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Inyx Inc – ‘POS AM’ on 6/2/06

On:  Friday, 6/2/06, at 3:00pm ET   ·   Accession #:  1144204-6-23477   ·   File #:  333-119468

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 6/02/06  Inyx Inc                          POS AM                 2:3.8M                                   Vintage/FA

Post-Effective Amendment
Filing Table of Contents

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POS AM   —   Post-Effective Amendment


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  Unassociated Document  

 
As filed with the Securities and Exchange Commission on June 2, 2006
 
 
 
Registration No. 333-119468
 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

POST-EFFECTIVE AMENDMENT NO. 2 TO FORM SB-2 ON FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

INYX, INC.
(Exact name of registrant as specified in its Charter)

(State or other jurisdiction of incorporation or organization)
(Primary Standard Industrial Classification Code Number)
75-2870720
(I.R.S. Employer
Identification No.)
825 Third Avenue, 40th Floor
(212) 838-1111
(Address and Telephone Number Of Principal Executive Offices)

Jack Kachkar, Chairman & CEO
825 Third Avenue, 40th Floor
(212) 838-1111
(Name, Address and Telephone Number of Agent for Service)
With a copy to:
Lawrence G. Nusbaum, Esq.
Gusrae, Kaplan, Bruno & Nusbaum PLLC
120 Wall Street, 11th Floor
(212) 269-1400

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. ý:

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. 333-119468) 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.

Subject to completion dated June 2, 2006
 
inyx Logo
 
Inyx, Inc.
 
19,165,088 Shares
Common Stock
 
The persons listed in this Prospectus under “Selling Stockholders” may offer and sell from time to time up to an aggregate of 19,165,088 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 May 19, 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 COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR PASSES UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
_________, 2006

 

 
TABLE OF CONTENTS


Prospectus Summary
2
Risk Factors
6
Note on Forward Looking Statements
17
Use of Proceeds
17
Selling Stockholders
17
Plan of Distribution
22
Price Range of Common Stock and Dividend Policy
23
Our Business
24
Selected Financial Data
51
Management’s Discussion and Analysis of Financial Condition and Results of Operations
52
Management
83
Certain Relationships and Related Transactions
91
Security Ownership of Certain Beneficial Owners and Management
93
Description of Capital Stock
95
Legal Matters
101
Experts
101
Disclosure of Commission Position on Indemnification for Securities Act Liabilities
101
Available Information
102
Index to Consolidated Financial Statements
103


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.




PROSPECTUS SUMMARY

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 York 10022, 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 19,165,088 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 (i) 9,190,901 shares sold in private placements to institutions and accredited investors in August and September 2004; (ii) up to 9,190,901 shares issuable upon exercise of stock purchase warrants granted to institutions and accredited investors in the foregoing private placements, exercisable at prices ranging from $1.00 to $1.11 per share, and (iii) up to 783,286 shares issuable upon exercise of common stock purchase warrants granted pursuant to a placement agency agreement for one of the foregoing private placements, exercisable at prices ranging from $1.00 to $1.11 per share.

The Concurrent 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.

3


SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
 
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 March 31, 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.)
 
   
Historical
 
Adjusted Pro Forma
 
   
For the three months
ended March 31,
 
For the year ended December 31,
 
For the
three months ended
March 31,
 
For the year ended December 31,
 
     
2005
 
2005
 
2004
 
2005
 
2005
 
2004
 
Net revenues
 
$
21,412
 
$
2,677
 
$
49,565
 
$
15,699
 
$
19,406
 
$
81,277
 
$
73,602
 
Gross profit
   
8,301
   
142
   
14,706
   
1,383
   
3,760
   
22,310
   
15,465
 
Total operating expenses
   
8,604
   
2,540
   
35,656
   
13,622
   
6,419
   
44,173
   
28,375
 
Loss from operations before interest & financing costs and income tax benefit
   
(303
)
 
(2,398
)
 
(20,950
)
 
(12,239
)
 
(2,658
)
 
(21,863
)
 
(12,910
)
Interest & financing costs
   
2,290
   
4,612
   
10,059
   
3,370
   
1,775
   
9,091
   
8,541
 
Income tax expense (benefit)
   
-
   
-
   
-
   
1,333
   
(429
)
 
(872
)
 
1,034
 
Net loss
   
(2,593
)
 
(7,010
)
 
(31,009
)
 
(16,942
)
 
(4,004
)
 
(30,082
)
 
(22,485
)
Net loss per common share
   
(0.06
)
 
(0.18
)
 
(0.78
)
 
(0.52
)
 
N/A
   
N/A
   
N/A
 

Balance Sheet Summary
 
   
March 31,
   
     
2005
 
2004
 
Total assets
 
$
97,465
 
$
92,153
   
14,755
 
Total stockholders’ deficit
   
(27,771
)
 
(30,400
)
 
(5,865
)
Total liabilities
   
125,236
   
122,553
   
20,620
 

4

 
Notes to Unaudited Pro Forma Consolidated Statement of Operations
 
For the Three Months Ended March 31, 2006 and the Years Ended December 31, 2005 and 2004
 
(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 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.

5


RISK FACTORS

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 December 31, 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 $4.5 million ( £2.6 million) relating to 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 August 31, 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
·  
difficulties in enforcing contracts
·  
difficulties in protecting intellectual property
·  
unexpected changes in regulatory 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 December 31, 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 May 19, 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.

16


A NOTE ABOUT FORWARD-LOOKING STATEMENTS

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.
 
USE OF PROCEEDS
 
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.

