**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
  **FORM
10-Q**
  (Mark
One)
  [X]
    QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31, 2005[ 
      ]
    TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACTFor
      the transition period from _________________ to
      _________________Commission
      file number 333-83152
 
  Inyx,
      Inc.
      (Exact
      name of small business issuer as specified in its
  charter)Nevada
      (State
      or other jurisdiction of incorporation or organization)
    75-2870720
      (IRS
      Employer Identification No.)825
      Third Avenue, 40thFloor, New York, New York
      (Address
      of principal executive offices)(212)
      838-1111
      (Issuer’s
      telephone number)
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days: Yes [X] No [ 
].
  Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act: Yes [  ] No [X ].
  **APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**
 **PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:**
  Check
whether the registrant filed all documents and reports required to be filed by
Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [  ] No [ 
]
  **APPLICABLE
ONLY TO CORPORATE ISSUERS**
  State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of May 19, 2005: 38,983,983 shares of common stock.
   
  PART I —
FINANCIAL INFORMATION
  Item
1. FINANCIAL STATEMENTS




Consolidated
      Balance Sheets as of March 31, 2005 and December 31, 2004;
    F-2Consolidated
      Statements of Operations for the three months ended March 31, 2005 and
      2004;
    F-3Consolidated
      Statements of Cash Flows for three months ended March 31, 2005 and
      2004;
    F-4Notes
      to Consolidated Financial Statements
    F-5


F-1
  **** **INYX,
INC.**
 **Consolidated
Balance Sheets**
 **(Expressed
in thousands of U.S. dollars except for share amounts)**
 **March
      31,**
    
    **December
      31,****2005**
    
    **2004****(Unaudited)****Assets**Current
      assets:Cash
    
    $
    3,277
    
    $
    336Accounts
      receivable, net
    
    
    862
    
    
    1,697Inventory,
      net
    
    
    3,648
    
    
    1,520Prepaid
      expenses and other current assets
    
    
    1,144
    
    
    2,571Total
      current assets
    
    
    8,931
    
    
    6,124Property,
      plant and equipment, net
    
    
    18,887
    
    
    6,230Deferred
      financing costs, net
    
    
    697
    
    
    651Other
      assets
    
    
    29
    
    
    45Purchased
      intangible assets, net
    
    
    9,645
    
    
    1,70529,258
    
    
    8,631Total
      assets
    
    $
    38,189
    
    $
    14,755**Liabilities and Stockholders'
      Deficit**Current
      liabilities:Accounts
      payable
    
    $
    4,578
    
    $
    4,091Accrued
      expenses and other current liabilities
    
    
    3,106
    
    
    1,636Deferred
      revenues
    
    
    3,500
    
    
    108Debt
      refinanced, net of discount
    
    
    -
    
    
    10,395Current
      portion of long-term debt
    
    
    9,008
    
    
    4,277Total
      current liabilities
    
    
    20,192
    
    
    20,507Long-term
      debt, net of current portion
    
    
    29,296
    
    
    113Total
      liabilities
    
    
    49,488
    
    
    20,620Commitments
      and contingenciesStockholders'
      deficit:Preferred
      stock - $0.001 par value, 10,000,000 sharesauthorized
      -0- shares issued and outstanding
    
    
    -
    
    
    -Common
      stock - $0.001 par value, 150,000,000 sharesauthorized,
      39,983,983 shares issued and outstandingat
      March 31, 2005; 38,012,479 shares issued andand
      outstanding at December 31, 2004
    
    
    40
    
    
    38Additional
      paid-in capital
    
    
    26,996
    
    
    25,275Accumulated
      deficit
    
    
    (37,344
    )
    
    (30,334
    )Subscriptions
      receivable
    
    
    (343
    )
    
    (343
    )Accumulated
      other comprehensive loss -foreign
      currency translation adjustment
    
    
    (648
    )
    
    (501
    )Total
      stockholders' deficit
    
    
    (11,299
    )
    
    (5,865
    )Total
      liabilities and stockholders' deficit
    
    $
    38,189
    
    $
    14,755
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-2
  **INYX,
INC.**
 **Consolidated
Statements of Operations**
 **(Expressed
in thousands of U.S. dollars, except per share amounts)**
  **For the Three Months EndedMarch
      31,****2005**
    
