Rico site. At Runcorn, the first
MDI
manufacturing line produces environmentally-friendly HFA inhalers and is
capable
of manufacturing 15.0 million units annually, based on three shifts. Our
capacity utilization on this line has been averaging 19% on an annual basis,
based on one shift. The other Runcorn MDI manufacturing line produces CFC-based
inhalers and has a capacity of 49.4 million units annually, based on three
shifts. Due to the Montreal protocol our capacity utilization on this line
has
been averaging 4% on an annual basis, based on one shift, both lines consist
of
valve placements, filling, check-weighing and packing operations. These lines
are also capable of bulk manufacture feeding and come with integrated downstream
packaging.
Our
Puerto Rico MDI manufacturing line produces CFC and HFA based inhalers and
has a
total capacity of 33.9 million units annually, based on three shifts. Due
to the
Montreal Protocol's phase-out of CFC inhalers, demand for this product has
been
diminished, resulting in a capacity utilization of 25% based on one
shift.
In
producing dry powder inhalers, we utilize semi-automatic processes that include
bulk manufacture, device assembly and printing, filling and packaging. Our
annual output capacity for DPIs at our Runcorn facility is 4.8 million units
based on three shifts. Based on one shift, our current production at Runcorn
is
running at approximately 6%. The annual output capacity at our Ashton facility
is 1.5 million units based on three shifts. Based on one shift at Ashton,
our
current production is currently running at 73% of capacity for this line.
Collectively the DPI capacity is currently at 6.3 million units based on
three
shifts. Based on one shift, our current production is running at approximately
28% of capacity for our DPI production lines.
With
respect to pump spray production, our Runcorn facility employs newly installed
equipment capable of bulk manufacturing, filling/crimping or filling/screw
capping and final packaging. We are capable of producing these products in
glass
or plastic bottles. Current maximum capacity for the pump spray line is
26.1 million units annually, based on three shifts. Based on one shift, our
current production is running at approximately 10% of capacity for this line.
Our Puerto Rico facility also has two pump spray lines which are not currently
utilized, but have a capability for processing of Pump Sprays with a maximum
capacity of 77.4 million units.
36
The
acquisition of the assets of Aventis PR has expanded our development and
production capabilities into dermatological pharmaceutical products in the
form
of gels, creams, ointments, and lotions. These two production lines at Manatí
can manufacture such semi-solids in container sizes ranging from 0.5 oz to
4 oz.
Current maximum capacity for this line is 84.6 million units annually, based
on
three shifts. This work center is also capable of handling creams and ointments
in presentation format ranging from plastic and aluminum tubes in various
sizes
from 3 gms through 60 gms. Our capacity utilization on this line has been
averaging 4% on an annual basis, based on one shift.
Our
Ashton acquisition has introduced sterile injectable pharmaceuticals into
the
portfolio of products we manufacture. We are able to produce up to 29 million
units per year based on two shifts. We fill ampoules and vials in batch sizes
from 10 liters through to 200 liters (with plans to increase capacity up
to 400
liters) per year based on two shifts. We also have the capability to
automatically or manually inspect products. Based on one shift, our current
production is running at approximately 35% of capacity for this
line.
Ashton
also has expanded our development and production capabilities into solid
dose
pharmaceuticals, and we are able to produce up to 1.7 billion tablets and
capsules annually based on three shifts, with computer controlled compression
machines capable of producing up to 200,000 tablets per hour. We have film
tablet coating facilities able to process aqueous and solvent formulations
as
well as sugar coating, and we have specialized facilities for handling potent
and steroid materials. In addition, we have specialized packaging equipment
that
enables us to pack a wide range of formats and materials, including blister
packaging that is becoming increasingly demanded for the proper daily dosing
of
tablet and capsule medications. Our capacity utilization on this line has
been
averaging 83% on an annual basis, based on one shift. At our Puerto Rico
site we
also have some unutilized solid dose capabilities; current maximum capacity
for
this facility is 21.7 million units annually, based on three shifts.
With
respect to saline aerosol spray production, our Runcorn facility employs
equipment capable of bulk manufacturing, filling/crimping and final packaging.
We are capable of producing these products in aluminum canisters. The current
maximum capacity for the saline aerosol line is 19.3 million units
annually, based on three shifts. Based on one shift, our current production
is
running at approximately 27% of capacity for this line.
With
respect to topical hydrocarbon aerosol spray production, our Runcorn facility
employs equipment capable of bulk manufacturing, filling/crimping and final
packaging and are capable of producing these products in aluminum or tinplate
canisters. The current maximum capacity for the topical hydrocarbon aerosol
line
is 19.3 million units annually, based on three shifts. Based on one shift,
our current production is running at approximately 46% of capacity for this
line. Our Puerto Rico facility also employs equipment capable of bulk
manufacturing, filling/crimping and final packaging. We are capable of producing
these products in glass bottles, aluminum or tinplate canisters. The current
maximum capacity for the hydrocarbon aerosol line is 3.3 million units
annually, based on three shifts. Based on one shift, our current production
is
running at approximately 25% of capacity for this line
Finally,
with respect to secondary packaging, we utilize two discrete packaging areas
at
our Runcorn site each capable of handling a wide range of products and packaging
materials on an automatic, semi-automatic, and manual basis. The two MDI
packaging lines are capable of packaging material via check-weighers, function
testers, labeling, cartoning, shrink-wrap, coding and palletizing equipment.
Based on three shifts, these packaging lines are capable of packaging
approximately 51.8 million MDI units annually, and our capacity utilization
is
currently 5% for these two lines collectively based on one shift. Our Puerto
Rico facility also has an MDI packaging line with a capacity of 29 million
units
annually, based on three shifts. Based on one shift, our current production
is
running at 29% of capacity for this line.
37
Capital
Improvements
We
continuously make capital improvements to our development and production
facilities in order to improve operating efficiencies, increase automation,
improve quality control and keep pace with regulatory requirements and market
demand. As of March 31, 2006 we had contractual commitments for capital
expenditures amounting to approximately $1 million. In addition we have made
plans to spend a total of approximately $8.3 million in capital expenditures
for
2006. Approximately $5.3 million will be spent in our two U.K. facilities,
which
will provide increased capabilities in our metered dose inhaler (MDI), DPI,
hydrocarbon topical aerosols, solid dose manufacturing and related packaging
facilities, and expanding our sterile injectable capacity. Approximately
$2.2
million will be committed at our Puerto Rico plant, which includes upgrading
of
solid dose capabilities, the installation of new processing facilities for
expanded MDI capabilities, and commencement of the installation of eye care
manufacturing capabilities scheduled to be completed in 2007. The capital
budgets at all three sites also include expenditures to ensure that each
site
maintains acceptable health, safety and regulatory standards. Approximately
$750,000 has also been budgeted corporate-wide, mostly related to the
integration of all our operations and the expansion of our information
technology systems. For the three months ended March 31, 2006, there were
capital expenditures of approximately $1.2 million consisting of approximately
$700,000 for production machinery and equipment, $365,000 for construction
in
progress costs and approximately $88,000 for office furniture, computer hardware
and building and leasehold improvements.
In
2007
we may require additional capital expenditures totaling approximately $12
million to further enhance our development, manufacturing and quality control
systems not only related to contract business but also to the production
and
commercialization of our company's own proprietary products.
Suppliers
We
utilize a variety of suppliers as indicated by our own and our customers'
respective requirements. There are eight critical suppliers for a number
of our
products, primarily related to our can, and valve and spray actuator
requirements for aerosol products. The loss of any of these key suppliers,
or
the interruption or delay in the supply of materials and components would
force
us to seek an alternative source, which could result in an interruption of
our
sales. Agreements with these suppliers are through routine purchase orders
and,
as noted above, in the case of the Bespak and 3M we pay a royalty fee to
those
suppliers for the use of their respective valves in an HFA GTN aerosol product
we manufacture for one of our clients. If we fail to meet these suppliers'
payment terms, we may face delays or interruption of critical supplies for
our
production requirements.
As
of
December 31, 2005, our key suppliers and their terms of payment
were:
·
Cebal
UK Limited: Provides various types of cans. We pay Cebal on a pro
forma
basis, meaning that we pay in advance for our supply of valves
from this
company prior to production.
·
Valois
UK Ltd.: Provides valves for MDIs. We pay Perfect Valois on a pro
forma
basis.
·
LABLABO:
Provides actuators for steroidal foam products. Payment terms are
30%
deposit prior to manufacture and the 70% balance from date of invoice.
·
Bespak
Europe Ltd.: Provides actuators/valves for MDIs and the Clickhaler
device.
Payment terms are pro forma prior to manufacture. Royalty fees
to Bespak
(0.5% of HFA GTN sprays) and 3M (5.5% of HFA GTN sprays) are due
quarterly.
·
Precision
Valve (UK) Ltd.: Provides aerosol can valves. Payment terms are
30 days
from the date of invoice.
·
Nussbaum
(UK) Ltd.: Provides cans. Payment terms are 30 days from the date of
invoice.
·
Eurand
SpA: Provides tablets. Payment terms are 30 days from the date
of
invoice.
38
·
Innovata
Biomed plc: Provides machinery for use in the DPI facility. Payment
terms
are 30 days from the date of
invoice.
Inventories
We
maintain various levels of inventories of pharmaceuticals, raw materials
and
components to produce our products and drug delivery devices, which are stored
in warehouses at our production sites. Inventories are reconciled monthly
and
security measures are in place to avoid theft and unauthorized access.
Additionally, in accordance with regulatory requirements finished products,
are
quarantined in specific areas within our warehouse facilities before shipping
to
our customers. We do this to allow the completion of quality assurance testing
on finished goods prior to shipping such products to our customers.
Product
Development Capabilities
Our
development operation is comprised of a 13-person pharmaceutical research
and
development center, located at a 30,000 square foot leased laboratory and
office
complex in Manor Park, Cheshire, England. This development and testing center
is
a five minute drive from our Runcorn manufacturing site and provides analytical
and formulation development, stability testing, scale-up and validation
outsourcing services to our clients. With our acquisition of the Puerto Rico
site, we plan to establish strong development capabilities in all critical
functions there to serve the marketplace in the Western Hemisphere.
On
a
contract or fee-for-service basis, we provide product research and development
services to our customers in the respiratory, allergy, dermatological, and
cardiovascular and topical disease areas. In addition to these services,
our
research and development group is now also actively involved in developing
our
own proprietary products, and seeking drug delivery extensions and improvement
for existing marketed products. Our research and development group also provides
our manufacturing services group with integrated support for product scale-up
and commercialization activities, and explores ways to improve the quality
and
efficiency of our manufacturing processes. Our development scientists and
associated laboratories have developed a number of pharmaceutical products
for
our clients. Such products are currently being supplied to these clients
in a
number of international markets. Early-stage development activities are
outsourced when necessary to independent clinical research organizations
to
reduce overhead costs and increase efficiency.
Our
development operation, comprised of five separate areas listed below, is
vertically integrated into our manufacturing operation, thereby allowing
us to
provide complementary scale-up and commercialization services for our
manufacturing clients and allowing us to scale-up our own products, when
developed, to commercial production.
Formulation
Development.
We have
the capability to formulate a wide range of therapeutic dosage forms. We
presently concentrate on those dosage forms that complement our core
manufacturing skills, such as orally inhaled products (metered dose and dry
powder inhalers), nasal pump actuated formulations and topical and dermal
pharmaceuticals.
Analytical
Development.
Our
development group also has the ability to work closely with existing and
new
customers to provide method development and validation services that support
pre-formulation and stability testing. This group is equipped with required
analytical instrumentation including automated High Performance Liquid
Chromatography (HPLCs), gas liquid chromatography, malvern particle sizer,
and
Anderson cascade impactors. Generated methods and reports are used to support
worldwide regulatory submissions.
Stability.
Our
development group also provides extensive time-point testing expertise, enabling
the group to guide our clients to the appropriate stability protocol for
a
particular type of dosage form or targeted geographic market. Large walk-in
stability chambers offer the flexible capacity to meet world-wide market
requirements, all operating within guidelines for the International Conference
on Harmonization of Technical Requirements for Registration of Pharmaceuticals
for Human Use (ICH). We intend to expand our stability capabilities and services
as we believe that customer demand for this type of development service is
growing.
39
Regulatory
Support.
This
development service is comprised of four functions: 1) technical guidance,
which
involves ensuring that all agreed technical protocols will achieve license
approval in the target geographic market; 2) license submission support,
where
we generate a comprehensive product technical file, which is then transferred
to
the client for inclusion in a regulatory file submission; 3) technical
assistance, which involves assisting the client to respond promptly to queries
and questions from the regulatory authorities; and 4) license maintenance,
which
involves supporting renewal and license variations including manufacturing
licenses.
Integrated
Project Management.
We also
provide full turnkey project management services at our Manor Park development
center. These services include formulation and analytical development through
production scale process validation and batch stability, and to license
submission support and production for commercial marketing. Alternatively,
our
development clients can contract for any combination of the individual component
services provided by our development group.
Seasonality
A
number
of our products are seasonal. Such products include the metered dose pump
sprays
such as the beclomethasone aqueous nasal products that are supplied to the
allergy market. Such products are predominantly produced early in the first
quarter for sale in the spring season and then again in the third quarter
for
sale in the late summer (harvest season) of each year. We also manufacture
a
hydrocarbon-based product that is used in the treatment of head lice and
this is
produced during specific periods to allow its sale to coincide with the
beginning of school terms. Our sales levels are also affected by plant closings
for year-end holidays.
Business
Strategies
We
believe that our competitive strengths lie in our experienced management,
our
ability to offer specialized pharmaceutical development and manufacturing
services, including product transition consulting services, and our blue-chip
customer base. We intend to employ the following key strategic initiatives
in
order to leverage our strengths:
Provide
comprehensive sterile fill manufacturing and developmental services in the
aerosol and topical spray market sector:
We
believe that the outsourcing of finished dosage form drugs is a growing trend
in
the pharmaceutical industry which could result in an increasing demand for
our
services. By capitalizing on our niche sterile-fill pharmaceutical aerosol
manufacturing technologies, we intend to provide our clients with commercial
manufacturing capabilities that may be unavailable to our clients' competitors.
Additionally, through integrated late-stage drug development and manufacturing
scale-up capabilities, we believe that we can enhance our clients' competitive
position by accelerating the time to market for their new pharmaceutical
products. Due to the ensuing site-specific, regulatory authorizations for
the
manufacture of these products at our production facility, we believe we can
retain the subsequent commercial manufacturing opportunities from
clients.
Develop
and invest in specialized sterile-fill manufacturing processes that have
significant barriers to entry:
We
believe that we must continue to expand our customer base by developing and
investing in specialized sterile-fill manufacturing processes that constitute
significant barriers to entry. We believe that most of our contract services
growth opportunities will come from pharmaceutical companies' requirements
for
highly specialized manufacturing technologies, for which they lack the required
niche expertise or capacity. In particular, due to their increased presence
in
the healthcare market, we expect that biopharmaceutical and virtual
pharmaceutical companies, which typically lack an in-house manufacturing
infrastructure, will increasingly rely on us for their process development
and
production requirements. We believe that as we further develop our specialized
manufacturing capabilities, we can maintain greater pricing power and margin
growth as a result of increased demand. Based on our experience within the
industry, we anticipate that potential clients may be unable to secure these
specialized manufacturing capabilities elsewhere, while competitors may not
be
inclined to invest in specialized non-core manufacturing competencies that
may
take significant time and capital to develop.
40
Enhance
clients' competitive position by accelerating time to market for new and
innovative pharmaceutical products:
We
believe that one of our strengths is our ability to provide our customers
with a
full spectrum of products and services in development, formulation, analytical
testing and trial, and large-scale production phases within the pharmaceutical
aerosol sector. By leveraging integrated scale-up and pilot facilities, we
feel
that we can assist our clients develop sterile-fill manufacturing processes
to
commercialize new or innovative products. We also expect that as a result
of
their limited financial resources, which are focused on clinical development
and
clinical testing, biotechnology and small, specialized pharmaceutical clients
will increasingly rely on our integrated product development and manufacturing
capabilities to bring their products to market.
Focus
on quality, versatility, innovative solutions and outstanding customer
service:
Our
success is critically dependant upon achieving results for our clients by
providing comprehensive and versatile development and manufacturing services
in
our targeted market sectors, which include the respiratory, allergy,
dermatological and topical disease areas. We have integrated our development
and
scale-up capabilities with our manufacturing operations in order to allow
ourselves to efficiently introduce new products or product line extensions
into
a targeted market area. Based on our experience, regulatory agencies such
as the
FDA and the MHRA are continuously enacting new policies requiring better
quality
control and quality assurance systems in the global pharmaceutical industry.
As
a result of these policies by the regulatory agencies, we feel that we must
continually invest to maintain and upgrade our manufacturing and quality
systems
to meet the evolving requirements of such regulatory agencies, our customer's
needs, and our own requirements. Furthermore we believe that we must also
continue to enhance our staff training systems in order to improve our staff's
performance in line with our customers' changing needs. It is our view that
manufacturing flexibility, along with a well-trained staff and high quality
systems, will allow us to provide good customer service, and thereby enhance
our
competitive position and growth opportunities.
Improve
the organic growth of the business by introducing volume products that
complement the existing product portfolio, especially via the introduction
of
our own proprietary products:
We
believe that we possess a blue-chip customer base that has an international
presence and multinational distribution channels. Based on our review of
publicly available documents, many of our customers are lacking one or more
key
pharmaceutical aerosol products in their product portfolio or are looking
for
product line extensions in niche market areas. We expect that by developing
and
licensing these types of niche products to our client base, we can significantly
increase our manufacturing volume and enhance the commercial relationships
we
have with these customers. It is our belief that the Company can also take
advantage of key strategic relationships with a number of our customers to
exploit key and profitable niche market sectors in the aerosol pharmaceutical
market. We believe that these customers would prefer to allocate capital
and
resources to sales and marketing functions, while leaving the manufacturing
to
companies like us. This trend may become even more prevalent in cases where
highly specialized development processes or equipment is required. We believe
that such factors also facilitate the introduction of our Company's own
proprietary products, which will allow us to focus on materially higher
profitable business opportunities while departing from lower profit
activities.
41
Capitalize
on the increasing conversion from ozone-depleting CFC aerosol pharmaceutical
products to non-CFC pharmaceuticals:
Having
conducted the transition from CFC to CFC-free aerosol pharmaceuticals for
clients in Europe and Canada, we believe that we are one of the few
pharmaceutical companies that has proven experience in such conversions.
As the
United States and countries in Asia and Latin and South America implement
the
phase-out of CFC pharmaceutical products in coming years, we plan to increase
our contract development and manufacturing services in this area and also
to
leverage our CFC-to-HFA expertise into strategic partnering relationships,
as
well as to cultivate our Company's own CFC-free proprietary
products.
Where
feasible, acquire under-exploited, complementary pharmaceutical products
and
businesses that would benefit from our development and production
expertise:
We
also
seek growth opportunities through strategic product and business acquisitions
that would benefit from our aerosol pharmaceuticals development and production
expertise, including our capabilities in the conversion of CFC-based
pharmaceutical aerosol productions to CFC-free pharmaceutical aerosols. We
anticipate that there is an increasing trend in the pharmaceutical industry,
particularly by big pharmaceutical companies, to license or sell outright
products that they deem to no longer be core assets. We also believe that
the
acquisition of strategic products and businesses would accelerate the building
of our Company.
Become
a vertically integrated, specialty pharmaceutical company to leverage our
niche
drug delivery technologies, proprietary development platforms and strategic
industry relationships:
Exaeris
commenced formal operations in January 2006 as Inyx's marketing and commercial
arm in North America. Although it operates independently of Inyx's client
manufacturing operations, we believe that Exaeris will create more possibilities
for business collaborations and greater opportunities to commercialize both
client's products and our own planned proprietary products in the United
States
and Canada. Exaeris will also seek to capitalize on opportunities to acquire
products of other pharmaceutical companies which are no longer core assets.
Exaeris' focus is on the sales and marketing of niche or enhanced pharmaceutical
products in the respiratory, allergy, dermatological, topical and cardiovascular
treatment market sectors. Exaeris is presently organizing its management
team
and sales force, which is being established initially through a commercial
relationship with a pharmaceutical contract sales representative organization.
The Exaeris sales force is initially focused on the marketing of King
Pharmaceutical's Intal®
product,
under the long-term, collaborative alliance that Inyx has with King. Currently,
too, Exaeris is actively seeking other product-marketing opportunities. We
believe that Exaeris provides the commercial and marketing resources to
complement Inyx's development and manufacturing operations, making our Company
a
vertically integrated, specialty pharmaceutical company.
42
Insurance
Coverage and Risk Management
We
maintain insurance coverage, including property, major weather catastrophes,
casualty and business interruption; foreign medical costs; freight; motor
vehicles; title insurance on owned real properties; errors and omissions
including general liability; product liability; workers' compensation and
personal accident and business/union travel insurance. We also maintain director
and officer liability coverage. We currently maintain product liability
insurance with coverage limits of $10 million per occurrence on claims made
basis with a maximum $10 million aggregate per policy year for products
manufactured at our Inyx USA and Inyx Pharma facilities. At our Ashton location
we currently maintain product liability insurance with coverage limits of
$20
million per occurrence on claims made basis with a maximum $20 million aggregate
per policy year. We believe such coverage is adequate for our present level
of
operations.
Our
products must comply with the strict requirements of pharmaceutical
manufacturers including those required by the United States' FDA, the United
Kingdom's MHRA, the Canadian government's TPD, and the European Union's EMEA,
plus general current good manufacturing practices (“cGMPs”) required in the
pharmaceutical industry.
We
also
maintain a quality assurance group to ensure that production quality and
associated documentation meet the requirements of our customers and regulatory
authorities alike. The quality control group performs in-line testing during
the
manufacturing operations to ensure that the necessary standards are met and
finished product testing to ensure that the products were manufactured in
accordance to our customers' specifications and regulatory requirements.
All
filled and packaged product is placed in quarantine to verify and ensure
sterility before it is shipped to the customers. Regulatory agencies, local
environment, health and safety authorities and the customers themselves,
inspect
and audit our facilities and operations on a regular basis.
Trademarks,
Patents and Licenses
When
we
acquired Inyx Pharma on April 28, 2003, we acquired a number of licenses
and other forms of intellectual property. Since that acquisition, we have
also
acquired a number of product licenses and drug delivery technologies that
we
believe will allow us to effectively compete in our targeted market
sectors.
Pharmaceutical
Manufacturing Licenses
Inyx
Pharma possesses a Manufacturer's License, ML20165, granted by the MHRA and
also
possesses all the necessary authorities, approvals and certifications to
conduct
normal business activities within the United Kingdom. See “Government
Regulation.” The license must be renewed every five years, and the next
renewal is due in February 2008.
Ashton
also possesses a Manufacturer's License, ML11816/01M, granted by the MHRA
and
possesses all the necessary authorities, approvals and certifications to
conduct
normal business activities within the United Kingdom. See “Government
Regulation.” The license must be renewed every five years, and the next
renewal is in July 2006.
Inyx
USA
possesses the necessary licenses and registration certificates, granted by
the
FDA and also possesses all the necessary authorities, approvals and
certifications to conduct normal business activities within the United
States. See “Government Regulation.” The license must be renewed
annually, with the next renewal in March 2007 in accordance with
21CFR207.21.
Product
Licenses
Inyx
Pharma owns product licenses granted by the MHRA in the U.K. market for
oxymetazoline decongestant nasal spray, chlorhexidine gluconate mouth spray
and
beclomethasone dipropionate nasal spray. Every license in the United
Kingdom is granted for a period of five years. At that time, the product
license is subject to a review by the U.K. Medicine and Healthcare products
Regulatory Agency (“MHRA”). The MHRA reviews product stability, adverse
event reports and any legislative changes that may have taken place within
that
five-year period that may have affected the licensing requirements for that
product. During the review process, the subject company may continue to
market the licensed product. Once the MHRA completes its review, it
extends the expiration date on the license for another five years, when the
licensing review cycle is repeated again.
43
As
part
of our Ashton acquisition on August 31, 2005, we acquired three product licenses
granted by the MHRA, for the treatment of hyperthyroidism (propylthiouracil
and
thyroxine tablets) and acute gout (colchicine).
On
April26, 2004, we announced that we acquired a group of parenteral pharmaceutical
product licenses (i.e., injections and irrigations that are administered
intravenously) enabling our Company to enter the hospital supply market in
the
United Kingdom. These product licenses were issued by the MHRA and gave us
the
production and distribution rights in the U.K. through 2005/6 for a group
of
hospital products used in infusion, irrigation and injection applications.
The
products were acquired for a nominal fee from a pharmaceutical company that
was
placed in U.K. Administration in 2002. These products were acquired
royalty-free, are currently under review for extension, and are summarized
as
follows:
Product
Solution
Indication
Sterile
Chlorhexidine Gluconate
0.2%
Disinfectant
Sterile
Chlorhexidine Gluconate
0.05%
Disinfectant
Sterile
Chlorhexidine Gluconate
0.1%
Disinfectant
Sterile
Chlorhexidine Gluconate (Pink)
0.05%
Disinfectant
Sterile
Chlorhexidine Gluconate (Pink)
0.5%
Disinfectant
Sterile
Chlorhexidine Gluconate & Centrimide
0.15%
Disinfectant
Sterile
Chlorhexidine Gluconate & Centrimide
0.05%
Disinfectant
Metrozol
Injection
-
Antibiotic
Sodium
Chloride
0.9%
IV
Infusion
Glucose
5%(1)
IV
Infusion
Uroclens
Chlorhexidine
N/A
Disinfectant
Uroclens
Saline
N/A
Saline
Solution
(1) Other
concentrations up to 50% are undergoing licensing renewals
We
are
currently in discussions with a number of parties regarding the use of their
sales and marketing and distribution capabilities to sell the above listed
products through their sales channels, although currently no such agreements
have been formalized. We plan to manufacture these products at our Ashton
site
commencing in 2007.
Pursuant
to our 2005 acquisition of the intellectual property of Carr Pharmaceuticals,
Inc., a pharmaceutical company that went through bankruptcy proceedings,
we
obtained ophthalmic pharmaceutical product licenses that will enable our
Company
to manufacture a variety of over-the-counter (“OTC”) and prescription eye care
products. Among these are OTC eye drops and eye care solutions used for reducing
redness in the eyes; eye wash which helps relieve irritation, burning and
itching; artificial tears which protect the eyes and relieve dryness and
irritation; and saline solution used for contact lens maintenance. We also
obtained the intellectual property and know-how to manufacture the following
prescription eye care products, utilized for treating and diagnosing eye
disorders:
·
Atropine
Sulfate (1%)
·
Carbachol
(3%)
·
Phenylephrine
HCl (2.5%)
·
Pilocarpine
HCl (0.5%; 1%; 2%; 3%; 4%; 6%)
44
·
Sulfacetamide
Sodium (10%)
·
Tetracaine
HCl (0.5%)
·
Tropicamide
(0.5% and 1%)
We
intend
to commence manufacturing these eye care products at our Inyx USA manufacturing
site in Puerto Rico in 2007, and to have Exaeris market the products when
they
are ready for commercialization.
Medical
Devices
Inyx
Pharma is also an ISO9001/EN 46001 registered company and as such is approved
for the design, manufacture and inspection of pharmaceutical medical devices.
Such medical devices include sterile saline for wound irrigation, ringers
irrigation solution, sterile saline in a polyethylene bottle, sterile buffered
saline for contact lens use, sterile saline aerosol for contact lens use,
two
step lens care system stage one-disinfecting solution and two step lens care
system stage two-rinsing and neutralizing solution. Our certifications were
recently renewed and do not expire until 2007.
Registered
Marks and Logos
We
use
and have filed trademarks on Inyx, Inyx Pharma and the associated logo (i.e.,
six square orange and grey boxes). In April 2005, we received confirmation
that
our application to trademark the Inyx name and logo had been approved for
the
United States market. Subsequent to year end, in March 2006, we received
confirmation that approval for our trademark had similarly been made in the
Japan market, and in April 2006 we received similar confirmation for trademark
approval in South Korea. We are currently continuing such applications in
other
major countries. We are also pursuing trademark protection worldwide for
our
Ashton Pharmaceutical and Exaeris brands.
Patents
and Registered Design Rights
Our
customers' patents and product licenses are owned by the respective client.
On a
contract basis, we manufacture products according to our customers'
specifications. Until we successfully develop and begin to market our own
products, we will not have any design rights that are registered to our own
brand items. At that time, we will seek trademark protection for any design
rights or brand names for such products.
45
On
September 21, 2004, we announced that we had completed the acquisition of
the patent rights to a novel platform technology, from Phares Technology
B.V.
(“Phares”), which we believe will enable us to more readily develop
inhalation-therapy drugs, including combinations of inhalation drugs that
cannot
be readily combined in one drug delivery device. The Phares technology is
based
on the utilization of a lipid-binding matrix for delivering incompatible
or
unstable drug substances. For example, in November 2004, we received positive
results from a two-year Phares stability study utilizing the lipid-binding
matrix on an HFA-propelled formulation of salbutamol (albuterol) for use
in an
MDI. We intend to now test the matrix on other types of respiratory
drugs.
Pursuant
to our acquisition of the technology for use in inhalation-therapy drugs,
Phares
assigned all relevant patents to us. Such patents include “Methods of preparing
proliposome dispersions and aerosols” and “Membrane lipid composition and method
for its preparation.” The Phares technology is patented in the United States
(U.S. Patent No. 5,141,674); Japan (Japanese Patent No. 2779 165); and
Europe (EP Patent No. 0 309 464) and its major countries, including the United
Kingdom, Sweden, Switzerland, Germany, France and Holland. The respective
patents for Sweden, Switzerland, Germany, France, Holland and the United
Kingdom
were originally registered to Phares Pharmaceutical Holland B.V., which
subsequently merged with Phares Technology B.V. on December 12,2000.
As
additional consideration for the transfer of these patent rights, we paid
Phares
approximately $86,000 in transfer fees plus approximately $67,500 as support
and
management fees.
46
Confidential
Information, Industrial Secrets, Trade Secrets and
Know-how
We
have
entered into confidentiality agreements with our employees and third parties
including customers, suppliers and contractors. Confidential information,
such
as business proposals and/or plans, customer lists, profit projections, budgets,
economic or market information and specific manufacturing methods, is limited
to
staff and customers on a “need to know” basis. Data such as manufacturing
formulas and methods, forecasts etc. are held within databases under individual
password control. We retain and control all associated soft copy and hard
copy
documentation.
Our
product formulation group has certain know-how in the development of new
formulations and comparative brand leader testing, including associated testing
for product submissions, in the pharmaceutical aerosol sector. Such core
skills
include polymer chemistry, colloid chemistry, drug design, powder technology,
and formulation and device interactions. We also possess analytical skills
to
support these activities.
Additionally,
we believe that we have certain know-how and applicable expertise in the
manufacturing scale-up and industrialization of certain pharmaceutical products,
including:
·
Metered
dose inhalers - utilizing HFA 134a or CFC as
propellants
·
Sublingual,
oral and throat sprays - utilizing propellants or as pump
sprays
·
Dry
powder inhalers
·
Hydrocarbon
topical and foam products
·
Nasal
pump sprays
·
Barrier
pack systems
·
Sterile
saline solutions and injectables
·
Solid
dose (tablets and capsules), including sustained release
pills
Currently,
we protect this know-how and expertise through trade secrets and confidentiality
agreements although we are in the process of further protecting our proprietary
information with applicable patents. At this time, no such patents have been
granted.
As
a
result of our acquisition of the business assets of Aventis PR, we received
certain pharmaceutical know-how and technical data required to manage and
operate an FDA-approved, regulatory compliant pharmaceutical operation in
the
respiratory, allergy and dermatological sectors.
As
a
result of our acquisition of Ashton, we received certain pharmaceutical know-how
and technical data required to manage and operate a facility in regulatory
compliance for the production of inhalation delivery, solid dose and injectable
pharmaceutical products to be marketed in the United Kingdom, Europe and
Asia.
Databases
and Software Protection
Our
information technology and database systems, including PEMAC (Planned
Maintenance program), Prolog 4 (Payroll system), Maximizer (Customer
Relationship Management system) and other Microsoft-based systems, are all
individually licensed, and controlled and supported by our internal information
technology group.
As
a
result of our acquisition of the business assets Aventis PR, we acquired
a JD
Edwards Enterprise Management system, as well as computer software, data
and
documentation related to the former Aventis PR aerosol and dermatological
pharmaceutical operation at the Manatí site. All necessary licenses to
operate our information systems at the Manatí site, including the JD Edwards
system, were transferred to Inyx USA by Aventis PR.
47
As
a
result of our acquisition of Ashton, we acquired an Oracle Enterprise
Manager system, which Celltech had purchased in 2004 for approximately €8
million. All necessary licenses to operate these Oracle information systems
at
Ashton were transferred to our Company as part of that purchase.
During
2006, we will continue to integrate our operating sites and support offices,
both from a financial and operational controls standpoint. This integration
includes making a decision on which Enterprise technology system we will
utilize
on a companywide basis.
Domain
Names
We
have
registered several domain names, including “inyxgroup.com”, “inyxinc.com”,
“inyx-pharma.co.uk”, “inyx-pharma.com”, “exaeris.com” and “inyxusa.com.” The
address of our primary website is “www.inyxgroup.com.”
Sarbanes-Oxley
Compliance
The
Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by
the
Securities and Exchange Commission, required changes in corporate governance
practices of public companies. Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002
(“SOX
404”), we will be required to furnish a report by our management on our internal
control over financial reporting in our annual report for our fiscal year
ended
December 31, 2007. The internal control report must contain (a) a statement
of
management's responsibility for establishing and maintaining adequate internal
control over financial reporting, (b) a statement identifying the framework
used
by management's to conduct the required evaluation of the effectiveness of
our
internal control over financial reporting, (c) management's assessment of
the
effectiveness of our internal control over financial reporting as of the
end of
our most recent fiscal year, including a statement as to whether or not internal
controls over financial reporting is effective, and (d) a statement that
our
independent registered public accounting firm has issued an attestation report
on management's assessment of internal control over financial reporting.
In
order
to comply with SOX 404, we will engage in a process to document and evaluate
our
internal control over financial reporting, which may be both costly and
challenging. In this regard, we will need to dedicate internal resources,
engage
outside consultants and use a detailed work plan to (a) assess and document
the
adequacy of internal control over financial reporting, (b) take steps to
improve
control processes where appropriate, (c) validate through testing that controls
are functioning as documented, and (d) implement a continuous reporting and
improvement process for internal control over financial reporting. Despite
our
efforts, we can provide no assurance as to our, or our independent registered
public accounting firm's, conclusions with respect to the effectiveness of
our
internal control over financial reporting under SOX 404. There is a risk
that
neither we nor our independent registered public accounting firm will be
able to
conclude within the prescribed timeframe that our internal controls over
financial reporting are effective as required by Section 404. This could
result
in an adverse reaction in the financial markets due to a loss of confidence
in
the reliability of our financial statements.
Government
Regulation
Our
business as a pharmaceutical company is regulated by government authorities
in
jurisdictions where we and our customers market and distribute products,
including the United States, the United Kingdom, Canada and various parts
of
Europe and Latin America. We must ensure that our products and services
continuously comply with strict requirements designed to ensure the quality
and
integrity of pharmaceutical products. These requirements include the United
States Federal Food, Drug and Cosmetic Act (“FDC Act”) governed by the FDA and
the United Kingdom's Medicines Act governed by the MHRA. Our products and
services must also continuously comply with the requirements of the European
Union's EMEA, and the Canadian TPD. These regulations apply to all phases
of our
business, including drug testing and manufacturing; record keeping; personnel
management; management and operations of facilities and equipment; control
of
materials, processes and laboratories; and packaging, labeling and
distribution.
48
All
of
the pharmaceutical products supplied to the United States market are approved
and regulated by the FDA and are approved under, and subject to, the FDC
Act. In
the U.S., the FDA requires extensive testing of new and existing pharmaceutical
products to demonstrate safety, efficacy and purity, ensuring that the products
are effective in treating the indications for which approval is granted.
Where
products are under development, testing in humans may not commence until
either
an investigational new drug application has been approved or an exemption
is
given by the FDA.
Where
a
drug is acquired that has been previously approved by the FDA, both the Company
and the former application holder are required to submit certain information
to
the FDA. This information, provided it is adequate, enables the transfer
of
manufacturing and/or marketing rights to take place. The Company is also
required to advise the FDA about any changes that may affect the approved
application as set forth in FDA's regulations. Our strategy focuses on acquiring
existing approved products or those in late-stage development, transferring
manufacture to our own facilities to leverage our existing expertise and
know-how where this is considered both economic and advantageous. In order
to
perform such transfers, we must demonstrate by filing information with the
FDA
that we are able to manufacture the product in accordance with current good
manufacturing practices (“cGMPs”) and the specifications and conditions of the
approved marketing application. For changes where prior approval is required
under FDA regulations, there is no assurance that such approval will be granted
by FDA.
The
U.S.
government has extensive enforcement powers over the activities of
pharmaceutical manufacturers, including the authority to withdraw approvals,
to
prohibit sales of unapproved or non-conforming products, seize product and
to
halt manufacturing operations that are not compliant with cGMPs in addition
to
monetary penalties, both civil and criminal. Such restrictions may materially
adversely affect our business, financial performance and results of
operations.
In
addition, modifications to or enhancements of manufacturing facilities may
be
subject to further additional approval by the FDA that may require a lengthy
approval process. The Company's manufacturing facility is subject to continual
inspection from regulatory bodies and other government agencies such as the
FDA,
and manufacturing operations can be interrupted or halted if such inspection
proves unsatisfactory.
Our
United Kingdom manufacturing facilities also hold Manufacturer's Licenses
granted by the U.K.'s Medicines and Healthcare products Regulatory Agency
(`MHRA”). These licenses permit the Company to manufacture, control and supply
pharmaceutical products to all markets provided that individual products
meet
with the specification in force within the particular territory that the
product
is marketed. The MHRA is very similar to the FDA in that it operates under
formal legislation that controls the approval of all medicinal products used
within the U.K. Due to the U.K.'s membership of the European Union, the MHRA
also regulates products manufactured for sale both within the U.K. and the
E.U.
The MHRA is responsible for the review and approval of all license applications
and, via its inspection and enforcement division, the inspection and control
of
manufacturing, assembly and labeling requirements for all medicinal products.
As
with the FDA, the MHRA has a legal jurisdiction whereby companies who are
not
compliant with license particulars (known as marketing authorizations within
the
E.U.) or cGMP can be heavily penalized, including seizure, cessation of
manufacture, product recall or, in extreme cases, the cancellation of the
manufacturer's license. In this latter case, the manufacturing facility is
unable to manufacture for any market. Monetary penalties can also be enforced
subject to the judicial system approval within the U.K.
Our
operations are also subject to numerous and increasingly stringent regulations,
whether scientific, environmental or labor related, and can be applied via
central government or at state or local level. The standards required by
regulatory authorities as a result of changes in statutes, regulations or
legal
interpretations cannot be determined in advance by us. Such future changes
could
have a material effect upon our business in the future. Changes may, among
other
aspects, require modification to manufacturing facilities or processes, amend
labeling, result in product recall, replacement or discontinuation of products,
increase the requirements for control and record keeping or require additional
scientific substantiation. Such changes may affect our business, financial
condition and results of operations.
49
Our
U.S.
and U.K. plants are inspected by the regulatory authorities on a periodic
basis
and all three sites comply with the principles of good manufacturing practice
to
date.
In
addition to regulations that govern the manufacture and supply of pharmaceutical
products, our U.K. facilities are also subject to regulation by other agencies
such as the United Kingdom's Health and Safety, Executive Environmental Agency
and other legislation within the U.K. (e.g. Labour Relations Act, etc.) that
are
applicable under the laws of the United Kingdom. Periodic inspection by the
appropriate agencies occurs to ensure that we are in compliance with the
requirements within the appropriate regulations whether these are local,
state
or national.
Employees
As
of
December 31, 2005, we employed a total of 572 personnel, consisting of 9
senior executives, 21 senior managers, 41 other members of management, 84
clerical staff, 167 technical personnel (including 13 scientific research
and
development personnel), and 250 production, maintenance and distribution
staff.