SELLING STOCKHOLDERS
 
We have agreed to register 19,165,088 shares of our common stock, beneficially owned by the Selling Stockholders. These shares were acquired or will be acquired by the Selling Stockholders pursuant to private placement offerings of our securities (the “Placements") completed in August and September 2004 and the warrants issued under the Placements. Warrants were also issued to persons associated with Sands Brothers International Limited, a registered broker/dealer, as part of its compensation for services rendered in connection with one of the Placements. The warrants expire in August and September 2009. The shares of common stock beneficially owned by each of the Selling Stockholders are being registered to permit public secondary trading of these shares, and the Selling Stockholders may offer these shares for resale from time to time. See "Plan of Distribution”.

The following table sets forth the names of the Selling Stockholders, the number of shares of common stock owned beneficially by each Selling Stockholder as of May 19, 2006 and the number of shares that may be offered pursuant to this Prospectus. Except as may be identified in the footnotes to the table, none of the Selling Stockholders has, or within the past three years has had, any position, office or material relationship with us or any of our predecessors or affiliates. The table has been prepared based upon information furnished to us by or on behalf of the Selling Stockholders.

The Selling Stockholders may decide to sell all, some, or none of the shares of common stock listed below. We cannot provide you with any estimate of the number of shares of common stock that any of the Selling Stockholders will hold in the future.

17

 

For purposes of this table, beneficial ownership is determined in accordance with the rules of the SEC, and includes voting power and investment power with respect to such shares. All percentages are approximate. Percentage ownership of common stock is based on 50,389,860 shares of our common stock issued and outstanding as of May 19, 2006. As explained below under "Plan of Distribution”, we have agreed to bear certain expenses (other than broker discounts and commissions, if any) in connection with the registration statement, which includes this Prospectus.
 
Selling Stockholders
 
Shares and Warrants
Beneficially Owned
Prior to Offering
 
Number
of Shares
Subject to
Warrants
 
Number of
Shares
Offered by
this Prospectus
 
Shares Beneficially
owned After
the Offering
 
 
Number
 
Percent
 
 
 
 
 
Number
 
Percent 
Perceptive Life Sciences Master Fund, Ltd. (a)
 
3,250,000
 
6.36%
 
0
 
3,250,000
 
0
 
*
Sands Brothers Venture Capital III, LLC (b)
 
1,481,482
 
2.90%
 
740,741
 
1,481,482
 
0
 
*
James K. and Sharon A. Randolph
 
1,000,000
 
1.98%
 
0
 
1,000,000
 
0
 
*
Peter Nordin APS (c)
 
875,000
 
1.74%
 
0
 
875,000
 
0
 
*
Potomac Capital Partners, Ltd. (a)
 
766,500
 
1.50%
 
0
 
766,500
 
0
 
*
Vision Opportunity Master Fund, Ltd(d)
 
625,000
 
1.23%
 
0
 
625,000
 
0
 
*
Pleiades Investment Partners-R, LP (a)
 
514,500
 
1.01%
 
0
 
514,500
 
0
 
*
Stonestreet LP (e)
 
500,000
 
*
 
0
 
500,000
 
0
 
*
Sands Brothers Venture Capital IV, LLC (b)
 
493,828
 
*
 
246,914
 
493,828
 
0
 
*
The Carnahan Trust (f)
 
470,588
 
*
 
0
 
470,588
 
0
 
*
Potomac Capital International, Ltd. (a)
 
469,000
 
*
 
0
 
469,000
 
0
 
*
Catalytix Life Science Hedge Fund(g)
 
250,000
 
*
 
125,000
 
250,000
 
0
 
*
Catalytix, LDC (h)
 
250,000
 
*
 
125,000
 
250,000
 
0
 
*
Stan Nabozny and Catherine Carlson
 
250,000
 
*
 
0
 
250,000
 
0
 
*
Whalehaven Capital LP (i)
 
250,000
 
*
 
0
 
250,000
 
0
 
*
John Pappajohn
 
250,000
 
*
 
0
 
250,000
 
0
 
*
Arco van Niewland
 
250,000
 
*
 
0
 
250,000
 
0
 
*
William R. and Joanne S. Jellison
 
250,000
 
*
 
0
 
250,000
 
0
 
*
Natan and Milyan Vislitsky
 
247,500
 
*
 
0
 
247,500
 
0
 
*
Sands Brothers Venture Capital, LLC (b)
 
246,914
 
*
 
123,457
 
246,914
 
0
 
*
Sands Brothers Venture Capital II, LLC (b)
 
246,914
 
*
 
123,457
 
246,914
 
0
 
*
David and Deborah Turbide
 
235,294
 
*
 
0
 
235,294
 
0
 
*
Nitkey Holding Corp. (j)
 
235,294
 
*
 
0
 
235,294
 
0
 
*
Greenwich Growth Fund (k)
 
225,988
 
*
 
0
 
225,988
 
0
 
*
Bonanza Trust (l)
 
194,000
 
*
 
194,000
 
194,000
 
0
 
*
KWG Trust (m)
 
194,000
 
*
 
194,000
 
194,000
 
0
 
*
Shyam Kumaria
 
155,294
 
*
 
0
 
155,294
 
0
 
*
Thomas J. Benson
 
125,000
 
*
 
0
 
125,000
 
0
 
*
Michael B. and Sheila J. Carroll
 
125,000
 
*
 
0
 
125,000
 
0
 
*
 
18


Selling Stockholders
 
Shares and Warrants
Beneficially Owned
 Prior to Offering
 
Number
of Shares
Subject to
Warrants
 
Number of
Shares
Offered by
 this Prospectus
 
Shares Beneficially
owned After
the Offering
 
 
Number
 
Percent
 
 
 