    
    **2004****(Unaudited)**Net
      revenues
    
    $
    2,677
    
    $
    4,526Cost
      of sales
    
    
    2,535
    
    
    3,911Gross
      profit
    
    
    142
    
    
    615Operating
      expenses:Research
      and development
    
    
    357
    
    
    287General
      and administrative
    
    
    1,841
    
    
    2,104Selling
    
    
    134
    
    
    84Depreciation
      and amortization
    
    
    161
    
    
    152Amortization
      of intangible assets
    
    
    47
    
    
    42Total
      operating expenses
    
    
    2,540
    
    
    2,669Loss
      from operations before interest andfinancing
      costs and income tax benefit
    
    
    (2,398
    )
    
    (2,054
    )Interest
      and financing costs (Note 10)
    
    
    4,612
    
    
    1,026Loss
      before income tax benefit
    
    
    (7,010
    )
    
    (3,080
    )Income
      tax benefit
    
    
    -
    
    
    393Net
      loss
    
    $
    (7,010
    )
    $
    (2,687
    )Basic
      and fully diluted loss per share
    
    $
    (0.18
    )
    $
    (0.09
    )Weighted-average
      number of shares used incomputing
      basic and fully diluted loss per share amounts
    
    
    38,296,035
    
    
    28,747,582
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-3
  **** **INYX,
INC.** **Consolidated
Statements of Cash Flows** **(Expressed
in thousands of U.S. dollars)**
  **For
      the Three Months Ended March 31,****2005**
    
    **2004****(Unaudited)**Cash
      flows from operating activities:Net
      loss for the period
    
    $
    (7,010
    )
    $
    (2,687
    )Adjustments
      to reconcile net loss to net cashprovided
      by (used in) operating activities:Depreciation
      and amortization
    
    
    161
    
    
    152Amortization
      of financing costs and debt discount
    
    
    2,096
    
    
    823Amortization
      of intangible assets
    
    
    47
    
    
    42Deferred
      tax asset
    
    
    -
    
    
    (393
    )Issuance
      of stock for termination fees and conversion of debt
    
    
    1,577
    
    
    -Reserve
      for inventory obsolescence
    
    
    64
    
    
    386Provision
      for bad debts
    
    
    24
    
    
    59Stock
      option compensation
    
    
    66
    
    
    66Warrants
      issued for financing & consulting fees
    
    
    162
    
    
    -Issuance
      of shares for exercise of stock options
    
    
    -
    
    
    290Subscription
      receivable
    
    
    -
    
    
    (293
    )Changes
      in assets and liabilities:Decrease
      in accounts receivables
    
    
    811
    
    
    46(Increase)
      decrease in inventory
    
    
    142
    
    
    (212
    )(Increase
      ) decrease in prepaid and other current assets
    
    
    1,427
    
    
    (1,308
    )(Increase)
      in deferred financing costs
    
    
    (697
    )
    
    (107
    )Decrease
      in other assets
    
    
    16
    
    
    -Increase
      in accounts payable and accrued liabilities
    
    
    1,957
    
    
    135Increase
      (decrease) in deferred revenues
    
    
    3,117
    
    
    (191
    )Net
      cash provided by (used in) operating activities
    
    
    3,960
    
    
    (3,192
    )Cash
      flows from investing activities:Purchase
      of property, plant and equipment
    
    
    (120
    )
    
    (58
    )Acquisition
      of Aventis Pharmaceuticals, Puerto Rico
    
    
    (22,744
    )
    
    -Net
      cash used in investing activities
    
    
    (22,864
    )
    
    (58
    )Cash
      flows from financing activities:Borrowings
      under revolving line of credit, net of fees
    
    
    2,423
    
    
    3,206Proceeds
      from issuance of long term debt to Westernbank
    
    
    29,187
    
    
    -Proceeds
      from issuance of long term debt (current portion) to Westernbank
    
    
    1,813
    
    
    -Repayment
      of long term debt and revolving line of credit to Laurus
      Funds
    
    
    (10,395
    )
    
    -Payment
      of fees on long-term debt and revolving line of credit to Laurus
      Funds
    
    
    (1,739
    )
    
    -Proceeds
      from issuance of demand notes to shareholders
    
    
    600
    
    
    -Repayment
      of demand notes to shareholders
    
    
    (67
    )
    
    -Cost
      of registering stock (SB2 registration)
    
    
    (82
    )
    
    -Repayment
      of capital lease obligation
    
    
    (42
    )
    