Our
success is heavily dependent on the performance of our executive officers
and
managers. We have entered into employment agreements with these individuals,
including our top five paid executives which include Dr. Jack Kachkar, our
Chairman and Chief Executive Officer; Steven Handley, our President; Colin
Hunter, our Chief Scientific and Regulatory Officer; Jay M. Green, Executive
Vice President and Director of Corporate Development; and Stephen Beckman,
Vice
President of Commercial Development for Inyx and President and Chairman of
Exaeris, Inc., our wholly-owned marketing subsidiary. None of such persons
has
signified any intention to retire or leave the Company. Our growth and future
success will depend, in large part, on the continued contributions of these
key
individuals as well as our ability to motivate and retain these personnel.
In
addition, our proposed plan of product development and sales activities will
require an increase in scientific, management and sales and marketing personnel,
and an investment in the professional development of the expertise of our
existing employees and management. We are currently seeking business development
personnel to join our Company.
Our
United Kingdom operations, Inyx Pharma and Ashton, consult with their employees
through a Joint Consultation Committee comprised of representatives across
all
levels of the business, and which is chaired by a senior manager. The purpose
of
that committee is consultative only. We believe that we enjoy favorable
relations with our employees. We make available to our employees benefits
consisting of a contributing and matching pension plan, available after one
year
of service, and life insurance benefits and stock options based upon the
Company's value and meeting performance targets.
Ashton
has 28 unionized employees, all members of the TGWU (Transport & General
Workers Union). Ashton employs an additional 276 staff who are not members
of
any union. A Staff Consultation Forum is in place that represents all 306
staff
on site.
Our
Inyx
USA operation in Manatí, Puerto Rico has approximately 46 unionized employees in
the engineering and manufacturing areas pursuant to a collective bargain
agreement in effect through March 31, 2008. Inyx USA also has approximately
100
non-union employees across in management, quality control and quality assurance,
supply chain, finance, support and administrative functions. All Inyx USA
employees receive medical insurance and other benefits, including stock options
based upon the Company's value and meeting performance targets.
Environmental
Impact
We
utilize a variety of chemicals in our business, many of which are dangerous
if
used or handled improperly due to their toxicity, corrosiveness and ability
to
cause irritation or flammability. Wastes from our manufacturing and testing
processes are either collected in drums and removed by a waste contractor
or
discharged into public sewers pursuant to a Trade Effluent Discharge Consent.
The Company takes stringent precautions in the storage and use of these
materials and constantly trains its personnel in their use. Because of this,
we
have not caused any release of hazardous materials into the environment or
exposed any of our employees to health risks. We maintain liability and product
liability insurance covering the risks of such exposure, in amounts we deem
to
be adequate.
50
Under
government regulations governed by the Montreal Protocol on Substances That
Deplete the Ozone Layer, chlorofluorocarbon (“CFC”) compounds are being phased
out because of environmental concerns. We presently manufacture respiratory
inhalers that utilize CFC gas as a propellant. Although, we have expertise
in
converting such products to non-CFC based respiratory inhalers and have
commenced manufacturing non-CFC or hydrofluoroalkane (“HFA”) respiratory
inhalers at our Inyx Pharma production facility, a small number of our customers
continue to require CFC respiratory inhalers. These customers sell these
products in a number of countries that still allow the import and marketing
of
CFC-based respiratory inhalers. We believe that we are able to successfully
implement a complete transition to the use of CFC-free gas or HFA gas as
a
propellant in the development and production of respiratory aerosols, as
may be
required by the respective governing agencies.
Additionally,
a material element of our growth strategy is to expand our existing business
through strategic acquisitions of other pharmaceutical manufacturing operations.
Prior to making any such acquisition, we expect to first complete stringent
environmental studies through the use of expert consultants to ensure that
there
are no existing or potential environmental hazards at the site or the potential
to environmentally contaminate neighboring sites from the acquired
site.
The
following summary consolidated financial information should be read together
with the Company's historical consolidated financial statements and related
notes. Prior to March 6, 2003, the Company, under the name Doblique, Inc.,
was
engaged in the business of breeding and racing thoroughbred horses at various
major horse racing venues throughout the United States. On March 6, 2003,
management discontinued the Company's thoroughbred horse operation by selling
the assets of that operation to a third party. Concurrent with the
discontinuance of its horse racing operations, Doblique concluded a reverse
acquisition of Inyx Pharma Limited (“Inyx Pharma”), and changed its name to
Inyx, Inc. The acquisition of Inyx Pharma was consummated on April 28, 2003
and
was accounted for as a capital transaction under the reverse acquisition method
of accounting for business combinations. Under this method, Inyx Pharma (the
legal subsidiary) is considered to have acquired Inyx, Inc. (the legal parent)
effective April 28, 2003, and continued as Inyx, Inc. thereafter.
Inyx
Pharma's business emerged from its acquisition of the assets of Miza
Pharmaceuticals, Ltd. (“Miza UK”) on March 7, 2003. Miza UK had been an
operating entity which filed for bankruptcy and reorganization in the United
Kingdom on September 3, 2002. As a result of the reverse acquisition method
of
accounting, the consolidated financial statements (and the financial highlights
below) for periods subsequent to March 7, 2003 are those of Inyx Inc., and
the
consolidated financial statements and highlights prior to March 7, 2003 are
presented herein as the historical financial statements of Miza UK.
Inyx,
Inc. (“Inyx”, “we”, “us”, “our”, or the “Company”), through its wholly-owned
subsidiaries, Inyx USA, Ltd. (“Inyx USA”), Inyx Pharma Limited (“Inyx Pharma”),
Inyx Canada Inc. (“Inyx Canada”), Inyx Europe Limited (“Inyx Europe”), including
Inyx Europe’s wholly-owned subsidiary, Ashton Pharmaceuticals Limited (“Ashton
Pharmaceuticals” or “Ashton”) , and Exaeris Inc. (“Exaeris”), is a specialty
pharmaceutical company. We focus our expertise on the development and
manufacturing of prescription and over-the-counter (“OTC”) aerosol
pharmaceutical products and drug delivery technologies for the treatment of
respiratory, allergy, cardiovascular, dermatological and topical conditions.
Our
client base primarily consists of ethical pharmaceutical corporations, branded
generic pharmaceutical distributors and biotechnology companies. Although we
perform some sales and marketing functions, we have limited product distribution
capabilities and so we depend on our customers’ distribution channels or
strategic partners to market and sell the pharmaceutical products we develop
and
manufacture for them.
Recent
Developments
Pending
Acquisition of German Pharmaceutical Production Business
On
April3, 2006, we announced that we had reached an agreement in principle to acquire
a
German pharmaceutical production business from a pan-European specialty company,
with which we are also entering into a strategic 10-year collaboration
agreement, whereby we will become the exclusive manufacturing resource for
the
European company's therapeutic products. The acquisition is subject to the
completion of customary due diligence and preparation, negotiation and execution
of definitive documents. We expect to close the acquisition by the end of
the second quarter of 2006 and to expense approximately $2.6 million in one-time
costs and expenses related to the transaction.
Commencement
of Operations of Exaeris
On
March29, 2005, we incorporated a wholly-owned subsidiary, Exaeris Inc. (“Exaeris”), a
Delaware Corporation, to manage and operate our pharmaceutical marketing and
commercial activities, including those through collaborative agreements with
other companies. In January 2006, Exaeris commenced formal
operations.
Exaeris
is led by its President, Stephen Beckman, who we hired on September 1, 2005.
Mr.
Beckman has more than 15 years experience in the sales, marketing and
commercialization of pharmaceutical products. Exaeris is currently building
its
management team and sales force.
Our
strategy is to have Exaeris focus on the sales and marketing of niche or
enhanced generic pharmaceutical products, including our clients’ products and
our own planned proprietary products in the respiratory, allergy,
dermatological, topical and cardiovascular treatment market sectors. Exaeris
is
currently organizing its management team and sales force, which is being
established initially through a commercial relationship with a pharmaceutical
contract sales representative organization.
In
addition to continuing to develop a sales force, Exaeris’ management team’s
initial primary focus will be to provide the sales, marketing and product
promotion support required for our product development, manufacturing and
marketing collaboration agreements with King Pharmaceuticals, Inc. (“King”)
regarding King’s Intal®
and
Tilade®
products.
Intal®
and
Tilade®
are
non-steroidal, anti-inflammatory agents for the management of asthma. Such
multi-year agreements were signed on September 8, 2005 and include the formation
of an Alliance Management Committee (“AMC”), comprised of three senior
executives from each company who will plan, administer and monitor the
activities of parties under the noted agreements. Under the King marketing
and
collaboration agreements, Exaeris will commence co-promoting and marketing
Intal®
and
Tilade®
in
2006.
52
Acquisition
of Celltech Manufacturing Services Limited
On
August31, 2005, our Company through our wholly-owned United Kingdom subsidiary, Inyx
Europe, completed the purchase of all of the outstanding shares of Celltech
Manufacturing Services Limited (“CMSL”), a United Kingdom pharmaceutical
manufacturing company, from UCB Pharma Limited (“UCB Pharma”), for approximately
$40.7 million comprised of an initial deposit of approximately $610,000, a
cash
payment at closing of approximately $23.2 million, a purchase price deferral
of
approximately $9.8 million payable in six installments, an amount equivalent
to
$4.6 million representing the excess working capital over the targeted working
capital at closing agreed to between the parties and direct transaction costs
of
approximately $2.4 million, and thereby assumed possession and control of the
operations of CMSL effective September 1, 2005. On September 9, 2005, the
Company changed the “CMSL” name to Ashton Pharmaceuticals Limited. Ashton
currently operates as a wholly-owned subsidiary of Inyx Europe, and its
operating results are included in the Company’s consolidated results of
operations effective September 1, 2005 (the day after completion of the
acquisition of all of the outstanding stock of Ashton).
Ashton
has over 50 years of experience in pharmaceutical development and manufacturing,
and currently produces a portfolio of branded and non-branded products for
third
party customers including UCB, its previous parent company. Before its
acquisition by the UCB Group in 2004, the Ashton business was part of the
Celltech Group PLC.
Ashton
operates a 152,000 square foot cGMP (current Good Manufacturing Practice)
facility approved to manufacture pharmaceuticals products for the United
Kingdom, Europe and Asia. The site is regulated by the United Kingdom MHRA
(Medicines and Healthcare products Regulatory Agency) and the EMEA (the European
Agency for the Evaluation of Medicinal Products). The manufacturing site is
comprised of a complex of pharmaceutical manufacturing, laboratory and product
support, storage space, and administrative office premises located on an
approximately 7.3-acre piece of land in Ashton, near Manchester, in the North
West of England, and approximately one hour away by car from our Company’s other
United Kingdom operation, Inyx Pharma Limited, located in Runcorn, Cheshire.
Ashton currently has approximately 300 employees consisting of management,
commercial and finance, production, quality control and testing and technical
and distribution support staff.
The
Ashton facility is approved to produce pharmaceuticals, including solid dose,
sterile and dry powder inhaler products, for the United Kingdom, Europe and
Asia. Through the Ashton Site, the Company also manufactures steroids, hormonal
products and highly potent product formulations. The Ashton site also possesses
a controlled drug license from the MHRA.
Revenues
at the Ashton site consist of product manufacturing and support services for
the
Celltech-UCB group, under a new five-year exclusive manufacturing contract,
and
contracts and purchase orders from other pharmaceutical companies, as well
as
the sales of three of its own products, consisting of three major hormonal
products and currently sold through third parties.
Acquisition
of the Business Assets of Aventis PR
On
March31, 2005, Inyx USA acquired the business assets of Aventis Pharmaceuticals
Puerto Rico, Inc. (“Aventis PR”) from the Sanofi-Aventis Group. The acquisition
was accounted for as a business combination in accordance with Statement of
Financial Accounting Standard No. 141 “Business
Combinations”(“SFAS
No. 141”).
In
connection with this acquisition, Inyx USA paid approximately $20.7 million
as a
total purchase price comprising of a cash payment of approximately $19.7 million
paid upon closing, approximately $2.7 million in direct transaction costs
(including approximately $90,000 of additional transaction costs incurred
subsequent to closing), a subsequent purchase price adjustment of approximately
$570,000 paid to Aventis PR in August 2005, and received a purchase price
reduction amounting to approximately $2.3 million relating to the final value
assigned to the commercial contracts transferred to the Company on acquisition
as agreed by the Company and Aventis PR, pursuant to a purchase price settlement
adjustment in November 2005. Aventis PR is a pharmaceutical manufacturing
operation producing dermatological, respiratory and allergy products under
contract manufacturing agreements with third party customers. The results of
operations of the acquired Aventis PR business assets are included in the
Company’s consolidated results of operations effective April 1, 2005 (the day
after completion of the acquisition of such business assets).
53
The
Aventis PR business assets that we acquired are located on a 9.5 acre property
in Manatí, Puerto Rico comprised of a 140,000 square foot pharmaceutical
manufacturing operation with supporting equipment, laboratories, warehouse
and
office space. We retained 145 employees and the operation currently manufactures
dermatological, respiratory and allergy products, including niche aerosol
pharmaceutical products.
Prior
to
our acquisition of its manufacturing assets, Aventis PR previously produced
pharmaceutical products in accordance with a contract manufacturing agreement
with its parent company, Aventis Pharmaceuticals.
Consolidated
Results
The
accompanying consolidated financial information includes the accounts of Inyx
and its wholly-owned subsidiaries: Inyx Pharma, Inyx Canada, Inyx USA, Inyx
Europe (and its wholly-owned subsidiary, Ashton), and Exaeris. All inter-company
accounts and transactions have been eliminated in consolidation.
Pro
Forma Results for Comparative Purposes
As
we
acquired certain business assets of Aventis PR on March 31, 2005 and all the
outstanding shares of Ashton (“CMSL”) on August 31, 2005, our Management’s
Discussion and Analysis of Financial Condition and Results of Operations for
the
three months ended March 31, 2005 and the years ended December 31, 2005 and
2004, will therefore focus on both actual and combined pro forma
results.
Based
on
the timing of the noted business acquisitions, we believe that a period over
period pro forma comparison provides the reader the best comparative analysis
of
our current business situation and results of operations, especially as these
acquisitions have contributed materially to a growth in our revenues and
business scope. Accordingly, the pro forma analysis discussed below for the
year
ended December 31, 2005 includes the actual results of our Company for the
year
ended December 31, 2005 combined with the results of the acquired business
of
Aventis PR (“Inyx USA”) for the three months ended March 31, 2005 and the
results of CMSL (“Ashton”) for the eight months ended August 31, 2005, i.e. the
period during 2005, prior to our acquisition of that business through Inyx
Europe. Similarly, the pro forma results give effect to the acquisitions of
Aventis PR and CMSL as if these operations had been owned and operated by Inyx
for the three months ended March 31, 2005, along with our Company’s other
operations.
Furthermore,
the pro forma analysis for the year ended December 31, 2004 includes the actual
results of our Company for the year ended December 31, 2004 combined with
the results of operations of the acquired business of Aventis PR and the results
of operations of Ashton as if we had owned and operated these operations for
the
entire year ended December 31, 2004. The pro forma analysis is presented for
informational purposes only and is not indicative of the results of operations
that would have been achieved if the acquisitions had actually taken place
at
the beginning of each of the reporting periods presented.
CRITICAL
ACCOUNTING POLICIES
Our
accounting policies are disclosed in Note 2 to the Notes to the Audited
Consolidated Financial Statements found elsewhere herein. We consider the
following policies to be important to our financial statements.
54
Revenue
Recognition
Our
Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No.
104 (“SAB 104”), “Revenue Recognition in Financial Statements” which requires
that four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) product delivery has occurred
or services rendered; (3) the fee is fixed or determinable; and (4) collection
is reasonably assured. Revenues are recognized FOB (Freight-on-Board) shipping
point, when products are shipped, which is when legal title and risk of loss
is
transferred to our customers, and is recorded at the net invoiced value of
goods
supplied to customers after deduction of sales discounts and sales and value
added tax, where applicable. In situations where our Company receives payment
in
advance of the performance of research and development services, such amounts
are deferred and recognized as revenue as the related services are performed.
The
Company obtains detailed credit evaluations of customers generally without
requiring collateral, and establishes credit limits as required. Exposure to
losses on receivables is principally dependent on each customer’s financial
condition. The Company monitors its exposure for credit risk losses and
maintains an allowance for anticipated losses.
Non-refundable
fees are recognized as revenue over the term of the arrangement, based on the
percentage of costs incurred to date, estimated costs to complete and total
expected contract revenue. Product returns are not accepted.
Shipping
costs are paid for by our customers. Any shipping and handling costs incurred
by
our Company are included in costs of goods sold in the accompanying consolidated
statements of operations.
Translation
of Foreign Currency
The
functional currency of our Company’s United Kingdom subsidiaries, Inyx Pharma
and Inyx Europe (including its wholly-owned subsidiary, Ashton) is the Great
Britain Pound (GBP). Our Company’s financial statements are reported in United
States Dollars (USD) and are translated in accordance with Statement of
Financial Accounting Standards No. 52 (“SFAS No. 52”), which requires that
foreign currency assets and liabilities be translated using the exchange rates
in effect at the balance sheet date. Results of operations are translated using
the weighted average exchange rates prevailing during the period. For purposes
of SFAS No. 52, we consider the dollar to be the reporting currency. The effects
of unrealized exchange fluctuations on translating foreign currency assets
and
liabilities into dollars are reported under accumulative other comprehensive
loss in stockholders’ deficit. Realized gains and losses from foreign currency
transactions are included in the results of operations for the period.
Fluctuations arising from inter-company transactions are of long term in nature
and are reported under accumulative other comprehensive loss in shareholders’
deficit.
As
of
December 31, 2005, we had not utilized any currency-hedging programs. However,
as we intend to continue to utilize U.S.-based financing sources, and as the
significant majority of our revenues are in GBP, with some revenues and
associated transactions in Euros, we intend to begin hedging activities at
some point in 2006 as may be necessary, but at this time no formal plan has
been
adopted.
Valuation
of Long-Lived Assets and Intangible Assets
We
review
the carrying value of our long-lived assets, including purchased intangible
assets, whenever events or changes in circumstances indicate that the historical
cost-carrying value of an asset may no longer be appropriate. We assess
recoverability of the carrying value of the assets by estimating the future
net
cash flows expected to result from the assets, including eventual disposition.
Factors
considered important that could trigger an impairment review include among
others significant changes relative to: (i) projected future operating results;
(ii) significant changes in the manner of our use of the assets or the strategy
for our overall business (iii) business collaborations; and (iv) significant
negative industry, business, or economic trends. Each impairment test is based
on a comparison of the undiscounted cash flow to the recorded value of the
asset.
55
If
it is
determined that the carrying value of long-lived or intangible assets may not
be
recoverable based upon the existence of one or more of the above indicators
of
impairment, the asset is written down to its estimated fair value on a
discounted cash flow basis.
Based
on
such tests conducted by the Company, we concluded that as of December 31, 2005,
there was no impairment to the carrying value of our long-lived or intangible
assets.
RESULTS
OF OPERATIONS
Inyx
currently manages and operates its business as one operating segment. Our
results of operations are derived from pharmaceutical contract manufacturing
services and associated product formulation and development outsourcing
services, including product stability, commercial scale-up, and validation
and
regulatory support for our clients’ products. Future contract revenues are
dependent upon our clients maintaining or obtaining regulatory approval for
the
sale of their products in their designated markets.
We
are
incurring proprietary product research and development costs, including costs
that may be associated with certain potential proprietary products and
associated intellectual property acquisitions. At this time, we have not
commercialized any of our own proprietary products or product acquisitions
but
we believe that in 2006 we will be in a position to commence the sale of our
own
proprietary products or products that we have licensed from other companies.
In
addition, we will be commencing the distribution of selected clients’ products
through product collaboration and joint marketing and promotion agreements
such
as our marketing agreement with King Pharmaceuticals commencing in January
2006.
The
financial information set forth in the following discussion should be read
in
conjunction with and qualified in its entirety by the financial statements
of
our Company presented elsewhere herein.
Loss
before interest and financing costs and income tax benefit
(303
)
(2,398
)
(2,658
)
Interest
and financing costs
2,290
4,612
1,775
Income
tax benefit
-
-
429
Net
loss
$
(2,593
)
$
(7,010
)
$
(4,004
)
Net
Revenues
Our
revenues are derived from pharmaceutical manufacturing revenues, product
marketing and commercialization fees, and product formulation and development
outsourcing services, including product stability, commercial scale-up, and
validation and regulatory support for our clients’ products. Such revenues are
dependant upon our clients maintaining or obtaining regulatory approval for
the
sale of their products in their designated markets.
Net
revenues for the three months ended March 31, 2006 were approximately $21.4
million as compared to net revenues of approximately $2.7 million for the three
months ended March 31, 2005. Net revenues increased by $18.7 million or
approximately 693% for the comparative three months. On a pro forma basis,
net
revenues for the three months ended March 31, 2005 amounted to approximately
$19.0 million.
The
increase in net revenues for the three months ended March 31, 2006, as compared
to the three months ended March 31, 2005, is primarily attributable to the
addition of the Inyx USA, Ashton and Exaeris businesses to our operations,
none
of which were included in our operating results in the first quarter of 2005.
Additionally, during the three months ended March 31, 2006, we commenced a
number of contract development and product commercialization activities,
including technology transfer, for a number of existing and new customers.
We
have also started to commercially manufacture hydrofluoroalkane (“HFA”)
non-ozone depleting metered dose inhalers for two of our larger customers at
our
Inyx Pharma site. We believe our expertise in converting from CFC to CFC-free
aerosol pharmaceuticals, particularly the production of HFA aerosol
pharmaceutical products, should continue to generate increasing business as
the
Montreal Protocol continues to be implemented around the world, and most
importantly, the U.S. market.
57
In
January 2006, our commercial marketing subsidiary, Exaeris, commenced formal
operations. During the three months ended March 31, 2006, we received a revenue
contribution of approximately $428,000 from that operation as a result of our
co-marketing collaboration with King, with respect to King’s Intal®
and
Tilade®
products.
We expect Exaeris to start to materially contribute to our revenues commencing
in the second half of 2006 as a result of the King collaboration agreement
and
other strategic initiatives we are pursuing through Exaeris.
Although
we do not currently derive any of our revenues from the sale of our own
products, we believe that we can also increase our revenues and achieve greater
margins through the addition of our own product lines in selected pharmaceutical
market sectors, with marketing to be conducted through alliances and
partnerships with certain strategic customers or directly through Exaeris.
We
expect that these types of revenues would include direct sales, royalty payments
and marketing and licensing fees for our planned products.
For
the
three months ended March 31, 2006, our three top customers in aggregate
accounted for approximately $12.7 million or approximately 59% of our total
net
revenues. During this period, these three customers accounted
for approximately $8.7 million, or 41% of total revenues; approximately $2.0
million, or 9% of total revenues; and approximately $2.0 million, or 9% of
total
revenues, respectively.
In
comparison, for the three months ended March 31, 2005, our three top customers
in aggregate accounted for approximately $1.4 million or approximately 51%
of
our total net revenues. During this period, these three customers accounted
for
approximately $662,000, or 25% of total revenues; approximately $357,000, or
13%
of total revenues; and approximately $350,000, or 13% of total revenues,
respectively.
A
delay
in the production for any one of our top three clients or the loss of any such
client would have a material adverse affect on our revenues and profitability
opportunities. As part of our strategic growth objectives, we continue to
broaden our customer base and distribution channels to mitigate the risk of
our
economic dependence on any one client.
Cost
of Goods Sold
Cost
of
goods sold is associated with manufacturing and development revenues and
includes materials, labor, factory overheads and technical affairs, including
quality control and quality assurance regulatory support functions.
Cost
of
sales for the three months ended March 31, 2006 amounted to approximately $13.1
million, or approximately 61% of net revenues. In comparison, for the three
months ended March 31, 2005, cost of goods sold amounted to approximately $2.5
million, or approximately 95% of net revenues of $2.7 million. On a pro forma
basis, cost of sales for the three months ended March 31, 2005 was approximately
$15.3 million, or approximately 80% of pro forma net revenues.
The
improvement in cost of goods sold as a percentage of net revenues is primarily
attributable to increasing business at our sites, including the noted technology
transfers, and the addition of more profitable business as a result of the
inclusion of Exaeris and Ashton in the first quarter of 2006, where we
experienced overall lower manufacturing costs as a percentage of revenues.
Gross
Profit
Gross
profit for the three months ended March 31, 2006 amounted to approximately
$8.3
million on net revenues of $21.4 million or approximately 39% of net revenues.
In comparison, gross profit for the three months ended March 31, 2005 amounted
to approximately $142,000 on net revenues of approximately $2.7 million or
approximately 5% of net revenues. Pro forma gross profit for the three months
ended March 31, 2005 amounted to approximately $3.8 million, or approximately
20% of pro forma net revenues.
58
The
improvement in gross profitability is the result of several factors, including
the achievement of development milestones in the quarter on several new customer
contracts related to high-margin, technical transfer work required prior to
the
commencement of commercial manufacturing. Additionally, production volumes
from
commercial supply contracts with two of our larger current customers have
increased due to regulatory approvals in certain markets having been granted
for
their respiratory products. This has all resulted in increased utilization
of
product development and manufacturing outsourcing capacity at our facilities
in
the United States and United Kingdom. Therefore we have been able to absorb
more
of our fixed overhead and labor costs thereby improving our overall gross profit
margins.
We
believe that we can further improve our gross profit margins as we continue
to
add more business at our facilities and through the addition of our own
pharmaceutical product lines, which offer greater profit margins than those
provided by contract manufacturing services. We also continue to pursue product
in-licensing opportunities including those in collaboration with other
pharmaceutical companies. Although we do not currently derive any revenues
from
the sale or marketing of our own products, we believe that our initial two
proprietary products should be ready for commercial marketing before the end
of
2006.
Operating
Expenses
Our
operating expenses consist of product research and development costs, general
and administrative, selling, depreciation and amortization, as well as
amortization of intangible assets expenses.
Operating
expenses for the three months ended March 31, 2006 amounted to approximately
$8.6 or approximately 40% of net revenues of $21.4 million. In comparison,
operating expenses for the three months ended March 31, 2005 amounted to
approximately $2.5 million or approximately 95% of net revenues of $2.7 million.
On a pro forma basis, operating expenses amounted to approximately $6.4 million,
or 34%, of pro forma net revenues for three months ended March 31, 2005.
The
increase to our operating expenses for the three months ended March 31, 2006
is
the result of higher general and administrative, selling and depreciation and
amortization expenses as compared to the same period in 2005. This is primarily
due to the addition of the Inyx USA, Ashton and Exaeris operations to our
overall business. However, the increase in net revenues and resultant gross
profit we had for the three months ended March 31, 2006 as compared to the
three
months ended March 31, 2005 was substantially higher than the increase in
operating expenses, resulting, respectively, in operating expenses as a
percentage of revenues being significantly reduced and the majority of our
increased operating expenses being absorbed.
Research
and Development Costs
Research
and development costs for the three months ended March 31, 2006 were
approximately $682,000 or approximately 8% of our operating expenses and 3%
of
our net revenues. In comparison, research and development costs for the three
months ended March 31, 2005 were approximately $357,000 or 14% of our operating
expenses and 13% of our net revenues. On a pro forma basis, research and
development costs for the three months ended March 31, 2005 also amounted to
approximately $357,000, which constituted 6% of our pro forma operating expenses
and 2% of our pro forma net revenues.
As
part
of our strategy to evolve into a specialty pharmaceutical company with its
own
proprietary products, we will continue to incur research and development costs
as part of our operating expenses. We also expect our research and development
costs to generally increase as we increase our activities in these areas over
the next twenty-four months. Such costs include intellectual property
development costs, salaries for required technical staff, fees to consultants
and costs associated with the use of external laboratory facilities as may
be
required. We believe that even though research and development costs may
increase our operating expenses in the short term; in the long term, these
costs
should be offset by the higher profit margins derived from the manufacturing
and
sale of our own proprietary products as compared to the operating margins of
our
contract manufacturing services. We plan to distribute our proprietary products
through our own customers’ distribution channels or in collaboration with other
strategic marketing partners.
59
We
are
focusing our product development efforts on inhalation-therapy drug delivery
devices and methods, and generic prescription and over-the-counter aerosol
pharmaceutical products for respiratory, dermatological and topical, and
cardiovascular applications. We also believe that we can enhance our competitive
position through the acquisition of regulatory-approved pharmaceutical products
and drug delivery devices for respiratory, dermatological, topical and
cardiovascular medication applications or such products in development,
including those through the acquisition of other pharmaceutical companies.
One
such example is our acquisition of a lipid-binding matrix for delivering
incompatible or unstable drug substances. We plan to use this technology to
develop our own proprietary metered dose inhalers (“MDIs”) for the treatment of
asthma and other respiratory diseases, as well as across a broad-spectrum of
other inhalation-therapy treatments including acute and chronic pain management.
At
this
time, we have not commercialized any of our own proprietary products although
we
do have a number of aerosol pharmaceutical products already under development
or
in late planning stages. These consist of single molecule and combination HFA
respiratory inhalants, non-CFC propelled oral sprays for cardiovascular
ailments, wound irrigation and cleansing sprays utilizing novel barrier
technologies, and anti-inflammatory nasal pumps. Our initial two proprietary
products, a wound-care spray and an anti-inflammatory nasal pump, are expected
to be ready for commercial marketing in late 2006.
General
and Administrative Expenses
Our
General and Administrative expenses include corporate overhead costs such as
salaries and benefits, insurance costs, administrative support, business and
corporate development expenses, as well as business support costs incurred
by
our wholly owned subsidiaries.
General
and administrative expenses amounted to approximately $4.7 million or
approximately 22% of net revenues of approximately $21.4 million for the three
months ended March 31, 2006 compared to general and administrative expenses
of
approximately $1.9 million or approximately 69% of net revenues of approximately
$2.7 million for the three months ended March 31, 2005. Pro forma general and
administrative expenses for the three months ended March 31, 2005 amounted
to
approximately $3.7 million, or approximately 19% of pro forma net revenues
for
the period.
The
increase in general and administrative expenses is primarily due to the addition
of the Inyx USA, Ashton and Exaeris operations, and included: approximately
$2.5
million for salaries and benefits; insurance costs of approximately $866,000;
building and rent expenses of approximately $807,000; legal, audit and outside
consulting expenses of approximately $340,000 and travel expenses of
approximately $213,000.
As
we
continue to implement our corporate development and growth strategy, we expect
to incur additional salary and benefit, and administrative support costs due
to
the addition of senior business and financial executives to our management
team
in order to help manage our expanding operations. Subsequently, as we continue
to grow our business and also begin to introduce our own proprietary products,
we believe that we can continue to achieve better gross profit margins and
that
such improved margins will offset these administrative incremental costs.
Selling
Expenses
Selling
expenses consists primarily of salaries, commissions and marketing costs
including those associated with Exaeris, the commercial, and sales and marketing
operation of our business.
60
Selling
expenses were approximately $1.2 million or approximately 6% of net revenues
of
$21.4 million for the three months ended March 31, 2006 compared to $134,000
or
approximately 5% of net revenues of approximately $2.7 million for the three
months ended March 31, 2005. On a pro forma basis, selling expenses for the
three months ended March 31, 2005 amounted to approximately $425,000, or
approximately 2% of pro forma net revenues for the period.
The
increase in selling expenses is primarily attributable to the addition of our
Exaeris marketing operation and enhanced sales and marketing activities across
all of our operations as we continue to our efforts to improve the capacity
utilization of our facilities.
Although
we continue to expand our own proprietary product development programs, we
have
not yet commercialized or marketed our own products or drug delivery
applications. Therefore, our selling expenses have remained relatively
consistent on a percentage basis over the comparative periods. Our sales and
marketing functions have been primarily focused on expanding our pharmaceutical
manufacturing business with existing or potential clients. As we continue to
ramp-up our business development and commercial activities, we expect our
selling expenses to increase concomitantly with expected revenue expansion.
In
addition, now under Exaeris, we have started to build a sales force through
a
contract services organization. Although part of this cost will be off-set
as a
result of our collaboration agreement with King, a larger sales force (which
as
of March 31, 2006 consisted of twenty-five sales representatives) will add
to
our selling expenses in 2006. We believe that we can offset such additional
costs by the new revenue stream that this sales force is expected to generate,
including through expected revenues as a result of the product in-licensing
opportunities that we are currently actively pursuing.
Depreciation
The
value
of our property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method based on the estimated useful lives of the
assets, which range from 25 years for buildings and 3-10 years for equipment.
Depreciation
expenses were approximately $1.5 million or 7% of net revenues of $21.4 million
for the three months ended March 31, 2006 as compared to $161,000 or 6% of
net
revenues of approximately $2.7 million for the three months ended March 31,2005. Pro forma depreciation expenses for the three months ended March 31,2005
amounted to approximately $1.2 million, or approximately 6% of pro forma net
revenues for the period.
The
higher depreciation expenses for the three months ended March 31, 2006 are
attributable to the addition of the Inyx USA and Ashton facilities to our
operations.
Amortization
of Intangible Assets
The
fair
values assigned to the intangible assets acquired are based on estimates and
assumptions provided and other information compiled by management, including
independent valuations, that utilize established valuation techniques
appropriate for the industry the Company operates in.
Amortization
expenses for intangible assets for the three months ended March 31, 2006 were
approximately $436,000 compared to $47,000 for the three months ended March31,2005. Pro forma amortization expenses for intangible assets were approximately
$722,000 for the three months ended March 31, 2005.
For
the
three months ended March 31, 2006, the amortization expenses for intangible
assets relates to acquired intangible assets which include trade marks, trade
names, customer relationships, customer contracts, customer lists, product
licenses, know-how, and a technology patent acquired by the
Company.
61
The
increase in amortization expenses related to intangible assets between the
comparative periods ended March 31, 2006 and 2005 is due to the acquisition
of
identifiable intangible assets associated with the acquisition of certain
business assets of Aventis PR, now the Inyx USA operation, and the acquisition
of all of the outstanding shares of Ashton (“CMSL”) in 2005.
These
intangible assets are amortized on a straight line basis over their estimated
remaining useful lives in proportion to the underlying cash flows that were
used
in determining the acquired value.
Operating
Loss before Interest and Financing Costs
Loss
from
operations before interest and financing costs amounted to approximately
$303,000 for the three months ended March 31, 2006 compared to a loss of $2.4
million for the three months ended March 31, 2005. On a pro forma basis, loss
from operations before interest and financing costs and income tax benefit
amounted to approximately $2.7 million.
As
noted
above, our operating loss of approximately $303,000 for the three months ended
March 31, 2006 includes approximately $2.0 million of non-cash depreciation
and
amortization expenses. This is a result of the growth of our overall business
and the resultant improved gross profits of our operations which have allowed
us
to absorb more of our operating expenses than we had been able to do in the
past. We expect that as we continue to enhance our business by increasing the
capacity utilization of our facilities and introducing our own proprietary
products, including those products we acquire through in-licensing and
collaboration agreements, we will continue to grow our revenues and improve
our
profitability opportunities and thereby continue to offset our operating
expenses.
Interest
and Financing Costs
Interest
and financing costs consist of interest expense related to the long term debt.
For the three months ended March 31, 2006, interest and financing costs totaled
approximately $2.3 million or 11% of net revenues of $21.4 million compared
to
interest and financing costs of approximately $4.6 million or 170% of net
revenues of $2.7 million for the three months ended March 31, 2005. On a pro
forma basis, for the three months ended March 31, 2005, interest and financing
costs totaled approximately $1.8 million, or approximately 9% of pro forma
net
revenues of $19.0 million for the period.
Interest
and financing costs for the three months ended March 31, 2006 included
approximately $2.1 million in interest payments to Westernbank and approximately
$160,000 in amortization of deferred financing charges. As of March 31, 2006,
the weighted average interest rate on outstanding loans during the period
amounted to approximately 10.0%.
The
higher interest and financing costs are related to the asset-based funding
that
Westernbank has provided the Aventis PR and Ashton acquisitions and our
operations of those sites to date.
Net
Loss
The
net
loss for the three months ended March 31, 2006 was approximately $2.6 million
or
approximately 12% of net revenues of $21.4 million compared to a net loss of
$7.0 million or approximately 260% of net revenues of $2.7 million for the
three
months ended March 31, 2005. Pro forma net loss for the three months ended
March31, 2005 amounted to approximately $4.0 million, or approximately 21% of pro
forma net revenues for the period.
Our
net
loss of approximately $2.6 million for the three months ended March 31, 2006
includes approximately $2.0 million of depreciation and amortization expenses
and interest charges of approximately $2.3 million.
62
We
expect
to continue benefiting from our recent acquisitions as a result of the diverse
client base, commercial collaborations and business development opportunities
that we believe these business assets are starting to provide to our overall
operation in 2006, and that we
believe should contribute increasingly in future
years.
We believe that once we fully integrate these new business acquisitions and
continue to ramp-up our business and marketing efforts, we can obtain new
contracts and purchase orders from existing and new customers. This should
allow
us to continue to improve the capacity utilization of our facilities, thereby
improving our profitability opportunities and allowing us to absorb more of
our
depreciation and amortization expenses and interest and financing
charges.
We
also
expect our profitability opportunities to improve once we have commercialized
for sale our own proprietary products or those through collaborative or
in-licensing agreements with other pharmaceutical companies. Additionally,
we
believe that we can enhance our competitive position through the acquisition
of
regulatory-approved pharmaceutical products and drug delivery devices for
respiratory, dermatological, and topical and cardiovascular drug delivery
applications or such products in development, including those through the
acquisition of other pharmaceutical companies.
Loss
from operations before interest and financing costs and income tax
expense
(benefit)
(20,950
)
(12,239
)
(21,863
)
(12,910
)
Interest
and financing costs
10,059
3,370
9,091
8,541
Loss
before income tax expense (benefit)
(31,009
)
(15,609
)
(30,954
)
(21,451
)
Income
tax expense (benefit)
-
1,333
(872
)
1,034
Net
loss
$
(31,009
)
$
(16,942
)
$
(30,082
)
$
(22,485
)
Net
Revenues
Our
revenues are derived from pharmaceutical manufacturing and related product
formulation and development outsourcing services, including product stability,
commercial scale-up, and validation and regulatory support for our clients’
products. Future contract revenues are dependant upon our clients maintaining
or
obtaining regulatory approval for the sale of their products in their designated
markets.
63
Although
we do not currently derive any of our revenues from the sale of our own
products, we believe that we can increase our revenues and achieve greater
margins through the addition of our own product lines in selected pharmaceutical
market sectors, with marketing to be conducted through our new wholly-owned
subsidiary, Exaeris, and/or certain strategic customers. We expect that these
types of revenues would include direct sales, royalty payments and licensing
fees of our planned or collaborative products. At this time, we have not
commercialized any of our own proprietary products and we have no agreements
for
such fees or distribution agreements finalized.
Net
revenues for the year ended December 31, 2005 were approximately $49.6 million
as compared to net revenues of approximately $15.7 million for the year ended
December 31, 2004. Net revenues increased by approximately $33.9 million or
approximately 216% for the year. Most of this increase is attributed to the
two
acquisitions we made in 2005; these are the acquisition of the business assets
of Aventis PR on March 31, 2005 and the acquisition of all of the shares of
Ashton (f/k/a CMSL) through our subsidiary, Inyx Europe, on August 31, 2005.
On
a pro
forma basis, net revenues for the year ended December 31, 2005 were
approximately $81.3 million as compared to pro forma net revenues of
approximately $73.6 million for the year ended December 31, 2004. Net revenues
increased by approximately $7.7 million or approximately 10% on a pro forma
basis.
For
the
year ended December 31, 2005, our three top customers accounted for
approximately $29.2 million or approximately 59% of our total net revenues.
During this period, these three customers were Kos Pharmaceuticals, accounting
for approximately $13.1 million in net revenues or approximately 26% of total
revenues; UCB Pharma Ltd., accounting for approximately $11.9 million in net
revenues or approximately 24% of total revenues; and the Sanofi-Aventis Group,
accounting for approximately $4.1 million in net revenue or approximately 9%
of
total revenues.
In
comparison, for the year ended December 31, 2004, our three top customers
accounted for approximately $7.5 million or approximately 48% of combined net
revenues. Our three top customers in 2004 were the Merck Generics group of
companies, accounting for approximately $4.2 million in net revenues or
approximately 27% of total revenues; Genpharm, Inc., accounting for
approximately $1.5 million in net revenues or approximately 10% of total
revenues; and SSL International Plc, accounting for approximately $1.8 million
in net revenues or approximately 11% of total revenues.
As
part
of our strategic growth objectives, we are increasing our new business
cultivation efforts as well as expanding both our technical capabilities and
business scope, including establishing our own marketing and distribution
channels, in order to continue to broaden our customer base to mitigate the
risk
of our economic dependence on any one client or industry sector. We believe
that
our two strategic acquisitions in 2005 will allow us to accomplish these
objectives.