 
 
Number
 
Percent 
John W. Eilers
 
125,000
 
*
 
0
 
125,000
 
0
 
*
Caspar Helmer
 
125,000
 
*
 
0
 
125,000
 
0
 
*
Ronald A. Soicher
 
125,000
 
*
 
0
 
125,000
 
0
 
*
Peter Thompson
 
125,000
 
*
 
0
 
125,000
 
0
 
*
Lighthouse Capital Insurance Co. (n)
 
125,000
 
*
 
0
 
125,000
 
0
 
*
Dominique Lubar
 
125,000
 
*
 
0
 
125,000
 
0
 
*
R. Van Den Toorn
 
125,000
 
*
 
0
 
125,000
 
0
 
*
Paul Russo
 
125,000
 
*
 
0
 
125,000
 
0
 
*
Thominvest OY (o)
 
125,000
 
*
 
0
 
125,000
 
0
 
*
Meganet Uno, S.A (p)
 
125,000
 
*
 
0
 
125,000
 
0
 
*
280 Ventures, LLC (b)
 
123,456
 
*
 
61,728
 
123,456
 
0
 
*
Katie and Adam Bridge Partners, L.P. (b)
 
123,456
 
*
 
61,728
 
123,456
 
0
 
*
Per Gustafsson
 
120,000
 
*
 
0
 
120,000
 
0
 
*
Blake Williams
 
117,648
 
*
 
0
 
117,648
 
0
 
*
Graham Smith
 
117,648
 
*
 
0
 
117,648
 
0
 
*
Kevin Schoenfelder
 
117,648
 
*
 
0
 
117,648
 
0
 
*
Sheldon Miller
 
117,648
 
*
 
0
 
117,648
 
0
 
*
Howard E. Richmond, Jr.
 
112,500
 
*
 
0
 
112,500
 
0
 
*
Richard Pitt
 
110,588
 
*
 
0
 
110,588
 
0
 
*
Kenneth W. and Christine P. Hurst
 
100,000
 
*
 
0
 
100,000
 
0
 
*
David M. Craig
 
100,000
 
*
 
0
 
100,000
 
0
 
*
James T. O’Connell, Jr.
 
100,000
 
*
 
0
 
100,000
 
0
 
*
Ronald Steinberg
 
100,000
 
*
 
0
 
100,000
 
0
 
*
Thomas Fish
 
94,118
 
*
 
0
 
94,118
 
0
 
*
Gordon Sjodin
 
89,176
 
*
 
0
 
89,176
 
0
 
*
Colin Kramer
 
70,588
 
*
 
0
 
70,588
 
0
 
*
Charles Mader IRA
 
65,882
 
*
 
0
 
65,882
 
0
 
*
Yves Hertoghs
 
63,530
 
*
 
0
 
63,530
 
0
 
*
Enrico Deluchi
 
62,500
 
*
 
0
 
62,500
 
0
 
*
Lance R. Gelein
 
62,500
 
*
 
0
 
62,500
 
0
 
*
Andrew Goode and Fiona McPhee
 
62,500
 
*
 
0
 
62,500
 
0
 
*
Ulrich Kuhn
 
62,500
 
*
 
0
 
62,500
 
0
 
*
Robert A. Laughlin
 
62,500
 
*
 
0
 
62,500
 
0
 
*
Robert D. Mosbaugh
 
62,500
 
*
 
0
 
62,500
 
0
 
*
Louis Quagliata
 
62,500
 
*
 
0
 
62,500
 
0
 
*
Luc Lissoir
 
62,500
 
*
 
0
 
62,500
 
0
 
*
Aharon Orlansky
 
59,760
 
*
 
59,760
 
59,760
 
0
 
*
Ralph Canter IRA
 
58,824
 
*
 
0
 
58,824
 
0
 
*
Ralph Canter
 
58,824
 
*
 
0
 
58,824
 
0
 
*
Randy Davenport
 
58,824
 
*
 
0
 
58,824
 
0
 
*
Erwin Bamps
 
58,824
 
*
 
0
 
58,824
 
0
 
*
Peter James Weallans
 
56,470
 
*
 
0
 
56,470
 
0
 
*
 
19

 
Selling Stockholders
 
Shares and Warrants
Beneficially Owned
Prior to Offering
 
Number
of Shares
Subject to
Warrants
 
Number of
Shares
Offered by
this Prospectus
 
Shares Beneficially
owned After
the Offering
 
 
Number
 
Percent
 
 
 
 
 