    (34
    )Net
      cash provided by financing activities
    
    
    21,698
    
    
    3,172Effect
      of foreign exchange rate changeson
      cash and cash equivalents
    
    
    147
    
    
    35Increase
      (decrease) in cash
    
    
    2,941
    
    
    (43
    )Cash
      at beginning of period
    
    
    336
    
    
    796Cash
      at end of period
    
    $
    3,277
    
    $
    753
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Tabular amounts are expressed in
thousands of U.S. dollars)**
  NOTE
1 : BUSINESS
DESCRIPTION
  Inyx,
Inc. (“Inyx” or the “Company”) through its wholly-owned subsidiaries, Inyx
Pharma Limited, Inyx Canada Inc. and Inyx USA, Ltd., is a specialty
pharmaceutical company which focuses on the development and manufacturing of
prescription and over-the-counter aerosol pharmaceutical products and drug
delivery technologies for the treatment of respiratory, allergy, dermatological
and topical conditions. Inyx’s client base primarily consists of large ethical
pharmaceutical corporations, branded generic pharmaceutical distributors, and
biotechnology companies.
  On March
31, 2005, the Company through its wholly-owned subsidiary, Inyx USA, completed
the acquisition of the business assets of Aventis Pharmaceuticals Puerto Rico,
Inc. (“Aventis PR”) from Aventis Pharmaceuticals, Inc. (“Aventis
Pharmaceuticals”) a subsidiary of the sanofi-aventis Group, for approximately
$20.1 million, plus acquisition costs of approximately $2.6 million. Aventis PR
is a pharmaceutical manufacturing operation producing dermatological,
respiratory and allergy products. Aventis PR manufactured pharmaceutical
products in accordance with a contract manufacturing agreement with its parent
company, Aventis Pharmaceuticals. The operating results of the acquired business
will be included in the Company’s consolidated results from the effective date
of the acquisition. The Company’s March 31, 2005 balance sheet includes the
assets acquired.
  Inyx
currently manages and operates its business as one operating
segment.
 
 NOTE
2 : BASIS
OF PRESENTATION
  The
financial information presented herein should be read in conjunction with our
consolidated financial statements for the year ended December 31, 2004. The
accompanying consolidated financial statements for the three months ended March
31, 2005 and 2004 are unaudited but, in the opinion of management, include all
necessary adjustments (consisting of normal, recurring in nature) for a fair
presentation of the financial position, results of operations and cash flow for
the interim periods presented. Interim results are not necessarily indicative of
results for a full year. Therefore, the results of operations for the three
months ended March 31, 2005 are not necessarily indicative of operating results
to be expected for the year.
  Significant
accounting policies are detailed in our annual report on Form 10-KSB for the
year ended December 31, 2004.
  All
intercompany accounts and transactions have been eliminated in
consolidation.
  Certain
amounts from prior consolidated financial statements and related notes have been
reclassified to conform to the current period presentation
  NOTE
3 : ACQUISITION
OF AVENTIS PHARMACEUTICALS
  On March
31, 2005, Inyx USA acquired the business assets of Aventis PR from the
sanofi-aventis Group for approximately $20.1 million plus acquisition
transaction costs of $2.6 million. The acquisition was accounted for as a
business combination in accordance with Statement of Financial Accounting
Standard No. 141 *“Business
Combinations”.* In
connection with this acquisition, Inyx USA paid cash of approximately $19.7
million upon closing (an additional $365,000 remains payable at March 31,
2005) and incurred approximately $2.6 million in direct transaction costs. The
acquisition was funded through a credit facility
from the Business Credit Division of Westernbank Puerto Rico; Puerto Rico’s
second largest bank, and a wholly owned subsidiary of W Holding Company, Inc.
(“Westernbank”) . 
The Westernbank financing consists of a revolving loan, three term loans, and a
mezzanine loan, in the agregate refered to as the “Westernbank Credit Facility”
(See Note 10).
  The
purchase price was allocated to the identifiable net assets acquired including
the identifiable intangible assets based on their estimated fair market values
at the date of acquisition as determined by an independent valuation obtained by
the Company.
  The fair
value of the assets acquired from the transaction totaled approximately $66
million based on independent third-party appraisals and valuations, which
resulted in negative goodwill of $43.2 million. The negative goodwill was
proportionately allocated over the non-current tangible and intangible assets
acquired as follows:
  F-5
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Tabular amounts are expressed in
thousands of U.S. dollars)**
  Fair
      Value of
    