Cost
of Goods Sold
Cost
of
goods sold is associated with manufacturing and development revenues and
includes materials, labor, factory overheads and technical affairs, which
include quality control and quality assurance regulatory support.
For
the
year ended December 31, 2005, cost of goods sold amounted to approximately
$34.9
million, or approximately 70% of net revenues. In comparison, the cost of goods
sold for the year ended December 31, 2004 amounted to approximately $14.3
million or approximately 91% of net revenues. The improvement in cost of goods
sold of 21 percentage points is primarily attributed to lower direct materials
costs at Inyx Pharma in 2005 versus 2004 and the inclusion of Inyx USA and
Ashton in 2005, where we experienced overall lower manufacturing costs as a
percentage of revenues.
64
Pro
forma
cost of goods sold amounted to approximately $59.0 million or approximately
73%
of pro forma net revenues for 2005. By comparison, pro forma cost of goods
sold
amounted to approximately $58.1 million or approximately 79% of pro forma net
revenues for 2004.
Even
though the cost of goods sold as a percentage of revenues has improved in 2005
versus 2004, it remained consistently high in the comparative periods due to
the
following factors:
(1)
We
continued to experience low manufacturing capacity utilization in 2005 as it
has
taken us time to start up a number of client projects due to the required
regulatory approvals, production commissioning and validation processes involved
in the pharmaceutical manufacturing industry. We expect our cost of goods sold
to be reduced as more of these projects are ramped up to full production.
Additionally, with more volume throughput at our manufacturing facilities,
we
can absorb more overhead costs and therefore reduce our manufacturing
costs.
(2)
We
continued to incur high prices for raw materials and component supplies because
of lack of purchasing-power leverage and limited vendor sources as a result
of
operating in a regulated industry. With increasing business from new and
existing customers, we expect to gain better pricing and terms from vendors
and
further improve our profit margins.
Gross
Profit
Gross
profit for the year ended December 31, 2005 amounted to approximately $14.7
million on net revenues of $49.6 million, or approximately 30% of net revenues.
In comparison, gross profit for the year ended December 31, 2004 amounted to
approximately $1.4 million on net revenues of approximately $15.7 million or
approximately 9% of net revenues for the year. The improvement in gross profit
is mostly due to lower direct materials costs at Inyx Pharma in 2005 versus
2004, and the inclusion of Inyx USA and Ashton where we experienced overall
lower manufacturing costs as a percentage of revenues.
Pro
forma
gross profit amounted to $22.3 million or approximately 27% of pro forma net
revenues of $81.3 million for 2005. By comparison, pro forma gross profit
amounted to approximately $15.5 million or approximately 21% of pro forma net
revenues of approximately $73.6 million for 2004.
We
believe that we can also improve our gross profit margins through the addition
of our own pharmaceutical product lines, which offer greater profit margins
than
those provided by contract manufacturing services. Although we do not currently
derive any revenues from the sale of our own products, we believe that our
initial two proprietary products should be ready for commercial marketing before
the end of 2006.
Operating
Expenses
Our
operating expenses consist of product research and development costs, and
general and administrative, selling, depreciation, and amortization of
intangible assets expenses.
Operating
expenses for the year ended December 31, 2005 amounted to approximately $35.7
million or approximately 72% of net revenues. In comparison, operating expenses
for the year ended December 31, 2004 amounted to approximately $13.6 million
or
approximately 87% of net revenues. Operating expenses as a percentage of net
revenues improved by 15 percentage points over the prior year primarily due
to
the allocation of corporate overhead over a larger revenue base that included
the Inyx USA and Ashton operations in 2005.
65
Pro
forma
operating expenses amounted to approximately $44.2 million or approximately
54%
of pro forma net revenues for 2005. In comparison, pro forma operating expenses
amounted to approximately $28.4 million or approximately 39% of pro forma net
revenues for 2004.
The
largest increases to our operating expenses for the year ended December 31,2005
were the addition of approximately $14.9 million in general and administrative
costs and the addition of approximately $2.7 million in depreciation expenses,
both of which were consequences of our two acquisitions in 2005.
General
and Administrative Expenses
Our
general and administrative expenses include corporate overhead costs,
administrative support, and business and corporate development and support
costs
incurred by our wholly owned subsidiaries.
For
the
year ended December 31, 2005, general and administrative expenses amounted
to
approximately $24.6 million or approximately 50% of net revenues. In comparison,
for the year ended December 31, 2004, general and administrative expenses
amounted to approximately $9.7 million or approximately 62% of net revenues.
Pro
forma
general and administrative expenses amounted to approximately $27.9 million
or
approximately 34% of pro forma net revenues for 2005. By comparison, pro forma
general and administrative expenses amounted to approximately $16.0 million
or
approximately 22% of pro forma net revenues for 2004.
Of
the
total amount of $24.6 million charged to general and administrative expenses
for
the year ended December 31, 2005, salaries and benefits comprised approximately
$7.6 million; legal, audit and outside consulting expenses were approximately
$3.1 million; travel accounted for approximately $1.4 million; insurance cost
was $1.8 million and building and rent expense was approximately $1.8 million.
Of the balance, there were approximately $3.9 million in non-cash charges,
$3.0
million in non-recurring expenses related to the two acquisitions made last
year
and $819,000 related to other new business development expenditures.
Of
the
total amount of $9.7 million we spent on actual general and administrative
expenses for the year ended December 31, 2004, salaries and benefits accounted
for approximately $4.7 million; legal, accounting and consulting fees were
approximately $1.7 million; travel accounted for approximately $1.0 million;
insurance costs amounted to approximately $768,000 and rent and building
expenses were approximately $475,000.
As
we
continue to implement our corporate development and growth strategy, we expect
to incur additional administrative costs due to the addition of senior business
and financial executives to our management team. We believe that as we grow
our
business and begin to introduce our own proprietary products, which we believe
will have better margins than the contract development and manufacturing fees
that we presently receive from our customers, we can offset these administrative
incremental costs on a long-term basis.
Selling
Expenses
Selling
expenses consists primarily of salaries, commissions and marketing costs
associated with the commercial, and sales and marketing arm of our business.
Although we perform some sales and marketing functions, such activities up
through 2005 were primarily focused on expanding our pharmaceutical
manufacturing business with existing or potential clients.
66
Selling
expenses were approximately $3.0 million or approximately 6% of net revenues
for
the year ended December 31, 2005 compared with $367,000 or approximately 2%
of
net revenues for the year ended December 31, 2004.
Pro
forma
selling expenses were approximately $3.7 million or approximately 5% of pro
forma net revenues for 2005 compared with $1.3 million or approximately 2%
of
pro forma net revenues for 2004.
For
the
year ended December 31, 2005 selling expenses include a payment to JK Services
(a related party) amounting to approximately $642,000 relating to sales
commissions for new commercial contracts initiated and completed by the
Company’s CEO. Although we continue to expand our own proprietary product
development programs, we have not yet commercialized or marketed our own
products or drug delivery applications. Therefore, our selling expenses have
remained consistent over the comparative years. Our sales and marketing
functions have been primarily focused on expanding our pharmaceutical
manufacturing business with existing or potential clients. As we continue to
ramp-up our business development and commercial activities, we expect our
selling expenses to increase concomitantly with expected revenue expansion.
Our
selling expenses as a percentage of our revenues will also increase as we are
planning to add senior sales and marketing executives to assist in our business
expansion, including intensifying our marketing activities to existing or
potential customers.
In
addition, with the commencement of formal operations of our wholly-owned
subsidiary Exaeris in January 2006, we have started to build a sales force
through a contract services organization. This will add to selling expenses
in
2006, which we believe will be offset by the new revenue stream this sales
force
is expected to generate.
Depreciation
The
value
of our property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method based on the estimated useful lives of the
assets, which range from 30 years for buildings and 3-15 years for equipment.
For
the
year ended December 31, 2005, depreciation expenses were approximately $3.3
million, or 7% of net revenues of $49.6 million compared with $619,000 or 4%
of
net revenues of approximately $15.7 million for the year ended December 31,2004. The primary reason for the increase in depreciation expenses were the
respective acquisitions of the business assets of Aventis PR on March 31, 2005,
and all the outstanding shares of Ashton on August 31, 2005.
Pro
forma
depreciation expenses were approximately $6.5 million, or 8% of pro forma net
revenues for 2005, compared with $5.9 million or 8% of pro forma net revenues
for 2004.
The
pro
forma year ended December 31, 2005 also includes the depreciation of these
assets as if we had owned them from the beginning of 2005. The pro forma
analysis is therefore indicative of the type of depreciation expenses that
we
will have on a go-forward basis due to the assets we have acquired.
Amortization
of Intangible Assets
The
fair
values assigned to the intangible assets acquired are based on estimates and
assumptions provided and other information compiled by management, including
independent valuations that utilize established valuation techniques appropriate
for the industry in which our Company operates.
67
The
amortization expenses for intangible assets in 2005 were approximately $1.4
million compared to approximately $166,000 in 2004. On a pro forma basis, the
amortization expenses for intangible assets were approximately $2.7 million
for
2005 as compared to approximately $2.5 million for 2004.
For
the
year ended December 31, 2005, the amortization expenses for intangible assets
relates to acquired intangible assets which include trade marks, trade names,
customer relationships, customer contracts, customer lists, product licenses,
know-how, and a technology patent acquired by the Company.
The
increase in the amortization expense related to intangible assets between the
comparative years ended December 31, 2005 and 2004 is due to the acquisition
of
identifiable intangible assets associated with the acquisition of certain
business assets of Aventis PR and the acquisition of all of the outstanding
shares of Ashton (“CMSL”) in 2005.
Operating
Loss before Interest and Financing Costs and Income Tax Expense
Loss
from
operations before interest and financing costs and income tax benefit amounted
to approximately $21.0 million for the year ended December 31, 2005, compared
to
a loss of $12.2 million for the year ended December 31, 2004.
Pro
forma
loss from operations before interest and financing costs and income tax benefit
amounted to approximately $21.9 million for 2005 as compared to a pro forma
loss
of approximately $12.9 million for 2004.
Interest
and Financing Costs
Interest
and financing costs consist of interest expense related to the long-term debt
as
well as the amortization of the financing charges and the amortization of the
debt discount associated with the fair value of the warrants issued and the
beneficial conversion feature related to the financings with Laurus Master
Fund,
Ltd. (“Laurus Funds”).
For
the
year ended December 31, 2005, interest and financing costs totaled approximately
$10.1 million or approximately 20% of net revenues compared to interest and
financing costs of approximately $3.4 million or approximately 21% of net
revenues for the year ended December 31, 2004.
Pro
forma
interest and financing costs totaled approximately $9.1 million or approximately
11% of pro forma net revenues for 2005 compared to pro forma year interest
and
financing costs of approximately $8.5 million or approximately 12% of pro forma
net revenues for 2004.
For
the
year ended December 31, 2005, our interest and financing charges consist of
$1.4
million in amortization of debt discount, approximately $1.7 million for the
beneficial conversion feature related to the convertible debt to Laurus Funds,
approximately $872,000 for the amortization of deferred charges, approximately
$238,000 in interest expense for the notes paid off to Laurus Funds,
approximately $318,000 in interest payable under a convertible promissory note
paid off to Stiefel, and approximately $189,000 in interest payments and
associated issued warrant costs as a result of short-term loans obtained by
our
Company during 2005.
In
addition, approximately $4.2 million relates to the two non-dilutive asset
based
secured credit facilities obtained from Westernbank on March 31, 2005 and August31, 2005, and $1.2 million of other interest related charges.
In
comparison, for the year ended December 31, 2004, interest and financing costs
included approximately $670,000 in amortization of debt discount, approximately
$773,000 for the charge to interest for the beneficial conversion feature
related to the convertible debt to Laurus Funds, approximately $336,000 for
the
amortization of deferred charges, approximately $795,000 in interest expense
for
the notes payable to Laurus Funds, approximately $250,000 in interest payable
under a convertible promissory note payable to Stiefel, and approximately
$550,000 in interest payments and associated issued warrant costs as a result
of
short-term loans obtained by our Company during 2004.
68
Income
Tax Expense (Benefit)
For
the
year ended December 31, 2005 we recorded no income tax expenses or benefits.
In
comparison, for the year ended December 31, 2004, our Company recorded a
deferred tax expense relating to valuation allowance on deferred tax assets
of
approximately $1.3 million.
Net
Loss
The
net
loss for the year ended December 31, 2005 was approximately $31.0 million
compared to a net loss of $16.9 million for the year ended December 31,2004.
On
a pro
forma basis, the net loss was approximately $30.1 million for 2005 compared
to a
net loss of approximately $22.5 million for 2004.
The
2005
net loss included approximately $3.9 million in non-cash charges, $3.0 million
in non-recurring expenses related to the two acquisitions made last year and
approximately $819,000 related to other new business development
expenditures.
Contributing
to our net losses in both respective years were operating expenses, consisting
of product research and development costs, and general and administrative,
selling, depreciation and amortization of intangible assets expenses, and
interest and financing costs. Although our operating expenses as a percentage
of
net revenues improved by 15 percentage points during 2005 as compared to 2004,
due to the allocation of corporate overhead over a larger revenue base, our
losses increased between the comparative years as a result of the operating
expenses and transaction costs associated with our respective acquisitions
of
the business assets of Aventis PR on March 31, 2005, and all of the outstanding
shares of Ashton through our subsidiary Inyx Europe, on August 31, 2005. Further
adding to the 2005 net loss was low manufacturing capacity utilization at our
Inyx Pharma U.K. site. This was caused by delayed implementation of production
contracts and projects due to delays in regulatory approvals received by
customers and acceptable supplies from approved vendors which subsequently
commenced late in the year. In addition, at our new Inyx USA site, there were
delays due to the extended time required for new business development in the
contract pharmaceutical sector.
We
expect
to begin benefiting from our noted acquisitions including offsetting a
significant part of our operating expenses as a result of the diverse client
base, commercial collaborations and business development opportunities that
we
believe these business assets will begin to provide to our overall operation
in
2006 and future years. Once we fully integrate these new business acquisitions
and continue to ramp-up our business and marketing efforts, we believe that
we
can obtain new contracts and purchase orders from existing and new customers,
thereby setting off our operating expense and improving our profitability
opportunities. We also expect our profitability opportunities to improve once
we
have commercialized for sale our own proprietary products or those through
collaborative agreements with other pharmaceutical companies.
Additionally,
we believe that we can enhance our competitive position through the acquisition
of regulatory-approved pharmaceutical products and drug delivery devices for
respiratory, dermatological, and topical and cardiovascular drug delivery
applications or such products in development, including those through the
acquisition of other pharmaceutical companies.
69
We
expect
to benefit during 2006 and future years from newly intensified new business
development and marketing efforts. As we continue to ramp-up our business and
obtain new contracts and purchase orders from existing and new customers, we
believe that we can achieve profitability and have positive cash flows from
the
operations we acquired once we fully integrate our operations. We expect
profitability to grow further as we establish ourselves as a vertically
integrated, specialty pharmaceutical company.
The
financial information set forth in the following discussion should be read
in
conjunction with and qualified in its entirety by the financial statements
of
our Company presented elsewhere herein.
For
comparative purposes and in order to present a full year of results for the
year
ended December 31, 2003, Managements’ Discussion and Analysis of Results of
Operations will focus on “combined” results. Such combined results of operations
include the results of the Company (the “Successor Company”) for the period from
March 7, 2003 through to December 31, 2003 combined with the results of
operations of Miza UK (the “Predecessor Company”) for the period from January 1,2003 through March 6, 2003.
Inyx
Pharma had acquired the majority of the business assets of Miza UK on March7,2003. Prior to its acquisition of the majority of Miza UK’s business assets,
Inyx Pharma was a non-operating private corporation with nominal net assets.
As
the historical financial statements of Inyx Pharma are presented herein as
our
own historical financial statements, and because as of March 7, 2003 Inyx
Pharma’s sole operation was essentially the continuation of the Miza UK
business, the Company’s historical financial statements for the period from
January 1, 2003 through March 6, 2003 and prior are those of Miza UK, and are
therefore presented as “Predecessor” financial statements.
The
Company’s financial statements for the periods commencing March 7, 2003 are
referred to as “Successor” financial statements. The financial statements for
all periods are collectively referred to as “Inyx” or the “Company”.
Additionally,
as the Biopharma Division was historically part of the Miza UK business but
was
an operation not acquired by Inyx Pharma, its results of operations are
presented as discontinued operations in the Company’s financial
statements.
Prior
to
our reverse acquisition of Inyx Pharma, we had divested all prior operations
of
our thoroughbred horse business and since then all of our revenues have been
generated by Inyx Pharma. As a result, the following discussion of our results
of operations for the period from March 7, 2003 through December 31, 2003
focuses on approximately ten months of operations of our wholly owned
subsidiary, Inyx Pharma, a pharmaceutical manufacturing operation we acquired
through a reverse acquisition on April 28, 2003.
The
table
below sets forth the consolidated statement of operations for our Company in
the
aforementioned periods:
Loss
before interest and financing costs, income tax expense (benefit)
and
discontinued operations
(12,239
)
(10,548
)
(10,374
)
(174
)
Interest
and financing costs
3,370
4,488
4,312
176
Loss
before income tax expense (benefit) and discontinued
operations
(15,609
)
(15,036
)
(14,686
)
(350
)
Income
tax expense (benefit)
1,333
(1,294
)
(1,294
)
-
Loss
before discontinued operations
(16,942
)
(13,742
)
(13,392
)
(350
)
Loss
from discontinued operations
-
558
-
558
Net
loss
$
(16,942
)
$
(14,300
)
$
(13,392
)
$
(908
)
Net
Revenues
Net
revenues for the year ended December 31, 2004 were approximately $15.7 million
as compared to combined net revenues of approximately $15.5 million period
from
January 1, 2003 to December 31, 2003. Net revenues increased by $200,000 or
approximately 1.3% for the year.
For
the
year ended December 31, 2004, our three top customers accounted for
approximately $7.5 million or approximately 48% of our total net revenues.
During this period, these three customers were the Merck Generics group of
companies (“Merck Generics”), accounting for approximately $4.2 million in net
revenues or approximately 27% of total revenues; Genpharm Inc. (“Genpharm”),
accounting for approximately $1.5 million in net revenues or approximately
10%
of total revenues; and SSL International Plc (“SSL”), accounting for
approximately $1.8 million in net revenue or approximately 11% of total
revenues.
71
In
comparison, for the combined two periods of 2003, our three top customers
accounted for approximately $6.6 million or approximately 43% of combined net
revenues. Our three top customers were Merck Generics, accounting for
approximately $3.1 million in net revenues or approximately 20% of total
combined revenues; Genpharm, accounting for approximately $2.2 million in net
revenues or approximately 14% of total combined revenues; and SSL, accounting
for approximately $1.3 million in net revenues or approximately 9% of total
combined revenues.
Revenues
in 2004 were approximately $10 million less than originally anticipated because
of the delay in two contracts that were initially scheduled to start last year
but didn’t because the required government and regulatory approvals were not
secured and were not in Inyx’s control. One of these delayed contracts was
valued at approximately $6.5 million annually for an initial four-year term.
Cost
of Goods Sold
Cost
of
sales for the year ended December 31, 2004, cost of goods sold amounted to
approximately $14.3 million or approximately 91% of net revenues. In comparison,
the combined cost of goods sold for the year ended December 31, 2003 amounted
to
approximately $12.5 million, or approximately 81% of combined net revenues
of
$15.5 million.
The
cost
of goods sold as a percentage of revenues was consistently high in the
comparative periods due to the following factors:
(1)
This
reduced manufacturing capacity utilization continued into 2004 as it took us
time during 2004 to start-up a number of client projects due to the required
regulatory approvals, and the production commissioning and validation processes
involved in the pharmaceutical manufacturing industry.
(2)
In
addition, due to the previously noted Montreal Protocol Treaty, during 2002
thru
2004, we have been phasing out the CFC-based MDI respiratory product line,
which
has gradually reduced our total manufacturing capacity utilization, and
therefore reduced overhead absorption rates and increased our cost of goods
sold. As a result of the CFC phase-out, the MDI line, which accounted for
approximately 20% of overall production in 2002, accounted for approximately
only 2% of overall production in 2003 and 2004. Additionally, CFC respiratory
inhaler products are approximately 20% lower in material costs than their
non-CFC equivalents. As we are now focused on phasing in the non-CFC version
of
these products, primarily HFA-based respiratory MDIs, our cost of goods sold
have marginally increased as a result of the increased production of such
inhalers for our customers.
Gross
Profit
Gross
profit for the year ended December 31, 2004 amounted to $1.4 million on net
revenues of $15.7 million or approximately 9% of net revenues. In comparison,
combined gross profit for the two periods amounted to approximately $3.0 million
on combined net revenues of approximately $15.5 million or approximately 19%
of
net revenues for the combined two periods.
Operating
Expenses
Our
operating expenses consist of product research and development costs, and
general and administrative, selling, depreciation, and amortization of
intangible assets expenses.
Operating
expenses for the year ended December 31, 2004 amounted to approximately $13.6
or
approximately 87% of net revenues of $15.7 million. In comparison, operating
expenses for the combined two periods amounted to approximately $13.5 million
or
approximately 87% of combined net revenues of $15.5 million.
72
The
largest increase to our operating expenses for the year ended December 31,2004
was the addition of $2.7 million of Research and Development Expense offset
by
reductions to the General and Administrative expenses.
In
comparison, the largest contributor to our operating expenses for the period
ended December 31, 2003, was the general and administrative expenses.
General
and Administrative Expenses
Our
General and Administrative expenses include corporate overhead costs,
administrative support, and business and corporate development and support
costs
incurred by our wholly owned subsidiaries.
General
and administrative expenses amounted to approximately $9.7 million or 62% of
net
revenues of $15.7 million for the year ended December 31, 2004 compared to
general and administrative expenses of approximately $12.7 million or
approximately 82% of net revenues of $15.5 million for the combined period
ended
December 31, 2003.
The
significant decrease in the general and administrative expenses between the
respective comparative periods was largely attributable to a number of business
ramp-up and corporate overhead costs that we had to incur as a result of our
reverse acquisition of Inyx Pharma on April 28, 2003.
These
included the costs associated with the hiring of a number of key personnel,
consulting, legal and accounting fees, higher insurance costs, and increased
business and corporate development activities, including travel and
communication expenses.
Of
the
total amount of $9.7 million spent on general and administrative expense for
total year ended December 31 2004, salaries and benefits accounted for nearly
$4.7 million; legal, audit and outside consulting expense was approximately
$1.7
million; travel accounted for approximately $1.0 million; insurance costs were
approximately $768,000 million; and building and rent expense amounted to
approximately $475,000 million.
Of
the
total amount of $12.7 million spent on general and administrative expenses
for
the combined periods in 2003, approximately $1.3 million of such expenses was
related to warrants issued in conjunction with services provided by consultants
and investment bankers; approximately $2.0 million of expenses related to
reorganization and acquisition costs; approximately $1.7 million of these
expenditures were related to salaries and benefits; approximately $1.6 million
in expenses for legal, accounting and consulting fees; approximately $0.9
million in travel, communication and corporate development costs, including
rent
paid; approximately $1.1 million in expenses for investor relation activities;
approximately $0.8 million relating to a consulting services provided by an
affiliated Partnership controlled by the Chairman and his immediate family
and
approximately $600,000 in insurance costs, due to a general increase in
insurance premiums within the insurance industry. Our Inyx Pharma subsidiary
also had an allowance for bad debt totaling approximately $0.2 million. We
also
expensed approximately $1.5 million for employee vested options granted to
employees, officers, directors, and other persons which made valuable
contributions to our Company as per the Company’s 2003 Stock Option Plan.
Selling
Expenses
Selling
expenses were approximately $367,000 or approximately 2% of net revenues of
$15.7 million for the year ended December 31, 2004 compared to $311,000 or
approximately 2% of net revenues of approximately $15.5 million for the combined
periods through December 31, 2003.
73
Depreciation
Depreciation
expenses were approximately $619,000 or 4% of net revenues of $15.7 million
for
the year ended December 31, 2004 compared to $422,000 or 3% of net revenues
of
approximately $15.5 million for the combined periods through December 31,2003.
There
were no significant additions to fixed assets for the year ended December 31,2004 and for the combined period from January 1, 2003 through March 6, 2003
and
for the period from March 7, 2003 through December 31, 2003. Our depreciation
costs for the year were $558,000 for the depreciation of property, plant and
equipment, compared to $415,000 for the combined period and $61,000 compared
to
7,000 for the amortization of equipment under capital leases.
Amortization
of Intangible Assets
The
amortization expenses for intangible assets for the year ended December 31,2004
was approximately $166,000 compared to $139,000 for the combined periods through
December 31, 2003.
Our
amortization expenses for intangible assets stem from the Company’s purchased
intangible assets related to the Inyx Pharma acquisition of Miza UK’s assets.
The intangible assets include Miza UK’s customer list and know-how. The customer
list is amortized over a period of 12 years and know-how is amortized over
10
years.
These
intangible assets are amortized on a straight line method basis over their
estimated remaining useful lives in proportion to the underlying cash flows
that
were used in determining the acquired value.
Operating
Loss before Interest and Financing Costs, Income Tax Expense (Benefit) and
Discontinued Operations
Loss
from
operations before interest and financing costs, income tax benefit and
discontinued operations amounted to approximately $12.2 million for the year
ended December 31, 2004 compared to a loss of $10.5 million for the combined
periods through December 31, 2003.
Interest
and Financing Costs
Interest
and financing costs consisted of interest expense related to the long term
debt
as well as the amortization of the financing charges and the amortization of
the
debt discount associated with the fair value of the warrants issued and the
beneficial conversion feature related to the financings with Laurus Master
Fund,
Ltd. (“Laurus Funds”).
For
the
year ended December 31, 2004, interest and financing costs totaled approximately
$3.4 million or 22% of net revenues of $15.7 million compared to interest and
financing costs of approximately $4.5 million or 29% of net revenues of $15.5
million for the combined periods of 2003.
For
the
year ended December 31, 2004, interest and financing costs amounted to
approximately $3.4 million and included approximately $670,000 in amortization
of debt discount, approximately $773,000 for the charge to interest for the
beneficial conversion feature related to the convertible debt to Laurus Funds,
approximately $336,000 for the amortization of deferred charges, approximately
$795,000 in interest expense for the notes payable to Laurus Funds,
approximately $250,000 in interest payable under a convertible promissory note
payable to Stiefel, and approximately $550,000 in interest payments and
associated issued warrant costs as a result of short term loans obtained by
the
Company during the year.
74
In
comparison, for the combined period from January 1, 2003 through December 31,2003, interest and financing costs amounted to approximately $4.3 million and
included approximately $48,000 in amortization of debt discount, approximately
$3.7 million for the charge to interest for the beneficial conversion feature
related to the convertible debt to Laurus Funds, approximately $40,000 for
the
amortization of deferred charges, approximately $52,000 in interest expense
for
the notes payable to Laurus Funds, approximately $180,000 in interest payable
under a convertible promissory note payable to Stiefel, and approximately
$468,000 in interest payments and associated issued warrant costs as a result
of
short term loans obtained by the Company during the combined period.
Income
Tax Expense (Benefit)
During
2003 the company recorded a tax benefit on the tax loss carry forward of $1.3
million on the basis of projected earnings in subsequent years. Due to delayed
regulatory approvals experienced by customers, there were significant shortfalls
from projected revenues in 2004 resulting in continued operating losses;
therefore, we elected to provide a valuation allowance relating to this tax
benefit in the year ended December 31, 2004.
For
the
period from March 7, 2003 through December 31, 2003, the tax benefit net of
valuation allowance was approximately $1.3 million.
Net
Loss
The
net
loss for the year ended December 31, 2004 was approximately $16.9 million
compared to a net loss of $14.3 million for the combined period.
The
net
loss in both 2003 and 2004 was the result of low manufacturing capacity
utilization due to delayed project implementation. The $2.6 million increase
in
net loss is approximately equal to the change in tax benefit of $1.3 million
in
2003 versus the tax expense of $1.3 million in 2004.
LIQUIDITY
AND CAPITAL RESOURCES
General
We
are
financing our operations primarily through credit facilities, revenues from
multi-year contract manufacturing and product development contracts and purchase
orders, sale of equity securities, stockholder loans and capital lease
financing.
As
of
March 31, 2006, we had approximately $98.4 million in loan obligations
(short-term and long-term debt) that are due through 2008, including
approximately $84.2 million relating to our credit facilities with Westernbank
which are automatically renewable on maturity in March 2008, on a year-to-year
basis, unless terminated by us or Westernbank. The balance of the obligations
includes approximately $14.1 million due within the next 12 months relating
to
amounts owed related to our purchase of the Ashton business.
As
of
March 31, 2006, our current assets, including cash and cash equivalents,
accounts receivable (net of $14.6 million deferred revenue), inventory and
other
current assets amounted to approximately $37.7 million. Current liabilities
amounted to approximately $81.1 million and include approximately $30.8 million
in borrowings under working capital lines of credit (which automatically renews
on maturity in March 2008, on a year-to-year basis unless terminated by either
party); approximately $24.9 million in accounts payable and other current
liabilities, approximately $9.3 million for the current portion of our long-term
debt obligations, approximately $14.1 in a loans repayable related to our
acquisition of the Ashton business, and approximately 1.8 million as a deferred
tax liability.
75
We
believe that we can continue to adequately service our debt with Westernbank
and
fund our operations through the business generated from our recent acquisitions
and expanded business base. Our expanded business base has contributed
significantly to our revenues, cash flows and profitability opportunities as
it
has diversified and grown our client base, enhanced our product development,
manufacturing and marketing capabilities, and enlarged our overall scope of
operations.
Ashton
has historically been a highly profitable operation and is expected to continue
to be so. Customer production demand at Ashton continues to be strong in both
the sterile and dry powder inhaler areas, which traditionally provide higher
margins. We expect that our Inyx USA facility will be profitable due to the
increasing demand for respiratory, allergy and cardiovascular products from
that
facility, as the Montreal Protocol is implemented in the United States, and
due
to new contracts commencing at this facility. In addition two large multi-year
contracts that have been delayed at our Inyx Pharma facility have now commenced
and our HFA lines at that facility are now in full production.
We
also
expect Exaeris, which commenced formal operations in January 2006 to start
to
materially contribute to our revenues commencing in the second half of 2006
as a
result of the King collaboration agreement and other strategic initiatives
we
are pursuing through Exaeris.
We
also
expect to achieve profitability by continuing to intensify our sales and
marketing efforts to increase the number of customer purchase orders and
contracts for our development and manufacturing services, especially as our
two
recent acquisitions have significantly strengthened and enlarged our Company’s
operating scope. Additionally, these acquisitions have led to new and profitable
multi-year exclusive manufacturing contracts with large pharmaceutical
clients.
We
also
believe that we can establish new sources of revenue by marketing our own
proprietary pharmaceutical products or selected clients’ products through
collaborative agreements, such as our recent collaborative agreement with King
Pharmaceuticals. Based on pharmaceutical industry profit margins for these
types
of proprietary products, we expect that the King Pharmaceuticals collaboration
and product development agreements, including the promotion and marketing of
King’s Intal®
and
Tilade®
lead
respiratory products, and the successful commercialization and marketing of
our
own proprietary products that should offer similar high profit margins, will
provide us with greater operating cash flow and improve our performance and
overall profitability.
We
cannot
predict exactly if, or when, additional funds will be needed. We may obtain
funds through a public or private financing, including equity financing, debt
financing, a combination of debt and equity financing, and/or through
collaborative arrangements. Additionally, we cannot predict whether any such
financing will be available on acceptable terms. If our funding requirements
are
not met, we may have to delay, reduce in scope or to raise additional funds
through additional borrowings or the issuance of additional debt or equity
securities.
Until
that time, we will continue to depend on our Westernbank credit facilities,
contract manufacturing and product support customer revenues, and any required
placements of equity and debt securities to assist us with our working capital
requirements and the implementation of our business development strategies,
capital expenditure plans, and proprietary product development and
commercialization initiatives.
Capital
Resources
As
of
March 31, 2006, our total indebtedness outstanding (including current
portion and amounts due to Seller of Ashton) was approximately $98.4 million,
consisting of approximately $84.2 million under two credit facilities with
Westernbank Business Credit, a division of Westernbank Puerto Rico
(“Westernbank”) related to the two acquisitions made in 2005, and $14.1 million
related to our acquisition of Ashton (f/k/a Celltech Manufacturing Services
Limited). The sum owed to UCB Pharma is comprised of a non-interest bearing
amount of $9.6 million relating to deferred purchase price, to be repaid in
six
monthly installments commencing May 2006. The balance of approximately $4.5
million is related to additional net current assets acquired not considered
when
the purchase price was negotiated with UCB Pharma, interest on which is accrued
and payable at Barclay’s Bank base rate. For a more detailed discussion of our
credit facilities with Westernbank and the loan from UCB Pharma see “Financing
Activities” below.
76
As
of
March 31, 2006, our annual long term debt service requirements are approximately
$14.5 million (which includes approximately $5.3 million of interest.) Such
debt
is collateralized by all the existing and future assets of the Company and
its
subsidiaries. In the event we are unable to generate sufficient cash flow from
our operations or use proceeds derived from our financing efforts including
through issuance of debt or equity securities, we may face difficulties in
servicing our substantial debt load.
During
the three months ended March 31, 2006, the Company received approximately $4.6
million in cash proceeds from the exercise of 4,602,072 warrants at prices
per
share ranging from $0.81 to $2.60. All such proceeds were used for operating
activities and working capital. In addition, pursuant to certain cashless
exercise of warrants, approximately 391,000 shares of common stock were returned
into treasury.
Subsequent
to March 31, 2006, the Company granted stock options to purchase 420,000 shares
of the Company’s common stock. The fair value of these shares approximating
$634,000 was evaluated using the Black-Scholes option pricing model with the
following assumptions: a risk free interest rate of 4.8%, an expected life
of
four years, a volatility factor of 64.4% and a dividend yield of
0%.
Subsequent
to March 31, 2006, the Company issued 1,782,405 shares of its restricted common
stock upon the exercise of 1,782,405 warrants at prices per share ranging from
$1.00 to $1.50 for total cash proceeds of approximately $1.8 million. All such
proceeds were used for operating activities and working capital. In addition,
pursuant to certain cashless exercise of warrants 10,095 shares of common stock
were returned into treasury.
We
believe that the funding provided by these asset-based facilities provide us
with the necessary capital to fund our core operations, including raw material
and component purchases, research and development and business development
activities, and capital expenditures and debt servicing requirements. On a
short-term basis, these financings have provided us with sufficient capital
to
fund all of our present operations, including our immediate capital expenditure
plans and the commercialization of our first two proprietary products, which
we
plan to commence marketing by the end of 2006. On a longer term basis, over
the
next three years, exclusive of any acquisition opportunities and related costs,
we will require additional funding of approximately $30 million to continue
to
implement our business development strategies, capital expenditure plans and
the
development and commercialization of our own proprietary pharmaceutical
products. We intend to raise such funds through the issuance of debt or equity
securities at the time we require such funding, although no such financing
plans
have been formalized at this time.
Additionally,
we believe that we can enhance our competitive position through the acquisition
of regulatory-approved pharmaceutical products and drug delivery devices for
respiratory, dermatological, and topical and cardiovascular drug delivery
applications or such products in development, including those through the
acquisition of other pharmaceutical companies. We are actively pursuing or
are
involved in acquisitions that require substantial capital resources. In the
event that we make such acquisitions or change our capital structure, we may
be
required to raise funds through additional borrowings or the issuance of
additional debt or equity securities.
Furthermore,
as we need additional funds to expand our sales and marketing activities and
fully develop, manufacture, market and sell our potential products, we may
have
to delay our product development, commercialization and marketing programs
if we
are unable to continue to obtain the necessary capital to fund these operations.
We expect to meet our short term liquidity requirements through net cash
provided by operations and borrowings under the debt agreements with
Westernbank. We believe that these sources of cash will be sufficient to meet
the Company’s operating needs and planned capital expenditures for at least the
next twelve months.
Long
term debt as at March 31, 2006 was comprised of the First and Second
Westernbank Credit Facilities. The First Westernbank Credit Facility
includes debt under term loan A of approximately $2.6 million, debt
under
term loan B of approximately $12.1 million, debt under term loan
C of
approximately $11.2 million and debt under term loan D of approximately
$4.3 million. The Second Westernbank Credit Facility includes debt
under
term loan A of approximately $2.9 million, debt under term loan B
of
approximately $9.1 million, debt under term loan C of approximately
$2.8
million and debt under term loan D of approximately $8.4
million.
(2)
The
amounts owed to the seller of Ashton, UCB Pharma, consist of $9.6
million
(€8.0 million) deferred purchase price and approximately $4.5 million
(£2.6 million) relating to additional net current assets acquired but
not
considered when the purchase price was
negotiated.
(3)
We
have commitments under various long-term operating lease agreements
for
our manufacturing, development and office facilities. In addition
to the
payment of rent, we are also responsible for operating costs, real
estate
taxes and insurance.
(4)
Commercial
commitments include all current purchase obligations for inventories
and
capital expenditures for plant and equipment. We purchase valves
and other
components from outside sources. Except for deposits required pursuant
to
supply agreements, these obligations are not recorded on our consolidated
statement of income until contract payment terms take
effect.
At
December 31, 2005, we had cash of approximately $1.0 million as compared to
cash
of approximately $336,000 at December 31, 2004, and $796,000 at December 31,2003. The increase in our cash position was due mainly to renewed borrowings
under our Westernbank facility which was partially offset by increased working
capital requirements due mainly to losses incurred during 2005.
In
addition, during the fourth quarter of 2005, our Company received cash proceeds
of approximately $3.4 million from the exercise of stock purchase warrants
by
outside holders. Subsequent to year end, from January 1, 2006 through March24,2006, the Company received additional cash of approximately $4.5 million from
the exercise of more stock purchase warrants by outside holders.
The
net
cash used in operating activities for the year ended December 31, 2005 was
$17.9
million compared to approximately $9.0 million for the year ended December31,2004 and approximately $6.6 million for the period ended December 31,2003.
For
the
year ended December 31, 2005, the net cash used in operating activities included
a net loss of $31.0 million adjusted for non-cash charges totaling $13.2 million
consisting primarily of $2.4 million of amortization of financing cost and
debt
discounts, $3.1 million due to the issuance of equity securities as compensation
of services, $3.3 million of depreciation and an additional $552,000 provision
for inventory obsolescence. Net cash used in changes in working capital of
approximately $112,000 resulted primarily from an increase in accounts
receivable of $12.3 million offset by an increase in accounts payable and
accrued liabilities of $7.8 million and a decrease in inventory of $3.7
million.
The
net
cash used in investing activities for the year ended December 31, 2005 amounted
to approximately $4.1 million compared to approximately $1.7 million for the
year ended December 31, 2004, and approximately $400,000 for the period ended
December 31, 2003.
For
the
year ended December 31, 2005, there were capital expenditures of approximately
$2.2 million consisting of $2.1 million for construction in progress costs
in
preparation for a new customer to be serviced from our Manatí site and
approximately $98,000 for office furniture and computer hardware.
For
the
year ended December 31, 2005, the net cash provided by financing activities
approximated $25.6 million compared to approximately $10.5 million for the
year
ended December 31, 2004 and $7.6 for the period ended December 31,2003.
The
proceeds for the year ended December 31, 2005 included net proceeds from the
issuance of debt of approximately $26.5 million, exercise of warrants amounting
to approximately $3.4 million and the exercise of stock options approximating
$11,000. The borrowings were offset by repayment of short-term and long-term
debt repayments and financing fees totaling approximately $4.1 million for
the
year ended December 31, 2005.
At
March31, 2006, we had cash of approximately $1.6 million as compared to cash of
$3.3
million at March 31, 2005.
Cash
Flows from Operating Activities for the Three Months Ended March 31, 2006 and
2005
The
net
cash provided by operating activities for three months ended March 31, 2006
was
approximately $587,000 compared to $3.1 million for the three months ended
March31, 2005.
For
the
three months ended March 31, 2006, the net cash provided by operating activities
included a net loss of $2.6 million adjusted for non-cash charges totaling
$1.8
consisting primarily of $1.5 million in depreciation, $436,000 of amortization
of intangible assets, a $185,000 provision for inventory obsolescence, $160,000
for amortization of financing costs and a compensation expense on stock options
of $157,000. These charges were offset by a release of bad debt provision of
approximately $687,000. Net cash provided by changes in working capital of
approximately $1.4 million resulted primarily from an increase in accounts
payable and accrued liabilities of $3.9 million offset by an increase in
accounts receivable of $2.0 million, increase in prepaid expenses and other
assets of $355,000 and increase in deferred financing costs of $110,000 and
increase in other net assets of $218,000.