Number
 
Percent 
Linda Sterling**
 
54,828
 
*
 
54,828
 
54,828
 
0
 
*
Jonathan Lawrence**
 
50,000
 
*
 
50,000
 
50,000
 
0
 
*
Bernard Questier
 
50,000
 
*
 
0
 
50,000
 
0
 
*
Ricardo Contreras
 
50,000
 
*
 
0
 
50,000
 
0
 
*
David and Buris Blanchfield
 
50,000
 
*
 
0
 
50,000
 
0
 
*
Gary and Ruth Rehm
 
50,000
 
*
 
0
 
50,000
 
0
 
*
Manrswara Sreenvasan
 
50,000
 
*
 
0
 
50,000
 
0
 
*
Davit Katt
 
47,058
 
*
 
0
 
47,058
 
0
 
*
Martin Weigand
 
47,058
 
*
 
0
 
47,058
 
0
 
*
Markus Seigar
 
35,294
 
*
 
0
 
35,294
 
0
 
*
Rich Lisauskas
 
30,588
 
*
 
15,294
 
30,588
 
0
 
*
Frank G. Mazzola**
 
29,943
 
*
 
0
 
29,943
 
0
 
*
Theodore V. Fowler**
 
26,500
 
*
 
0
 
26,500
 
0
 
*
Peter and Linda Licari
 
23,528
 
*
 
0
 
23,528
 
0
 
*
John and Barbara Arent
 
23,528
 
*
 
0
 
23,528
 
0
 
*
Peter Silverman**
 
22,500
 
*
 
0
 
22,500
 
0
 
*
Jason A. Russo**
 
20,656
 
*
 
0
 
20,656
 
0
 
*
Todd A. Cirella**
 
20,656
 
*
 
0
 
20,656
 
0
 
*
Michael W. Wagner**
 
13,647
 
*
 
0
 
13,647
 
0
 
*
Robert J. Bonnaventura**
 
12,029
 
*
 
0
 
12,029
 
0
 
*
Craig A. Bonn**
 
12,029
 
*
 
0
 
12,029
 
0
 
*
R. Kevin Connors**
 
12,029
 
*
 
0
 
12,029
 
0
 
*
Jordan D. Cooper**
 
9,760
 
*
 
9,760
 
9,760
 
0
 
*
Hugh J. Marasa, Jr.**
 
9,522
 
*
 
0
 
9,522
 
0
 
*
Craig Boden**
 
7,500
 
*
 
0
 
7,500
 
0
 
*
Justin Kastan**
 
7,202
 
*
 
0
 
7,202
 
0
 
*
Mark F. Blaha**
 
5,941
 
*
 
0
 
5,941
 
0
 
*
Robert Casolaro**
 
5,000
 
*
 
0
 
5,000
 
0
 
*
Michael Giles Pesackis**
 
4,080
 
*
 
0
 
4,080
 
0
 
*
Glen McKelvey**
 
3,643
 
*
 
3,643
 
3,643
 
0
 
*
Lars M. Headley**
 
3,300
 
*
 
3,300
 
3,300
 
0
 
*
Stephen Michael Stabile**
 
2,200
 
*
 
0
 
2,200
 
0
 
*
Peter O'Neill**
 
2,000
 
*
 
2,000
 
2,000
 
0
 
*
Maya Lana Lawler**
 
361
 
*
 
0
 
361
 
0
 
*
Robin Baker-Williams**
 
200
 
*
 
 200
 
200
 
0
 
*
Total Number of
Shares and Warrants
 
19,165,088
     
2,194,810
 
19,165,088
       

*          Less than one percent
 
 
**
A person or entity associated with Sands Brothers International Limited (“Sands Brothers”). Sands Brothers acted as the placement agent for one of our private placements and warrants to purchase up to an aggregate of 783,286 shares of our common stock were issued to persons and entities associated with it as partial compensation for its services as placement agent.
 
20


 
(a)
The Company has been advised by this Selling Stockholder that Mr. Joseph E. Edelman is the managing member of Perceptive Advisors, LLC, the Investment Manager of Perceptive Life Sciences Master Fund, Ltd. ("Perceptive"). As such, Mr. Edelman has dispositive and voting authority for all of Perceptive's shares in the Company. Perceptive transferred 766,500 warrants to Potomac Capital Partners, Ltd., 469,000 warrants to Potomac Capital International, Ltd. and 514,500 warrants to Pleiades Investment Partners. As of the date of this prospectus, all such warrants have been exercised and are no longer outstanding.
 
 
(b)
The Company has been advised by Sands Brothers Venture Capital LLC, Sands Brothers Venture Capital II, LLC, Sands Brothers Venture Capital III, LLC and Sands Brothers Venture Capital IV, LLC that they are managed by Sands Brothers Venture Capital Management LLC, of which Mr. Steven Sands is the Manager. The Company has been further advised by 280 Ventures LLC and Kate & Adam Bridge Partners, LP that they are managed by 280 Ventures Management, LLC and Katie and Adam Bridge Partners Management, L.P., respectively, of which Mr. Steven Sands is the Manager. The Company has also been advised that the foregoing six entities are affiliates of Sands Brothers. If all shares beneficially owned by the foregoing six entities were to be aggregated, the number of shares beneficially owned by them prior to the Offering would be 2,716,050 shares, constituting approximately 6.9% of the Company's issued and outstanding shares.
 
 
(c)
Peter Nordin APS has advised the Company that Peter Nordin has dispositive and voting authority for all of its shares in the Company.
 
 
(d)
Asset Managers International Ltd. (the original Selling Stockholder) transferred 187,500 shares and 187,500 warrants to Vision Opportunity Master Funds Ltd (“Vision”). Tiberius Investment & Capital, Ltd. Also transferred 125,000 shares and 125,000 warrants to Vision.
 
 
(e)
Stonestreet LP is a private investment fund managed by the Stonestreet Corporation. The Selling Stockholder has advised the Company that Mr. Michael Finkelstein and Ms. Elizabeth Leonard have dispositive and voting authority for all of its shares in the Company.
 
 
(f)
The Carnahan Trust has advised the Company that Mr. Kevin Carnahan and Ms. Laurie Carnahan, as trustees, have dispositive and voting authority for all of its shares in the Company.
 
 
(g)
Catalytix Life Science Hedge Fund is managed by Array Capital Management, LLC. This Selling Stockholder has advised the Company that Kenneth A. Sorensen, Ph.D. has dispositive and voting authority for all of its shares in the Company.
 
 
(h)
Catalytix, LDC is managed by Array Capital Management, LLC. This Selling Stockholder has advised the Company that Kenneth A. Sorensen, Ph.D. has dispositive and voting authority for all of its shares in the Company.
 