    Allocation
      of
    
    Allocation
      ofAssets
    
    negative
    
    Purchase
      priceacquired
    
    goodwill
    
    of
      assets acquiredLand
    
    $
    3,040
    
    $
    (2,065
    )
    $
    975Building
    
    
    12,700
    
    
    (8,627
    )
    
    4,073Machinery
      and equipment
    
    
    22,725
    
    
    (15,436
    )
    
    7,289Computer
      hardware and software
    
    
    269
    
    
    (183
    )
    
    86*Identifiable
      intangible assets subject to amortization:*Customer
      contracts
    
    
    4,800
    
    
    (3,260
    )
    
    1,540*Identifiable
      intangible assets not subject to amortization:*Customer
      contracts renewals
    
    
    20,100
    
    
    (13,653
    )
    
    6,447Inventory
    
    
    2,334
    
    
    -
    
    
    2,334**Total**
    
    **$**
    **65,968**
    
    **$**
    **(43,224**
    **)**
    **$******
    ******22,744**
 
 The fair
values assigned to the acquired assets are based on estimates and assumptions
provided and other information compiled by management, including independent
valuations, that utilize established valuation techniques appropriate for the
industry the Company operates in. The property, plant and equipment will be
depreciated based on the Company’s existing depreciation policies. The
intangible assets, which represent the value assigned to customer contracts,
will be amortized on a straight line basis over three years, intangible assets
which represent the value assigned to customer contract renewal is considered to
have an indefinite life. The Company will assess the recoverability of the
carrying value assigned to customer contract renewal on an annual basis by
estimating the future net cash flows expected to result from these assets. If
future cash flows are determined to be less than the carrying value of these
intangibles, an impairment loss will be recorded.
  Pro
Forma Results
  The
following unaudited proforma summary information was based upon assumptions
deemed appropriate by the Company and presents the financial information as if
the acquisition of Aventis PR had taken place at the beginning of the periods
presented. These pro forma results have been prepared for comparative purposes
and are not indicative of what would have occurred had the acquisition occurred
at the beginning of the periods presented nor are they indicative of future
results.
 
 The most
significant pro forma adjustments reflect the new debt incurred to finance the
purchase of Aventis PR and the refinancing of existing debt to Lauus Master
Funds Ltd ( "Lauus Funds"); the depreciation and amortization were also adjusted
to reflect the fair market values of the tangible and intangible assets acquired
on March 31, 2005.
 Pro
      Forma
      For
      the Three Months EndedMarch 31,2005
    
    2004Pro
      forma net revenues
    
    $
    6,347
    
    $
    7,561Pro
      forma loss from operations
    
    $
    (3,125
    )
    $
    (2,512
    )
 
 NOTE
4: ACCOUNTSRECEIVABLE, NET
  Accounts
receivable consist of the following:
 March
      31,
      2005
      (Unaudited)
    
    December
      31,
      2004Trade
      receivables
    
    $
    1,038
    
    $
    1,849Less
      allowance for doubtful accounts
    
    
    (176
    )
    
    (152
    )$
    862
    
    $
    1,697
 
 F-6
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Tabular amounts are expressed in
thousands of U.S. dollars)**
  There was
a bad debt expense of $24,000 and $59,000 for the three months ended March
31, 2005 and 2004, respectively.
  NOTE
5: INVENTORY,
NET
  Inventory
is comprised of the following:
 March
      31,
      2005
      (Unaudited)
    
    December
      31,
      2004Finished
      goods
    
    $
    12
    
    $
    107Work
      in process
    
    
    527
    
    
    551Raw
      materials
    
    
    3,649
    
    
    1,3384,188
    
    
    1,996Less
      provision for obsolescence
    
    
    (540
    )
    
    (476
    )$
    3,648
    
    $
    1,520
  N OTE
6 : PROPERTY,
PLANT AND EQUIPMENT, NET
  Property,
plant and equipment **** consist
of the following:
 March
      31,
      2005
      (Unaudited)
    
    December
      31,2004Land
    
    $
    1,521
    
    $
    546Buildings
    
    
    5,132
    
    
    1,059Machinery,
      equipment and office furniture
    
    
    10,830
    
    
    3,541Computer
      hardware and software
    
    
    188
    
    
    10217,671
    
    
    5,248Less
      accumulated depreciation
    
    
    (1,044
    )
    