79
For
the
three months ended March 31, 2005, the net cash provided by operating activities
included a net loss of $7 million adjusted for non-cash charges totaling $2.6
million consisting primarily of $2.1 million of amortization of financing cost
and debt discounts and $161,000 of depreciation, an additional $64,000 provision
for inventory obsolescence and $90,000 of all other changes. Working Capital
changes provided net funds of $7.5 million resulting primarily from reductions
to pre-paid of $1.4 million an increase in accounts payable and accrued
liabilities of $1.7 million, an increase of $3.4 million in customer advance
attributable to business development activities with Sanofi-Aventis and a
decrease in accounts receivable of $811,000.
Cash
Flows from Investing Activities for the Three Months Ended March 31, 2006 and
2005
The
net
cash used in investing activities for the three months ended March 31, 2006
amounted to approximately $3.8 million compared to approximately $717,000 for
the comparative period in 2005.
For
the
three months ended March 31, 2006, there were capital expenditures of
approximately $1.2 million consisting of approximately $700,000 for production
machinery and equipment, $365,000 for construction in progress costs and
approximately $88,000 for office furniture, computer hardware and building
and
leasehold improvements.
Cash
Flows from Financing Activities for the Three Months Ended March 31, 2006 and
2005
For
the
three months ended March 31, 2006, the net cash provided by financing activities
approximated $3.4 million compared to approximately $409,000 for the three
months ended March 31, 2005.
The
cash
provided by financing activities for the three months ended March 31, 2006
included net proceeds from the exercise of warrants and stock options of
approximately $4.6 million, net proceeds from borrowings under working capital
lines of credit of approximately $928,000 and net proceeds of $246,000 under
the
First Westernbank Credit Facility, relating to a promissory note issued to
Westernbank for financing of capital expenditures and purchases of new
equipment. These proceeds were offset by payments of principal of approximately
$2.3 million on our Westernbank term loans.
External
Sources of Liquidity
Financing
Activities
On
March31, 2005, we obtained a non-dilutive, asset based secured credit facility from
Westernbank Business Credit Division of Westernbank Puerto Rico, Puerto Rico's
second largest bank and a wholly owned subsidiary of W Holding Company, Inc.
originally totaling $46 million (the “First Westernbank Credit Facility"), the
aggregate limit of this facility was increased to $51 million and then again
to
$56 million on September 1, 2005 and November 22, 2005 respectively. The second
increase of up to $5.0 million as a Secured Over Formula Advance (“SOFA”), this
SOFA facility is utilized to fund prepayment of inventory purchases and is
revolving in nature. The First Westernbank Credit Facility provides up to $15.0
million under a revolving line of credit (the "Revolver") secured by accounts
receivables and inventory and up to $36.0 million under a series of three term
loans (the "Term Loans") and a mezzanine loan of $5 million, secured by all
assets of the Company and its subsidiaries whether now owned or thereafter
to be
acquired.
The
Revolver has a three-year term and bears interest at the Westernbank prime
rate
plus 1.0%. The availability on the Revolver is based on a percentage of our
accounts receivable, unbilled finished good inventory and raw and in-process
inventory. The three Term Loans bear interest at the Westernbank prime rate
plus
2.0% with monthly payments having commenced on July 1, 2005. The mezzanine
term
loan bears interest at the rate of 15.0% with monthly principal payments having
commenced on July 1, 2005. All of the Term Loans mature on August 31, 2008
and
are automatically renewed on a year-to-year basis unless terminated by the
Company or Westernbank. Payment of the amounts due under the Term Loans
accelerates upon the occurrence of an event of default. As of March 31, 2006
total loan balance under the First Westernbank Credit Facility approximated
$48
million.
80
The
availability under the First Westernbank Credit Facility allowed the Company
to
complete the acquisition of certain assets and business of Aventis
Pharmaceuticals Puerto Rico Inc. from Aventis Pharmaceuticals, Inc., a member
of
the Sanofi-Aventis Group, to restructure debt by repaying the $12.4 million
Credit Facility with the Laurus Funds and to provide funding for working capital
requirements.
On
August31, 2005, our Company, through our wholly owned subsidiary Inyx Europe Limited,
obtained an additional non-dilutive asset based secured credit facility from
Westernbank totaling $36.5 million (“the Second Westernbank Credit Facility”) to
help fund its acquisition of Ashton. The Second Westernbank Credit Facility
is
comprised of a revolving loan of up to $11.7 million including a reserve of
$500,000 plus a series of four term loans (Term Loan “A”, “B”, “C” and “D”)
amounting in aggregate up to $24.8 million. On January 19, 2006, the limit
available under this facility was increased by Westernbank from $5 million
to
$16.7 million thus increasing total availability under these facilities to
$41.5
million. The revolving working capital line of credit associated with the Second
Westernbank Credit Facility is secured by Ashton’s eligible receivables and
inventory. The term loans associated with this credit facility are secured
by
all of the assets of the Company and its subsidiaries, Inyx Europe and Ashton,
and a guaranteed by those parties pursuant to Guarantor General Security
Agreement. In addition, the Company has pledged the stock of Inyx Europe, and
Inyx Europe has pledged the stock of Ashton to Westernbank, as part of the
collateral for the Credit Facility, in each case pursuant to a Pledge and
Security Agreement. Term Loans “A”, “B” and “C” bear interest at Westernbank
prime rate plus 2% with principal payments having commenced December 1, 2005.
Term Loan “D” bears interest at the rate of 15% per annum with principal
payments based on an agreed upon formula having commenced January 1, 2006.
All
of
the Term Loans mature on August 31, 2008 and are automatically renewed on a
year-to-year basis unless terminated by the Company or Westernbank. Payment
of
the amounts due under the Term Notes accelerates upon the occurrence of an
event
of default. As of March 31, 2006 total loan balance under the Second Westernbank
Credit Facility approximated $36 million.
The
Westernbank prime interest rate at March 31, 2006 was 7.5%.
Certain
Indebtedness and Other Matters
As
of
March 31, 2006, in addition to our Westernbank Credit Facilities, we owed the
previous owner of Ashton, UCB Pharma, approximately $9.6 million relating to
deferred purchase price plus approximately $4.5 million in indebtedness related
to the additional net current assets acquired but not considered when the
purchase price was negotiated (“excess working capital
adjustment”).
The
purchase price deferral is non-interest bearing and is payable by us to UCB
Pharma in six monthly payments commencing May 31, 2006, which may be extended
by
mutual agreement between the parties. We are also entitled, at any time prior
to
payment in full of the purchase price deferral amount, to set off against any
of
that deferral amount still due, any unpaid claim we may have against UCB Pharma
under the share purchase agreement of Ashton. As security collateral for the
purchase price deferral, and to be released upon full payment of that deferral,
we granted UCB Pharma a secondary security position over our Company’s assets
behind Westernbank’s current first security position. Westernbank and UCB Pharma
have also agreed to an inter-creditor agreement to be terminated upon full
payment of the purchase price deferral.
81
In
addition to indebtedness noted above, our Company’s stockholders have
periodically advanced and received repayment of funds loaned to the Company.
We
have utilized such stockholder loans to support operations, settle outstanding
trade accounts payable, and for general working capital purposes. Such loans
are
usually advanced on a short-term basis.
For
the
three months ended March 31, 2006, our interest and financing charges totaled
approximately $2.3 million. This amount included approximately $2.1 million
in
interest payments to Westernbank and approximately $160,000 in amortization
of
deferred financing charges. As of March 31, 2006, the weighted average interest
rate on outstanding loans during the period amounted to approximately
10.0%.
In
comparison, for the three months ended March 31, 2005, interest and financing
costs amounted to approximately $4.6 million, which included the acceleration
of
deferred charges, debt discount, an early termination penalty and additional
warrants issued to Laurus Funds totaling approximately $3.8 million and
approximately $465,000 in fees related to the Company’s 2004 equity financing
activities. The normalized interest expense for the period was approximately
$324,000 for the notes payable to Laurus Funds, Stiefel, and the short-term
loans obtained by the Company. The weighted average interest rate paid on the
gross outstanding debt during the year was approximately 7.7%.
Capital
Expenditures
We
continuously make capital improvements to our development and production
facilities in order to improve operating efficiencies, increase automation,
improve quality control and keep pace with regulatory requirements and market
demand.
For
the
three months ended March 31, 2006, there
were capital expenditures of approximately $1.2 million consisting of
approximately $700,000 for production machinery and equipment, $365,000 for
construction in progress costs and approximately $88,000 for office furniture,
computer hardware and building and leasehold improvements.
Future
Commitments
As
of
March 31, 2006, we have commitments under various long-term lease agreements
for
premises including those for our office and development and production
facilities. These property leases range from one to fifteen years depending
on
the specific property. We also have a number of operating and capital leases
for
office equipment, fork lifts and staff automobiles in the United Kingdom.
As
of
March 31, 2006, we had operating lease contractual obligations totaling
approximately $3.2
million due to various vendors over the next ten years.
As
of
March 31, 2006the Company has billed approximately $14.6 million for services
to be provided. The revenue recognized into income as services are
performed.
As
a
specialty pharmaceutical company, we are also involved in a number of business
development projects including research and development activities that require
the use of capital resources over extended periods of time. From time to time,
these activities may also include the use of external resources that require
prepayment or cash deposits for supplies, products or services that we require.
As we intensify the development of our own proprietary products, our capital
requirements and/or future commitments may increase accordingly. The profit
margins on our proprietary products and consulting services are expected to
be
higher than our contract manufacturing services, although the time line for
the
commencement of revenues and earnings from these newly evolving business
activities may be longer than that of our established contract manufacturing
operations.
In
the
ordinary course of our business, we could be subjected to a variety of market
risks, examples of which include, but are not limited to, interest rate
movements as borrowings under our credit facilities bear interest based on
prime
rate and foreign currency fluctuations as we have operations in the United
Kingdom and trade in the European community. We continuously assess these
risks
and have established policies and procedures to protect against the adverse
effects of these and other potential exposures. Although we do not anticipate
any material losses in these risk areas, no assurance can be made that material
losses will not be incurred in these areas in the future.
Foreign
Exchange Rate Risk
Our
functional currency is the U.S. Dollar. The financial statements of our
Company's operating subsidiaries with a functional currency other than U.S.
dollars are translated into U.S. dollars using the current rate method.
Accordingly, assets and liabilities are translated at period-end exchange
rates,
while revenues and expenses are translated at the period's average exchange
rates. Adjustments resulting from these translations are accumulated and
reported as a component of accumulated other comprehensive loss in stockholders'
equity.
We
neither hold nor issue financial instruments for trading purposes and we
do not
currently engage in any hedging activities designed to stabilize the risks
of
foreign currency fluctuations. Such fluctuations could adversely affect the
value of our revenues and the results of our operations stated in U.S. Dollars.
We intend to implement hedging transactions with a major financial institution
in 2006 in order to alleviate such risks.
Interest
Rate Risk
The
principal value of variable rate long-term debt as of December 31, 2005,
including current maturities approximated $72.1 million. A hypothetical increase
of one percentage point in the prime interest rate applicable to our long-term
debt at December 31, 2005 would be approximately $720,000.
Jack
Kachkar, MD—
Chairman, Chief Executive Officer and Director. Dr. Kachkar
is a medical doctor with experience as an executive within the pharmaceutical
industry. Dr. Kachkar has founded and assisted in the acquisition of a
number of pharmaceutical companies focused on niche product development and
manufacturing capabilities. He has also provided consulting and advisory
services within the pharmaceutical industry and was a founder in 1995 of a
medical publishing company. In addition to his role as Chairman of the Board
and
Chief Executive Officer of Inyx, Dr. Kachkar is also currently the Chairman
and
Chief Executive of Karver International, Inc., a publicly-held health care
services company. From 1996 until December 2002, Dr. Kachkar was President
and
CEO of Miza Pharmaceuticals, Inc. (“Miza”), a Canadian corporation in Toronto,
Ontario. Miza is now inactive. While in operation, Miza had three operating
subsidiaries, Miza Pharmaceuticals (UK), Ltd. (“Miza UK”), Miza Ireland Limited
(“Miza Ireland”) and Miza Pharmaceuticals USA, Inc. (“Miza USA”).
Dr. Kachkar was involved in the management of all four companies, although
he resigned as an officer of Miza in December 2002 and as a director in May
2003, prior to that company becoming inactive; he resigned as a director of
Miza
UK in August 2002 and was never an officer; he resigned as a director of Miza
Ireland in October 2002 and was never an officer; and he resigned as an officer
of Miza USA in March 2003 and as a director in April 2003. Miza UK was placed
in
Administration in September, 2002 and sold its assets out of Administration
in
March 2003 to Inyx Pharma; Miza Ireland’s assets were sold by a court-appointed
liquidator during 2003; Miza USA was placed into Chapter 11 bankruptcy
proceedings by its new owners in May 2003 under the name Carr Pharmaceuticals,
Inc., and was then subsequently liquidated by its secured lenders.
Dr. Kachkar earned his medical degree summa
cum laude
in 1995
from the English Language Medical Program at Semmelweis Medical University
in
Budapest, Hungary.
84
Steven
Handley —
President and Director. Mr. Handley
has over 20 years experience within the pharmaceutical industry. During this
period, Mr. Handley has held several senior management positions in
manufacturing and technical operations. He has extensive experience in the
development and manufacture of sterile pharmaceuticals and aerosols technology.
Mr. Handley has worked for Evans Medical, Medeva PLC, and, during the past
five
years for CCL Pharmaceuticals and its successor Miza UK, where he was
responsible for all manufacturing and technical operations as Senior Vice
President. Mr. Handley holds a qualified pharmaceutical technician degree
and is a member of several professional bodies. He also holds a diploma in
management and is experienced in vaccine manufacturing and lyophilization
technology.
Colin
Hunter—
Executive Vice President, Chief Scientific Officer and Director.
Mr. Hunter
has over 25 years experience within the pharmaceutical industry where he has
held senior positions within quality and manufacturing operations, gaining
extensive experience of regulatory authorities’ requirements for pharmaceutical
products, including both FDA and EU regulatory agencies. During his career,
he
has worked for Glaxo Pharmaceuticals, Evans Medical Ltd. and Medeva PLC. From
January 1990 until June 2000, he was European Quality Director for Medeva Pharma
Ltd., a subsidiary of Medeva + Celltech PLC. From July 2000 until April 2001,
he
was Quality Director for CCL Industries, Inc. From May 2001 until February
2003,
he was Senior Vice President of Miza Pharmaceuticals UK, Ltd. From March 2003
until April 2003, he was a director of Inyx Pharma Limited, and he became
Executive Vice President of the Company in May 2003. Mr. Hunter holds a
Bachelor of Science Degree with Honors in Bacteriology and Virology. He is
a
Chartered Biologist, Member of the Institute of Biology, a Fellow of The
Institute of Quality Assurance and is a member of other professional
societies.
Douglas
Brown—
Director, Compensation Committee Chair and Audit Committee Member.
Mr. Brown
is an independent director of the Company. He has been active in a number of
financial and investment companies. He has served as a director of the L/M
Asia
Arbitrage Fund since June 1988 and of the Eastern Capital Fund since June 1988.
Previously, Mr. Brown was Vice-President of Citibank in London, United Kingdom,
and Geneva, Switzerland where he managed over one billion dollars in assets.
Mr. Brown graduated LLB from Edinburgh University, United
Kingdom.
Joseph
Rotmil—
Director, Audit Committee Chair and Compensation Committee
Member.
Currently, he is President and CEO of Weston Capital Quest Corporation, a
private consulting firm, prior to that, since 1993, Mr. Rotmil had been
President and CEO of Mixson Corporation, a manufacturer of public safety
equipment. Prior to 1993 his experience includes serving as President and
CEO of Cobotyx Corporation, a privately owned telecommunications equipment
manufacturer, and earlier as Vice President, Finance and Chief Financial Officer
of that company. Mr. Rotmil has also served as a Controller at
Executone Information Systems, a telecommunications equipment manufacturer,
and
as a Director of Corporate Accounting for Tetley, Inc., a large consumer
products company. He also served as a Controller for the Accessories Group
of General Mills, and as a Senior Financial Analyst at IBM.
Mr. Rotmil began his career in 1972 as an auditor with Coopers &
Lybrand (now part of Price Waterhouse Coopers).
85
Jay M.
Green—
Executive Vice President and Director of Corporate Development.
Mr. Green
joined Inyx in December 2003. From January until November 2003, Mr. Green
was a managing director of Duncan Capital, LLC, a merchant banking/investment
banking firm that served as our investment banking firm. From June 2001 until
2002 year-end, Mr. Green was a Managing Director of BlueFire Partners, a
Minneapolis-based capital markets advisory firm. From January 2001 until May
2001, Mr. Green served as an independent financial consultant advising both
private and public companies. From June 2000 until December 2000, he was a
Vice
President with Unapix Entertainment, Inc., which was a public company on the
American Stock Exchange (ASE: UPX) that filed for bankruptcy and its assets
were
subsequently liquidated. From March 1999 to May 2000, Mr. Green was an
independent consultant advising private and public companies. From September
1998 until February 1999, he served as a Vice President with Paxar Corp. (NYSE:
PXR). From January 1991 until May 1998, Mr. Green was a Vice President with
Seitel, Inc. (which was on the ASE and then the NYSE during his
tenure).
Rima
Goldshmidt, CA—
Vice President, Treasurer, Corporate Secretary and Acting Chief Financial
Officer. Ms. Goldshmidt
has been employed with Inyx Canada Inc. and Inyx, Inc. since April 2003.
Ms. Goldshmidt worked in the pharmaceutical industry for Miza
Pharmaceuticals, Inc. between November 2001 and September 2002 as Director
of
Finance. From September 2002 to April 2003, she was a self-employed financial
consultant to pharmaceutical companies. Prior to November 2001
Ms. Goldshmidt served as an audit manager at KPMG where she focused on
serving clients in the life sciences industry. Ms. Goldshmidt is a
Chartered Accountant with a Bsc. degree in Microbiology and Biochemistry from
the University of Toronto. Ms. Goldshmidt is a member of The Institute of
Chartered Accountants of Ontario and the Canadian Institute of Chartered
Accountants.
Stephen
Beckman—
President of Exaeris, Inc., Inyx's wholly-owned marketing
subsidiary.
Mr.
Beckman joined Inyx in September 2005. Prior to joining Inyx, Mr. Beckman served
as a consultant to the pharmaceutical industry. Earlier, he served as Corporate
Vice President of Global Franchise Management and Vice President of Corporate
Marketing, Respiratory for Altana Pharma AG. He was also Worldwide Director
-
Pulmonary Marketing for SmithKline Beecham Pharmaceuticals. Mr. Beckman has
held
executive marketing positions also with Astra Merck Corporation and Fisons
Pharmaceutical Corporation, and he began his career with Marion Merrell Dow
Pharmaceuticals. Mr. Beckman holds a B.S. in Marketing from Syracuse University
and graduate studies in pharmaceutical marketing from UCLA and advanced studies
at the Wharton School of Business.
David
Zinn, CPA— Vice
President, Finance. Mr.
Zinn
joined Inyx in May 2006. Prior to joining Inyx, Mr. Zinn served as Audit Partner
at the accounting firm of Infante and Company where he led the firm’s Securities
and Exchange Commission practice. Before then, he served as Chief
Financial Officer of Electrolytic Technologies Corporation. His career in
public accounting includes auditing small and large public companies. Mr.
Zinn held the positions of Manager at Arthur Andersen, LLP and Senior at
PriceWaterhouseCoopers, LLP. Mr.
Zinn
is a certified public accountant. He has a M.S. in Taxation from Florida
International University and a B.S. in Accounting from the Richard T. Farmer
School of Business at Miami University.
Duncan
A. McIntyre —
Managing
Director, Inyx Europe. Mr.
McIntyre has over 15 years experience in the pharmaceutical industry. From
2002
through March 2006, Mr. McIntyre was Supply Chain Director of Boots Healthcare
International (BHI), formerly the U.K.-headquartered drug-manufacturing division
of The Boots Company PLC, which was sold on February 1, 2006 to Reckitt
Benckiser PLC.
At BHI,
Mr. McIntyre had six plants reporting to him: four in the U.K., one in Germany
and one in Thailand. From 1991 through 2002, Mr. McIntyre held several different
operating management positions at Glaxo Smith Kline companies. Mr. McIntyre
holds a BA in Natural Sciences from the University of Cambridge, Churchill
College, and a MBA from Strathclyde Graduate Business School in the United
Kingdom.
86
Other
Key Employees
Name
Position
Company
Marc
Couturier
Senior
Vice President, Global Business Development
Inyx,
Inc.
Ulrich
Bartke
Vice
President, Global Sales and Marketing
Inyx,
Inc.
Dolores
Fernandez
Vice
President, Global Supply Chain
Inyx,
Inc.
Nancy
Hernandez
Vice
President, Regulatory Compliance and Quality Operations
Inyx,
Inc.
Jimmy
Meade
Vice
President, Group Engineering Projects
Inyx,
Inc.
Jose
Betancourt
Vice
President, General Manager
Inyx,
Inc.
William
Kelley
Vice
President, Investor Relations and Corporate Communications
Inyx,
Inc.
Serge
Agueev
Information
Systems Manager
Inyx,
Inc.
Rohit
Sarawat
Controller
Inyx
USA, Ltd.
Joseph
Rose
Vice
President, Finance
Inyx
Europe Ltd. & Inyx Pharma
Patricia
Gillmore
Head
of Human Resources
Inyx
Europe Ltd. & Inyx Pharma
Ged
Dittman
Vice
President, Operations
Inyx
Pharma Ltd.
Phil
Jenkinson
Vice
President, Quality
Inyx
Pharma Ltd.
Anastasia
Loftus
Regulatory
Affairs Manager
Inyx
Pharma Ltd.
Malcolm
Fox
Engineering
Manager
Inyx
Pharma Ltd.
Carole
Richardson
Corporate
Administration Manager
Inyx
Pharma Ltd.
Tony
Weeks
Head
of Operations
Ashton
Pharmaceuticals, Ltd.
Eddie
Prady
Head
of Quality
Ashton
Pharmaceuticals, Ltd.
Christopher
Henshall
Director
of Marketing
Exaeris,
Inc.
Drew
Bosso
Regional
Sales Manager
Exaeris,
Inc.
Randal
Martinek
Regional Sales
Manager
Exaeris,
Inc.
Officers
are appointed by and serve at the will of the Board of Directors. There are
no
family relationships between or among any of the directors or executive officers
of the Company.
Director
Compensation
Directors
received annual compensation of $30,000 for serving on the Board and all
committees. Effective January 1, 2006, such annual compensation was increased
to
$40,000. The chair of the Compensation Committee receives an additional $10,000
per year, and the chair of the Audit Committee receives an additional $10,000
per year. Existing non-management directors have also received certain stock
options. See “Principal Stockholders and Security Ownership of
Management.”
Governance
The
Board
of Directors has adopted the following committees to assist in the Company’s
governance:
Audit
Committee
-
Joseph A. Rotmil and Douglas Brown comprise the Audit Committee, and
Mr. Rotmil is the Chairman and Audit Committee Financial Expert. The Audit
Committee functions under a Charter empowering it to, among other things,
appoint the independent auditors, approve the auditor’s fees, evaluate
performance of the auditor, review financial statements and management’s
discussion and analysis thereof, review all SEC reports and press releases
of a
financial nature, oversee internal audit processes, oversee new audit reviews
performed by the auditors, and receive management and other reports from the
auditor.
87
Compensation
Committee
-
Douglas Brown and Joseph A. Rotmil comprise the Compensation Committee, and
Mr. Brown serves as the Chairman. The Compensation Committee determines the
compensation of the Chief Executive Officer and other executive officers,
determines Board of Director compensation, awards options and other stock
grants, and issues the report regarding these matters for inclusion in annual
reports to stockholders.
Code
of Ethics
Pursuant
to Section 406 of the Sarbanes-Oxley Act, we adopted a Code of Ethics for Senior
Financial Officers. This code was filed as an exhibit to our Form 10-K for
the
fiscal year ended December 31, 2005 and is also available free of charge at
our
website at www.inyxgroup.com.
Compliance
with Section 16(a)
We
do not
file reports pursuant to Section 12 of the Securities Exchange Act of 1934,
and our officers, directors, and 10% shareholders are not required to file
reports under Section 16(a) of the Securities Act.
EXECUTIVE
COMPENSATION
Executive
Compensation
For
the
fiscal years ended December 31, 2005, 2004 and 2003, the following officers
of the Company received the following cash compensation for services rendered
to
the Company. See “Management - Employment Agreements” for a description of
compensation arrangements entered into by the Company with certain of its
executive officers.
During
2003, 2004 and 2005, Dr. Kachkar also provided his services to Inyx
and its subsidiaries through “JK Services”, a partnership of corporations
owned by him and members of his immediate family. Compensation for
such
services is not included in the table above. See “Related Party
Transactions.” Subsequent
to March 31, 2006, the Company's Board of Directors approved a new
employment agreement with the Chairman and CEO, which will include
such
performance compensation incentives, and therefore has terminated
its
agreement with JK Services.
(2)
Represents
a discretionary expense allowance. Effective January 1, 2004, such
amount was combined with the salary amount.
(3)
Represents
vehicle, travel and professional fee
allowances.
(4)
Represents
a one-time discretionary expense
allowance.
(5)
Includes
consulting fees and reimbursement of
expenses.
Dr.
Kachkar’s contract was with Inyx through May 15, 2003, when it was
amended to direct all payments to JK Services, a personally owed
investment company, for purposes of Canadian tax planning. Beginning
January 1, 2004, the employment agreement was resumed with Dr.
Kachkar and the terms amended to provide for a $345,000 salary without
any
discretionary expense allowance.
(2)
Actual
grants during 2003, 2004 and 2005 were: Kachkar - 3,000,000; Handley
-
nil; Hunter - 400,000; Green - 1,500,000; Goldshmidt -
500,000.
(3)
Mr.
Green’s contract was amended on January 1, 2005 to increase his annual
salary to $200,000 from $150,000.
All
agreements contain the following provisions: Bonus payments will be made as
a
percentage of base salary increasing with performance measured by EBITDA, with
a
guaranteed bonus of ten percent of annual base salary. Each executive may
receive additional option grants upon award of the Compensation Committee.
Base
salary will increase by 5% during each year of the term. The term automatically
renews for successive one-year periods after expiration of the primary
employment term. Each agreement may be terminated early for good cause or by
the
executive’s resignation. Termination for other reason triggers payment of the
severance amount, offset by any termination event that is insured. Severance
amounts for key senior executives increase from one-year base salary to two
times salary in case of termination due to a change of control of the Company.
Each executive is subject to customary confidentiality obligations and an
agreement not to compete with the Company for three years following termination.
Key executives are covered by a life insurance policy through the Company
benefit plan. The policy coverage starts at two times the base
salary.
91
Equity
Incentive Plans
The
Company has two equity incentive plans: the Stock Option Plan adopted in 2003
(the “2003 Option Plan”) and the Equity Incentive Plan adopted in 2005 (the
“2005 Equity Plan”). The 2003 Option Plan provides for the grant to eligible
employees and directors of options for the purchase of common stock. The 2003
Option Plan covers, in the aggregate, a maximum of 5,000,000 shares of common
stock and provides for the granting of both incentive stock options (as defined
in Section 422 of the Internal Revenue Code of 1986) and nonqualified stock
options (options which do not meet the requirements of Section 422). Under
the
2003 Option Plan, the exercise price may not be less than the fair market value
of the common stock on the date of the grant of the option.
The
2005
Equity Plan provides for the grant to eligible employees and directors of
stock-based awards including options, restricted stock, unrestricted stock
and
other stock-based awards. The 2005 Equity Plan covers, in the aggregate, a
maximum of 6,000,000 shares of common stock and provides for the granting of
both incentive stock options (as defined in Section 422 of the Internal Revenue
Code of 1986) and nonqualified stock options (options which do not meet the
requirements of Section 422).
The
Board
of Directors administers and interprets the equity incentive plans and is
authorized to grant awards thereunder to all eligible employees of the Company,
including officers. The Board of Directors designates the participants, the
number of shares subject to the awards and the terms and conditions of each
award. Each option granted under the 2005 Equity Plan must be exercised, if
at
all, during a period established in the grant which may not exceed 10 years
from
the later of the date of grant or the date first exercisable. A participant
may
not transfer or assign any option granted, and may not exercise any options
after a specified period subsequent to the termination of the participant’s
employment with the Company.
Mr. Jay
M. Green and Dr. Kachkar’s spouse, Viktoria Benkovitch, are co-owners of
Karver Capital Holding, Ltd., (“Karver Capital”), a private investment holding
company incorporated in the British Virgin Islands. Karver Capital is not a
stockholder of Inyx but is a stockholder of Karver International, Inc. (“Karver
International”), a New York corporation and a publicly-held health and
pharmaceutical services holding company. Dr. Jack Kachkar, the Company’s
Chairman and CEO, and Mr. Jay M. Green, the Company’s Executive Vice President,
Corporate Development, are also stockholders, officers and directors of Karver
International.
Karver
International subleases office space from the Company at its headquarters in
New
York City. This consists of approximately 25% of the Company’s total office
space on the 40th
Floor,
825 Third Avenue, New York, 10022. For the year ending December 31, 2005, the
Company charged Karver International approximately $36,000 for the sublease
of
furnished office space and approximately $15,000 for management services in
accordance with a management services agreement. Under that management services
agreement, certain Inyx employees located at the Company’s office in Toronto,
Canada provide information technology and book-keeping services to Karver
International; such services consist of approximately ten hours of allocated
work-time per week.
92
As
of
December 31, 2005, the Company prepaid approximately $1.1 million in fees
and
costs to acquire all of the intellectual property of Carr Pharmaceuticals,
Inc.
(“Carr” f/k/a Miza Pharmaceuticals USA, Inc.), an eye care product manufacturing
and marketing company that was originally placed into Chapter 11 bankruptcy
protection by its owners in May 2003, and was then subsequently liquidated
by
its secured lenders under a bankruptcy plan during 2005. The intellectual
property consists of all of the manufacturing protocols, standard operating
procedures, know-how, testing, stability and technical data, and FDA product
registrations for seven prescription eye care formulations and five
over-the-counter eye care and contact lens solutions which accounted for
approximately $6.0 million in annual revenues during Carr’s last fiscal year of
operations. Carr and all of its related intellectual property were previously
majority-owned by Medira Investments LLC (“Medira”), a privately-held investment
company wholly-owned by Dr. Kachkar’s spouse, Viktoria Benkovitch. Under the
bankruptcy plan agreed to with its secured lenders (all unrelated parties),
Carr
Pharmaceuticals allowed its secured lenders to sell its intellectual property..
Inyx provided Carr’s secured lenders with the funding required to acquire Carr’s
intellectual property in exchange for the intellectual property that Medira
was
eligible to acquire under the bankruptcy plan. Medira and its ownership did
not
directly or indirectly receive any fees or compensation pursuant to such
transaction. The Company has subsequently transferred all of the acquired
eye
care intellectual property to its manufacturing facility in Puerto Rico in
February 2006, and intends to commence manufacturing and marketing the acquired
eye care products in 2007.
Inyx
Canada, a Company subsidiary provides management and business development
services to Inyx and its other subsidiaries. From time to time, under sales
commission and management services agreements with Inyx Canada, JK Services,
a
partnership of companies owned by Dr. Kachkar and his immediate family members,
provides Dr. Kachkar’s services to the Company under such agreements. For
the year ended December 31, 2005, total payments to JK Services amounted to
$642,724 and consisted of sales commissions for new commercial contracts
initiated and completed by Dr. Kachkar and that were successfully signed by
the
Company in 2005 including the long-term contract with Sanofi-Aventis Group,
UCB
Group and King Pharmaceuticals. For the year ended December 31, 2005, such
amounts are included in the Company’s selling expenses in the Company’s
consolidated statement of operations. Subsequent
to March 31, 2006, the Company's Board of Directors approved a new employment
agreement with the Chairman and CEO, which will include such performance
compensation incentives, and therefore has terminated its agreement with JK
Services.
From
time
to time, Dr. Kachkar and his family make stockholder loans to the Company.
The
Company utilizes the net proceeds from such loans for working capital purposes
and such loans are included in the Company’s liabilities as they are made. As of
December 31, 2005, the Company had repaid all such stockholder
loans.
In
July
2004, Dr. Jack Kachkar and his spouse, and Mr. Douglas Brown, an
outside Director, each provided the Company with stockholder loans amounting
to
$300,000. Mr. Jay Green, the Company’s Executive Vice President of
Corporate Development, also provided the Company a stockholder loan in the
amount of $100,000. The net proceeds from these loans were utilized for working
capital purposes. All of these stockholder loans were originally due by
December 31, 2004 and bear interest at seven percent annually. As
additional consideration for these loans, the Company granted these individuals
five-year warrants, to purchase an aggregate of 700,000 shares of its common
stock at an exercise price of $0.80 per share. Such warrants were issued with
a
fair value of $178,000 related to the issuance of a promissory note to each
respective lender. This amount was charged to interest and financing costs
in
the consolidated statement of operations. Then in November 2004,
Dr. Kachkar and his spouse, Mr. Brown and Mr. Green each agreed
to renew their loans to the Company. As additional consideration for such loans
and other services provided to the Company in connection with the Company’s
corporate development, the Company granted these individuals five-year warrants,
to purchase an aggregate of 1,150,000 shares of its common stock at an exercise
price of $0.95 per share. The fair values of these warrants amounted to $246,000
and such amount was charged to interest and financing costs in the consolidated
statement of operations. During 2005, such loans including accrued interest
were
repaid.
93
Through
a
holding company, Kachkar Air LLC (“Kachkar Air”), the Company’s Chairman, Dr.
Kachkar, leased a private aircraft from an unrelated aircraft management
company, Priester Aviation, during 2005. From
time
to time, the Company was allowed to utilize such leased aircraft for the
Company’s own corporate travel requirements. In such instances, the Company paid
Priester Aviation directly for the use of the aircraft and such fees amounted
to
the direct costs of the usage of the aircraft. Kachkar Air and Dr. Kachkar
did not directly or indirectly receive any fees or compensation for allowing
the
Company to utilize its leased aircraft. For the year ended December 31,2005, the Company paid approximately $680,000 to Priester Aviation for the
use,
service and maintenance of the Kachkar Air leased aircraft. The Priester
Aviation charges were included in the Company’s general and administrative
expenses in the consolidated statement of operations. These charges were
all related to the trans-European and trans-Atlantic travel required for the
cultivation, negotiations, due diligence and completion of the Company’s
acquisition of Ashton Pharmaceuticals (Celltech Manufacturing Services Limited)
in the United Kingdom from UCB Group based in Belgium. There were no similar
charges in 2004 and 2003, respectively.
The
Company paid $1.47 million to Aldo Union for pharmaceutical product dossiers
during the year ended December 31, 2005. The Aldo Union dossiers are for
products to be manufactured in Spain only, and the Company is extracting
from
these dossiers relevant information/technical data/historical validation
and
stability information in order for it to copy generic versions of the products
for other markets (i.e. outside of Spain) and to create new drug delivery
formats for the active ingredients of these products. The Company has more
work to do before these products will be ready for commercial production.
Therefore, these are only technical data dossiers that the Company is expending
money on to create new products. The Company has expensed these payments
since
it is not absolutely certain whether these dossiers will have a definitive
benefit to future periods. Dr. Santiago Calzada, who owned 100,000 shares
of the
Company’s common stock as of December 31, 2005, is a principal of
Aldo-Union. None of the Company’s management or its affiliates has or have
had any interest or equity associations or directorships in Aldo
Union.
The
Company believes that all of the foregoing transactions were made on terms
as
favorable as could have been obtained from unrelated third parties.
The
table
below sets forth the beneficial ownership of our voting securities by the named
executive officers, our directors and owners of more than 5.0% of our common
stock, and all of our executive officers and directors as a group as of May19,2006:
Consists
of 2,250,000 shares owned of record and beneficially and warrants
to
purchase 750,000 shares. Ms. Benkovitch is the spouse of Dr. Jack
Kachkar.
Dr. Kachkar disclaims any beneficial ownership of her
shares.
(2)
Consists
of 40,000 shares owned of record and beneficially, options to purchase
3,000,000 shares, and warrants to purchase 100,000 shares. Dr. Kachkar
previously held 100,000 shares but in January 2004 transferred 60,000
shares to Bennett Jones, a Canadian law firm, which provides his
family
with legal advice and services. Although Dr. Kachkar is presently
one of
the beneficiaries of the JEM Family Trust and First Jemini Trust,
such
trusts are discretionary family trusts for the benefit of Kachkar
family
members in which the Trustee has absolute discretion to determine
to pay
any or part of the income or capital of the Trusts to the beneficiaries,
and to exclude any beneficiary from any distribution - also see notes
(8
and 9) below. Dr. Kachkar possesses no right to vote or dispose of
or
otherwise control any shares held by the trusts, and therefore has
no
direct beneficial ownership of shares owned by Larry Stockhamer as
sole
Trustee of both the JEM Family Trust and First Jemini Trust.
(3)
Shares
owned of record and beneficially.
(4)
Options
to purchase 500,000 shares.
(5)
Consists
of 600,000 shares owned of record and beneficially and options to
purchase
400,000 shares. Of these options, options to purchase 150,000 shares
have
vested. Options to purchase the remaining 250,000 shares are vesting
over
three years commencing June 2003.
(6)
Mr.
Stockhamer is the Trustee of both the JEM Family Trust and First
Jemini
Trust. As Trustee of the JEM Family Trust, Mr. Stockhamer owns of
record
and beneficially 7,600,000 shares. As Trustee of First Jemini Trust,
Mr.
Stockhamer owns of record and beneficially warrants to purchase 1,500,000
shares. The JEM Family Trust and First Jemini Trust are discretionary
family trusts for the benefit of Kachkar family members, including
Dr.
Kachkar, his spouse and two children. Dr. Kachkar and his family
members
possess no right to vote or dispose of or otherwise control any shares
and
warrants held by these family trusts, and therefore have no direct
beneficial ownership of shares and warrants held by the Trustee,
Mr. Larry
Stockhamer.
(7)
Options
to purchase 300,000 shares, vesting over 3
years.
(8)
Consists
of 100,000 shares owned of record and beneficially, warrants to purchase
750,000 shares, and options to purchase 250,000 shares. Mr. Douglas
previously held warrants to purchase 100,000 shares. Such warrants
expired on August 22, 2005.
(9)
Options
to purchase 400,000 shares. Mr. Douglas previously held warrants
to
purchase 100,000 shares. Such warrants expired on August 22,2005.
(10)
Options
to purchase 1,500,000 shares and warrants to purchase 350,000
shares.
(11)
Options
to purchase 300,000 shares, vesting over two
years.
(12)
Shares owned of record and
beneficially.
(13)
Options to purchase 300,000 shares, vesting over
three
years.
(14)
Includes
2,740,000 shares, options to purchase 6,950,000 shares, and warrants
to
purchase 1,200,000 shares.
The
Company is not aware of any arrangement which might result in a change in
control in the future.
DESCRIPTION
OF CAPITAL STOCK
The
following summary is qualified in its entirety by reference to the Company’s
Restated Articles of Incorporation (“Articles”) and its Bylaws. The Company’s
authorized capital stock consists of 150,000,000 shares of common stock, $.001
par value per share, and 10,000,000 shares of preferred stock, $.001 par value
per share.
Common
Stock
As
of
March 31, 2006, 47,996,994 common shares of the Company's common stock net
of
600,366 treasury stock were held of record by 224 holders of record, and an
unknown number of beneficial stockholders. Each share of common stock entitles
the holder of record thereof to cast one vote on all matters acted upon at
the
Company’s stockholder meetings. Directors are elected by a plurality vote.
Because holders of common stock do not have cumulative voting rights, holders
or
a single holder of more than 50% of the outstanding shares of common stock
present and voting at an annual meeting at which a quorum is present can elect
all of the Company’s directors. Holders of common stock have no preemptive
rights and have no right to convert their common stock into any other
securities. All of the outstanding shares of common stock are fully paid and
non-assessable.
Holders
of common stock are entitled to receive ratably such dividends, if any, as
may
be declared from time to time by the Board of Directors in its sole discretion
from funds legally available there for. In the event the Company is liquidated,
dissolved or wound up, holders of common stock are entitled to share ratably
in
the assets remaining after liabilities and all accrued and unpaid cash dividends
are paid.