 
(i)
Whalehaven Capital LP ("Whalehaven") has advised the Company that Mr. Michael Finkelstein has dispositive and voting authority for all of its shares in the Company.
 
 
(j)
Nitkey Holding Corp. has advised the Company that Ms. Michele Clerici and Mr. Isaac Truzman have dispositive and voting authority for all of its shares in the Company.
 
 
(k)
Greenwich Growth Fund Limited is managed by Meridian Fund Management Limited. This Selling Stockholder has advised the Company that Messrs. Evan Schemerauer, Jonathan Walk and Don Dunstan hves dispositive and voting authority for all of its shares in the Company.
 
 
(l)
Bonanza Trust has advised the Company that Mr. Jeff Zaluda, as agent for the trustee of said trust has dispositive and voting authority for all of its shares in the Company.
 
 
(m)
KWG Trust ("KWG") advised the Company that Mr. Jeff Zaluda, agent for trustee, has dispositive and voting authority for all of KWG's shares in the Company.
 
 
(n)
Lighthouse Capital Insurance Company is managed by Aon Insurance Managers (Cayman) Ltd. ("Aon"). This Selling Stockholder has advised the Company that Aon has dispositive and voting authority for all of its shares in the Company.
 
 
(o)
Thominvest OY has advised the Company that Juha Jouhki has dispositive and voting authority for all of its shares in the Company.
 
 
(p)
Meganet Uno, S.A. has advised the Company that Mr. Federico A. Golcher has dispositive and voting authority for all of its shares in the Company.
 
21


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.

22


PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

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.

   
BID
 
ASK
 
For the Quarter Ended:
 
High
 
Low
 
High
 
Low
 
 
$
1.36
 
$
1.01
 
$
1.38
 
$
1.04
 
 
$
1.13
 
$
0.84
 
$
1.20
 
$
0.88
 
 
$
1.27
 
$
0.87
 
$
1.30
 
$
0.97
 
 
$
1.35
 
$
0.82
 
$
1.40
 
$
0.90
 
 
$
1.40
 
$
0.75
 
$
1.45
 
$
0.82
 
 
$
1.11
 
$
0.82
 
$
1.14
 
$
0.85
 
 
$
1.55
 
$
0.80
 
$
1.59
 
$
0.84
 
 
$
2.00
 
$
1.22
 
$
2.02
 
$
1.24
 
 
$
3.00
 
$
1.98
 
$
3.06
 
$
2.00
 
 
Holders
 
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.

23


OUR BUSINESS

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.
 
Inyx is a Nevada corporation headquartered in the United States. Our corporate address is 825 Third Avenue, 40th Floor, New York, New York 10022, 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:

24


inxyinc
 

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.
 
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.

25


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 March 31, 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).
 
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 August 31, 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.
 

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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.

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.

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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.
 
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.
 

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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.

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.

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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.
 
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.

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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.
 
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.

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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.
 
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.

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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.
 
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:
 
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    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 April 15, 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.
 
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.  

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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 March 31, 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.
  
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.

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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.
 
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.

36

 
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.
 
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.
 
Manufacturing Capacities as of December 31, 2005
 
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.

37

 
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.
 
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.

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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.
 
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.

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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.
 
·  
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.

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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.
 
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:

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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.
 
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.

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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.
 
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.

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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. 

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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.
 
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 April 26, 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:

45

 
·  
Atropine Sulfate (1%)
·  
Carbachol (3%)
·  
Phenylephrine HCl (2.5%)
·  
Pilocarpine HCl (0.5%; 1%; 2%; 3%; 4%; 6%)
·  
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.
 
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.

46

 
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.
 
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.

47

 
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.
 
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.

48


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.
 
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.

49

 
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.
 
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.

50

 
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.
 
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.

SELECTED FINANCIAL DATA
 
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.

51

 
   
Successor
 
Predecessor
 
   
For the
 year
ended
 
For the
year
ended
 
For the
period from
March 7, 2003 through
 
For the
period from January 1, 2003 through
 
For the
 
For the
(Unaudited)
 
Net revenues
 
$
49,565
 
$
15,699
 
$
13,099
 
$
2,396
 
$
21,184
 
$
21,919
 
Operating (loss) income
   
(20,950
)
 
(12,239
)
 
(10,374
)
 
(174
)
 
(3,893
)
 
2,304
 
Net (loss) income
   
(31,009
)
 
(16,942
)
 
(13,392
)
 
(908
)
 
(30,988
)
 
524
 
Net loss per common share
   
(0.78
)
 
(0.52
)
 
(0.59
)
 
N/A
   
N/A
   
N/A
 
Total assets
   
92,153
   
14,755
   
15,490
   
N/A
   
10,612
   
N/A
 
Long-term debt, net of current portion
   
46,236
   
113
   
6,617
   
N/A
   
N/A
   
N/A
 
Stockholders’ (deficit) equity
   
(30,400
)
 
(5,865
)
 
1,841
   
N/A
   
N/A
   
N/A
 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 April 3, 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 March 29, 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.

52


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.
 
Acquisition of Celltech Manufacturing Services Limited
 
On August 31, 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.

53


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 March 31, 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).
 
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.

54


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.
 
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.

55


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.

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.
 
56

 
For the Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005 and the Pro Forma Three Months Ended March 31, 2005.