    (898
    )16,627
    
    
    4,350Computer
      hardware and software under capital lease
    
    
    407
    
    
    407Less
      accumulated amortization
    
    
    (83
    )
    
    (68
    )324
    
    
    339Equipment
      held for future use (a)
    
    
    1,541
    
    
    1,541Construction
      in progress (b)
    
    
    395
    
    
    -$
    18,887
    
    $
    6,230
  For the
three months ended March 31, 2005, depreciation of property, plant and equipment
was approximately $146,000 and for
the same period in 2004 it was approximately $138,000. Amortization for
equipment under capital leases was approximately $15,000 and $14,000 for
the three months ended March 31, 2005 and 2004, respectively.
  (a) The
equipment held for future use consists of a manufacturing line which the Company
is in the process of developing. Management expects to incur additional costs to
equip this manufacturing line for the filling and gassing of non-CFC aerosol
pharmaceutical products.
  (b) The
construction in progress relates to costs associated with building a
manufacturing line for a customer and various other ongoing projects. Management
expects to incur additional costs to complete the manufacturing line for
production and the various other projects estimated to be in excess of $3.0
million over the next two years. As of March 31, 2005, the Company has
approximately $230,000 of outstanding commitments relating to these projects.
  NOTE
7 : DEFERRED
FINANCING COSTS, NET
  As of
December 31, 2004, deferred financing costs, net are comprised of fees related
to convertible debt issued to Laurus Master Funds, Ltd (“Laurus Funds”) in 2003
and amended in 2004. All amounts due to Laurus Funds were refinanced on March
31, 2005 through the Company's new Westernbank Credit Facility. (See Note 10)
The unamortized deferred financing costs of approximately $651,000 relating to
Laurus Funds were charged to interest and financing costs on the Company’s
consolidated statement of operations for the three months ended March 31, 2005.
  F-7
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Tabular amounts are expressed in
thousands of U.S. dollars)**
 
 As of
March 31, 2005, the deferred financing costs, net are related to the Westernbank
Credit Facility and will be amortized over a three year period.
  Deferred
financing costs, net consist of the following:
 March
      31,
      2005
      (Unaudited)
    
    December
      31,
      2004Deferred
      financing costs
    
    $
    1,724
    
    $
    1,027Less
      accumulated amortization
    
    
    (1,027
    )
    
    (376
    )$
    697
    
    $
    651
  For the
three months ended March 31, 2005 and 2004, the amortization of deferred
financing costs approximated $651,000 and $77,000, respectively.
  NOTE
8 : PURCHASED
INTANGIBLE ASSETS, NET
  Purchased
intangible assets consist of the following:
  March
      31,
      2005
      (Unaudited)
    
    
    December
      31,
      2004Intangible
      assets subject to amortization:Customer
      Contracts (3 year life)
    
    $
    1,540
    
    $
    -Customer
      list (12 year life)
    
    
    1,280
    
    
    1,280Know-how
      (10 year life)
    
    
    598
    
    
    598Patent
      (7 year life)
    
    
    132
    
    
    1323,550
    
    
    2,010Less
      accumulated amortization
    
    
    (352
    )
    
    (305
    )3,198
    
    
    1,705Intangible assets
      not subject to amortization:Customer
      Contract renewals
    
    
    6,447
    
    
    -$
    9,645
    
    $
    1,705
 Intangible assets subject to
amortization:
  Purchased
intangible assets are carried at cost less accumulated amortization. For the
three months ended March 31, 2005 and 2004, amortization expense related to
intangible assets totaled approximately $47,000, and $42,000 respectively. The
aggregate estimated amortization expense for intangible assets as of March 31,
2005 for each of the following five years and thereafter is as follows:
  2005
    
    $
    5242006
    
    
    6982007
    
    
    6992008
    
    
    3142009
    
    
    185Thereafter
    
    
    778Total
    
    $
    3,198
   Intangible assets not subject to amortization:
  The
intangible assets of $6.4 million which represent the value assigned to customer
contract renewals is considered to have an indefinite life. The Company will
assess the recoverability of the carrying value assigned to customer contract
renewal on an annual basis by estimating the future net cash flows expected to
result from these assets. If future cash flows are determined to be less than
the carrying value of these intangibles, an impairment loss will be
recorded.
 