96
Preferred
Stock
The
Board
of Directors of the Company has the authority to divide the authorized preferred
stock into series, the shares of each series to have such relative rights and
preferences as shall be fixed and determined by the Board of Directors. The
provisions of a particular series of authorized preferred stock, as designated
by the Board of Directors, may include restrictions on the payment of dividends
on common stock. Such provisions may also include restrictions on the ability
of
the Company to purchase shares of common stock or to purchase or redeem shares
of a particular series of authorized preferred stock. Depending upon the voting
rights granted to any series of authorized preferred stock, issuance thereof
could result in a reduction in the voting power of the holders of common stock.
In the event of any dissolution, liquidation or winding up of the Company,
whether voluntary or involuntary, the holders of the preferred stock will
receive, in priority over the holders of common stock, a liquidation preference
established by the Board of Directors, together with accumulated and unpaid
dividends. Depending upon the consideration paid for authorized preferred stock,
the liquidation preference of authorized preferred stock and other matters,
the
issuance of authorized preferred stock could result in a reduction in the assets
available for distribution to the holders of common stock in the event of the
liquidation of the Company.
There
are
no shares of preferred stock designated or issued as of the date
hereof
Certain
Rights of Holders of Common Stock
The
Company is a Nevada corporation organized under Chapter 78 of the Nevada Revised
Statutes (“NRS”). Accordingly, the rights of the holders of common stock are
governed by Nevada law. Although it is impracticable to set forth all of the
material provisions of the NRS or the Company’s Articles and Bylaws, the
following is a summary of certain significant provisions of the NRS and/or
the
Company’s Articles and Bylaws that effect the rights of securities
holders.
Warrants
Each
warrant issued to the purchasers in an August and September 2004 private
placements and the placement agent’s designees (the “Warrants”) entitles the
holder thereof to purchase at any time for a period of five years, a specified
number of shares of common stock at an initial Exercise Price equal to 125%
percent of the Issue Price, for a period of five years from the date of
issuance.
After
the
expiration of the exercise period, Warrant holders will have no further rights
to exercise such Warrants. The Warrants may be exercised by surrendering the
certificate evidencing the Warrant to the Company along with the form of
election to purchase properly completed and executed together with payment
of
the exercise price and any transfer tax. If less than all of the Warrants
evidenced by a warrant certificate are exercised, a new certificate will be
issued for the remaining number of Warrants not so exercised. Payment of the
exercise price may be made by cash or certified or official bank check equal
to
the exercise price. Warrant certificates may be exchanged for new certificates
of different denominations or transferred and may be exercised in whole or
in
part by presenting them at the office of the Company.
The
Warrants may be exercised only for full shares of common stock. They include
a
cashless exercise provision that will become operative if a registration
statement covering the Warrant Shares is not effective any time after one year
from the date of purchase. The Company will not issue fractional shares of
common stock or cash in lieu of fractional shares of common stock. Warrant
holders do not have any voting or other rights as a stockholder of the
Company.
The
exercise price and the number of shares of common stock purchasable upon the
exercise of each Warrant are subject to adjustment upon the happening of certain
events, such as stock dividends, distributions, and splits. Additionally, The
Warrants include weighted average anti-dilution protection (including "carve
outs" for, among other issuances, options and/or warrants and, to be issued,
employee stock options, securities issued in and/or related to the private
placements, securities issued in connection with public offerings, mergers
and
acquisitions, employment agreements, strategic ventures and similar items)
until
the earlier to occur of (i) the effective date of a public offering of the
Company's securities at no less than 75% of the then current Exercise Price
of
the Warrant and in which no less than $5,000,000 in gross proceeds are raised,
and (ii) the date eighteen months following the date of issuance. During the
term of the Warrants, the Exercise Price: (i) will be increased by 2% (but
no
more than cumulatively 20%) for every $2,000,000 of net revenues of the Company
above $35,000,000 and $55,000,000 for the twelve months ended December 31,2005
and December 31, 2006, respectively; and (ii) will be decreased by 5% (but
no
more than cumulatively 50%) for every $2,000,000 million that net revenues
of
the Company are below the $35,000,000 and $55,000 threshold amounts for the
same
respective periods of time. "Net revenues" will be as set forth in the Company's
audited financial statements included in the Company's Annual Report on Form
10-K (or such other similar report) for the applicable fiscal year. No
adjustment in the exercise price will be required unless cumulative adjustments
require an adjustment of at least $0.01. Notwithstanding the foregoing, in
case
of any consolidation, merger, or sale of all or substantially all of the assets
of the Company, the holder of each of the Warrants will have only the right,
upon the subsequent exercise thereof, to receive the kind and amount of shares
and other securities and property (including cash) that such holder would have
been entitled to receive by virtue of such transaction had the Warrants been
exercised immediately prior to such transaction.
97
Pursuant
to the Company’s Annual Report on Form 10-K, for the year ended December 31,2005, the Company’s Net Revenue were approximately $49.6 million, or
approximately $14.6 million above the $35.0 million Target Amount.
Accordingly, effective April 1, 2006 the Purchase Price of each Warrant has
been
increased by 14.656% to a new Adjusted Purchase Price of $1.15, $1.16 and $1.22
from the original Purchase Price of $1.00, $1.01 and $1.06
respectively.
The
Company reserves the right to reduce the exercise prices on certain of the
Warrants pursuant to privately negotiated transactions with individual holders
of such Warrants.
The
Warrants may be redeemed on not less than ten business day prior written notice
at a redemption price of $0.01 per Warrant provided that: (i) the average market
price per share equals or exceeds (a) 300% percent of the then current Exercise
Price if the date of redemption is within the period commencing on the date
of
issuance and terminating on the date twelve months following such dates (the
“Period"), and (b) 225% percent of the Exercise Price if the date of redemption
is a date within the period commencing on the day immediately following the
Period and terminating on the date of expiration of the Warrant for ten
consecutive trading days ending on the second trading day prior to the date
of
the notice of redemption; and (ii) if the date of redemption is during the
period commencing on the date of issuance of the Warrant and terminating on
the
date two years thereafter, a registration statement covering the Warrant shares
filed under the Securities Act is declared effective and remains effective
on
the date fixed for redemption of the Warrants.
98
Registration
Rights
In
connection with the issuance of its securities in connection with the August
and
September 2004 private placements, the Company entered into a registration
rights agreement with the purchasers and the placement agents requiring the
Company to file (or amend any non-effective registration statement) to register
the Shares sold to said purchaser and the Shares underlying the Warrants issued
to the Purchaser (including those underlying the Warrants issued to the
Placement Agent's Designees) on a Form S-1 or SB-2 (or comparable form) by
on or
about October 17, 2004 and ensure that such registration statement is effective
no later than on or about January 2, 2005. In connection with the initial
$1,100,000 portion of the private placements, the dates are advanced to on
or
about October 1, 2004 and on or about December 1, 2004, respectively. As the
above time periods were not met, the Company was obligated to pay-investors
an
amount in cash, as partial liquidated damages and not as a penalty, equal to
2%
per month of the issue price until such deficiency is cured. As of March 31,2006, the Company had accrued liquidated damages of approximately $550,000,
which were paid out pursuant to settlement and release with the eligible
purchasers and placement agents, subsequent to March 31, 2006.
Anti
Takeover Provisions
Special
Meetings of Stockholders; Director Nominees
The
Company’s Bylaws and Articles provide that special meetings of stockholders may
be called by stockholders only if the holders of at least 66-2/3% of the common
stock join in such action. The Bylaws and Articles of the Company also provide
that stockholders desiring to nominate a person for election to the Board of
Directors must submit their nominations to the Company at least 60 days in
advance of the date on which the last annual stockholders’ meeting was held, and
provide that the number of directors to be elected (within the minimum - maximum
range of 3 to 21 set forth in the Articles and Bylaws of the Company) shall
be
determined by the Board of Directors or by the holders of at least 66-2/3%
of
the common stock. While these provisions of the Articles and Bylaws of the
Company have been established to provide a more cost-efficient method of calling
special meetings of stockholders and a more orderly and complete presentation
and consideration of stockholder nominations, they could have the effect of
discouraging certain stockholder actions or opposition to candidates selected
by
the Board of Directors and provide incumbent management a greater opportunity
to
oppose stockholder nominees or hostile actions by stockholders. The affirmative
vote of holders of at least 66-2/3% of the common stock is necessary to amend,
alter or adopt any provision inconsistent with or repeal any of these
provisions.
Removal
of Directors
The
Articles of the Company provide that directors may be removed from office only
for cause by the affirmative vote of holders of at least 66-2/3% of the common
stock. Cause means proof beyond the existence of a reasonable doubt that a
director has been convicted of a felony, committed gross negligence or willful
misconduct resulting in a material detriment to the Company, or committed a
material breach of such director’s fiduciary duty to the Company resulting in a
material detriment to the Company. The inability to remove directors except
for
cause could provide incumbent management with a greater opportunity to oppose
hostile actions by stockholders. The affirmative vote of holders of at least
66-2/3% of the common stock is necessary to amend, alter or adopt any provision
inconsistent with or repeal this provision.
Control
Share Statute
Sections
78.378 - 78.3793 of the Nevada statutes constitute Nevada’s control share
statute, which set forth restrictions on the acquisition of a controlling
interest in a Nevada corporation which does business in Nevada (directly or
through an affiliated corporation) and which has 200 or more stockholders,
at
least 100 of whom are stockholders of record and residents of Nevada. A
controlling interest is defined as ownership of common stock sufficient to
enable a person directly or indirectly and individually or in association with
others to exercise voting power over at least one-fifth but less than one-third
of the common stock, or at least one-third but less than a majority of the
common stock, or a majority or more of the common stock. Generally, any person
acquiring a controlling interest must request a special meeting of stockholders
to vote on whether the shares constituting the controlling interest will be
afforded full voting rights, or something less. The affirmative vote of the
holders of a majority of the common stock, exclusive of the control shares,
is
binding. If full voting rights are not granted, the control shares may be
redeemed by the Company under certain circumstances. The Company does not
believe the foregoing provisions of the Nevada statutes are presently applicable
to it because it does not presently conduct business in Nevada; however, if
in
the future it does conduct business in Nevada then such provisions may
apply.
99
Business
Combination Statute
Sections
78.411 - 78.444 of the NRS set forth restrictions and prohibitions relating
to
certain business combinations and prohibitions relating to certain business
combinations with interested stockholders. These Sections generally prohibit
any
business combination involving a corporation and a person that beneficially
owns
10% or more of the common stock of that company (an “Interested Stockholder”)
(A) within five years after the date (the “Acquisition Date”) the Interested
Stockholder became an Interested Stockholder, unless, prior to the Acquisition
Date, the corporation’s board of directors had approved the combination or the
purchase of shares resulting in the Interested Stockholder becoming an
Interested Stockholder; or (B) unless five years have elapsed since the
Acquisition Date and the combination has been approved by the holders of a
majority of the common stock not owned by the Interested Stockholder and its
affiliates and associates; or (C) unless the holders of common stock will
receive in such combination, cash and/or property having a fair market value
equal to the higher of (a) the market value per share of common stock on the
date of announcement of the combination or the Acquisition Date, whichever
is
higher, plus interest compounded annually through the date of consummation
of
the combination less the aggregate amount of any cash dividends and the market
value of other dividends, or (b) the highest price per share paid by the
Interested Stockholder for shares of common stock acquired at a time when he
owned 5% or more of the outstanding shares of common stock and which acquisition
occurred at any time within five years before the date of announcement of the
combination or the Acquisition Date, whichever results in the higher price,
plus
interest compounded annually from the earliest date on which such highest price
per share was paid less the aggregate amount of any cash dividends and the
market value of other dividends. For purposes of these provisions, a “business
combination” is generally defined to include (A) any merger or consolidation of
a corporation or a subsidiary with or into an Interested Stockholder or an
affiliate or associate; (B) the sale, lease or other disposition by a
corporation to an Interested Stockholder or an affiliate or associate of assets
of that corporation representing 5% or more of the value of its assets on a
consolidated basis or 10% or more of its earning power or net income; (C) the
issuance by a corporation of any of its securities to an Interested Stockholder
or an affiliate or associate having an aggregate market value equal to 5% or
more of the aggregate market value of all outstanding shares of that
corporation; (D) the adoption of any plan to liquidate or dissolve a corporation
proposed by or under an agreement with the Interested Stockholder or an
affiliate or associate; (E) any receipt by the Interested Stockholder or an
affiliate, except proportionately as a stockholder, of any loan, advance,
guarantee, pledge or other financial assistance or tax credit or other tax
advantage; and (F) any recapitalization or reclassification of securities or
other transaction that would increase the proportionate shares of outstanding
securities owned by the Interested Stockholder or an affiliate. Sections
78.411-78.444 of the Nevada statutes are presently applicable to the
Company.
Special
Meetings
The
Company’s Bylaws and Articles provide that special meetings of the stockholders
of the Company may be called by the Chairman of the Board, the Board of
Directors or upon written request of stockholders holding not less than 66
2/3%
of the common stock.
Mergers,
Consolidations and Sales of Assets
Nevada
law provides that an agreement of merger or consolidation, or the sale or other
disposition of all or substantially all of a corporation’s assets, must be
approved by the affirmative vote of the holders of a majority of the voting
power of a corporation (except that no vote of the stockholders of the surviving
corporation is required to approve a merger if certain conditions are met,
unless the articles of incorporation of that corporation states otherwise,
and
except that no vote of stockholders is required for certain mergers between
a
corporation and a subsidiary), but does not require the separate vote of each
class of stock unless the corporation’s articles of incorporation provides
otherwise (except that class voting is required in a merger if shares of the
class are being exchanged or if certain other rights of the class are effected).
The Company’s Articles do not alter these provisions of Nevada law.
100
Directors;
Removal of Directors
Under
Nevada law, the number of directors may be fixed by, or determined in the manner
provided in the articles of incorporation or bylaws of a corporation, and the
board of directors may be divided into classes as long as at least 25% in number
of the directors are elected annually. Nevada law further requires that a
corporation have at least one director. Directors may be removed under Nevada
law with or without cause by the holders of not less than a majority of the
voting power of the corporation, unless a greater percentage is set forth in
the
articles of incorporation. The Articles of the Company provide that directors
may be removed only for cause by a two-thirds majority of
stockholders.
The
Company’s Bylaws may be amended by the Board of Directors or stockholders,
provided, however that certain provisions can only be amended by the affirmative
vote of holders of at least 66 2/3% of the common stock. These provisions relate
to special meetings of stockholders, actions by written consent of stockholders,
nomination of directors by stockholders, proceedings for the conduct of
stockholder’s meetings and the procedures for fixing the number of and electing
directors.
Limitation
on Liability of Directors
Section
78.037 of the NRS provides that a Nevada corporation may limit the personal
liability of a director or officer to a corporation or its stockholders for
breaches of fiduciary duty, except that such provision may not limit liability
for acts or omissions which involve intentional misconduct, fraud or a knowing
violation of law, or payment of dividends or other distributions in violation
of
the Nevada statutes. The Company’s Articles provide that no director shall be
personally liable to the Company or its stockholders for monetary damages or
breach of fiduciary duty as a director, except for liability (A) for any breach
of the director’s duty of loyalty to the Company or its stockholders, (B) for
acts or omissions not in good faith or which involved intentional misconduct
or
a knowing violation of law, (C) liability under the Nevada statutes, or (D)
for
any transaction from which the director derived an improper personal
benefit.
In
the
opinion of the Securities and Exchange Commission, the indemnification and
limitation of liability provisions described above would not eliminate or limit
the liability of directors and officers under the federal securities
laws.
Appraisal
Rights
The
Nevada statutes provide dissenting or objecting security holders with the right
to receive the fair value of their securities in connection with certain
extraordinary corporate transactions. These appraisal rights are available
with
respect to certain mergers and share exchanges and in connection with the
granting of full voting rights to control shares acquired by an interested
stockholder. However, unless the transaction is subject to the control share
provisions of the Nevada statutes, a stockholder of a Nevada corporation may
not
assert dissenters’ rights, in most cases, if the stock is listed on a national
securities exchange or held by at least 2,000 stockholders of record (unless
the
articles of incorporation of the corporation expressly provide otherwise or
the
security holders are required to exchange their shares for anything other than
shares of the surviving corporation or another publicly held corporation that
is
listed on a national securities exchange or held of record by more than 2,000
stockholders). The Company’s Articles do not alter these provisions of Nevada
law.
101
Distributions
Dividends
and other distributions to security holders are permitted under the Nevada
statutes as authorized by a corporation’s articles of incorporation and its
board of directors if, after giving effect to the distribution, the corporation
would be able to pay its debts as they become due in the usual course of
business and the corporation’s total assets would exceed the sum of its total
liabilities plus (unless the articles of incorporation provide otherwise) the
amount needed to satisfy the preferential rights on dissolution of holders
of
stock whose preferential rights are superior to those of the shares receiving
the distribution.
Preemptive
Rights
Under
the
Nevada statutes, stockholders of Nevada corporations organized prior to October
1, 1991 have preemptive rights unless the articles of incorporation expressly
deny those rights or the stock issuance is among those described in Section
78.265. A stockholder who has preemptive rights is entitled, on terms and
conditions prescribed by the board of directors, to acquire proportional amounts
of the corporation’s unissued or treasury shares in most instances in which the
board has decided to issue them. The Company’s Articles expressly deny the
availability of preemptive rights to the Company’s stockholders.
Cumulative
Voting
Under
the
Nevada statutes, the articles of incorporation of a corporation may provide
for
cumulative voting, which means that the stockholders are entitled to multiply
the number of votes they are entitled to cast by the number of directors for
whom they are entitled to vote and then cast the product for a single candidate
or distribute the product among two or more candidates. Cumulative voting is
not
available to stockholders of a Nevada corporation, unless its articles of
incorporation expressly provide for that voting right. The Company’s Articles do
not contain a provision permitting stockholders to cumulate their votes when
electing directors.
The
validity of the issuance of the shares of common stock offered by this
Prospectus has been passed upon for the Company by Lionel, Sawyer & Collins.
The
consolidated financial statements of Inyx, Inc. as of December 31, 2005, 2004
and 2003, for the years ended December 31, 2005 and 2004, and the period
beginning March 7, 2003 to December 31, 2003, and the period from
January 1, 2003 to March 6, 2003, as listed below, included in this
Prospectus and the Registration Statement have been included herein in reliance
upon the report of Berkovits, Lago & Company, LLP, independent registered
certified public accountants, given on the authority of said firm as an expert
in auditing and accounting.
The
independent valuation referred to in the notes to the financial statements
of
Inyx, Inc. was prepared by the Valuation Services practice of Bearing Point,
Inc., and has been included herein in reliance upon the authority of said firm
as an expert in conducting valuations.
The
consolidated financial statements of Aventis Pharmaceuticals Puerto Rico, Inc,
as of December 31, 2004 and 2003, and the related statements of operations,
changes in stockholders’ equity and cash flows for the two years ended December31, 2004 and 2003 included in this Prospectus and in the Registration Statement
have been included herein in reliance upon the report of Berkovits, Lago &
Company, LLP, independent registered certified public accountants, given on
the
authority of said firm as an expert in auditing and accounting.
Our
certificate of incorporation provides that we shall indemnify our directors
and
officers to the fullest extent permitted by Nevada law and that none of our
directors will be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability:
·
for
any breach of the director’s duty of loyalty to the Company or its
stockholders;
·
for
acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of the law;
·
for
any transaction from which the director derives an improper personal
benefit.
These
provisions require the Company to indemnify its directors and officers unless
restricted by Nevada law and eliminate the Company’s rights and those of its
stockholders to recover monetary damages from a director for breach of his
fiduciary duty of care as a director except in the situations described above.
The limitations summarized above, however, do not affect the Company’s ability
or that of its stockholders to seek non-monetary remedies, such as an injunction
or rescission, against a director for breach of his fiduciary duty.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, we have been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The
Company has filed under the Securities Act with the Securities and Exchange
Commission a Registration Statement on Form S-1 with respect to the shares
of
common stock to be offered by the selling stockholders. This Prospectus was
filed as a part of the Registration Statement. As permitted by the rules and
regulations of the Commission, this Prospectus omits certain information
contained in the Registration Statement, and reference is hereby made to the
Registration Statement for further information with respect to the Company
and
its common stock.
The
Company is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and, in accordance therewith, files reports, proxy
and
information statements, and other information with the Commission. Reports,
proxy statements and other information filed by the Company with the Commission
pursuant to the informational requirements of the Exchange Act may be inspected
and copied at the public reference facilities maintained by the Commission,
100
F Street, N.E., Washington, D.C. 20549. Copies of such material may also be
obtained upon written request addressed to the Commission, Public Reference
Section, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that filed
electronically with the Commission at http://www.sec.gov. The Company maintains
a website at www.inyxgroup.com and publishes all SEC reports on the
website.
No
person
has been authorized to give any information or to make any representation other
than as contained or incorporated by reference in this Prospectus and, if given
or made, such information or representation must not be relied upon as having
been authorized by the Company. Neither the delivery of this Prospectus nor
any
sale of common stock made hereunder shall, under any circumstances, create
any
implication that the information contained herein is correct as of any date
subsequent to the date hereof. This Prospectus does not constitute an offer
to
sell or a solicitation of an offer to buy the securities offered by this
Prospectus to any person or by anyone in any jurisdiction in which it is
unlawful to make such an offer or solicitation.
Adjustments
to reconcile net loss to net cash provided by
operating
activities-
Depreciation
1,514
161
Amortization
of financing costs and debt discount
160
2,096
Amortization
of intangible assets
436
47
Provision
for bad debts
(687
)
24
Reserve
for inventory obsolescence
185
64
Compensation
expense on stock options issued to employees
157
66
Warrants
issued for financing and consulting fees
-
162
Change
in assets and liabilities:
(Increase)
decrease in accounts receivable
(1,960
)
811
Decrease
in inventory
63
142
(Increase)
decrease in prepaid and other current assets
(355
)
1,427
Increase
in deferred financing costs
(110
)
-
Increase
in deferred revenue
76
-
Increase
in customer advance
-
3,392
Increase
in accounts payable and accrued expenses
3,919
1,704
Other,
net
(218
)
16
Total
adjustments
3,180
10,112
Net
cash provided by operating activities
587
3,102
CASH
FLOWS FROM INVESTING ACTIVITIES:
Purchase
of property, plant and equipment
(1,158
)
(120
)
Increase
in deferred acquisition costs
(2,687
)
-
Acquisition
of Aventis Pharmaceuticals, Puerto Rico
-
(597
)
Net
cash used in investing activities
(3,845
)
(717
)
CASH
FLOWS FROM FINANCING ACTIVITIES:
Borrowings
under working capital lines of credit
928
-
Proceeds
from issuance of long term debt
246
-
Repayment
of long term debt
(2,297
)
-
Proceeds
from issuance of demand notes to shareholders
-
600
Repayment
of demand note to shareholders
-
(67
)
Proceeds
from issuance of common stock and warrants
4,577
-
Costs
related to issuance of stock
(13
)
-
Cost
of registering stock (SB2 registration)
-
(82
)
Proceeds
from exercise of stock options
5
-
Repayment
of capital lease obligation
-
(42
)
Net
cash provided by financing activities
3,446
409
Effect
of exchange rate changes on cash
377
147
Net
increase in cash and cash equivalents
565
2,941
CASH
AND CASH EQUIVALENTS, at beginning of the period
1,023
336
CASH
AND CASH EQUIVALENTS, at end of the period
$
1,588
$
3,277
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
Cash
paid for interest
$
2,078
$
644
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Note
1.Business
Description
Inyx,
Inc. (“Inyx” or the “Company”) through its wholly-owned subsidiaries, Inyx
Pharma Limited (“Inyx Pharma”), Inyx Canada Inc. (“Inyx Canada”), Inyx USA, Ltd.
(“Inyx USA”), Inyx Europe Limited (“Inyx Europe”), including Inyx Europe’s
wholly-owned subsidiary, Ashton Pharmaceuticals Limited (“Ashton
Pharmaceuticals” or “Ashton”), and
Exaeris Inc. (“Exaeris”), is a specialty pharmaceutical company which focuses on
the development and manufacturing of prescription and over-the-counter aerosol
pharmaceutical products and drug delivery technologies for the treatment
of
respiratory, allergy, cardiovascular and dermatological and topical conditions.
In addition, the Company performs certain sales and marketing functions to
market and promote its manufacturing, technical and product development
capabilities to its client base.
Inyx’s
client base primarily consists of ethical pharmaceutical corporations, branded
generic pharmaceutical distributors and biotechnology companies. Until it
has
completed developing its own products as well as its own distribution and
marketing capabilities, the Company expects to continue to depend on its
customers’ distribution channels or strategic partners to market and sell the
products it manufactures.
On
March31, 2005, the Company’s Inyx USA operation acquired the business assets of
Aventis Pharmaceuticals Puerto Rico, Inc. (“Aventis PR”) from the Sanofi-Aventis
Group. The acquisition was accounted for as a business combination in accordance
with Statement of Financial Accounting Standard No. 141 “Business
Combinations”(“SFAS
No. 141”).
In
connection with this acquisition, Inyx USA paid approximately $20.7 million
as a
total purchase price. The results of operations of the acquired Aventis PR
business assets are included in the Company’s consolidated results of operations
effective April 1, 2005 (the day after completion of the acquisition of such
business assets).
On
August31, 2005, the Company through its wholly-owned United Kingdom subsidiary,
Inyx
Europe, completed the purchase of all of the outstanding shares of Celltech
Manufacturing Services Limited (“CMSL”), a United Kingdom pharmaceutical
manufacturing company, from UCB Pharma Limited (“UCB Pharma”), for approximately
$40.7 million thereby assuming possession and control of the operations of
CMSL
effective September 1, 2005. On September 9, 2005, the Company changed the
“CMSL” name to Ashton Pharmaceuticals Limited. Ashton currently operates as a
wholly-owned subsidiary of Inyx Europe, and its operating results are included
in the Company’s consolidated results of operations effective September 1, 2005
(the day after completion of the acquisition of all of the outstanding stock
of
Ashton).
On
March29, 2005, Exaeris Inc. (“Exaeris”), a Delaware corporation, was incorporated as
the Company’s wholly-owned subsidiary to manage and operate the Company’s
product promotion and marketing activities, including those through
collaborative agreements with other companies.
Inyx
currently manages and operates its business as one operating segment.
Note
2.
Basis
of Presentation
The
financial information presented herein should be read in conjunction with
our
consolidated financial statements for the year ended December 31, 2005. The
accompanying consolidated financial statements for the three months ended
March31, 2006 and 2005 are unaudited but, in the opinion of management, include
all
necessary adjustments (consisting of normal, recurring in nature) for a fair
presentation of the financial position, results of operations and cash flows
for
the interim periods presented. The results of operations for the three months
ended March 31, 2006, however, are not necessarily indicative of operating
results to be expected for the year.
Significant
accounting policies are detailed in our annual report on Form 10-K for the
year
ended December 31, 2005.
F-5
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
All
inter-company accounts and transactions have been eliminated in
consolidation.
Certain
amounts from prior consolidated financial statements and related notes have
been
reclassified to conform to the current period presentation
Note
3.Acquisition
of the Business Assets of Aventis PR
On
March31, 2005, Inyx USA acquired the business assets of Aventis PR from the
Sanofi-Aventis Group. The acquisition was accounted for as a business
combination in accordance with Statement of Financial Accounting Standard
No.
141 “Business
Combinations”(“SFAS
No. 141”).
In
connection with this acquisition, Inyx USA paid approximately $20.7 million
as a
total purchase price comprising of a cash payment of approximately $19.7
million
paid upon closing, approximately $2.7 million in direct transaction costs
(including approximately $90,000 of additional transaction costs incurred
subsequent to closing), a subsequent purchase price adjustment of approximately
$570,000 paid to Aventis PR in August 2005, and received a purchase price
reduction amounting to approximately $2.3 million relating to the final value
assigned to the commercial contracts transferred to the Company on acquisition
as agreed by the Company and Aventis PR, pursuant to a purchase price settlement
adjustment in November 2005. Aventis PR is a pharmaceutical manufacturing
operation producing dermatological, respiratory and allergy products under
contract manufacturing agreements with third party customers. The results
of
operations of the acquired Aventis PR business assets are included in the
Company’s consolidated results of operations effective April 1, 2005 (the day
after completion of the acquisition of such business assets).
The
Aventis PR acquisition was funded through a credit facility from Westernbank
Business Credit, a Division of Westernbank Puerto Rico (“Westernbank”). The
Westernbank financing consists of a revolving loan, three term loans and
a
mezzanine loan, together referred to as the “First Westernbank Credit Facility”
(see Note 14,footnote
(1)).
The
purchase price was allocated to the identifiable net assets acquired including
the identifiable intangible assets based on their estimated fair market values
at the date of acquisition as determined by the Valuations Services Practice
of
BearingPoint, Inc.
The
fair
value of the assets acquired from the transaction totalled approximately
$62.9
million based on independent third-party appraisals and valuations, which
resulted in negative goodwill of $42.1 million. The negative goodwill was
proportionately allocated over the non-current tangible and intangible assets
acquired as follows:
Fair
Value of Assets Acquired
Allocation
of Negative Goodwill
Allocation
of Purchase Price of Assets Acquired
Land
$
3,040
$
(2,129
)
$
911
Building
12,700
(8,893
)
3,807
Machinery
and equipment
21,809
(15,090
)
6,719
Computer
hardware and software
1,185
(720
)
465
Inventory
2,334
-
2,334
Identifiable
intangible assets subject to amortization:
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
The
fair
values assigned to the acquired assets are based on estimates and assumptions
provided and other information compiled by management, including independent
valuations that utilize established valuation techniques appropriate for
the
industry in which the Company operates. The property, plant and equipment
are
depreciated based on the Company’s existing depreciation policies. The
intangible assets, which represent the value assigned to customer contracts,
are
amortized on a straight line basis over three years. The intangible asset
which
represents the value assigned to customer relationships is amortized on an
accelerated period of ten years.
Note
4.Acquisition
of CMSL
On
August31, 2005, Inyx Europe, a wholly-owned United Kingdom subsidiary of the Company,
completed the purchase of all of the outstanding shares of CMSL from UCB.
On
September 9, 2005, the Company changed the “CMSL” name to Ashton Pharmaceuticals
Limited.
The
Ashton share acquisition was accounted for as a business combination in
accordance with Statement of Financial Accounting Standard No. 141 “Business
Combinations”(“SFAS
No. 141”).
The
acquisition cost of $40.7 million consisted of an initial deposit of
approximately $610,000, a cash payment at closing of approximately $23.2
million, a purchase price deferral of approximately $9.8 million payable
in six
installments commencing at the end of May 2006, an amount equivalent to $4.6
million representing the additional net current assets acquired not considered
when purchase price was negotiated and direct transaction costs of approximately
$2.4 million.
The
Ashton acquisition was funded through a credit facility from Westernbank.
The
Westernbank financing consists of a revolving loan, three term loans and
a
mezzanine loan, together referred to as the “Second Westernbank Credit Facility”
(see Note 14,footnote
(2)).
The
purchase price was allocated to the identifiable net assets acquired including
the identifiable intangible assets based on their estimated fair market values
at the date of acquisition as determined by the Valuations Services Practice
of
BearingPoint, Inc.
The
fair
value of the assets acquired from the transaction totaled approximately $55.6
million based on independent third-party appraisals and valuations, which
resulted in negative goodwill of $14.9 million. The negative goodwill was
proportionately allocated over the non-current tangible and intangible assets
acquired as follows:
Fair
Value of Assets and Liabilities Acquired
Allocation
of Negative Goodwill
Allocation
of Purchase Price of Assets and Liabilities
Acquired
Land
$
1,787
$
(577
)
$
1,210
Buildings
7,146
(2,310
)
4,836
Machinery
and equipment
26,799
(8,661
)
18,138
Net
working capital
7,000
-
7,000
Excess
over agreed working capital
4,607
-
4,607
Identifiable
intangible assets subject to amortization:
Trademarks
and trade names
160
(52
)
108
Customer
relationships
8,400
(2,715
)
5,685
Product
Licenses
1,820
(588
)
1,232
Deferred
tax liability
(1,858
)
-
(1,858
)
Assumed
liability
(230
)
-
(230
)
$
55,631
$
(14,903
)
$
40,728
F-7
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
For
the
three months ended March 31, 2006, there was a release of bad debt provision
of
approximately $687,000 related to the subsequent collection of an aged debt.
In
comparison, for the three months ended March 31, 2005 there was a bad debt
expense of approximately $24,000.
As
of
March 31, 2006the Company had billed certain customers approximately $14.6
million in advance for raw materials and for services to be provided pursuant
to
arrangements under contract manufacturing and product support and services
agreements that it has in place. Such advance invoicing has allowed the Company
to acquire certain raw materials and components that have longer lead times
and
are required to manufacture such customers’ production requirements on a timely
basis. Such amounts have been offset against deferred revenue for financial
statement presentation purposes.
(a)
The
equipment held for future use consists of a manufacturing line which the
Company
is in the process of developing. Management expects to incur approximately
$500,000 in additional costs to equip this manufacturing line for the filling
and gassing of non-CFC aerosol pharmaceutical products.
(b)
The
construction in progress relates to costs associated with building a hydrocarbon
aerosol manufacturing line for a number of pending customer projects at the
Company’s Inyx USA facility. Additional costs and expenses necessary to complete
the manufacturing line and commence commercial manufacturing on the line
are
estimated to be in excess of $11.0 million over the next two years.
For
the
three months ended March 31, 2006, depreciation of property, plant and equipment
was approximately $1.5 million and for the same period in 2005 it was
approximately $161,000.
Note
9.Deferred
Financing Costs, Net
As
of
March 31, 2006, the deferred financing costs, net, are comprised of bank
fees
and legal costs incurred in connection with obtaining the First and Second
Westernbank Credit Facility. The Company incurred $969,000 in such costs
and
fees on March 31, 2005, when obtaining the First Westernbank Credit Facility,
and an additional $788,000 on August 31, 2005 in obtaining the Second
Westernbank Credit facility used to fund the Company’s acquisition of Ashton.
During the three months ended March 31, 2006, the Company incurred an additional
amount of $110,000 relating to amendment to the agreements increasing the
limits
under these credit facilities. Such deferred financing costs are being amortized
to interest and financing costs over the three year term of the Westernbank
credit facilities.
Deferred
financing costs, net consist of the following:
The
Company has deferred legal, consulting, translation, environmental,
regulatory and risk assessment fees and costs for appraisals, third
party
travel and other direct costs relating to the strategic acquisitions
(including business and intellectual property acquisitions) that
the
Company is currently working on. In management’s judgment, these business
development activities and strategic acquisitions have a high probability
of being successful and are expected to be completed within the
next
twelve months.
Deferred
costs associated with successful negotiations will be included as part of
the
acquisition costs of such investments. If a related project is abandoned,
deferred costs will be expensed in the Company’s results of
operations.
Note
11.Purchased
Intangible Assets, Net
Purchased
intangible assets consist of the following:
This
amount relates to deposits made towards an intellectual property
purchase
which is in the process of being acquired and developed. The Company
expects to incur additional costs and expenses to complete this
project.
Such costs are not currently being
amortized.
Purchased
intangible assets are carried at cost less accumulated amortization. For
the
three months ended March 31, 2006 and 2005, amortization expense related
to
intangible assets totaled approximately $436,000 and $47,000, respectively.
The
aggregate estimated amortization expense for intangible assets as of March31,2006 for the remainder of this year, each of the following four years and
thereafter is as follows:
F-10
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Note
12.Borrowings
under Working Capital Lines of Credit
On
March31, 2005, the Company, through its wholly owned subsidiary Inyx USA, Ltd.,
obtained a three-year revolving working capital line of credit facility from
Westernbank, under the First Westernbank Credit Facility, allowing the Company
to borrow up to $10 million. On September 1, 2005, the limit was increased
to
$15 million. Advances under this facility are limited to 85% of eligible
accounts receivables and together with the reserve amounting to $500,000
shall
not exceed $15 million, and 60% of eligible inventory which shall not exceed
a
sub-limit of $5 million for such inventory. As of March 31, 2006, total
advances under this facility amounted to approximately $13.2
million.
On
August31, 2005, the Company, through its wholly owned subsidiary Inyx Europe Limited,
obtained an additional three-year revolving working capital line of credit
facility with Westernbank, under the Second Westernbank Credit Facility,
allowing the Company to borrow up to $11.7 million. Advances under this
facility are limited to 85% of eligible accounts receivables together with
the
reserve of $500,000 shall not exceed $11.7 million plus a reserve of $500,000,
and 60% of eligible inventory which shall not exceed a sub-limit of $5 million
for such inventory. On
January 19, 2006, this facility was increased to $16.7 million.
As of
March 31, 2006, total advances under this facility amounted to approximately
$13.0 million.
On
November 22, 2005, the Company obtained an additional facility of up to $5.0
million from Westernbank under the First Westernbank Credit Facility. This
Secured Over Formula Advance (“SOFA”) facility is collateralized by the equity
in Company owned fixed assets, to be utilized for prepayment of inventory
purchases and is revolving in nature. As at March 31, 2006, total advances
under
this facility amounted to approximately $4.6 million.
Borrowings
under the above facilities bear interest at Westernbank’s prime rate (7.5% as of
March 31, 2006) plus 1.0%. Borrowings under the revolving working capital
lines of credit are collateralized by the eligible receivables and inventories
and are guaranteed by the Company and its subsidiaries. The Company is
required to maintain compliance with certain financial covenants including
a
specified working capital and net worth levels based on the Company’s
consolidated operating budget. As of March 31, 2006, Westernbank has
waived certain requirements of the loan and security agreements such that
non-compliance of certain covenants shall not trigger an event of
default.
Note
13.Loan
Payable to Seller of Ashton
As
of
March 31, 2006the Company owed the previous owner of Ashton, UCB Pharma,
approximately $9.6 million (€8.0 million) relating to a deferred purchase price
of that business. The Company also owes approximately $4.5 million (£2.6
million) as payment due for the additional net current assets acquired not
considered when the purchase price was negotiated between the parties (“excess
working capital adjustment”).
The
deferred purchase price is non-interest bearing and is payable by the Company
to
UCB in six monthly payments commencing at the end of May 2006, which may
be
extended by mutual agreement between the parties. The Company is also entitled,
at any time prior to payment of the balance of the purchase price, to set-off
against any unpaid claim it may have against UCB under the share purchase
agreement of Ashton. As security collateral for the purchase price deferral,
and
to be released upon full payment of such deferral, the Company granted UCB
a
secondary security position over the Company’s assets behind Westernbank’s
current first security position. Westernbank and UCB have also agreed to
an
inter-creditor agreement to be terminated upon full payment of the purchase
price deferral. The excess working capital adjustment amounting to approximately
$4.5 million, is interest bearing at Barclay’s Bank base rate.
F-11
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Note
14.Long
Term Debt, Net of Current Portion
Debt,
net
of current portion, consists of the following:
Prime+
2% Secured Term Promissory Note A issue to Westernbank (1)
$
2,561
$
2,315
Prime+
2% Secured Term Promissory Note B issue to Westernbank
(1)
12,070
12,780
Prime+
2% Secured Term Promissory Note C issue to Westernbank (1)
11,210
11,407
15%
Secured Term Loan D Promissory Note issued to Westernbank (1)
4,250
4,500
Prime+
2% Secured Term Promissory Note A issue to Westernbank by Inyx
Europe
(2)
2,934
2,983
Prime+
2% Secured Term Promissory Note B issue to Westernbank by Inyx
Europe
(2)
9,147
9,637
Prime+
2% Secured Term Promissory Note C issue to Westernbank by Inyx
Europe
(2)
2,800
2,950
15%
Secured Term Loan D-Europe Promissory Note issued to Westernbank
by Inyx
Europe
(2)
8,400
8,850
Capital
lease obligations, due to financial institutions, collateralized
by
software and equipment, due in monthly installments of $14,000
including
interest of 10% to 27%, through 2006 (3)
68
102
53,440
55,524
Less
current portion
(9,255
)
(9,288
)
$
44,185
$
46,236
(1)
On
March 31, 2005the Company secured a non-dilutive asset based secured
credit facility from Westernbank originally totaling $46 million,
and then
subsequently increased to $51 million and $56 million in aggregate
by
Westernbank on September 1, 2005 and November 22, 2005 respectively
(the
“First Westernbank Credit Facility”). The First Westernbank Credit
Facility is comprised of a revolving loan (see Note 12) of up to
$15
million including a reserve of $500,000, a SOFA line of up to $5.0
million
(see Note 12), capital expenditure loan Term Note “A” of up to $5 million,
for the purpose of funding ongoing construction or the acquisition
of new
equipment, two term loans (Term Notes “B” and “C”) and a mezzanine loan
(Term Loan “D”) amounting in aggregate to up to $31 million for purpose of
refinancing the indebtedness to Laurus Funds and purchasing the
business
assets of Aventis PR,. The term notes are collateralized by substantially
all the property of the Company and its subsidiaries whether now
owned or
thereafter to be acquired. All the term loans mature March 31,2008 and
are automatically renewed on a year to year basis unless terminated
by the
Company or Westernbank. Term Notes “A”, “B”, and “C” bear interest at
Westernbank prime rate + 2%. The mezzanine loan (Term Loan “D”) bears
interest at the rate of 15% per annum. Payment of the amounts due
under
the Term Notes accelerates upon the occurrence of an Event of
Default
.