   
Actual (unaudited)
 
Pro Forma
 
   
For the three months ended
March 31,
 
For the three months ended
 
     
2005
 
2005
 
Net revenues
 
$
21,412
 
$
2,677
 
$
19,046
 
Cost of sales
   
13,111
   
2,535
   
15,286
 
Gross profit
   
8,301
   
142
   
3,760
 
                     
Operating expenses:
                   
Research and development
   
682
   
357
   
357
 
General and administrative
   
4,730
   
1,841
   
3,677
 
Selling
   
1,242
   
134
   
425
 
Depreciation
   
1,514
   
161
   
1,237
 
Amortization of intangible assets
   
436
   
47
   
722
 
Total operating expenses
   
8,604
   
2,540
   
6,418
 
                     
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 March 31, 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.
 
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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 March 31, 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.
 
For the Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004 and the Pro Forma Year Ended December 31, 2005 Compared to the Pro Forma Year Ended December 31, 2004

   
Actual
For the Year Ended
December 31,
 
Pro Forma
For the Year Ended
 
     
2004
 
2005
 
2004
 
                   
Net revenues
 
$
49,565
 
$
15,699
 
$
81,277
 
$
73,602
 
Cost of sales
   
34,859
   
14,316
   
58,967
   
58,137
 
Gross profit
   
14,706
   
1,383
   
22,310
   
15,465
 
                           
Operating expenses:
                         
Research and development
   
3,406
   
2,745
   
3,406
   
2,745
 
General and administrative
   
24,575
   
9,725
   
27,856
   
15,962
 
Selling
   
3,005
   
367
   
3,652
   
1,315
 
Depreciation
   
3,283
   
619
   
6,512
   
5,884
 
Amortization of intangible assets
   
1,387
   
166
   
2,747
   
2,469
 
Total operating expenses
   
35,656
   
13,622
   
44,173
   
28,375
 
                           
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.

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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.

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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.

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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.

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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 August 31, 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.

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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.

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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.
 
For the Year Ended December 31, 2004 and for the Combined Year Ended December 31, 2003
 
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 March 7, 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:

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For the
Year Ended
 
For the
Combined
Period from
January 1, 2003 through
 
For the
Period from
through
 
For the
Period from
January 1, 2003 through
 
                   
Net revenues
 
$
15,699
 
$
15,495
 
$
13,099
 
$
2,396
 
Cost of sales
   
14,316
   
12,510
   
10,634
   
1,876
 
Gross profit
   
1,383
   
2,985
   
2,465
   
520
 
                           
Operating expenses:
                         
Research and development
   
2,745
   
-
   
-
   
-
 
General and administrative expenses
   
9,725
   
12,661
   
12,093
   
568
 
Selling
   
367
   
311
   
260
   
51
 
Depreciation
   
619
   
422
   
347
   
75
 
Amortization of intangibles
   
166
   
139
   
139
   
-
 
Total operating expenses
   
13,622
   
13,533
   
12,839
   
694
 
                           
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.

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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.

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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.

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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.

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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.   

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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.

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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.
 
Contractual Obligations as of March 31, 2006
 
Contractual Obligations
 
Payments due by period
 
(amounts in thousands of U.S. dollars)
   
Total
   
2006
   
2007-2009
   
Thereafter
 
Long-term debt obligations - principal(1)
 
$
53,372
 
$
6,890
 
$
46,482
 
$
-
 
Long-term debt obligations - interest
   
9,177
   
3,924
   
5,253
   
-
 
Loan payable to seller of Ashton (2)
   
14,147
   
14,147
   
-
   
-
 
Operating Lease Obligations (3)
   
3,210
   
843
   
2,116
   
251
 
Subtotal
   
79,906
   
25,804
   
53,851
   
251
 
Commercial commitments(4)
                         
Capital expenditures
   
916
   
916
   
-
   
-
 
Purchase obligations
   
1,441
   
1,261
   
180
   
-
 
Subtotal
   
2,357
   
2,177
   
180
   
-
 
Total
 
$
82,263
 
$
27,981
 
$
54,031
 
$
251
 

(1)  
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.
 
Analysis of Cash Flows

For the Years Ended December 31, 2005 and 2004
 
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 March 24, 2006, the Company received additional cash of approximately $4.5 million from the exercise of more stock purchase warrants by outside holders.

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Cash Flows from Operating Activities for the Year Ended December 31, 2005 and 2004
 
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 December 31, 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.
 
Cash Flows from Investing Activities for the Year Ended December 31, 2005 and 2004
 
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.
 
Cash Flows from Financing Activities for the Year Ended December 31, 2005 and 2004
 
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.
 
For the Three Months Ended March 31, 2006 and 2005

At March 31, 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 March 31, 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.
 
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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 March 31, 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.
 
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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 August 31, 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.
 
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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, 2006 the 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.
 
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
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.
 
MANAGEMENT

Directors and Executive Officers
 
Name
 
Age
 
Position with Company
 
Start Date with Company
Jack Kachkar
 
43
 
Chairman, Chief Executive Officer, and Director
 
Steven Handley
 
42
 
President and Director
 
Colin Hunter
 
50
 
Executive Vice President, Chief Scientific Officer and Director
 
Douglas Brown
 
53
 
Director and Compensation Committee Chair
 
Joseph Rotmil
 
55
 
Director and Audit Committee Chair
 
Jay M. Green
 
57
 
Executive Vice President and Director of Corporate Development
 
Rima Goldshmidt
 
43
 
Vice President,Treasurer,
Corporate Secretary and Acting Chief Financial Officer
 
Stephen Beckman
 
39
 
President of Exaeris, Inc., Inyx's wholly-owned marketing subsidiary.
 
David Zinn
 
35
 
Vice President, Finance
 
Duncan A. McIntyre
 
44
 
Managing Director, Inyx Europe
 
 
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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.
 