(2)
In
connection with the acquisition of Ashton, the Company, through
its wholly
owned subsidiary, Inyx Europe, obtained an additional non-dilutive
asset
based secured credit facility from Westernbank totaling $36.5 million
(the
“Second Westernbank Credit Facility”). The Second Westernbank Credit
Facility is comprised of a revolving loan of up to $11.7 million
including
a reserve of $500,000 (see Note 12) plus a series of four term
loans (Term
Loan “A”, “B”, “C” and “D”), amounting in aggregate up to $24.8 million,
and utilized to help fund the acquisition of all the outstanding
shares of
Ashton. The loans are secured by all of the assets of the Company
and its
subsidiaries whether now owned or thereafter to be acquired, The
principal
payments of Term Notes “A”, “B” and “C” commenced on December 1, 2005. All
of the Term Notes mature on March 31, 2008, and are automatically
renewed
on a year-to-year basis unless terminated by the Company or Westernbank.
Term Notes “A”, “B” and “C” bear interest at Westernbank prime rate + 2%.
Term Loan “D” bears interest at the rate of 15% per annum, principal
payments based on an agreed upon formula commenced January 1, 2006.
Payment of the amounts due under the Term Notes accelerates upon
the
occurrence of an Event of Default.
F-12
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
(3)
The
Company leases computers and furniture under capital leases that
expire in
2006. Interest rates range from 10% to 27%.
The
aggregate maturities of the Westernbank long term debt facilities are as
follows: for the nine month period ending December 31, 2006-$6.9 million,
for
the year ending December 31, 2007-$9.6 million, and for the year ending December31, 2008-$36.9 million. These Westernbank loans are automatically renewable
after the initial three year period ending on March 31, 2008 on a year to
year
basis, unless terminated by the Company or Westernbank. The amortization
schedule for repayment of the term loans ranges from 60 months to 180 months.
Note
15.Net
Loss per Share
The
Company follows the guidelines of Statement of Financial Accounting Standards
No. 128, “Earnings
per Share”
(“SFAS
No.128”) in calculating its loss per share. SFAS No.128 states basic and diluted
earnings per share are based on the weighted average number of shares of
common
stock and potential common stock outstanding during the period. Potential
common
stock equivalents for purposes of determining diluted earnings per share
include
the effects of dilutive stock options, warrants and convertible securities.
The
effect on the number of shares of such potential common stock equivalents
is
computed using the treasury stock method or the if-converted method, as
applicable. The Company has excluded all outstanding options and warrants
as
well as shares issued upon conversion of convertible debt from the calculation
of diluted net loss per share because these securities are anti-dilutive.
Accordingly,
as of March 31, 2006 and December 31, 2005, the Company had common stock
equivalents of approximately 11,717,852 and 3,043,172 shares respectively,
related to options and warrants.
Note
16.Commitments
and Contingencies
Leases
The
Company has commitments under various long-term operating lease agreements
for
various premises. For the three months ended March 31, 2006 and 2005, total
rent
of office space was approximately $64,000 and $40,000, respectively. In addition
to rent, the Company and its subsidiaries are responsible for operating costs,
real estate taxes and insurance. As of March 31, 2006, future minimum annual
rental commitments under operating leases are as follows:
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Legal
Matters
The
Company
and its
subsidiaries are subject to claims and lawsuits arising in the ordinary course
of business. Management, in consultation with its legal advisors, believes
that
the outcomes of such legal matters are remote and unlikely to have a material
adverse effect on the Company’s financial position or operating
results.
Key
Suppliers
The
Company purchases raw materials and components from a limited number of key
suppliers. A loss of any one of these suppliers would have a material adverse
effect on the Company’s operations.
Key
Customers
For
the
three months ended March 31, 2006, the Company’s three top current
customers
in
aggregate accounted
for approximately $12.7 million of revenue or approximately 59% of total
net
revenues. In comparison, for the three months ended March 31, 2005, the
Company’s top three customers in aggregate accounted for approximately $1.4
million in net revenues or approximately 51% of total net revenues.
The
Company’s management believes that a delay in the production requirements for
any one of the Company’s major customers or the loss of any one of the Company’s
top three customers would have a material adverse affect on operations and
on
the realizability of the Company’s assets.
Note
17.Subsequent
Events
Subsequent
to March 31, 2006, the Company granted 420,000 stock options to purchase
420,000
shares of the Company’s common stock. The fair value of these shares
approximating $634,000 was evaluated using the Black-Scholes option pricing
model with the following assumptions: a risk free interest rate of 4.8%,
an
expected life of four years, a volatility factor of 64.4% and a dividend
yield
of 0%.
Subsequent
to March 31, 2006, the Company issued 1,782,405 shares of its restricted
common
stock upon the exercise of 1,782,405 warrants at prices per share ranging
from
$1.00 to $1.50 for total cash proceeds of approximately $1.8 million. All
such
proceeds were used for operating activities and working capital. In addition,
pursuant to certain cashless exercise of warrants 10,095 shares of common
stock
were returned into treasury.
Note
18. Stockholders’
Deficit
During
the three months ended March 31, 2006, the Company recorded approximately
$157,000 of additional paid-in capital resulting from stock option compensation
costs incurred during the period. The fair value was calculated using the
Black-Scholes option pricing model with the following assumptions: a risk
free
interest rate of 3.14% to 4.20%, an expected life of four years, a volatility
factor of 53% to 77%, and a dividend yield of 0%. This amount is included
in
general and administrative expenses in the consolidated statement of
operations.
During
the three months ended March 31, 2006the Company issued 5,000 shares of
its
common stock with a value of approximately $6,000 for exercising stock options
at a price of $1.10 per share.
For
the
three months ended March 31, 2006, the Company charged approximately $13,000
to
additional paid in capital for stock offering costs.
F-14
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
During
the three months ended March 31, 2006, the Company received approximately
$4.6
million in cash proceeds from the exercise of 4,602,072 warrants at prices
per
share ranging from $0.81 to $2.60. All such proceeds were used for operating
activities and working capital. In addition, pursuant to certain cashless
exercise of warrants, approximately 391,000 shares of common stock were returned
into treasury.
Note
19. Equity
Incentive Plans
On
August28, 2005, the Company adopted the 2005 Equity Incentive Plan (the “2005 Plan”),
which provides for the granting of incentive
awards,
which include stock options,
restricted stock and other stock-based awards
for the
benefit of employees, officers, directors and those
persons who the Company believes may have made a valuable contribution to
the
Company. The 2005 Plan authorizes total stock awards of up to 6,000,000 shares
of the Company’s common stock.
On
May 1,2003, the Company’s Board of Directors adopted the 2003 Stock Option Plan (the
“2003 Plan”) which provides for the granting of stock options to employees,
officers, directors and those making valuable contributions to the Company.
The
total number of shares of the Company’s common stock available for granting
under the 2003 Plan is 5,000,000.
All
options granted pursuant to the 2003 Plan and the 2005 Plan shall be exercisable
at a
price
per share at least equal to the fair market price at the time of grant. Unless
otherwise specified, all options expire ten years from the date of grant.
Both
the 2003 Plan and the 2005 Plan are administered by the Company’s Compensation
Committee.
For
the
three months ended March 31, 2006, the Company granted 277,000 stock options
to
purchase 277,000 shares of the Company’s common stock. The fair value of these
shares approximating $371,000 was evaluated using the Black-Scholes option
pricing model with the following assumptions: a risk free interest rate of
4.2%,
an expected life of four years, a volatility factor of 53% to 67% and a dividend
yield of 0%.
During
the three months ended March 31, 2006the Company issued 5,000 shares of
its
common stock with a value of approximately $6,000 for exercising stock options
at a price of $1.10 per share.
For
the
three months ended March 31, 2006 and 2005, 310,000 and 400,000 stock options
respectively were forfeited and cancelled.
Total
compensation costs relating to stock options granted to employees, officers,
directors, and other persons approximated $157,000 for the three months ended
March 31, 2006 and $66,000 for the three months ended March 31, 2005. These
amounts are included in general and administrative expenses in the consolidated
statement of operations, as the Company expects that it will continue to
issue
stock options to such persons.
Note
20. Accumulated
Comprehensive Loss
The
accumulated comprehensive loss reflected in the consolidated statement of
changes in stockholders’ deficit and other comprehensive loss represents
accumulated foreign currency translation adjustments associated with the
conversion of the Company’s United Kingdom and Canadian subsidiary’s accounts to
US dollars. These amounts are not adjusted for income taxes as they relate
to an
indefinite investment in a foreign subsidiary.
Note
21.
Warrants
During
the three months ended March 31, 2006, the Company received approximately
$4.6
million in cash proceeds from the exercise of 4,602,072 warrants at prices
per
share ranging from $0.81 to $2.60. All such proceeds were used for operating
activities and working capital. In addition, pursuant to certain cashless
exercise of warrants, approximately 391,000 shares of common stock were returned
into treasury.
F-15
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Comparatively,
during the three months ended March 31, 2005, the Company issued to Laurus
Funds, 300,000 five year warrants in conjunction with a waiver received and
certain amendments to the registration rights agreements with Laurus Funds.
The
waiver waived any Events of Default that may have occurred under the credit
facility and term note due to Laurus Funds. These warrants allow the holders
to
purchase the Company’s common stock at a price of $0.95 per share. The fair
value of these warrants was estimated using the Black-Scholes option pricing
model with the following weighted average assumption: a risk free interest
rate
of 3.14%, an expected life of four years, a volatility factor of 57%, and
a
dividend yield of 0%. The value assigned to these warrants was approximately
$162,000 and was charged as interest and financing costs to the Company’s
consolidated statement of operations for the three months ended March 31,2005.
Note
22.
Related
Party Transactions
Karver
International, Inc. (“Karver”) is an affiliated company that subleases office
space from the Company on the 40th
Floor,
825 Third Avenue, New York, New York10022. This consists of approximately
25%
of the Company’s total office space in New York. For the three months ended
March 31, 2006 and 2005, the Company charged Karver $9,375 and $9,000,
respectively, for the sublease of furnished office space. In addition, the
Company charged Karver $7,500 for the three months ended March 31, 2006 for
management services in accordance with a related management services agreement.
Under that management services agreement, certain Inyx employees located
at the
Company’s office in Toronto, Canada provide information technology, word
processing and bookkeeping services to Karver, with such services consisting
of
approximately ten hours of allocated work-time per week. There were no similar
charges for the three months ended March 31, 2005.
During
the three months ended March 31, 2006, the Company entered into a short-term
lease agreement with Karver for sublease of an office space in Miami, Florida
on
a month to month basis. Monthly rent payments amount to $2,500. For the three
month period, the Company paid a total of $5,000 to Karver for sublease of
this
office space.
Note
23. Liquidity
and Capital Resources
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplates continuation of the Company as a going concern. The Company
has experienced recurring operating losses and has an accumulated deficit
and
negative working capital. Additionally, the Company has significant debt
which
is due within the next twelve months.
The
management of the Company intends to mitigate any factors relating to future
liquidity and capital resources from:
1)
Income
generated from its recent acquisitions - the Ashton business, that the Company
acquired, through its wholly-owned subsidiary, Inyx Europe, on August 31,2005,
has historically been a profitable operation and the Company expects it to
continue to be so. The Company also expects to generate profits from its
manufacturing facility in Puerto Rico that it acquired on March 31, 2005,
and
from its Inyx Pharma facility as two previously delayed major customer contracts
have now commenced in late 2005. Additionally, the Company’s Exaeris subsidiary
commenced operations in January 2006, and the Company believes that it can
establish new sources of revenue by marketing its own proprietary pharmaceutical
products or selected clients’ products through collaborative agreements with its
clients such as its September 8, 2005 product marketing and collaborative
agreements with King Pharmaceuticals, Inc.
F-16
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
2)
Its
Westernbank credit facilities including its revolving working capital lines
of
credit and capital expenditure loans. During 2005, the Company received
increased limits on the First Westernbank Credit Facility amounting in aggregate
to $10 million. In addition, in January 2006, the Company received an additional
$5 million increase to its limit under the Second Westernbank Credit
Facility.
3)
Issuance of equity or debt securities to assist funding its operations and
growth strategies.
There
can
be no assurances that the Company’s intentions will be achieved or that
additional financing will be obtained.
F-17
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The
following unaudited consolidated pro forma statements of operations presented
herein for the three months ended March 31, 2005 and the year ended December31,2005 give effect to the acquisitions of the business assets of Aventis PR
and
the CMSL (n/k/a Ashton) operations as if these acquisitions had taken place
at
the beginning of the respective periods presented.
The
pro
forma results for the three months ended March 31, 2005 and year ended December31, 2005, as summarized below, include the actual results of the Company
combined with the results of the acquired businesses of Aventis PR and CMSL
(n/k/a Ashton) for the three months ended March 31, 2005.
The
pro
forma results for the year ended December 31, 2005, as summarized below,
include
the actual results of the Company combined with the results of the acquired
business of Aventis PR for the three months ended March 31, 2005, and the
results of the acquired business of CMSL (n/k/a Ashton) for the eight months
ended August 31, 2005; i.e. prior to the respective acquisition dates of
those
two businesses.
The
historical financial data presented is derived from the historical financial
statements of both companies, prepared in accordance with generally accepted
accounting principles in the United States of America. The unaudited pro
forma
adjustments and certain assumptions are described in the accompanying notes
which should be read in conjunction with this unaudited pro forma consolidated
statement of operations.
The
preparation of the unaudited pro forma statement of operations for Aventis
PR
included an adjustment to back-out any revenues attributable to any Aventis
PR
inter-company sales and customer contracts not renewed at the date of
acquisition. The Aventis acquisition was accounted for using the purchase
method
of accounting. The unaudited pro forma financial data is not necessarily
indicative of the operations had the acquisition taken place at the beginning
of
the periods presented and such data is not intended to project the Company’s
results of operations for any future period.
The
CMSL
(n/k/a Ashton) acquisition was a share purchase agreement. As such, all
historical financial information is assumed to be as recorded with the exception
of the pro forma adjustments as described in the following notes.
F-18
Unaudited
Consolidated Pro Forma Statement of Operations
(1)
Reflects adjustments to back out certain revenues and expenses historically
recorded or incurred by Aventis PR which related to those operations not
acquired by Inyx USA.
a.
Aventis PR’s revenue represents all manufacturing revenues relating to the
carved-out business of Aventis PR and was derived using the actual product
volumes of the products acquired in the acquisition on March 31, 2005,
extended
at the newly negotiated unit prices for each one of these products.
(2)
Reflects the actual revenue and expenses historically recorded by CMSL
(n/k/a
Ashton). The figures have been converted from GBP’s to US dollars based on
average exchange rates for each year. Adjustments were made to reduce the
cost
of sale and correspondingly increase the selling, general and administration
cost to remain consistent with US reporting format.
(3)
Reflects the following pro forma adjustments related to the Aventis PR
acquisition:
a.
Depreciation expense was adjusted to reflect the fair value of assets acquired
as of the closing of the acquisition on March 31, 2005, and based on valuations
provided by an independent third party.
b.
The
amortization of intangible assets was recorded to reflect the amortization
of
purchased intangible assets subject to amortization, including customer
contract
renewals and customer relationships that were acquired in the Aventis PR
transaction on March 31, 2005, and based on valuations provided by an
independent third party.
c.
Reflects additional interest expense from the Westernbank credit facility
closed
on March 31, 2005 and a reduction of interest expense due to the repayment
of
the Laurus Master Funds credit facility also occurring on March 31,2005.
(4)
Reflects the following pro forma adjustments related to the CMSL
(n/k/a Ashton) acquisition:
a.
Depreciation expense was adjusted to reflect the fair value of assets acquired
as of the closing of the acquisition on August 31, 2005, based on valuations
provided by a third party.
b.
Amortization of intangible assets was recorded to reflect the amortization
of
purchased intangible assets subject to amortization including customer
contract
renewals and customer relationships acquired in the CMSL
(n/k/a Ashton) acquisition on August 31, 2005, and based on valuations
provided
by a third party.
c.
Reflects additional interest expense from the new Westernbank credit facility
closed on August 31, 2005.
F-20
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Inyx,
Inc.
We
have
audited the consolidated balance sheets of Inyx, Inc. (the “Company”) as of
December 31, 2005 and 2004, and the related consolidated statements of
operations, changes in stockholders’ equity (deficit) and cash flows for the
years ended December 31, 2005 and 2004 and for the period from March 7, 2003
through December 31, 2003. We have also audited the statements of operations,
changes in stockholders’ equity (deficit) and cash flows of Miza Pharmaceuticals
(UK) Ltd. (the predecessor to Inyx, Inc.) (the “Company”) for the period from
January 1, 2003 through March 6, 2003. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company has
determined that it is not required to have, nor were we engaged to perform,
an
audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we do not express such
an opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Inyx, Inc.
as
of December 31, 2005 and 2004, and the results of operations and cash flows
for
the years ended December 31, 2005 and 2004 and for the period from March 7,2003
through December 31, 2003 and the results of operations and cash flows of Miza
Pharmaceuticals (UK) Ltd. (the predecessor to Inyx, Inc.) for the period from
January 1, 2003 through March 6, 2003, in conformity with accounting principles
generally accepted in the United States.
Preferred
stock - $0.001 par value, 10,000,000 shares authorized - 0 shares
issued
and outstanding
-
-
Common
stock - $0.001 par value, 150,000,000 shares authorized - 43,389,922
shares issued and outstanding at December 31, 2005; 38,012,479 shares
issued and outstanding at December 31, 2004
43
38
Additional
paid-in capital
33,315
25,275
Accumulated
deficit
(61,343
)
(30,334
)
Subscriptions
receivable
(293
)
(343
)
Accumulated
other comprehensive loss-foreign currency translation
adjustment
(2,122
)
(501
)
Total
stockholder’s deficit
(30,400
)
(5,865
)
Total
liabilities and stockholders’ deficit
$
92,153
$
14,755
The
accompanying notes are an integral part of these consolidated financial
statements.
F-22
INYX,
INC.
Consolidated
Statements of Operations
(Expressed
in thousands of U.S. dollars, except per share amounts)
Adjustments
to reconcile net loss to net cash (used in) operating
activities:
Depreciation
3,283
619
347
75
Amortization
of financing costs and debt discount
2,406
1,778
3,821
-
Amortization
of intangible assets
1,387
166
139
-
Early
termination fees paid with common stock and warrants
1,739
30
2,105
-
Deferred
income tax expense (benefit)
-
1,333
(1,294
)
-
Provision
for bad debts
804
(39
)
191
-
Reserve
for inventory obsolescence
552
269
207
-
Compensation
expense on stock options issued to employees
3,084
291
1,513
-
Finance
and consulting fees on warrants issued
-
1,337
1,261
-
Issuance
of shares in recapitalization
-
-
23
-
Issuance
of shares for exercise of stock options
-
293
-
-
Subscription
receivable
-
(243
)
-
-
Changes
in assets and liabilities:
(Increase)
decrease in accounts receivable
(12,258
)
1,737
(3,586
)
(215
)
Decrease
(increase) in inventory
3,684
(700
)
23
385
Decrease
(increase) in prepaid and other current assets
402
(1,482
)
230
267
Increase
in deferred financing costs
-
(127
)
(900
)
-
(Decrease)
increase in deferred revenue
(108
)
(243
)
351
-
Increase
in accounts payable and accrued expenses
7,808
2,904
2,380
640
Other,
net
359
-
(45
)
353
Total
adjustments
13,142
7,923
6,766
1,505
Net
cash (used in) provided by operating activities
(17,867
)
(9,019
)
(6,626
)
1,155
Net
cash provided by (used in) discontinued operations
-
-
50
(617
)
CASH
FLOWS FROM INVESTING ACTIVITIES:
Purchase
of property, plant and equipment
(2,193
)
(1,641
)
(394
)
(18
)
Acquisition
of Aventis Pharmaceuticals, Puerto Rico
(597
)
-
-
-
Acquisition
of Celltech Manufacturing Services Limited
(1,312
)
-
-
-
Purchase
of intangible assets
-
(95
)
-
-
Net
cash used in investing activities
(4,102
)
(1,736
)
(394
)
(18
)
CASH
FLOWS FROM FINANCING ACTIVITIES:
Borrowings
under revolving line of credit, net of fees
20,382
3,869
3,080
(522
)
Advances
by shareholder
-
-
450
-
Repayment
to shareholder
-
-
(450
)
-
Proceeds
from issuance of long term debt
6,148
500
4,500
-
Repayment
of long term debt to Stiefel
(4,013
)
-
Repayment
of other long term debt
-
(281
)
(2,771
)
104
Payment
of fees on long term debt and revolving line of credit to Laurus
Funds
-
(19
)
(573
)
-
Proceeds
from issuance of demand notes to shareholders
-
700
100
-
Repayment
of demand note to shareholders
-
(600
)
-
-
Proceeds
from issuance of common stock and warrants
3,381
7,450
3,500
-
Costs
related to issuance of stock
(7
)
(819
)
(323
)
-
Cost
of registering stock (SB2 registration)
(163
)
(192
)
-
-
Proceeds
from exercise of stock options
11
-
90
-
Repayment
of capital lease obligation
(125
)
(107
)
-
-
Net
cash provided by (used in) financing activities
25,614
10,501
7,603
(418
)
Effect
of exchange rate changes on case
(2,958
)
(206
)
(295
)
(102
)
Net
increase (decrease) in cash and cash equivalents
687
(460
)
338
-
CASH
AND CASH EQUIVALENTS, at beginning of the period
336
796
458
-
CASH
AND CASH EQUIVALENTS, at end of the period
$
1023
$
336
$
796
$
-
The
accompanying notes are an integral part of these consolidated financial
statements
F-25
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Note
1.Business
Description and Presentation
Inyx,
Inc. (“Inyx” or the “Company”) through its wholly-owned subsidiaries, Ashton
Pharmaceuticals Limited (“Ashton”), Inyx Pharma Limited (“Inyx Pharma”), Inyx
Canada Inc. (“Inyx Canada”), Inyx USA, Ltd. (“Inyx USA”), Inyx Europe Limited
(“Inyx Europe”), including Inyx Europe’s wholly-owned subsidiary, Ashton
Pharmaceuticals Limited (“Ashton Pharmaceuticals” or “Ashton”), and
Exaeris Inc. (“Exaeris”), is a specialty pharmaceutical company which focuses on
the development and manufacturing of prescription and over-the-counter aerosol
pharmaceutical products and drug delivery technologies for the treatment of
respiratory, allergy, cardiovascular and dermatological and topical conditions.
In addition, the Company performs certain sales and marketing functions to
market and promote its manufacturing, technical and product development
capabilities to its client base.
Inyx’s
client base primarily consists of ethical pharmaceutical corporations, branded
generic pharmaceutical distributors and biotechnology companies. Until it has
completed developing its own products as well as its own distribution and
marketing capabilities, the Company expects to continue to depend on its
customers’ distribution channels or strategic partners to market and sell the
products it manufactures. On March 29, 2005, the Company incorporated Exaeris,
a
wholly-owned Delaware company to manage and operate its product promotion and
marketing activities, including those that it may potentially have through
collaborative agreements with other companies.
On
March31, 2005, Inyx USA acquired the business assets of Aventis PR from the
Sanofi-Aventis Group. The acquisition was accounted for as a business
combination in accordance with Statement of Financial Accounting Standard No.
141 “Business
Combinations”(“SFAS
No. 141”).
In
connection with this acquisition, Inyx USA paid approximately $20.7 million
as a
total purchase price comprising of a cash payment of approximately $19.7 million
paid upon closing, approximately $2.7 million in direct transaction costs
(including approximately $90,000 of additional transaction costs incurred
subsequent to closing), a subsequent purchase price adjustment of approximately
$570,000 paid to Aventis PR in August 2005, and received a purchase price
reduction amounting to approximately $2.3 million relating to the final value
assigned to the commercial contracts transferred to the Company on acquisition
as agreed by the Company and Aventis PR, pursuant to a purchase price settlement
adjustment in November 2005. Aventis PR is a pharmaceutical manufacturing
operation producing dermatological, respiratory and allergy products under
contract manufacturing agreements with third party customers. The results of
operations of the acquired Aventis PR business assets are included in the
Company’s consolidated results of operations effective April 1, 2005 (the day
after completion of the acquisition of such business assets).
On
August31, 2005, the Company through its wholly-owned United Kingdom subsidiary, Inyx
Europe, completed the purchase of all of the outstanding shares of Celltech
Manufacturing Services Limited (“CMSL”), a United Kingdom pharmaceutical
manufacturing company, from UCB Pharma Limited (“UCB Pharma”), for approximately
$40.7 million including acquisition costs of approximately $2.4 million, and
thereby assumed possession and control of the operations of CMSL effective
September 1, 2005. On September 9, 2005, the Company changed the “CMSL” name to
Ashton Pharmaceuticals Limited. Ashton currently operates as a wholly-owned
subsidiary of Inyx Europe, and its operating results are included in the
Company’s consolidated results of operations effective September 1, 2005 (the
day after completion of the acquisition of all of the outstanding stock of
Ashton).
Prior
to
its acquisition of the majority of Miza UK’s business assets on March 7, 2003,
Inyx Pharma was a non-operating private corporation with nominal business
assets. Prior to its completion of the reverse acquisition of Inyx Pharma on
April 28, 2003, the Company’s business concerns were unrelated to our current
pharmaceutical industry operations. As a result of the Company’s acquisition of
the majority of Miza UK’s business assets on March 7, 2003, financial reporting
for the 2003 fiscal year is limited to the period from March 7, 2003 to December31, 2003.
F-26
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Inyx
currently manages and operates its business as one operating segment.
Note
2.Summary
of Significant Accounting Policies
Consolidated
Financial Statements
The
accompanying consolidated financial statements include the accounts of Inyx
and
its wholly owned subsidiaries: Inyx Pharma, an operating company formed under
the laws of England and Wales; Inyx Europe, an operating company formed under
the laws of England and Wales and Inyx Europe’s wholly-owned subsidiary, Ashton
Pharmaceuticals, also an operating company formed under the laws of England
and
Wales; Inyx Canada, a federally incorporated Canadian corporation; Inyx USA,
a
corporation incorporated in the Isle of Man and operating in Manatí, Puerto
Rico; Exaeris, a Delaware corporation headquartered in Exton, Pennsylvania;
and
Inyx Realty, Inc., a Florida corporation through the date of its disposition
of
April 14, 2004. On April 14, 2004, Inyx Realty, Inc. was transferred to a
related party. As consideration, the related entity assumed all of the
liabilities of Inyx Realty, Inc. including a commitment of a ten year office
space lease of approximately $1.5 million. (See Note 25, Related Party
Transactions.)
All
inter-company accounts and transactions have been eliminated in
consolidation.
Use
of Estimates
The
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America. The preparation
of consolidated financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The more significant estimates are those used
by
management to measure the recoverability of intangible assets, the allowances
for doubtful accounts and inventory reserves. Actual results could differ from
those estimates.
Cash
and Cash Equivalents
Cash
and
cash equivalents consist of highly liquid investments with maturities of three
months or less when purchased and are stated at cost, which approximates market
value.
Accounts
Receivable
Accounts
receivable are stated at realizable value, net of an allowance for doubtful
accounts. Periodically, management reviews all accounts receivable and, based
on
an assessment of whether they are collectible, estimates the portion, if any,
of
the balance that will not be collected in order to establish an allowance for
doubtful accounts. Such allowance was based on the specific identification
of
accounts deemed uncollectible as of each period end. The provision for the
allowance for doubtful accounts is included in general and administrative
expenses in the accompanying consolidated statements of operations.
Inventory
Inventory
is valued using the first-in, first-out method of accounting and is stated
at
the lower of cost or net realizable value.
F-27
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Property,
Plant and Equipment
Property,
plant and equipment is stated at cost, net of accumulated depreciation and
amortization, which is provided for by charges to operations over the estimated
useful life of the assets using the straight line method. The useful life of
assets ranges from 3-15 years for equipment, and up to 30 years for buildings.
Leasehold improvements and equipment capital leases are amortized over the
life
of the related lease.
Expenditures
that extend the useful life of the respective assets are capitalized and
depreciated over the remaining lives of the respective assets. Maintenance,
repairs and other expenses that do not extend their useful life are expensed
as
incurred.
Purchased
Intangible Assets
The
Company’s purchased intangible assets consist of customer relationships,
customer contracts, a customer list, product licenses, know-how, a technology
patent, and trademarks and trade names. These intangible assets are accounted
for in accordance with Statement of Financial Accounting Standards No. 142,
“Goodwill
and Other Intangible Assets” (“SFAS
No. 142”) and are amortized on a straight line basis over their estimated
remaining useful lives in proportion to the underlying cash flows that were
used
in determining the acquired value. Customer relationships are amortized over
periods ranging from 10 to 15 years, customer contracts are amortized over
3
years, the customer list is amortized over 12 years, product licenses are
amortized over 10 years, know-how is amortized over 10 years, the patent is
amortized over 7 years, and the trademarks and trade names are amortized over
a
3 month period. The Company does not have any indefinite life intangible assets.
Deferred
Financing Costs
Costs
directly associated with obtaining financing are capitalized and amortized
on a
straight-line basis over the term of the financing arrangement. The amortization
of these costs are included as part of interest and financing costs.
Business
Combinations
The
Company accounts for business combinations in accordance with Statement of
Financial Accounting Standard No. 141, “Business
Combinations” (“SFAS
No.141”). SFAS No.141 requires that the purchase method of accounting be used
for all business combinations. SFAS No.141 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually by comparing carrying value to the
respective fair value in accordance with the provisions of Statement of
Financial Accounting Standards No. 142, “Goodwill
and Other Intangible Assets” (“SFAS
No. 142”). This pronouncement also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful
lives
to their estimated residual values, and reviewed for impairment by assessing
the
recoverability of the carrying value, The Company has adopted the provisions
of
SFAS No. 141 and SFAS No. 142 as of January 1, 2003.
Impairment
of Long Lived Assets and Intangible Assets
The
Company reviews the carrying value of its long lived assets including purchased
intangible assets whenever events or changes in circumstances indicate that
the
historical cost-carrying value of an asset may no longer be appropriate. The
Company assesses recoverability of the carrying value of the assets by
estimating the future net cash flows expected to result from the assets,
including eventual disposition. If the future net cash flows are less than
the
carrying value of the assets, an impairment loss is recorded, equal to the
difference between the asset’s carrying value and its fair value. In performing
such reviews, management takes into consideration the current operating levels
including any idle capacity, alternative uses for production utilizing current
equipment, and growth trends and industry projections.
F-28
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Financial
Instruments
Financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities, borrowings under the working capital line of
credit, loans payable and long-term debt. The carrying values of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate their fair values due to their relatively short lives to maturity.
Non-derivative financial instruments include letters of credit, commitments
to
extend credit and guarantees of debt. The fair value of debt also approximates
fair market value, as these amounts are due at rates which are compatible to
market interest rates. There were no derivative financial instruments for any
of
the periods presented. The carrying values of these financial instruments
approximated their fair market value as of December 31, 2005 and
2004.
Revenue
Recognition
The
Company recognizes revenue when (1) persuasive evidence of an arrangement
exists; (2) product delivery has occurred or services have been rendered; (3)
the fee is fixed or determinable; and (4) collectability is reasonably assured.
Revenues are recognized FOB shipping point, when products are shipped, which
is
when legal title and risk of loss is transferred to the Company’s customers, and
is recorded at the net invoiced value of goods supplied to customers after
deduction of sales discounts and sales and value added tax, where applicable.
In
situations where the Company receives payment in advance of the performance
of
research and development services, such amounts are deferred and recognized
as
revenue as the related services are performed.
Non-refundable
fees are recognized as revenue over the term of the arrangement, based on the
percentage of costs incurred to date, estimated costs to complete and total
expected contract revenue. Product returns are not accepted.
Shipping
costs are paid by the Company’s customers. Any shipping and handling costs
incurred by the Company are included in costs of sales in the accompanying
consolidated statements of operations.
Convertible
Debt
Convertible
debt with beneficial conversion features, whereby the conversion feature is
“in
the money” are accounted for in accordance with guidance supplied by Emerging
Issues Task Force (“EITF”) No. 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios"
and
EITF No. 00-27 "Application of Issue 98-5 to Certain Convertible Instruments."
The relative fair value of the warrants has been recorded as a discount against
the debt and is amortized over the term of the debt.
In
addition since the debt is convertible into equity at the option of the note
holder at the date of issuance at beneficial conversion rates, an embedded
Beneficial Conversion Feature has been charged to interest and financing costs
in the accompanying consolidated statements of operations and as an increase
to
additional paid-in capital at the time of issuance.
For
convertible debt and related warrants, the recorded discount is calculated
at
the issuance date as the difference between the conversion price and the
relative fair value of the common stock and warrants into which the security
is
convertible or exercisable.
Note
15,”Debt, Net of Current Portion and Debt Discount,” and Note 22, “Warrants,”
provide additional information on the valuation of the warrants and the
beneficial conversion feature.
F-29
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Net
Loss per Share
The
Company follows the guidelines of Statement of Financial Accounting Standards
No. 128, “Earnings
per Share”
(“SFAS
No.128”) in calculating its loss per share. SFAS No.128 states basic and diluted
earnings per share are based on the weighted average number of shares of common
stock and equivalent common stock outstanding during the period. Common stock
equivalents for purposes of determining diluted earnings per share include
the
effects of dilutive stock options, warrants and convertible securities. The
effect on the number of shares of such potential common stock equivalents is
computed using the treasury stock method or the if-converted method, as
applicable. The Company has excluded all outstanding stock options and warrants
as well as shares issued upon conversion of convertible debt from the
calculation of diluted net loss per share because these securities are
anti-dilutive.
As
of
December 31, 2005 and 2004, the Company had common stock equivalents of
approximately 3,043,172 and 1,805,168 shares respectively, related to options
and warrants; and approximately 18,375,000 shares as of December 31, 2004,
related to shares to be issued upon the conversion of the convertible
debt.
Stock
Based Compensation
On
September 15, 2005, the Company adopted an Equity Incentive Plan that provides
for the granting of stock options
and
other stock-based awards for the benefit of employees, officers, consultants,
directors and persons who the Company believes may have made a valuable
contribution to the Company. The total number of shares that may be issued
under
the plan amounts to 6,000,000. The exercise price per share must be at least
equal to the fair market price at the time of the grant.
The
Company applies the
fair
value method of Statement of Financial Accounting Standards No. 123,
“Accounting
for Stock Based Compensation”
(“SFAS
No. 123”) in accounting for its stock option plan. This standard states that
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model. The compensation cost has been
charged to salaries, wages, and benefits in accordance with SFAS No. 123.
Concentration
of Credit Risk
The
Company obtains detailed credit evaluations of customers generally without
requiring collateral, and establishes credit limits as required. Exposure to
losses on receivables is principally dependent on each customer’s financial
condition. The Company monitors its exposure for credit risk losses and
maintains an allowance for anticipated losses.
For
the
year ended December 31, 2005 and for the year ended December 31, 2004, the
Company’s three largest customers accounted for approximately 59% and 48% of net
revenues, respectively. As of December 31, 2005 and 2004, the Company’s three
largest customers accounted for 65% and 56% of net receivables, respectively.
The loss of any of these customers could have a material adverse effect on
the
operations of the Company.
Income
Taxes
The
Company follows Statement of Financial Accounting Standards No. 109 “Accounting
for Income Taxes”(“SFAS
No. 109”).
Under
the
asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributed to differences between
the financial statements carrying amounts of existing assets and liabilities
and
their respective tax base. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change
in
tax rates is recognized in the results of operations in the period that includes
the enactment date. If it is more likely than not that some portion of a
deferred tax asset will not be realized, a valuation allowance is
recognized.
F-30
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Translation
of Foreign Currency
The
functional currency of the Company’s United Kingdom subsidiaries is the Great
Britain Pound. The Company’s financial statements are reported in United States
Dollars and are translated in accordance with Statement of Financial Accounting
Standards No. 52, “Foreign
Currency Translation”
(“SFAS
No. 52”), which requires that foreign currency assets and liabilities be
translated using the exchange rates in effect at the balance sheet dates.
Results of operations are translated using the weighted average exchange rates
prevailing during the period. For purposes of SFAS No. 52,
the
Company considers the Dollar to be the reporting currency. The effects of
unrealized exchange fluctuations on translating foreign currency assets and
liabilities into Dollars are reported under “accumulated other comprehensive
loss-foreign currency translation adjustment” which is included as a separate
component in the stockholders’ deficit. Realized gains and losses from foreign
currency transactions are included in the statements of operations for the
period.
Research
and Development
All
research and development costs are expensed as incurred and include salaries
of,
and expense relating to, employees and consultants who conduct research and
development.
Recently
Issued Accounting Standards
In
January 2003, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 143, “Accounting
for Asset Retirement Obligations”
(“SFAS
No. 143”). SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. As of the date of adoption of SFAS 143, the Company
had
no tangible long-lived assets. During the second quarter of 2003, the Company,
through the reverse acquisition of Inyx Pharma acquired property, plant and
equipment, including the manufacturing facility for CFC-based respiratory
inhalers. The Company evaluates the carrying value of property, plant and
equipment to determine whether there is any impairment. Our evaluations have
indicated no such impairment to date. Management believes that as the Company
increases its marketing and commercial activities in the United States and
Latin
America where the market for CFC-based respiratory inhalers still exists, the
Company will be increasingly utilizing its production line for such products
and
any idle capacity will be eliminated.
In
April
2003, the FASB issued Statement of Financial Accounting Standards No. 149,
“Amendment
of Statement 133 on Derivative Instruments and Hedging
Activities”
(“SFAS
No. 149”).
SFAS No.
149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133 and is effective for contracts entered into or
modified after June 30, 2003. The adoption of SFAS No. 149 did not have a
material effect on the Company’s consolidated financial statements. The Company
does not currently have derivative instruments or hedging activities. However,
the Company is currently evaluating an arrangement with a financial institution
to participate in currency forward contracts for the purpose of mitigating
foreign exchange fluctuations.
In
December 2003, the FASB issued FASB Interpretation No. 46R, “Consolidation of
Variable Interest Entities,” which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
The adoption of this standard had no effect on the Company’s financial
statements.
F-31
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
In
November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, “Inventory
Costs”—an
amendment of ARB No. 43, Chapter 4”, which is the result of the FASB’s
project to reduce differences between U.S. and international accounting
standards. SFAS No. 151 requires idle facility costs, abnormal freight,
handling costs, and amounts of wasted materials (spoilage) be treated as
current-period costs. Under this concept, if the costs associated with the
actual level of spoilage or production defects are greater than the costs
associated with the range of normal spoilage or defects, the difference would
be
charged to current-period expense, not included in inventory costs. SFAS
No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005, or for our fiscal year 2006. The Company
does not expect that the adoption of SFAS No. 151 will have a material
effect on the Company’s consolidated financial statements.
In
December 2004, the Financial Accounting Standards Board issued SFAS
No. 123 (revised 2004), “Share-Based
Payment”
(“SFAS
No. 123R”). SFAS No. 123R requires companies to recognize in the
income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees, but expresses no preference
for a
type of valuation model. SFAS No. 123R eliminates the intrinsic value-based
method prescribed by Accounting Principles Board Opinion No. 25,
“Accounting
for Stock Issued to Employees”.
SFAS
No. 123R requires the Company to adopt the new accounting provisions
beginning in the first annual reporting period that begins after
December 15, 2005. The Company does not expect that the adoption of SFAS
No. 123R will have a material effect on the Company’s consolidated financial
statements.
In
May
2005, the Financial Accounting Standards Board issued SFAS No. 154, “Accounting
Changes and Error Corrections”
(“SFAS
No. 154”)-a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No.
154 requires retrospective application of changes in accounting principle to
prior periods’ financial statements, unless it is impracticable to determine the
effect of the change. SFAS No. 154 requires that such retrospective application
of changes in accounting principle be limited to direct effects of the change
and also requires that a change in depreciation, amortization, or depletion
method for long-lived, non-financial assets be accounted for as a change in
accounting estimate effected by a change in accounting principle. The Company
does not expect that the adoption of SFAS No. 154 will have a material effect
on
the Company’s consolidated financial statements.
Reclassifications
Certain
amounts from prior year consolidated financial statements and related notes
have
been reclassified to conform to the current year presentation.
Note
3.Acquisition
of the Business Assets of Aventis PR
On
March31, 2005, Inyx USA acquired the business assets of Aventis PR from the
Sanofi-Aventis Group. The acquisition was accounted for as a business
combination in accordance with Statement of Financial Accounting Standard No.
141 “Business
Combinations”(“SFAS
No. 141”).
In
connection with this acquisition, Inyx USA paid approximately $20.7 million
as a
total purchase price comprising of a cash payment of approximately $19.7 million
paid upon closing, approximately $2.7 million in direct transaction costs
(including approximately $90,000 of additional transaction costs incurred
subsequent to closing), a subsequent purchase price adjustment of approximately
$570,000 paid to Aventis PR in August 2005, and received a purchase price
reduction amounting to approximately $2.3 million relating to the final value
assigned to the commercial contracts transferred to the Company on acquisition
as agreed by the Company and Aventis PR, pursuant to a purchase price settlement
adjustment in November 2005. Aventis PR is a pharmaceutical manufacturing
operation producing dermatological, respiratory and allergy products under
contract manufacturing agreements with third party customers. The results of
operations of the acquired Aventis PR business assets are included in the
Company’s consolidated results of operations effective April 1, 2005 (the day
after completion of the acquisition of such business assets).
F-32
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
The
purchase price was allocated to the identifiable net assets acquired including
the identifiable intangible assets based on their estimated fair market values
at the date of acquisition as determined by the Valuations Services Practice
of
BearingPoint, Inc. (“BearingPoint”).
The
fair
value of the assets acquired from the transaction totalled approximately $62.9
million based on independent third-party appraisals and valuations, which
resulted in negative goodwill of $42.1 million. The negative goodwill was
proportionately allocated over the non-current tangible and intangible assets
acquired as follows:
Fair
Value of Assets Acquired
Allocation
of Negative Goodwill
Allocation
of Purchase Price of Assets Acquired
Land
$
3,040
$
(2,129
)
$
911
Building
12,700
(8,893
)
3,807
Machinery
and equipment
21,809
(15,090
)
6,719
Computer
hardware and software
1,185
(720
)
465
Inventory
2,334
-
2,334
Identifiable
intangible assets subject to amortization:
The
fair
values assigned to the acquired assets are based on estimates and assumptions
provided and other information compiled by management, including independent
valuations that utilize established valuation techniques appropriate for the
industry in which the Company operates. The property, plant and equipment is
depreciated based on the Company’s existing depreciation policies. The
intangible assets, which represent the value assigned to customer contracts,
are
amortized on a straight line basis over three years. The intangible asset which
represents the value assigned to customer relationships is amortized on an
accelerated period of ten years.
Note
4.Acquisition
of CMSL
On
August31, 2005, Inyx Europe, a wholly-owned United Kingdom subsidiary of the Company,
completed the purchase of all of the outstanding shares of CMSL from UCB Pharma.
On September 9, 2005, the Company changed the “CMSL” name to Ashton
Pharmaceuticals Limited.
The
Ashton share acquisition was accounted for as a business combination in
accordance with Statement of Financial Accounting Standard No. 141 “Business
Combinations”(“SFAS
No. 141”).
The
total purchase price of approximately $38.3 million consisted of an initial
deposit of approximately $610,000, a cash payment at closing of approximately
$23.2 million, a purchase price deferral of approximately $9.8 million payable
in six (6) equal installments commencing on April 30, 2006 and an amount
equivalent to $4.6 million, representing the excess working capital over a
targeted working capital at closing agreed to between the parties. The Company
also incurred approximately $2.4 million in direct transaction costs for a
total
purchase price of approximately $40.7 million.
The
Ashton acquisition was funded through a credit facility from Westernbank. The
Westernbank financing consists of a revolving loan, three term loans and a
mezzanine loan, together referred to as the “Second Westernbank Credit
Facility”.
F-33
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
The
purchase price was allocated to the identifiable net assets acquired including
the identifiable intangible assets based on their estimated fair market values
at the date of acquisition as determined by the Valuations Services Practice
of
BearingPoint.
The
fair
value of the assets acquired from the transaction totaled approximately $55.6
million based on independent third-party appraisals and valuations, which
resulted in negative goodwill of $14.9 million. The negative goodwill was
proportionately allocated over the non-current tangible and intangible assets
acquired as follows:
Fair
Value of Assets and Liabilities Acquired
Allocation
of Negative Goodwill
Allocation
of Purchase Price of Assets and Liabilities
Acquired
Land
$
1,787
$
(577
)
$
1,210
Buildings
7,146
(2,310
)
4,836
Machinery
and equipment
26,799
(8,661
)
18,138
Net
working capital
7,000
-
7,000
Excess
over agreed working capital
4,607
-
4,607
Identifiable
intangible assets subject to amortization:
As
of
December 31, 2005the Company had billed certain customers approximately $7.2
million in advance for raw materials and for services to be provided pursuant
to
arrangements under contract manufacturing and product support and services
agreements that it has in place. Such advance invoicing has allowed the Company
to acquire certain raw materials and components that have longer lead times
and
are required to manufacture such customers’ production requirements on a timely
basis. Such amounts have been offset against deferred revenue for financial
statement presentation purposes.
For
the
years ended December 31, 2005 and 2004, depreciation expense of property, plant
and equipment was approximately $3.3 million and $619,000, respectively.
(a)
The
equipment held for future use consists of a manufacturing line which the Company
is in the process of developing. Management expects to incur approximately
$500,000 in additional costs to equip this manufacturing line for the filling
and gassing of non-CFC aerosol pharmaceutical products.
(b)
The
construction in progress relates to costs associated with building a
manufacturing line for a customer and various other ongoing projects. Management
expects to incur additional costs to complete the manufacturing line for
production and the various other projects estimated to be in excess of $12.0
million over the next two years. As of December 31, 2005, the Company has
approximately $1.6 million of outstanding capital expenditure commitments
relating to these projects.
F-35
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Note 9.Deferred
Financing Costs, Net
As
of
December 31, 2005, the deferred financing costs, net, are comprised of bank
fees
and legal costs incurred in connection with obtaining the First and Second
Westernbank Credit Facilities. The Company incurred $969,000 in such costs
and
fees on March 31, 2005, when obtaining the First Westernbank Credit Facility,
and an additional $788,000 on August 31, 2005 in obtaining the Second
Westernbank Credit facility used to fund the Company’s acquisition of Ashton.
Such deferred financing costs are being amortized to interest and financing
costs over the three year term of the Westernbank credit facilities
As
of
December 31, 2004, deferred financing costs, net are comprised of fees related
to convertible debt issued to Laurus Master Funds, Ltd (“Laurus Funds”) in 2003.
All amounts due to Laurus Funds were refinanced on March 31, 2005 through the
Company’s First Westernbank Credit Facility. (See Note 12 “Borrowing under
Working Capital Lines of Credit”.) The unamortized deferred financing costs of
approximately $651,000 relating to Laurus Funds were charged to interest and
financing costs in the Company’s consolidated statement of operations on the
date of the refinancing.
Interest
and financing costs resulting from the amortization of deferred financing costs
totaled $323,000 and $336,000 for the years ended December 31, 2005 and 2004
respectively.
Deferred
financing costs, net consist of the following:
The
Company defers legal, consulting, finder’s fees, costs for appraisals,
travel and other direct costs relating to the business development
activities and strategic acquisitions, including intellectual property
acquisitions that the Company is currently working on. In management’s
judgment, these business development activities and strategic acquisitions
have a high probability of being successful and are expected to be
completed within the next twelve
months.
Deferred
costs associated with successful negotiations will be included as part of the
acquisition costs of such investments. If the project is abandoned, any deferred
costs are expensed in the Company’s results of operations.
The
amount as at December 31, 2004 of approximately $2.0 million represents the
direct costs associated with the acquisition of Aventis PR which was completed
on March 31, 2005. These costs include consulting fees, due diligence costs
and
manufacturing equipment costs were capitalized in 2005 and were included as
part
of the purchase price of Aventis PR. (See Note 3 Acquisition of the Business
Assets of Aventis PR)
F-36
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
(b)
Under
the terms of its lease agreement for its New York office, the Company
was
required to make a deposit with the landlord equal to two months
rent
payments. This deposit will be reimbursed at the termination of the
lease.
F-37
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Note
11.Purchased
Intangible Assets, Net
Purchased
intangible assets consist of the following:
These
costs include direct costs associated with the acquisition of certain
intellectual property from a related party of $1.0
million
Purchased
intangible assets are carried at cost less accumulated amortization. For the
years ended December 31, 2005 and 2004, amortization expense related to
intangible assets totaled approximately $1.4 million and $166,000, respectively.
The aggregate estimated amortization expense for intangible assets as of
December 31, 2005 for each of the following four years and thereafter is as
follows:
2006
$
2,039
2007
2,017
2008
1,595
2009
1,497
Thereafter
6,634
$
13,782
Note
12.Borrowings
under Working Capital Lines of Credit
On
November 22, 2005, the Company obtained an additional amount of $5.0 million
from Westernbank under the First Westernbank Credit Facility. This Secured
over
Formula Advance (“SOFA”) facility will be utilized to fund prepayment of
inventory and is revolving in nature. As at December 31, 2005, total advances
under this facility amounted to approximately $3.8 million.
On
August31, 2005, the Company, through its wholly owned subsidiary Inyx Europe Limited,
obtained an additional three-year revolving working capital line of credit
facility with Westernbank, under the Second Westernbank Credit Facility,
allowing the Company to borrow up to $11.7 million. Advances under this
facility are limited to 85% of eligible accounts receivables together with
the
reserve of $500,000 that shall not exceed $11.7 million plus a reserve of
$500,000, and 60% of eligible inventory which shall not exceed a sub-limit
of $5
million for such inventory. As of December 31, 2005, total advances under
this facility amounted to approximately $11.2 million. Subsequent to year end
the limit available under this facility was increased by $5 million to $16.7
million.
F-38
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Borrowings
under the above facilities bear interest at Westernbank’s prime rate (7% as of
December 31, 2005) plus 1.0%. Borrowings under the revolving working
capital lines of credit are collateralized by the eligible receivables and
inventories and are guaranteed by the Company and its subsidiaries. The
Company is required to maintain compliance with certain financial covenants
including a specified working capital and net worth levels based on the
Company’s consolidated operating results. As of December 31, 2005,
Westernbank has waived certain requirements of the loan and security agreements
such that non-compliance of certain covenants shall not trigger an event of
default.
The
amount of $108,000 at December 31, 2004 related to an advance from Stiefel
Laboratories, Inc. (“Stiefel”) for services that were carried out for that
customer during the first three months of 2005.
As
of
December 31, 2005the Company owed the previous owner of Ashton, UCB Pharma,
approximately $9.5 million (€8.0 million) of the purchase price and
approximately $4.5 million (£2.5 million) as payment for the additional net
current assets acquired not considered when the purchase price was negotiated
between the parties.
The
balance of the purchase price is non-interest bearing and is payable by the
Company to UCB Pharma in six equal monthly payments of approximately $1.6
million; such payments commencing April 2006. The Company is also entitled,
at
any time prior to payment of the balance of the purchase price, to set-off
against any unpaid claim it may have against UCB Pharma under the share purchase
agreement of Ashton. As security collateral for the purchase price deferral,
and
to be released upon full payment of such deferral, the Company granted UCB
Pharma a secondary security position over the Company’s assets behind
Westernbank’s current first security position. Westernbank and UCB Pharma have
also agreed to an inter-creditor agreement to be terminated upon full payment
of
the purchase price deferral.
The
amount payable as a result of the additional net current assets acquired
amounted to approximately $4.5 million, is interest bearing at Barclay’s Bank
base rate. The Company has reached an agreement with UCB Pharma which defers
payment of this amount until May 31, 2006.
F-39
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Note
15.Debt,
Net of Current Portion and Debt Discount
Debt,
net
of current portion consists of the following:
Prime
+ 2% Secured Term Promissory Note A issue to Westernbank
(1)
$
2,315
$
-
Prime
+2% Secured Tem Promissory Note B issue to Westernbank (1)
12,780
-
Prime
+ 2% Secured Term Promissory Note C issue to Westernbank
(1)
11,407
-
15%
Term loan D Promissory Note issued to Westernbank (1)
4,500
-
Prime
+ 2% Secured Term Promissory Note A issue to Westernbank by Inyx
Europe
(2)
2,983
-
Prime
+ 2% Secured Term Promissory Note B issue to Westernbank by Inyx
Europe
(2)
9,637
-
Prime
+ 2% Secured Term Promissory Note C issue to Westernbank by Inyx
Europe
(2)
2,950
-
15%
Term loan D Promissory Note issued to Westernbank by Inyx Europe
(2)
8,850
-
Revolving
line of credit due to Laurus Funds, net of debt discount of $0 at
March31, 2005 and $740,000 at December 31, 2004, paid from proceeds of
Westernbank on March 31, 2005 (3)
-
6,368
7%
convertible term note due to Laurus Funds, collateralized by accounts
receivable and other assets of the Company, and $692,000 at December31,2004, paid from proceeds of Westernbank on March 31, 2005
(3)
-
4,027
Uncollateralized
6% convertible promissory note due to customer, paid in
2005
-
4,013
Uncollateralized
7% to 18% demand notes due to stockholders and various executives
of the
Company, principal and interest due on demand paid in 2005
-
150
Capital
lease obligations, due to financial institutions paid in 2005,
collateralized by software and equipment, due in monthly installments
of
$14,000 including interest of 10% to 27%, through 2006 (4)
102
227
55,524
14,785
Less
debt refinanced, net of discount
-
(10,395
)
Less
current portion
(9,288
)
(4,277
)
$
46,236
$
113
(1)
On
March 31, 2005the Company secured a non-dilutive asset based secured
credit facility from Westernbank originally totaling $46 million,
and then
increased to $56 million in aggregate by Westernbank by November22, 2005.
The First Westernbank Credit facility is comprised of a revolving
loan
(see Note 12) of up to $15 million including a reserve of $500,000,
a SOFA
line of up to $5.0 million, three term loans (Term loan “A”, “B” and “C”)
amounting in aggregate to up to $31 million for purpose of refinancing
the
indebtedness to Laurus Funds and purchasing the business assets of
Aventis
PR, and a capital expenditure mezzanine loan (Term loan “D”) of up to $5
million for the purpose of funding construction or the acquisition
of new
equipment. The revolving working capital line of credit associated
with
the First Westernbank Credit Facility is secured by the Company’s eligible
receivables and inventory, including those of Inyx USA and Inyx Pharma.
The term notes are collateralized by substantially all the property
of the
Company and its subsidiaries whether now owned or thereafter to be
acquired. All the term loans mature March 31, 2008. Three of the
Term
Notes bear interest at Westernbank prime rate + 2%. The fourth Term
Note
(Term Note D) bears interest at the rate of 15% per annum. Payment
of the
amounts due under the Term Notes accelerates upon the occurrence
of an
Event of Default. Westernbank has waived certain requirements of
the loan
and security agreements such that non-compliance of certain covenants
shall not trigger an event of
default.
F-40
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
(2)
In
connection with the acquisition of Ashton, the Company, through its
wholly
owned subsidiary, Inyx Europe, obtained an additional non-dilutive
asset
based secured credit facility from Westernbank totaling $36.5 million.
The
Second Westernbank Credit Facility is comprised of a revolving loan
of up
to $11.7 million plus a reserve of $500,000 (see Note 12) plus a
series of
four term loans (Term Loan “A”, “B”, “C” and “D”), amounting in aggregate
up to $24.8 million, and utilized to help fund the acquisition of
the
outstanding stock of Ashton. The revolving working capital line of
credit
associated with the Second Westernbank Credit Facility is secured
by
Ashton’s eligible receivables and inventory. The Loans are secured by all
of the assets of the Company, Inyx Europe and Ashton, and are guaranteed
by those parties pursuant to Guarantor General Security Agreement.
In
addition, the Company has pledged the stock of Inyx Europe, and Inyx
Europe has pledged the stock of Ashton to Westernbank, as part of
the
collateral for the Loans, in each case pursuant to a Pledge and Security
Agreement (the “Pledge Agreement”). The principal payments of loan “A”,
“B” and “C” commence on December 1, 2005. All of the Term Notes mature on
March 31, 2008. Three of the Term Notes bear interest at Westernbank
prime
rate + 2%. The fourth Term Note (Term Note D) bears interest at the
rate
of 15% per annum, principal payments based on an agreed upon formula
commencing January 1, 2006. Payment of the amounts due under the
Term
Notes accelerates upon the occurrence of an Event of Default. Westernbank
has waived certain requirements of the loan and security agreements
such
that non-compliance of certain covenants shall not trigger an event
of
default.
(3)
The
aggregate maturities of long term debt are as follows: for the year
ending
December 31, 2006-$9.2 million, for the year ending December 31,2007-$9.5
million, and for the year ending December 31, 2008-$36.8 million.
The
Westernbank loans are automatically renewable after the initial three
year
period ending on March 31, 2008 on a year to year basis, unless terminated
by the Company or Westernbank. The amortization schedules for repayment
of
the term loans range from 60 months to 180 months.
(4)
On
March 31, 2005, the Company wrote off deferred charges, relating
to the
Laurus Master Funds revolving line of credit and convertible term
note, of
approximately $651,000 and debt discount of approximately $1.4 million.
On
such date the Company also recorded an early termination fee of $1.6
million, and repaid in full the debt to Laurus Funds
(5)
The
Company leases computers and furniture under capital leases that
expire in
2006. Interest rates on these leases range from 10% to 27% per
annum.
The
Company follows the guidelines of Statement of Financial Accounting Standards
No. 128, “Earnings
per Share”
(“SFAS
No. 128”) in calculating its loss per share. SFAS No. 128 states basic and
diluted earnings per share are based on the weighted average number of shares
of
common stock and potential common stock outstanding during the period. Common
stock equivalents for purposes of determining diluted earnings per share include
the effects of dilutive stock options, warrants and convertible securities.
The
effect on the number of shares of such potential common stock equivalents is
computed using the treasury stock method or the if-converted method, as
applicable. The Company has excluded all outstanding stock options and warrants
as well as shares issued upon conversion of convertible debt from the
calculation of diluted net loss per share because these securities are
anti-dilutive.
Accordingly,
as of December 31, 2005 and December 31, 2004, the Company had common stock
equivalents of approximately 3,043,172 and 1,805,168 shares respectively,
related to options and warrants. At December 31, 2004, the Company also had
approximately 18,375,000 related to shares to be issued upon the conversion
of
the convertible debt. There was no convertible debt outstanding at December31,2005.
F-41
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
The
Company has commitments under various long-term operating lease agreements
for
various premises. For the year ended December 31, 2005, total rent of office
space was approximately $202,000 (2004 - $180,000). In addition to rent, the
Company and its subsidiaries are responsible for operating costs, real estate
taxes and insurance. As of December 31, 2005, future minimum annual rental
commitments under operating leases are as follows:
2006
$
1,114
2007
971
2008
712
2009
423
2010
220
Thereafter
31
$
3,471
Legal
Matters
The
Company
and its
subsidiaries are subject to claims and lawsuits arising in the ordinary course
of business. Management, in consultation with its legal advisors, believes
that
the outcomes of such legal matters are remote and unlikely to have a material
adverse effect on the Company’s financial position or operating
results.
Key
Suppliers
The
Company purchases raw materials and components from a limited number of key
suppliers. A loss of any one of these suppliers would have a material adverse
affect on the Company’s operations.
Key
Customers
For
the
year ended December 31, 2005, the Company’s three top customers accounted for
approximately $29.2 million of revenue or approximately 59% of total net
revenues. In comparison, for the year ended December 31, 2004, the Company’s top
three customers accounted for approximately $7.5 million in net revenues or
approximately 48% of total net revenues.
The
Company’s management believes that a delay in the production requirements for
any one of the Company’s major customers or the loss of any one of the Company’s
top three customers would have a material adverse affect on operations and
on
the realizability of the Company’s assets.
Subsequent
to year end, on January 4, 2006, our wholly owned subsidiary Exaeris Inc.
commenced formal operations. Exaeris oversees sales and marketing activities
independent of Inyx’s client manufacturing operations. Pursuant to the Company’s
September 8, 2005 agreement with King Pharmaceuticals, Exaeris is directing
the
re-launch of King’s asthma medication Intal®
(cromolyn sodium) in specialty markets, including allergists, pulmonologists,
and pediatricians, and will co-market Tilade®
(nedocromil sodium), another of King’s respiratory products.
F-42
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Subsequent
to year end, between January 1, 2006 and March 24, 2006, the Company issued
4,574,517 shares of its restricted common stock upon the exercise of 4,574,517
warrants at prices per share ranging from $0.81 to $2.10, for total cash
proceeds of approximately $4.5 million. All such proceeds were used for
operating activities and working capital. In addition, pursuant to certain
cashless exercise of warrants approximately 587,957 shares of common stock
were
returned into treasury.
Subsequent
to year end, the limit available under the revolving working capital line of
the
Second Westernbank Credit Facility was increased by $5 million to $16.7 million
to accommodate the increased business activity.
Subsequent
to year end the Company entered into an agreement with Laurus Funds to amend
certain terms of payment of the exercise price and to change the exercise price
on one of the existing warrant agreements.
Subsequent
to year end the Company granted 170,000 options to purchase 170,000 shares
of
the Company’s common stock. The fair value of these options approximating
$226,000 was calculated using the Black-Scholes option pricing model with the
following assumptions: a risk free interest rate of 4.2%, an expected life
of
four years, a volatility factor of 56.8% and a dividend yield of
0%.
During
the year ended December 31, 2005, the Company issued 380,000 shares of its
restricted common stock as payment of $304,000 of principal due under the
refinanced Laurus Note. Additionally, the Company issued 300,000 five-year
stock
purchase warrants to Laurus in conjunction with a waiver received and certain
amendments to the registration rights agreement. The fair value of the warrants
was approximately $162,000 based on the Black-Scholes option pricing model
with
the following weighted average assumption: a risk free interest rate of 3.14%,
an expected life of four years, a volatility factor of 57%, and a dividend
yield
of 0%. This amount was charged to interest and financing costs on the
consolidated statement of operations. On March 31, 2005, the Company issued
1,591,504 shares of the Company’s restricted common stock valued at
approximately $1.3 million as payment of certain early termination fees in
connection with the repayment of all amounts due to Laurus Funds as of March31,2005. Such repayment approximated $12.3 million.
During
the year ended December 31, 2005, the Company recorded approximately $3.1
million of additional paid-in capital resulting from stock option compensation
costs incurred during the period. The fair value was calculated using the
Black-Scholes option pricing model with the following assumptions: a risk free
interest rate of 3.14% to 4.20%, an expected life of four years, a volatility
factor of 71% to 77%, and a dividend yield of 0%. This amount is included in
general and administrative expenses in the consolidated statement of
operations.
During
the year ended December 31, 2005, the Company issued 10,000 shares of its common
stock for exercising stock options at a price of $1.10 per
share.
For
the
year ended December 31, 2005, the Company charged costs to additional paid
in
capital relating to a Form SB-2 registration statement amounting to $163,000
and
approximately $7,000 for stock offering costs.
During
the year ended December 31, 2005, the Company recorded approximately $3.4 of
additional paid-in capital resulting from the exercise of 3,395,939 warrants
at
prices ranging from $1.00 to $1.35 per share. Proceeds amounting to
approximately $3.4 million were used in for operating activities and working
capital. In addition, pursuant to certain cashless exercise of warrants
approximately 210,000 shares of common stock were returned into
treasury.
F-43
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
The
accumulated comprehensive loss reflected in the consolidated statement of
changes in stockholders’ deficit and other comprehensive loss represents
accumulated foreign currency translation adjustments associated with the
conversion of the Company’s United Kingdom and Canadian subsidiaries’ accounts
to US dollars. These amounts are not adjusted for income taxes as they relate
to
an indefinite investment in foreign subsidiaries.
On
August28, 2005, the Company adopted the 2005 Equity Incentive Plan (the “2005 Plan”),
which provides for the granting of incentive
awards,
which include stock options,
restricted stock and other stock-based awards
for the
benefit of employees, officers, directors and those
persons who the Company believes may have made a valuable contribution to the
Company. The 2005 Plan authorizes total stock awards of up to 6,000,000 shares
of the Company’s common stock.
On
May 1,2003, the Company’s Board of Directors adopted the 2003 Stock Option Plan (the
“2003 Plan”) which provides for the granting of stock options to employees,
officers, directors and those making valuable contributions to the Company.
The
total number of shares of the Company’s common stock available for granting
under the 2003 Plan is 5,000,000.
All
options granted pursuant to the 2003 Plan and the 2005 Plan shall be exercisable
at a
price
per share at least equal to the fair market price at the time of grant. Unless
otherwise specified, all options expire ten years from the date of grant. Both
the 2003 Plan and the 2005 Plan are administered by the Company’s Compensation
Committee.
The
weighted average fair value, at the date of the grant of the individual options
granted during 2005 and 2004 was estimated at $1.36 and $1.18 respectively.
The
fair value of these options was estimated using the Black-Scholes option-pricing
model, with the following assumptions for the year ended December 31, 2005:
volatility rate of 71% to 77%, risk free interest rate of 3.14% to 4.20%, and
expected life of four years and no dividend yield. The assumptions used to
estimate the fair value of the options for the year ended December 31, 2004
were: volatility rate of 57%, risk free interest rate of 3.14%, an expected
life
of four years and no dividend yield for all periods.
Total
compensation costs relating to stock options granted to employees, officers,
directors, and other persons approximated $3.1 million for the year ended
December 31, 2005 and $293,000 for the year ended December 31, 2004. These
amounts are included in general and administrative expenses in the consolidated
statement of operations, as the Company expects that it will continue to issue
stock options to such persons.
A
summary
of stock option activity under the plans is shown below:
F-44
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
During
the year ended December 31, 2005, the Company issued to Laurus Funds, 300,000
five year warrants in conjunction with a waiver received and certain amendments
to the registration rights agreements with Laurus Funds. The waiver waived
any
Events of Default that may have occurred under the credit facility and term
note
due to Laurus Funds. These warrants allow the holders to purchase the Company’s
common stock at a price of $0.95 per share. The fair value of these warrants
was
estimated using the Black-Scholes option pricing model with the following
weighted average assumption: a risk free interest rate of 3.14%, an expected
life of four years, a volatility factor of 57%, and a dividend yield of 0%.
The
value assigned to these warrants was approximately $162,000 and was charged
as
interest and financing costs to the Company’s consolidated statement of
operations for the year ended December 31, 2005.
During
the year ended December 31, 2005, the Company received approximately $3.4
million in cash proceeds from the exercise of 3,395,939 warrants at prices
ranging from $1.00 to $1.35 per share. All such proceeds were used in for
operating activities and working capital. In addition, pursuant to certain
cashless exercise of warrants approximately 210,000 shares of common stock
were
returned into treasury.
F-45
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Comparatively,
during the year ended December 31, 2004 there were 9,974,187 warrants granted
to
purchase a maximum of 9,974,187 shares of common stock. 9,190,901 warrants
were
issued pursuant to the issuance of equity and are non-detachable 783,286
were
granted to consultants as consideration for services in connection with the
issuance of equity.
Additionally
during the year ended December 31, 2004, there were 2,575,000 detachable
warrants issued pursuant to consulting and investment banking agreements.
These
warrants allow the holders to purchase the Company’s common stock at prices
ranging from $0.80 to $1.75 per share. The fair value of these warrants was
estimated using the Black-Scholes option pricing model with the following
weighted average assumption: a risk free interest rate of 3.14%, an expected
life of four years, a volatility factor of 57%, and a dividend yield of 0%.
The
value assigned to these warrants was approximately $907,000 and was charged
as
general and administrative expenses to the Company’s consolidated statement of
operations for the year ended December 31, 2004.
Additionally
during the year ended December 31, 2004, there were 1,400,000 warrants were
issued in conjunction with promissory notes to related parties issued during
the
year. The value assigned to these warrants based on the Black-Scholes option
pricing model was $425,000 and was charged as interest and financing expense
to
the Company’s consolidated statement of operations for the year ended December31, 2004.
F-46
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Tax
losses for which no tax benefit has been recorded
8,888
5,463
3,846
Increase
in valuation allowances
-
1,333
-
Provision
for income taxes
$
-
$
1,333
$
(1,294
)
Deferred
Tax Assets and Liabilities
Deferred
income taxes reflect the net tax effects of temporary differences between
the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. Significant components of the net
deferred taxes at December 31, 2005 and 2004 are set forth in the table
below.
At
December 31, 2005, the Company had approximately $22 million of U.S. operating
loss carry-forwards expiring from 2006 through 2025; approximately $2 million
of
foreign loss carry-forwards expiring from 2006 through 2012 and approximately
$18 million with an indefinite life. The Company has not made any provision
for
United States federal or foreign taxes that may result from future remittance
of
undistributed earnings of foreign subsidiaries because it is expected that
such
earnings will be permanently reinvested in the foreign operations.
F-48
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
JK
Services, a partnership of companies owned by the Company’s Chairman and CEO and
his immediate family members, provides the services of the Chairman
and CEO to
the Company under certain sales commission and management services
agreements.
During the year ended December 31, 2005, the Company paid sales commissions
of
$642,000 to JK Services related to new commercial contracts initiated
and
completed by the Company’s Chairman and CEO. For the year ended December 31,2005, such amounts are included in selling expenses in the Company’s
consolidated statement of operations. There were no similar sales
commission
expenses paid to the Company’s Chairman and CEO for the year ended December
31,2004.In March 2003, the Company’s Chairman and CEO agreed to contribute
£400,000 to Inyx Pharma so it could meet the shareholders equity requirement
of
its lender Venture Finance. Such contribution was made with an understanding
that the Company would repay it when it could meet the financial
covenant on its
own, and the contribution was returned in November 2003 in the form
of a
management fee to JK Services. During 2003, amounts paid to JK Services
were
approximately $753,000 and were included in the Company’s general and
administrative expenses in the consolidated statement of operations.
Kachkar
Air LLC (“Kachkar Air”), a holding company owned by the Company’s Chairman and
CEO leased a private aircraft from an unrelated aircraft management
company,
Priester Aviation. From time to time, the Company was allowed to
utilize such
leased aircraft for the Company’s own corporate travel requirements. In such
instances, the Company paid Priester Aviation directly for the use
of the
aircraft and such fees amounted to the direct costs of the usage
of the
aircraft. Kachkar Air and Dr. Kachkar did not directly or indirectly
receive any
fees or compensation for allowing the Company to utilize its leased
aircraft.
For the year ended December 31, 2005, the Company paid approximately
$680,000 to
Priester Aviation for the use, service and maintenance of the Kachkar
Air leased
aircraft. The Priester Aviation charges were included in the Company’s general
and administrative expenses in the consolidated statement of operations.
There
were no similar transactions in 2004 and 2003, respectively.
Carr
Pharmaceuticals, Inc. (f/k/a Miza Pharmaceuticals USA, Inc.) (“Carr”), was an
eye care product manufacturing and marketing company that was placed
into
Chapter 11 bankruptcy protection by its owners in May 2003, and was then
subsequently liquidated by its secured lenders under a bankruptcy
plan during
2005. Carr was previously owned by an entity controlled by the spouse
of the
Company’s Chairman and CEO. For the year ended December 31, 2005, the Company
paid approximately $1.1 million to acquire all of the intellectual
property of
Carr. Such intellectual property consists of all of the manufacturing
protocols,
standard operating procedures, know-how, testing, stability and technical
data,
and FDA product registrations for seven prescription eye care formulations
and
five over-the-counter eye care and contact lens solutions which accounted
for
approximately $6.0 million in annual revenues during Carr’s last fiscal year of
operations. Approximately $1.0 million of the total acquisition costs
recorded
in purchased intangibles on the Company’s consolidated balance sheet as of
December 31, 2005, and the balance of approximately $100,000 was
included in the
Company’s general and administrative expenses in the consolidated statement
of
operations. The Company has subsequently transferred all of the acquired
eye
care intellectual property to its manufacturing facility in Puerto
Rico in
February 2006, and intends to commence manufacturing and commercializing
the
acquired eye care products in 2007.
Karver
International, Inc. (“Karver”) is an affiliated company that subleases office
space from the Company at its headquarters in New York City. This
consists of
approximately 25% of the Company’s total office space on the 40th
Floor,
825 Third Avenue, New York, 10022. For
the
year ending December 31, 2005 and 2004, the Company charged Karver
International
approximately $36,000 and $30,000, respectively, for the sublease
of furnished
office space and approximately $15,000 in 2005 for management services
in
accordance with a related management services agreement. Under that
management
services agreement, certain Inyx employees located at the Company’s office in
Toronto, Canada provide information technology and book-keeping services
to
Karver International; such services consist of approximately ten
hours of
allocated work-time per week. There were no similar charges in
2003.
During
the years ended December 31, 2004 and 2003, the Company also paid
to an
affiliate approximately $12,000 and $66,000, respectively, for the
sublease of
office furniture and equipment in Toronto, Canada. Such costs were
included in
general and administrative expenses in the Company’s consolidated statement of
operations for those respective years. There were no such sublease
fees paid by
the Company for the year ended December 31, 2005.
F-49
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
During
the year ended December 31, 2004, the Company issued three promissory notes
in
aggregate amounting to $700,000 to two of the Company’s executives and an
independent director. These notes carry interest of 10% per annum. The
parties
were issued warrants with a fair value of $178,000 for the issuance of
the
notes. This amount was charged to interest and financing costs in the
consolidated statement of operations. The Company renewed these promissory
notes
upon maturity and as additional consideration for the renewal, the Company
granted five-year warrants to the lenders to purchase an aggregate of 700,000
shares of its common stock at $0.95 per share. The fair values of these
warrants
amounted to $246,000 was charged to interest and financing costs in the
consolidated statement of operations. During 2005, all amounts under these
promissory notes including accrued interest were repaid.
On
April14, 2004, Inyx Realty, Inc., a subsidiary which the Company established
solely
to operate a corporate office lease in Miami Florida, was sold to First
Jemini
Trust, a discretionary family trust for the benefit of the Company’s
Chairman/CEO’s family. As consideration for the sale, this related party assumed
$100,000 of Inyx Realty’s liabilities. First Jemini Trust unconditionally
assumed all of the liabilities associated with Inyx Realty, thus terminating
all
of the Company’s obligations under that lease.
During
the year the Company paid $1.47 million to Aldo Union for pharmaceutical
product
dossiers. The Aldo Union dossiers are for products to be manufactured in
Spain
only - in this instance, we are extracting from those dossiers, relevant
information/technical data/historical validation and stability information
in
order for us to copy generic versions of those products for other markets
(i.e.
outside of Spain) and to create new drug delivery formats for the active
ingredients of these products. We have more work to do before these products
will be ready for commercial production. Therefore, these are only
technical data dossiers that we are expending money on to create new products.
We have expensed these payments for we are not absolutely certain whether
these
dossiers will have a definitive benefit to future periods. Dr. Santiago
Calzada,
who owns 100,000 shares in the Company as of December 31, 2005 is a principal
of
Aldo-Union. None of the Company’s management or its affiliates have or have had
any interest or equity associations, or directorships in Aldo
Union.
The
table
below summarizes the related party transactions of the Company for the
periods
discussed:
F-50
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
Interest
expense for promissory notes to two of the Company’s executives and an
independent director
37
12
-
Office
furnishings expense to affiliate
-
12
66
Interest
and financing charges on warrants issued to two of the Company’s
executives and an independent director
-
424
-
Compensation
costs associated with warrants issued to two of the Company’s executives
and an independent director for finders fees relating to the acquisition
of Aventis PR
-
158
-
Compensation
costs associated with warrants issued to two of the Company’s executives
and an independent director relating to private placements
-
530
158
Purchase
of intellectual properties from Carr Pharmaceuticals
1,000
-
-
Finders
fee to Carr Pharmaceuticals
100
-
-
Amounts
due to related parties are included in accrued expenses and other current
liabilities which were approximately $200,000 as of December 31, 2005. There
were no amounts due from related parties as of December 31, 2005.
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplates continuation of the Company as a going concern. The Company
has experienced recurring operating losses and has an accumulated deficit
and
negative working capital. Additionally, the Company has significant debt
which
is due within the next twelve months.
The
management of the Company intends to mitigate any factors relating to future
liquidity and capital resources from:
1)
Income
generated from its recent acquisitions - the Ashton business, that the Company
acquired, through its wholly-owned subsidiary, Inyx Europe, on August 31,2005,
has historically been a profitable operation and the Company expects it to
continue to be so. The Company also expects to generate profits from its
manufacturing facility in Puerto Rico that it acquired on March 31, 2005,
and
from its Inyx Pharma facility as two previously delayed major customer contracts
have now commenced in late 2005. Additionally, the Company’s Exaeris subsidiary
commenced operations in January, 2006 and the Company believes that it can
establish new sources of revenue by marketing its own proprietary pharmaceutical
products or selected clients’ products through collaborative agreements with its
clients such as its September 8, 2005 product marketing an collaborative
agreements with King Pharmaceuticals, Inc.
F-51
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
2)
Its
Westernbank credit facilities including its revolving working capital lines
of
credit and capital expenditure loans. During 2005, the Company received
increased limits on the First Westernbank Credit Facility amounting in aggregate
to $10 million. In addition, subsequent to year end, the Company received
an
additional $5 million increase to its limit under the Second Westernbank
Credit
Facility.
3)
Issuance of equity or debt securities to assist funding its operations and
growth strategies.
There
can
be no assurances that the Company’s intentions will be achieved or that
additional financing will be obtained.
Note
27.Financial
Information about Geographic Areas
Net
revenue, classified by the major geographic areas in which we operate, is
set
forth in the following table. The sum of the regions may not be equal to
the
total in the Consolidated Statements of Operations due to rounding:
Note
28.Quarterly
Selected Financial Information (Unaudited)
The
following tables set forth unaudited consolidated quarterly selected financial
information for the years ended December 31, 2005 and 2004. The Company believes
that this information includes all adjustments necessary for a fair presentation
of such quarterly information when read in conjunction with the “Notes to
Consolidated Financial Statements” included herein. The operating results for
any quarter are not necessarily indicative of the results for any future
period.
F-52
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts are expressed in thousands of U.S. dollars except per share
amounts)
2005
For
the Three Months Ended
December
31(3)
September
30
June
30
March
31
Net
revenues
$
25,479
$
12,908
$
8,501
$
2,677
Gross
profit
6,856
5,071
2,637
142
Total
operating expenses
17,419
9,565(1(2
))
6,132
2,540
Loss
from operations before interest and financing costs and income
tax expense
and extraordinary item
(10,563
)
(4,494
)
(3,495
)
(2,398
)
Interest
and financing costs
2,163
1,750
1,534
4,612
Loss
before extraordinary item
(12,726
)
(6,244
)
(5,029
)
(7,010
)
Extraordinary
item, net of taxes
(917
)
-
917
-
Net
loss
$
(12,726
)
$
(6,244
)
$
(5,029
)
$
(7,010
)
Basic
and fully diluted loss per share
$
(0.33
)
$
(0.16
)
$
(0.13
)
$
(0.18
)
Weighted-average
number of shares used in computing basic and fully diluted loss
per
share
40,802,851
39,985,613
39,983,983
38,296,035
(1)
Includes
approximately $951,000 adjustment to costs relating to the acquisition
of
CMSL from UCB Pharma on August 31,2005
(2)
Includes
approximately $352,000 relating to stocks options granted in September
of
2005. Certain vesting periods of such options were modified subsequent
to
grant date. As a result, it was determined that compensation costs
recorded in the third quarter of 2005 were
understated.
(3)
This
reclassification reflects a final purchase price adjustment relating
to
the acquisition of the business assets of Aventis PR pursuant to
a
purchase price settlement adjustment, subsequent to the transaction,
agreed to by the Company and the Seller, in November
2005.