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).

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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 BeckmanPresident 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.

85


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:

86

 
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.
 
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.
 
87


Summary Compensation Table

                   
Long-term Compensation
     
   
Annual Compensation
     
Awards
     
Payouts
     
Name/ Principal Position
 
Year
 
Salary
 
Bonus
 
Other Annual Compensation
 
Restricted Stock Awards
 
Securities Underlying Options/ SAR
 
LTIP Payouts
 
All Other Compensation
 
Jack Kachkar (1)
Chief Executive Officer
   
2005
2004
2003
 
$
$
$
345,000
345,000
245,000
   
 
$
100,000(2
)
           
$
$
$
100,000
75,000
65,000
 
 
                                 
Steven Handley
President
 
   
2005
2004
2003
 
$
$
$
183,000
183,000
163,300
 
$
12,250
 
$
$
17,568(3)27,885(3)
             
$
$
57,329
16,120
 
 
                                 
Colin Hunter
Executive Vice- President, CSO
   
2005
2004
2003
 
$
$
$
173,850
172,300
155,135
  $
11,635
 
$
$
17,568(3)
29,501(3)
             
$ 
$
61,568
16,120
 
 
                                 
Jay Green
Executive Vice-President, Corp. Dev.
   
2005
2004
2003
 
$
$
200,000
150,000
 
$
55,000
  $
5,000(4)
             
$
$
20,000
10,000
 
 
                                 
Rima Goldshmidt
Vice President, Finance & Acting Chief
Financial Officer
   
2005
2004
2003
 
$
$
$
125,000
100,000
92,000
 
$
 
$
45,000
5,000
   
             
$
$
10,000(3)
15,000
 
 
                                 
John Hamerski
Former Vice President & Chief Financial Officer
   
2005
2004
2003
 
$
200,000
   
 
$
66,000(6)
               
 
 
(1)  
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.
 
88

 
(3)  
Represents vehicle, travel and professional fee allowances.
 
(4)  
Represents a one-time discretionary expense allowance.
 
(5)  
Includes consulting fees and reimbursement of expenses.
 
(6)  
Includes vehicle and apartment costs.
 
Option/SAR Grants in the Year Ended December 31, 2005

   
Individual Grants
     
Name
 
Number of Securities Underlying Options/ SARs Granted
 
Percentage of Total Options/ SARs Granted to Employees in 2005
 
Exercise of Base Price
 
Expiration Date
 
Grant Date Present Value
 
Jack Kachkar
   
2,000,000
   
36.7
 
$
1.37
   
9/14/2015
 
$
1,540,000
 
Jack Kachkar
   
250,000
   
4.6
   
1.75
   
11/28/2015
   
260,000
 
Jay Green
   
1,000,000
   
18.3
   
1.37
   
9/14/2015
   
770,000
 
John Hamerski(1)
   
300,000
   
5.5
   
1.01
   
3/31/2015
   
177,000
 
Rima Goldshmidt
   
285,000
   
4.7
   
1.37
   
9,14,2015
   
219,450
 

 (1) Such options expired March 30, 2006. John Hamerski resigned in December 2005 and no longer holds a position with the Company.

Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values

Name
 
Shares Acquired on Exercise
 
Value Realized
 
Number of Securities Underlying Unexercised Options/ SARs at December 31, 2005 Exercisable/ Unexercisable
 
Value of Unexercised
In-the-Money Options/ SARs at December 31, 2005 Exercisable/ Unexercisable
 
Jack Kachkar
   
-
   
-
   
3,000,000
   
3,000,000
 
Steven Handley
   
-
   
-
   
-
   
-
 
Colin Hunter
   
-
   
-
   
400,000
   
400,000
 
Jay Green
   
-
   
-
   
1,500,000
   
1,500,000
 
John Hamerski(1)
   
-
   
-
   
300,000
   
300,000
 
Rima Goldshmidt
   
-
   
-
   
285,000
   
285,000
 

 (1) Such options expired March 30, 2006. John Hamerski resigned in December 2005 and no longer holds a position with the Company.

89


Long-Term Incentive Plans - Awards in 2005
 
           
Estimated Future Payments under
Non-Stock Price-Based Plans
 
Name
   
Number of Shares, Under or Other Rights
   
Performance or Other period Until Maturation or Payout
   
Threshold
($ or #)
 
 
Target
($ or #)
 
 
Maximum
($ or #)
 
                                 
Jack Kachkar
   
None
   
   
   
   
 
Steven Handley
   
None
   
   
   
   
 
Colin Hunter
   
None
   
   
   
   
 
Jay Green
   
None
   
   
   
   
 
Rima Goldshmidt
   
None
   
   
   
   
 
John Hamerski
   
None
   
   
   
   
 
 
Employment Agreements

The Company has signed Employment Agreements with its top five paid incumbent executive officers. Such agreements have the following principal terms:
 

 
 
Start Date
 
Term (Years)
 
Base Salary
 
Stock
Options(2)
 
Vacation (weeks)
 
Severance amount
 
Jack Kachkar (1)
       
5
 
$
345,000
   
750,000
   
4
   
24 month
base
 
Steven Handley
       
5
  £
 100,000
   
750,000
   
5
   
12 months
base
 
Colin Hunter
       
5
  £ 
 95,000
   
100,000
   
5
   
12 months
base
 
Rima Goldshmidt
       
4
 
$
145,000(4
)
 
100,000
   
4
   
6 months
 base
 
Jay Green(3)
       
5
 
$
200,000
   
500,000
   
4
   
24 month
base
 
Stephen Beckman
       
3
 
$
175,000
   
300,000
   
4
   
12 month
base
 
 
(1)  
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.