2004
For
the Three Months Ended
December
31
September
30
June
30
March
31
Net
revenues
$
4,150
$
4,249
$
2,774
$
4,526
Gross
profit (loss)
226
678
(136
)
615
Total
operating expenses
4,649
3,755
2,549
2,669
Loss
from operations before interest and financing costs and income
tax expense
(benefit)
(4,423
)
(3,077
)
(2,685
)
(2,054
)
Interest
and financing costs
896
750
698
1,026
Income
tax expense (benefit)
1,726
-
-
(393
)
Net
loss
(7,045
)
(3,827
)
(3,383
)
(2,687
)
Basic
and fully diluted loss per share
$
(0.19
)
$
(0.12
)
$
(0.12
)
$
(0.09
)
Weighted-average
number of shares used in computing basic and fully diluted loss
per
share
38,013,000
32,523,000
28,747,582
28,747,582
F-53
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The
following unaudited consolidated pro forma statements of operations presented
herein for the years ended December 31, 2005 and 2004, respectively, give
effect
to the acquisitions of the business assets of Aventis PR and the Ashton
operations as if these acquisitions had taken place at the beginning of the
respective periods presented.
The
pro
forma results for the year ended December 31, 2005, as summarized below,
include
the actual results of the Company for the year ended December 31, 2005 combined
with the results of the acquired business of Aventis PR for the three months
ended March 31, 2005, and the results of the acquired business of Ashton
for the
eight month period ended August 31, 2005; i.e. prior to the acquisition dates
of
those two respective businesses.
The
comparative pro forma results for the year ended December 31, 2004, as
summarized below, include the actual results of the Company for the year
ended
December 31, 2004 combined with the results of the acquired business of Aventis
PR for the year ended December 31, 2004, and the results of the acquired
business of Ashton for the year ended December 31, 2004.
The
historical financial data presented is derived from the historical financial
statements of both companies, prepared in accordance with generally accepted
accounting principles in the United States of America. The unaudited pro
forma
adjustments and certain assumptions are described in the accompanying notes
which should be read in conjunction with this unaudited pro forma consolidated
statement of operations.
The
preparation of the unaudited pro forma statement of operations for Aventis
PR
included an adjustment to back-out any revenues attributable to any Aventis
PR
inter-company sales and customer contracts not renewed at the date of
acquisition. The Aventis acquisition was accounted for using the purchase
method
of accounting. The unaudited pro forma financial data is not necessarily
indicative of the operations had the acquisition taken place at the beginning
of
the periods presented and such data is not intended to project the Company’s
results of operations for any future period.
The
Ashton acquisition was a share purchase agreement. As such, all historical
financial information is assumed to be as recorded with the exception of
the pro
forma adjustments as described in the following notes.
F-54
Unaudited
Consolidated Pro Forma Statement of Operations
(1) Reflects
adjustments to back out certain revenues and expenses historically recorded
or
incurred by Aventis PR which related to those operations not acquired by
Inyx
USA.
a.
Aventis
PR’s revenue represents all manufacturing revenues relating to the
carved-out business of Aventis PR and was derived using the actual
product
volumes of the products acquired in the acquisition on March 31,2005,
extended at the newly negotiated unit prices for each one of these
products.
(2)
Reflects
the actual revenue and expenses historically recorded by CMSL.
The figures
have been converted from GBP’s to US dollars based on average exchange
rates for each year. Adjustments were made to reduce the cost of
sale and
correspondingly increase the selling, general and administration
cost to
reflect consistent with US reporting
format.
(3)
Reflects
the following pro forma adjustments related to the Aventis PR
acquisition:
a.
Depreciation
expense was adjusted to reflect the fair value of assets acquired
as of
the closing of the acquisition on March 31, 2005, and based on
valuations
provided by an independent third
party.
b.
The
amortization of intangible assets was recorded to reflect the amortization
of purchased intangible assets subject to amortization, including
customer
contract renewals and customer relationships that were acquired
in the
Aventis PR transaction on March 31, 2005, and based on valuations
provided
by an independent third party.
c.
Reflects
additional interest expense from the Westernbank credit facility
closed on
March 31, 2005 and a reduction of interest expense due to the repayment
of
the Laurus Master Funds credit facility also occurring on March31,2005.
(4)
Reflects
the following pro forma adjustments related to the Ashton
acquisition:
a.
Depreciation
expense was adjusted to reflect the fair value of assets acquired
as of
the closing of the acquisition on August 31, 2005, based on valuations
provided by a third party.
b.
Amortization
of intangible assets was recorded to reflect the amortization of
purchased
intangible assets subject to amortization including customer contract
renewals and customer relationships acquired in the Ashton acquisition
on
August 31, 2005, and based on valuations provided by a third
party.
c.
Reflects
additional interest expense from the new Westernbank credit facility
closed on August 31, 2005.
F-56
NO
PERSON
HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
OTHER
THAN AS CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE
HEREBY, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST
NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY INYX, INC. THIS PROSPECTUS DOES
NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY
OF
THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF INYX, INC. SINCE
ANY
OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE
HEREOF.
15,398,004 Shares
of
Common
Stock
of
INYX,
INC.
PROSPECTUS
____________,
2006
DEALER
PROSPECTUS DELIVERY OBLIGATIONS
Until
_________, 2006, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PART
II
INFORMATION
NOT REQUIRED TO BE IN PROSPECTUS
Item
13. Other
Expenses of Issuance and Distribution
The
estimated expenses of the registration, all of which will be paid by the
Company, are as follows:
SEC
Filing fee
$
4,022
Printing
Expenses
3,000
Accounting
Fees and Expenses
2,500
Legal
Fees and Expenses
$
20,000
Blue
Sky Fees and Expenses
5,000
TOTAL
$
34,522
Item
14.
Indemnification of Directors and Officers.
Article
Eleven of the Company’s Restated Articles of Incorporation limits the liability
of the Company’s directors. It provides that no director of the Company shall be
personally liable to the Company or its stockholders for damages for breach
of
fiduciary duty as a director, except for liability for any breach of the duty
of
loyalty, for acts or omissions not in good faith or which involved intentional
misconduct or a knowing violation of law, or for any transaction from which
he
derived an improper personal benefit.
In
addition, Section 7.8 of the Company’s Bylaws provides that the Company
shall, to the maximum extent permitted by law, indemnify each officer and
director against expenses, judgments, fines, settlements and other amount
actually and reasonably incurred in connection with any proceeding arising
by
reason of the fact that such person in connection with any proceeding arising
by
reason of the fact that such person has served as an officer, agent or director
of the Company, and may so indemnify any person in connection with any
proceeding arising by reason of the fact that such person has served as an
officer or director of the Company.
Section
78.138(7) of the Nevada Revised Statutes (the “NRS”) provides, with limited
exceptions, that:
a
director or officer is not individually liable to the corporation
or its
stockholders for any damages as a result of any act or failure to
act in
his capacity as a director or officer unless it is proven
that:
(a)
His
act or failure to act constituted a breach of his fiduciary duties
as a
director or officer; and
(b)
His
breach
of
those duties involved intentional misconduct, fraud or a knowing
violation
of law.
Section
78.7502 of the NRS permits the Company to indemnify its directors and officers
as follows:
1. A
corporation may indemnify any person who was or is a party or is threatened
to
be made a party to any threatened, pending or completed action suit or
proceeding, whether civil, criminal, administrative or investigative, except
an
action by or in the right of the corporation by reason of the fact that he
is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys’ fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with the action suit or proceeding if he:
II-1
(a) Is
not
liable pursuant to NRS 78.138; or
(b) Acted
in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person is liable pursuant to NRS 78.138
or
did not act in good faith and in a manner which he reasonably believed to be
in
or not opposed to the best interests of the corporation, or that, with respect
to any criminal action or proceeding, he had reasonable cause to believe that
his conduct was unlawful.
2. A
corporation may indemnify any person who was or is a party or is threatened
to
be made a party to any threatened, pending or completed action or suit by or
in
the right of the corporation to procure a judgment in its favor by reason of
the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid
in
settlement and attorneys’ fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if
he:
(a) Is
not
liable pursuant to NRS 78.138; or
(b) Acted
in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation.
Indemnification
may not be made for any claim, issue or matter as to which such person has
been
adjudged by a court of competent jurisdiction, after exhaustion of all appeals
therefrom, to be liable to the corporation or for amounts paid in settlement
to
the corporation, unless and only to the extent that the court in which the
action or suit was brought or other court of competent jurisdiction determines
upon application that in view of all the circumstances of the case, the person
is fairly and reasonably entitled to indemnity for such expenses as the court
deems proper.
3. To
the
extent that a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections 1 and 2, or in defense of any claim,
issue
or matter therein, the corporation shall indemnify him against expenses,
including attorneys’ fees, actually and reasonably incurred by him in connection
with the defense.
In
addition, Section 78.751 of the NRS permits the Company to indemnify its
directors and officers as follows:
1. Any
discretionary indemnification pursuant to NRS 78.7502, unless ordered by a
court
or advanced pursuant to subsection 2, may be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the
director, officer, employee or agent is proper in the circumstances. The
determination must be made:
(a) By
the
stockholders;
(b) By
the
board of directors by majority vote of a quorum consisting of directors who
were
not parties to the action, suit or proceeding;
(c) If
a
majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding so orders, by independent legal counsel in a written
opinion; or
II-2
(d) If
a
quorum consisting of directors who were not parties to the action, suit or
proceeding cannot be obtained, by independent legal counsel in a written
opinion.
2. The
articles of incorporation, the bylaws or an agreement made by the corporation
may provide that the expenses of officers and directors incurred in defending
a
civil or criminal action, suit or proceeding must be paid by the corporation
as
they are incurred and in advance of the final disposition of the action, suit
or
proceeding, upon receipt of an undertaking by or on behalf of the director
or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that he is not entitled to be indemnified by the
corporation. The provisions of this subsection do not affect any rights to
advancement of expenses to which corporate personnel other than directors or
officers may be entitled under any contract or otherwise by law.
3. The
indemnification pursuant to NRS 78.7502 and advancement of expenses authorized
in or ordered by a court pursuant to this section:
(a) Does
not
exclude any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under the articles of incorporation
or
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, for either an action in his official capacity or an action in another
capacity while holding his office, except that indemnification, unless ordered
by a court pursuant to NRS 78.7502 or for the advancement of expenses made
pursuant to subsection 2, may not be made to or on behalf of any director or
officer if a final adjudication establishes that his acts or omissions involved
intentional misconduct, fraud or a knowing violation of the law and was material
to the cause of action.
(b) Continues
for a person who has ceased to be a director, officer, employee or agent and
inures to the benefit of the heirs, executors and administrators of such a
person.
The
Company has purchased director and officer liability insurance, as permitted
by
the NRS.
Each
selling stockholder has agreed to indemnify the Registrant, the officers and
directors and controlling persons of the Registrant, and the employees of the
Registrant who sign the Registration Statement against certain liabilities
incurred in connection with this offering as the result of claims made under
the
Securities Act of 1933 (the “Securities Act”), the Securities Exchange Act of
1934 (the “Exchange Act”) or state law.
Item
15. Recent Sales of Unregistered Securities
Upon
its
incorporation in March 2000, the Company issued 5,000,000 shares of common
stock
to Pam J. Halter for $0.001 per share.
On
April 17, 2003, in connection with the Company’s acquisition of all of the
issued and outstanding securities of Inyx Pharma Limited, a specialty
pharmaceutical company incorporated under the laws of England and Wales (“Inyx
Pharma”), the Company issued the following restricted shares of common stock in
a private transaction pursuant to Regulation D, Regulation S and
Section 4(2) of the Securities Act of 1933 (the “Securities
Act”):
Name
Number
of Shares
Saintsbury
Management Corp.
975,000
Grosvenor
Trust Company, Ltd.
475,000
Liberty
Management, LLC
500,000
Tri
Finity Venture Corp.
250,000
BPL
Corp.
250,000
II-3
The
above
purchasers are unaffiliated with the Company. The purchase price per share
recorded for each issuance was $0.53 per share. No other securities were
issued.
On
April 17, 2003, the Company issued 1,500,000 shares of restricted common
stock to Jordan Slatt, who is unaffiliated with the Company, at a recorded
issue
price of $0.53 per share, as consideration for future business consulting
services under a Business Advisory & Financial Consulting Services
Agreement. Such shares were restricted under Regulation D and
Section 4(2) of the Securities Act, but have subsequently been registered
for resale on a Form S-8 registration statement.
On
April28, 2003, the Company concluded its acquisition of Inyx Pharma. The transaction
consisted of an exchange of 100% of the outstanding common stock of Inyx Pharma,
for 16,000,000 shares of restricted common stock of the Company, representing
approximately 64% of the shares outstanding after the exchange, as a result
of
which Inyx Pharma became a wholly owned subsidiary of the Company. Inyx Pharma
focuses its expertise on development-led manufacturing in the sterile
pharmaceutical, finished-dosage form, outsourcing sector. It specializes in
niche products and technologies for the treatment of respiratory, allergy,
dermatological, and topical conditions. Inyx Pharma’s client base is comprised
of blue-chip ethical pharmaceutical companies, branded generic firms and
biotechnology groups. The acquirers were:
Name
Shares
of Common Stock Received
Relationship
to Company
715821
Ontario Ltd.
11,800,000
7,600,000
of such shares were distributed to JEM Family Trust, whose beneficiaries
are family members of Jack Kachkar. Dr. Kachkar and his wife disclaim
any
beneficial ownership of shares owned by the Trust. The balance of
the 11.8
million shares have been distributed to the unaffiliated partners
of
715821 Ontario Ltd.
Steve
Handley
2,000,000
President
and Director of Company
Colin
Hunter
600,000
Vice
President and Director of Company
Coral
Beach Ventures, Inc.
1,600,000
None
The
shares issued in connection with the Company’s acquisition of Inyx Pharma were
issued in a business combination pursuant to Regulation D or
Regulation S of the Securities Act, and the shares issued are restricted
against transfer. No lockups beyond usual Rule 144 restrictions were
applied. The purchasers were given registration rights. The total transaction
value was $8,520,000. No boot, warrants or other securities were issued in
the
transaction.
On
June26, 2003, the Company entered into a three month consulting agreement with
National Financial Communications Corp. (“NFCC”) to provide public relations and
shareholders communications services. In connection with those services,
warrants for 300,000 shares of the Company’s common stock were issued pursuant
to Section 4(2) of the Securities Act, consisting of warrants for 150,000
shares to NFCC and warrants for 150,000 shares to Gary Geraci, entitling the
holders to each purchase such shares by September 26, 2006 at prices
ranging from $1.10 to $3.10.
II-4
On
July1, 2003, pursuant to Section 4(2) of the Securities Act, the Company issued
a 5-year warrant to The Garrard Group to purchase 200,000 restricted shares
of
common stock at prices ranging from $1.10 to $2.60, in exchange for consulting
services regarding public relations, advertising and graphic
design.
On
August15, 2003, pursuant to Section 4(2) of the Securities Act, the Company
issued a 3-year warrant to Capital Financial Media, Inc. to purchase 100,000
restricted shares of common stock at prices ranging from $1.10 to $2.60, in
exchange for consulting services regarding advertising and mass
mailings.
On
August22, 2003, the Company closed a private placement of restricted common stock
pursuant to Regulation D of the Securities Act to the following purchasers.
The purchase price was $1.00 per share, and each purchaser also received a
warrant to purchase one share for each share purchased in the offering for
$1.50
per share.
Name
Number
of Shares
Affiliation
Jack
Kachkar
100,000(1)
Chairman
J.
Douglas Brown
100,000
Director
Jordan
Slatt
200,000
Shareholder
Saintsbury
Management Corp
50,000
Shareholder
Liberty
Management, LLC
50,000
Shareholder
(1) In
exchange for debt arising from working capital loans.
On
August 25, 2003, the Company issued five-year warrants to Duncan Capital
LLC to purchase 300,000 shares of our common stock at a price of $1.25 per
share
for investment banking and investor advisory services provided to us by Duncan
Capital. On October 29, 2003, the Company issued Duncan Capital additional
five-year warrants to purchase 525,000 shares of our common stock at a price
of
$1.80 per share, as consideration for arranging a $4.5 million convertible
debt
financing facility with Laurus Funds which we closed on October 29, 2003
and a $3 million private placement financing, provided by a group of accredited
and institutional investors, which the Company completed on October 30,2003. Duncan Capital subsequently transferred such warrants to its
principals.
On
September 12, 2003, the Company issued three-year warrants to Mr. Rick
Iler to purchase 20,000 shares of our common stock in exchange for business
consulting services provided by Mr. Iler to the Company. Mr. Iler is
entitled to purchase the following unregistered securities by September 12,2006: 5,000 shares at $1.25, 5,000 shares at $1.50, 5,000 shares at $1.75,
and
5,000 shares at $2.00.
On
October 1, 2003, the Company issued three- year warrants to R. Castro
and Associates, PLLC to purchase 30,000 shares of common stock at $1.25 per
share in exchange for advisory and consulting services provided by
Mr. Rafael Castro, of R. Castro and Associates, to the
Company.
On
October 29, 2003, the Company issued a 7% Convertible Term Note to Laurus Master
Fund, Ltd. in the principal amount of $4,500,000. Such note was convertible
by
the holder into common stock at the fixed conversion rate of $1.00 per share
but
was subsequently amended by the Company on August 31, 2004 to $0.80 per share.
In addition, such certain conditions, the principal and interest payable under
the Note may be paid by the Company in additional shares of common stock. The
Company also issued a Stock Purchase Warrant to purchase 450,000 shares at
$1.25
per share, 450,000 shares at $1.50 per share, and 450,000 shares at $1.75 per
share.
On
October 30, 2003, the Company issued 3,000,000 shares at $1.00 per share to
13
institutional and accredited investors in a private placement. In addition,
the
Company issued warrants to purchase 1,500,000 shares of which 750,000 shares
are
exercisable at $1.00 and 750,000 shares are exercisable at $1.35.
II-5
On
December 30, 2003, the Company closed a transaction with Laurus Master
Fund, Ltd. to obtain a US $3.5 million debt facility (the “Facility”). The
initial advance under the Facility was $3,133,197, of which $2,676,300 was
used
to repay the Company’s factoring arrangement with Venture Finance, PLC and the
balance was applied to working capital. The Facility consists of two promissory
notes, a $1.0 million Secured Convertible Minimum Borrowing Note, and a $2.5
million Secured Revolving Note. Such Notes are secured by all of the Company’s
assets previously pledged to Laurus under the $4.5 million loan on
October 29, 2003, and additionally by the Company’s accounts receivables
released by Venture Finance. Both Notes bear interest at the greater, of prime
plus 3% or 7% and are convertible into the Company’s common stock at a fixed
conversion price of $1.47 per share. On August 31, 2004, this conversion price
was amended to $0.80 per share. In addition, subject to certain limitations,
the
Secured Convertible Minimum Borrowing Note and any associated increases to
that
note permit payments to be made in the Company’s common stock. As additional
consideration for the loan, the Company issued to Laurus a five year Common
Stock Purchase Warrant to purchase 660,000 shares of its common stock at
exercise prices of $1.84 for 220,000 shares, $2.20 for 220,000 shares, and
$2.57
for 220,000 shares.
On
February 27, 2004, the Company closed a transaction with its primary leader,
Laurus Master Fund, Ltd. (“Laurus Funds”), to obtain an additional financing of
$2.0 million as an amendment to the $3.5 million credit facility that the
Company previously entered with them on December 30, 2003. That Laurus $3.5
million credit facility consists of two promissory notes, a $1.0 million Secured
Convertible Minimum Borrowing Note, and a $2.5 million Secured Revolving Note.
As a result of the additional Laurus financing, the $1.0 million Secured
Convertible Minimum Borrowing was increased by $1.0 million and the $2.5 million
principal amount Secured Revolving Note of the credit facility was increased
by
$1.0 million. Both Notes were further amended to decrease the applicable
conversion rate from $0.80. As additional consideration for the loan, the
Company issued to Laurus a five-year Common Stock Purchase Warrant to purchase
330,000 shares of its common stock at exercise prices of $1.25 for 110,000
shares, $1.50 for 110,000 shares and $1.75 for 110,000 shares.
On
March30, 2004, the Company also obtained an additional $1.0 million advance from
Laurus Funds under the Secured Revolving Credit Note, and issued additional
warrants to purchase 165,000 shares of common stock at exercise prices of $1.25
for 55,000 shares, $1.50 for 55,000 shares and $1.75 for 55,000
shares.
On
May11, 2004, the Company issued 100,000 stock purchase warrants to Mr. Orestes
Lugo
in exchange for the cancellation of 350,000 employee stock options. These three
year Common Stock Purchase Warrants have an exercise price of $1.20 per share.
On
May 27, 2004, we obtained an additional $500,000 advance from Laurus Funds
under the October 29, 2003 Laurus Note, convertible into common stock at
$0.80 per share, and issued additional five-year warrants to Laurus Funds to
purchase 82,500 shares at exercise prices of $1.00 per share for 27,500 shares,
$1.20 per share for 27,500 shares, and $1.40 per share for 27,500 shares.
On
July2, 2004, the Company granted a total of 1,500,000 warrants to First Jemini
Trust, a discretionary family trust in which the Company’s Chairman and his
spouse are non-voting beneficiaries. These five-year warrants were granted
pursuant to various business development services provided to the Company and
allow the holder to purchase the Company’s common stock at a price of $0.90 per
share.
In
July,
2004, Dr. Kachkar and Mr. J. Douglas Brown, an outside Director, each provided
the Company with stockholder loans amounting to $300,000. Another executive,
Mr.
Jay Green, our Executive Vice President of Corporate Development, also provided
the Company a stockholder loan in the amount of $100,000. All of these
stockholder loans are due by December 31, 2004 and bear interest at seven
percent annually. As additional consideration for these loans, the Company
granted these individuals five-year warrants, to purchase an aggregate of
700,000 shares of its common stock at an exercise price of $0.80 per share.
II-6
On
July30, 2004, the Company received from Laurus Funds a deferral on the first seven
months of principal payments due under the Laurus Note (originally $4.5 million
and then amended to $5.0 million on May 27, 2004). Such payments are now due
upon maturity of the Laurus Note in November, 2006. As consideration for this
principal payment deferral, on August 31, 2004, the Company has issued to Laurus
Funds a five-year Warrant to purchase 694,000 shares of its common stock at
an
exercise price of $0.81 per share.
On
or
about August 3, 2004, the Company sold and/or issued to the institutional
investors identified below, the securities of the Company for aggregate gross
consideration of $1,100,000.
Name
Number
of Shares of Common Stock and an Equal Number of Common Stock Purchase
Warrants
1.
Sands
Brothers Venture Capital, LLC
123,457
2.
Sands
Brothers Venture Capital II, LLC
123,457
3.
Sands
Brothers Venture Capital III, LLC
740,741
4.
Sands
Brothers Venture Capital IV, LLC
246,914
5.
280
Ventures, LLC
61,728
6.
Katie
and Adam Bridge Partners, L.P.
61,728
The
foregoing transactions were exempt from registration under the Securities Act
of
1933, as amended (the “Act”), under Section 4(2) of that Act as not involving a
public offering, and as to those sales set forth immediately above, reliance
is
placed upon Rule 506 of Regulation D and Section 4(6) of the Act. No underwriter
was engaged by the Company in connection with the issuances described above.
The
recipients of all of the foregoing securities represented that such securities
were being acquired for investment and not with a view to the distribution
thereof. In addition, the certificates evidencing such securities bear
restrictive legends.
On
August27, 2004 through September 3, 2004, the Company sold and/or issued an aggregate
of 7,832,876 shares of its Common Stock and an equal number of its Common Stock
purchase warrants to those accredited investors identified in the section of
the
Prospectus (included as part of this Registration Statement) entitled “Selling
Stockholders,” excluding the six institutional investors described above and the
persons associated with the Placement Agent (defined below) for gross
consideration of $6,339,000. These transactions were exempt from registration
under the Act, under Section 4(2) of that Act as not involving a public
offering, and as to those sales, reliance is placed upon Rule 506 of Regulation
D and Section 4(6) of the Act. The recipients of all of the foregoing securities
represented that such securities were being acquired for investment and not
with
a view to the distribution thereof. Sands Brothers International Limited acted
as the placement agent (the “Placement Agent”) for the foregoing offering to
accredited investors and received $633,990 in cash compensation and warrants
to
purchase up to 783,286 shares of the Company’s Common Stock were issued to
persons associated with it. In addition, the certificates evidencing such
securities bear restrictive legends.
Offering
costs incurred in connection with the second offering included approximately
$634,000 for the placement agent’s commission and approximately $150,000 in
related legal and financing costs. In addition, a cost valuation of
approximately $329,000 has been assigned to the issuance to the placement agent,
five-year warrants, to purchase 783,286 shares of the Company’s common stock at
exercise prices ranging from $1.00 to $1.11 per share. The Company also granted
certain registration rights with respect to the warrants issued as placement
agent compensation.
On
July1, 2004, the Company entered into a strategic alliance agreement with Utek
Corporation (“Utek”). Under the agreement, the Company will be collaborating
with Utek in the identification, acquisition and development of intellectual
property that it may require to implement its business initiatives. Pursuant
to
this agreement, in September 2004, the Company issued 31,579 restricted shares
of our common stock to Utek.
II-7
On
October 4, 2004, the Company granted 75,000 stock purchase warrants to our
New York solicitors, Gusrae Kaplan, Bruno & Nusbaum, PLLC (“GKBN”) in
connection with two private placements the Company had completed from
August 3, 2004 through September 3, 2004. These 5-year warrants allow
GKBN to purchase the Company’s common stock at $1.08 per share.
On
November 19, 2004, Dr. Kachkar and his spouse, Mr. Brown and
Mr. Green agreed to each renew previous loans made to the Company. Such
stockholder loans previously due by March 31, 2005 have been subordinated
as a result of the Westernbank credit facility which closed on March 31, 2005.
Net proceeds from these loans were utilized for working capital purposes. As
additional consideration for such loans and for additional services provided
to
the Company in connection with the Company’s corporate development and
acquisition activities, the Company granted these individuals five-year warrants
to purchase, an aggregate of 1,150,000 shares of the Company’s common stock at
an exercise price of $0.95 per share.
On
November 26, 2004, the Company granted Stephen Spitz and Spitz Business
Solutions (collectively “Spitz”) a five-year warrant to purchase an aggregate of
300,000 shares of the Company’s common stock at a price of $0.98 per share.
These warrants were originally issued to Spitz in relation to acquisition and
due diligence-related services in connection with the Company’s planned
acquisition of Aventis PR. Subsequent
to March 31, 2006, the Company voided such warrants due to Spitz’s failure to
perform such services.
On
December 16, 2004, the Company granted Enzo Barichello a five-year warrant
to purchase 100,000 shares of our common stock at a price of $1.11 per share.
These warrants were issued to Mr. Barichello in relation to business
acquisition and corporate development services provided to the Company in
connection with the Company’s planned acquisition of Aventis PR.
On
December 30, 2004, the Company granted to two parties (Sharon Brown and
Robert Carrigan) five-year warrants to each purchase 25,000 shares of the
Company’s common stock at a price of $1.35 per share. These warrants were issued
in relation to business acquisition and corporate development services provided
to the Company in connection with the Company’s planned acquisition of Aventis
PR.
Between
the period of January 14, 2005 and January 26, 2005, the Company issued 380,000
shares of the Company’s restricted common stock, par value $.001 per share to
Laurus Funds, the holders of the Convertible Note due 2006, for the conversion
of $304,000 of principal amounts owed under the Laurus Note. The Laurus Note
has
a conversion price of $0.80 per share.
On
February 28, 2005the Company granted 300,000 five-year stock purchase warrants
to purchase 300,000 shares of the Company’s common stock at a price of $0.95 per
share, to Laurus Funds in conjunction with a waiver and certain amendments
to
the registration rights agreements with Laurus Funds.
On
March31, 2005the Company issued 1,591,504 shares of the Company’s restricted common
stock as payment for certain early termination fees in connection with the
repayment of all amounts due to Laurus Funds as of March 31, 2005, including
the
repayment of the 7% Convertible Note and the borrowings under the Laurus
Facility.
II-8
Item
16. Exhibits
Exhibit
Number
Description
of Exhibit
Incorporated
by Reference
2.2.1
Asset
Purchase Agreement dated as of December 15, 2004, by and between
Inyx USA,
Ltd. and Aventis Pharmaceuticals Puerto Rico, Inc.
Filed
as Exhibit 10.34.1 to the Form 8-K/A filed on February 15, 2005
2.2.2
General
Assignment dated as of April 1, 2005, by and between Aventis
Pharmaceuticals Puerto Rico Inc. and Inyx USA, Ltd.
Filed
as Exhibit 2.2 to the Form 8-K filed on April 6, 2005
2.3
Agreement
for the Sale and Purchase of the entire Issued Share Capital of Celltech
Manufacturing Services Limited, dated August 25, 2005, by and among
UCB
Pharma Limited, Inyx Europe Limited, and Inyx, Inc.
Filed
as Exhibit 10.4.11 to the Form 10-Q filed on November 23,2005
10.6.1
Lease
dated July 22, 1994, with the Council of the Borough of Halton for
facilities at 6 Seymour Court, Manor Park, Runcorn, Cheshire,
England.
Filed
as Exhibit 10.6.1 to the Form 8K filed on May 13, 2003
10.6.2
Lease
dated June 23, 1988, between Warrington and Runcorn Development Corp
and MiniPak Aerosols, Ltd. for lease of facilities at 10-11 Arkwright
Road, Astmoor Industrial Estate, Runcorn, Cheshire,
England.
Filed
as Exhibit 10.6.2 to the Form 8K filed on May 13, 2003
10.6.3
Lease
dated June 23, 1988, between Warrington and Runcorn Development Corp
and MiniPak Aerosols, Ltd. for lease of facilities at 1-2 Arkwright
Road,
Astmoor Industrial Estate, Runcorn, Cheshire, England.
Filed
as Exhibit 10.6.3 to the Form 8K filed on May 13, 2003
10.23.14
Stock
Purchase Warrant Agreements for an aggregate of 1,500,000 shares
of the
Company’s common stock with Larry Stockhamer as Trustee for First Jemini
Trust dated July 2, 2004.
Filed
as Exhibit 10.30 to the Form SB-2/A filed on October 1,2004
10.23.15
Stock
Purchase Warrant Agreement for 300,000 shares of the Company’s common
stock with Douglas Brown dated July 19, 2004.
Filed
as Exhibit 10.23.12 to the Form SB-2/A filed on October 1,2004
10.23.16
Stock
Purchase Warrant Agreement for 300,000 shares of the Company’s common
stock with Viktoria Benkovitch dated July 19, 2004.
Filed
as Exhibit 10.23.13 to the Form SB-2/A filed on October 1,2004
10.23.17
Stock
Purchase Warrant Agreement for 100,000 shares of the Company’s common
stock with Jay Green., dated July 1, 2004.
Filed
as Exhibit 10.23.14 to the Form SB-2/A filed on October 1,2004
10.23.18
Stock
Purchase Warrant Agreement for 694,000 shares of the Company’s common
stock with Laurus Master Fund, Ltd. dated August 31,2004.
Filed
as Exhibit 10.29.2 to the Form SB-2/A filed on October 1,2004
10.23.19
Stock
Purchase Warrant for 75,000 shares of the Company issued to Gusrae,
Kaplan
& Bruno PLLC. dated October 4, 2004.
Filed
as Exhibit 10.23.10 to the Form 10Q-SB filed on November 22,2004
10.23.20
Stock
Purchase Warrant Agreement for 300,000 shares of the Company’s common
stock with Douglas Brown dated November 19, 2004.
Filed
as Exhibit 10.23.20 to the Form 10-KSB filed on April 14,2005
10.23.21
Stock
Purchase Warrant Agreement for 150,000 shares of the Company’s common
stock with Douglas Brown dated November 19, 2004.
Filed
as Exhibit 10.23.21 to the Form 10-KSB filed on April 14,2005
10.23.22
Stock
Purchase Warrant Agreement for 300,000 shares of the Company’s common
stock with Viktoria Benkovitch dated November 19, 2004.
Filed
as Exhibit 10.23.22 to the Form 10-KSB filed on April 14,2005
II-10
Exhibit
Number
Description
of Exhibit
Incorporated
by Reference
10.23.23
Stock
Purchase Warrant Agreement for 150,000 shares of the Company’s common
stock with Viktoria Benkovitch dated November 19, 2004.
Filed
as Exhibit 10.23.23 to the Form 10-KSB filed on April 14,2005
10.23.24
Stock
Purchase Warrant Agreement for 100,000 shares of the Company’s common
stock with Jay Green., dated November 19, 2004.
Filed
as Exhibit 10.23.24 to the Form 10-KSB filed on April 14,2005
10.23.25
Stock
Purchase Warrant Agreement for 150,000 shares of the Company’s common
stock with Jay Green., dated November 19, 2004.
Filed
as Exhibit 10.23.25 to the Form 10-KSB filed on April 14,2005
10.23.26
Stock
Purchase Warrant Agreement for 150,000 shares of the Company’s common
stock with Stephan Spitz., dated November 26, 2004.
Filed
as Exhibit 10.23.26 to the Form 10-KSB filed on April 14,2005
10.23.27
Stock
Purchase Warrant Agreement for 150,000 shares of the Company’s common
stock with Spitz Business Solutions., dated November 26,2004.
Filed
as Exhibit 10.23.27 to the Form 10-KSB filed on April 14,2005
10.23.28
Stock
Purchase Warrant Agreement for 25,000 shares of the Company’s common stock
with Sharon Brown dated December 22, 2004.
Filed
as Exhibit 10.23.28 to the Form 10-KSB filed on April 14,2005
10.23.29
Stock
Purchase Warrant Agreement for 100,000 shares of the Company’s common
stock with Enzo Barichello, dated December 16, 2004.
Filed
as Exhibit 10.23.29 to the Form 10-KSB filed on April 14,2005
10.23.30
Stock
Purchase Warrant Agreement for 25,000 shares of the Company’s common stock
with Robert Carrigan Jr. dated December 22, 2004.
Filed
as Exhibit 10.23.30 to the Form 10-KSB filed on April 14,2005
10.23.31
Stock
Purchase Warrant Agreement for 300,000 shares of the Company’s common
stock with Laurus Master Fund, Ltd. dated February 28,2005.
Filed
as Exhibit 10.2339 to the Form 8-K filed on March 9,2005
10.24
Supply
Agreement dated June 11, 2004, with AstraZeneca.
Filed
as Exhibit 10.24 to Form 8-K filed on June 29,2004
10.25.1
Form
of stock purchase warrant issued to purchasers of the Company's
securities
in a bridge financing offering on or about August 3, 2004 (the
"Bridge").
Filed
as Exhibit 3.6 to the Form 8-K filed on August 6, 2004
Filed
as Exhibit 10.22 to the Form 8-K filed on August 6,2004
10.25.4
Form
of Stock Purchase warrant issued to Purchasers of the Company's
securities
in a private placement during the period of time from August 27th
through
September 3rd, 2004 (the "August/September 2004 Private
Placement").
Filed
as Exhibit 3.6 to the Form 8-K filed on August 30, 2004
10.25.5
Form
of Subscription Agreement for the August/September 2004 private
placement.
Filed
as Exhibit 10.21 to the Form 8-K filed on August 30,2004
II-11
Exhibit
Number
Description
of Exhibit
Incorporated
by Reference
10.25.6
Form
of Registration Rights Agreement for the August/September 2004
private
placement.
Filed
as Exhibit 10.22 to the Form 8-K filed on August 30,2004
10.32
Patent
Purchase Agreement with Phares Technology BV dated September 21,2004.
Filed
as Exhibit 10.32 to the Form SB-2/A filed on October 1,2004
10.33
Manufacturing
Supply Agreement with NovaDel dated November 18, 2004.
Filed
as Exhibit 10.33 to the Form 8-K filed on December 2,2004
10.34
Manufacturing
and Supply Agreement with Aventis Pharmaceuticals Puerto Rico,
Inc. dated
March 31, 2004
Filed
as Exhibit 10.34.3 to the Form 10-KSB filed on April 14,2005
10.35.1
Loan
and Security Agreement dated as of March 31, 2005, by and between
Westernbank Puerto Rico, the Registrant and Inyx USA, Ltd.
Filed
as Exhibit 10.35.1 to the Form 8-K filed on April 6,2005
10.35.2
First
Amendment to Loan and Security Agreement dated as of March 31,2005, by
and between Westernbank Puerto Rico, the Registrant and Inyx USA,
Ltd.
Filed
as Exhibit 10.35.2 to the Form 8-K filed on April 6,2005
10.35.3
$3.5
million Promissory Note with Aventis Pharmaceuticals Puerto Rico,
Inc.
dated March 31, 2005
Filed
as Exhibit 10.35.3 to the Form 10-KSB filed on April 14,2005
10.36.1
Amendment
No. 1 to Finished Product Supply Agreement
Filed
as Exhibit 10.36.1 to the Form 8-K filed on April 19,2005
10.36.2
Finished
Product Supply Agreement dated March 5, 2004.
Set
forth as Exhibit 2.2 to the Form 8-K of Kos Pharmaceuticals, Inc.
filed on
March 5, 2004
10.37
Manufacturing
and Supply Agreement with Generics (UK) Ltd. dated March 18,2005
Filed
as Exhibit 10.37.1 to the Form 8-K filed on April 25,2005
10.38.1
Collaboration
Agreement dated September 8, 2005 between Registrant and King
Pharmaceuticals, Inc.
Filed
as Exhibit 10.38.1 to the Form 10-Q filed on November 23,2005
10.38.2
Manufacturing
and Supply Agreement dated September 8, 2005 between Registrant and
King Pharmaceuticals, Inc.
Filed
as Exhibit 10.38.2 to the Form 10-Q filed on November 23,2005
10.38.3
Technical
Transfer Agreement dated September 8, 2005 between Registrant and
King Pharmaceuticals, Inc.
Filed
as Exhibit 10.38.3 to the Form 10-Q filed on November 23,2005
10.38.4
Marketing
and Promotion Agreement dated September 8, 2005 between Registrant
and King Pharmaceuticals, Inc.
Filed
as Exhibit 10.38.4 to the Form 10-Q filed on November 23,2005
10.38.5
Development
Agreement dated September 8, 2005 between Registrant and King
Pharmaceuticals, Inc.
Filed
as Exhibit 10.38.5 to the Form 10-Q filed on November 23,2005
II-12
Exhibit
Number
Description
of Exhibit
Incorporated
by Reference
10.38.6
Pharmaceutical
Quality Agreement dated September 8, 2005 between Registrant and King
Pharmaceuticals, Inc.
Filed
as Exhibit 10.38.6 to the Form 10-Q filed on November 23,2005
10.39.1
Loan
and Security Agreement dated as of August 30, 2005, by and between
Westernbank Puerto Rico, Inyx Europe Ltd. and Celltech Manufacturing
Services Ltd.
To
file, during any period in which offers or sales are being made,
a
post-effective amendment to the Registration Statement to: (i) include
any
prospectus required by Section 10(a)(3) of the Securities Act; (ii)
reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement which, individually or in the
aggregate, represent a fundamental change in the information set
forth in
the Registration Statement; and notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar
value of securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated maximum
offering range may be reelected in the form of a prospectus filed
with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes
in
volume and price represent no more than a 20 percent change in the
maximum
aggregate offering price set forth in the “Calculation of Registration”
table in the effective registration statement; and (iii) include
any
material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material
change
to such information in the Registration Statement, provided however,
that
provisions (i) and (ii) of this undertaking are inapplicable if the
information to be filed thereunder is contained in periodic reports
filed
by the Company pursuant to the Exchange Act that are incorporated
by
reference into the Registration
Statement.
II-13
(2)
That,
for the purpose of determining any liability under the Securities
Act,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein,
and the
offering of such securities at that time shall be deemed to be the
initial
bona fide offering thereof.
(3)
To
remove from registration by means of post-effective amendment any
of the
securities being registered which remains unsold at the termination
of the
offering.
(b)
Insofar
as indemnification for liabilities arising under the Securities Act
may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the Company has
been
advised that in the opinion of the Commission such indemnification
is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than director, officer or controlling
person in the successful defense of any action, suit or proceeding)
is
asserted by such director, officer or controlling person in connection
with the securities being registered, the Company will, unless in
the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by is against public policy as expressed
in
the Securities Act and will be governed by the final adjudication
of such
issue.
II-14
SIGNATURES
Pursuant
to the requirements of the Securities Act, the Company and has duly caused
this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on May 26,2006.
INYX,
INC.
By:
/s/ Jack
Kachkar
Jack
Kachkar,
Chairman
and Chief Executive Officer
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed below by the following persons in the capacities and on the
dates indicated.