(4)  
Ms. Goldshmidt’s contract was amended on September 1, 2005 to increase annual salary to $145,000.

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.

90


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.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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.

91

 
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.

92

 
 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.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
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 May 19, 2006:

     
Common Stock 
 
Name and Address of Beneficial Owner
   
Number of Shares
   
Percentage  
 
Viktoria Benkovitch, Chairman’s spouse
Unit #1210, 445 Grand Bay Drive
   
3,000,000(1)
   
5.9
%
               
Jack Kachkar, Chairman & CEO
Unit #1210, 445 Grand Bay Drive
   
3,140,000(2)
   
5.9
%
               
Steven Handley, President
37 Parkland Drive
Elton, Chester
Cheshire, England CH2 4PG
   
2,000,000(3)
   
4.0
%
 
93


   
Common Stock 
 
Name and Address of Beneficial Owner
 
Number of Shares
 
Percentage
 
Rima Goldshmidt, Vice President, Treasurer, Corporate Secretary
& Acting Chief Financial Officer
103 Overbrook Place
Toronto, Ontario M3H 4P5
   
500,000(4)
 
 
1.0
%
               
Colin Hunter, Executive Vice President
& Chief Scientific Officer
11 Humberclose
Widnes, Cheshire, England WA8 3YY
   
1,000,000(5)
 
 
2.0
%
               
Larry Stockhamer
76 Sanibel Crescent
Thornhill, Ontario L4J 8K7
   
9,100,000(6)
 
 
17.5
%
               
David Zinn, Vice President, Finance
3010 Willow Ln,
   
300,000(7)
 
 
0.6
%
               
Douglas Brown, Director
Sturdy’s Cottage
Taston, Oxon, United Kingdom OX7 3JL
   
1,100,000(8)
 
 
2.1
%
               
Joseph A. Rotmil, Director
2453 Provence Circle
   
400,000(9)
 
 
0.8
%
               
Jay M. Green, Executive Vice President and Director of Corporate Development
104 West Shore Drive
   
1,850,000(10)
 
 
3.5
%
               
Stephen Beckman, President of Exaeris, Inc.
662 Collingwood Terrace
Glenmore, PA 19343
   
300,000(11)
 
 
0.6
%
               
Potomac Capital Management
825 Third Avenue, 33rd Floor
   
3,056,821(12)
 
 
6.1
%
               
Duncan McIntyre, Managing Director of Inyx Europe Limited
153 Chester Road
Grappenhall, Warrington
WA4 2SB, England
   
300,000(13)
 
 
0.6
%
               
All officers and directors (10 persons)
   
10,890,000(12)
 
 
18.6
%
 
 (1)
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.

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(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 three 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.
(10)
Options to purchase 1,500,000 shares and warrants to purchase 350,000 shares.
(11)
Options to purchase 300,000, 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.
 
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.
 
95

 
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.

96


Pursuant to the Company’s Annual Report on Form 10-K, for the year ended December 31, 2005, the Company’s Net Revenue was 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.

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 purchases 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.
 
97

 
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.
 
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.
 
98

 
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.
 
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.
 
Amendments to Bylaws
 
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.
 
99

 
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.
 
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.
 
100

 
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.

LEGAL MATTERS
 
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.
 
EXPERTS
 
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 December 31, 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.
 
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
 
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.

101


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.
 
AVAILABLE INFORMATION

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.
 
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Unaudited Consolidated Financial Statements:
 
Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005
F-2
   
Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005(unaudited)
F-3
   
Consolidated Statements of Cash Flows for three months ended March 31, 2006 and 2005(unaudited)
F-4
   
Notes to Consolidated Financial Statements (unaudited)
F-5
   
Unaudited Pro Forma Statements of operations
F-18
   
Audited Consolidated Financial Statements:
 
   
Report of Independent Registered Public Accounting Firm
F-20
   
Consolidated Balance Sheets as of December 31, 2005 and December 31, 2004
F-21
   
Consolidated Statements of Operations for the Years Ended December 31, 2005 and December 31, 2004; for the period from March 7, 2003 through December 31, 2003 and for the period from January 1, 2003 through March 6, 2003
F-22
   
Consolidated Statements of Stockholders’ Equity (Deficit) and Other Comprehensive Loss for the Years Ended December 31, 2005 and December 31, 2004; for the period from March 7, 2003 through December 31, 2003; and for the period from January 1, 2003 through March 6, 2003
F-23
   
Consolidated Statements of Cash Flows for Years Ended December 31, 2005 and December 31, 2004; for the period from March 7, 2003 through December 31, 2003 and for the period from January 1, 2003 through March 6, 2003
F-24
   
Notes to Consolidated Financial Statements
F-25
   
Unaudited Pro Forma Statements of operations
F-53
 


INYX, INC.
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars except for share amount)

   
March 31,
   
     
2005
 
   
(unaudited)
     
           
Assets
 
           
Current assets:
         
Cash and cash equivalents
 
$
1,588
 
$
1,023
 
Accounts receivable, net
   
22,241
   
19,782
 
Inventory, net
   
10,974
   
11,331
 
Prepaid expenses and other current assets
   
2,928
   
2,589
 
Total current assets
   
37,731
   
34,725
 
               
Property, plant and equipment, net
   
40,725
   
40,781
 
Deferred financing costs, net
   
1,384
   
1,434
 
Deferred costs and deposits
   
3,192
   
431
 
Purchased intangible assets, net
   
14,433
   
14,782