 F-8
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Tabular amounts are expressed in
thousands of U.S. dollars)**
  NOTE
9: DEFERRED
REVENUES
 
 On March
31, 2005, the Company received an advance of $3.5 milion from Aventis PR for
strategic and business development activities to be carried out by the Company
in 2005, in collaboration with Aventis PR and it's parent Company
sanofi-aventis. This amount was classified as deffered revenue and will be
recognized into income as revenue is earned.
  Deferred
revenues of $108,000 at December 31, 2004 related to an advance from Stiefel
Laboratories, Inc. (“Stiefel”) for services that were carried out
during the first three months of 2005.
  NOTE
10: LONG-TERM
DEBT, NET OF CURRENT PORTION
  Long-term
debt, net of current portion consists of the following:
 March
      31,
      2005
      (Unaudited)
    
    December
      31,2004Prime
      + 1% Secured Revolving loan due to Westernbank
    
    $
    2,423
    
    $
    -Prime
      + 2% Secured Term Promissory Note B issued to Westernbank
    
    
    14,200
    
    
    -Prime
      + 2% Secured Term Promissory Note C issue to Westernbank
    
    
    11,800
    
    
    -15%
      Term loan D Promissory Note issued to Westernbank
    
    
    5,000
    
    
    -Revolving
      line of credit due to Laurus Funds, net of debt discount of $0 at March
      31, 2005 and $740,000 at December 31, 2004, paid from proceeds of
      Westernbank on March 31, 2005
    
    
    -
    
    
    6,3687%
      convertible term note due to Laurus Funds, collateralized by accounts
      receivable and other assets of the Company, net of debt discount of $0 at
      March 31, 2005 and $692,000 at December 31, 2004, paid
      fromproceeds
      of Westernbank on March 31, 2005
    
    
    -
    
    
    4,027Uncollateralized
      6% convertible promissory note due to customer,
    
    
    4,013
    
    
    4,013Uncollateralized
      7% to 18% demand notes due to stockholders and various executives of the
      Company, principal and interest due on demand
    
    
    683
    
    
    150Capital
      lease obligations, due to financial institutions, collateralized by
      software and equipment, due in monthly installments of $14,000 including
      interest of 10% to 27%, through 2006
    
    
    185
    
    
    22738,304
    
    
    14,785Less
      debt refinanced, net of discount
    
    
    -
    
    
    (10,395
    )Less
      current portion
    
    
    (9,008
    )
    
    (4,277
    )Long-term
      debt, net of current portion
    
    $
    29,296
    
    $
    113
  On March
31, 2005 the Company obtained a new non-dilutive asset based secured credit
facility from Westernbank Puerto Rico totaling $46 million. The facility is
comprised of a revolving loan (the “Revolver”) of up to $10 million for purposes
of working capital, a series of three term loans (Term loan “A”, “B” and “C”)
amounting in aggregate to up to $31 million for purpose of refinancing the
indebtedness to Laurus Funds and purchasing the assets of Aventis PR, and a
mezzanine loan (Term loan “D”) of up to $5 million for the purpose of funding
construction or new equipment. The revolver is secured by the eligible
receivables and inventory. The term notes are collateralized by substantially
all the property of the Company and its subsidiaries whether now owned or
thereafter to be acquired. Interest is based on Westernbank’s prime rate. The
prime rate at March 31, 2005 was 5.75%.
  F-9
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Tabular amounts are expressed in
thousands of U.S. dollars)**
 
 The Westernbank
Credit Facility is automatically renewable after the initial three year period
ending on March 31, 2008 on a year to year basis, unless terminated by the
Company or Westernbank.
 
 For the three months ended March 31, 2005, the
Company accelerated its amortization of deferred charges of approximately
$651,000, debt discount of approximately $1.4 million and recorded an early
termination fee of $1.6 million related to the repayment of the debt to Lauus
Funds.
  NOTE
11: NET
LOSS PER SHARE
  The
Company follows the guidelines of Statement of Financial Accounting Standards
No. 128, “ *Earnings
Per Share* ” (“SFAS
No.128”) in calculating its loss per share. SFAS No.128 states basic and diluted
earnings per share are based on the weighted average number of shares of common
stock and potential common stock outstanding during the period. Potential common
stock equivalents for purposes of determining diluted earnings per share include
the effects of dilutive stock options, warrants and convertible securities. The
effect on the number of shares of such potential common stock equivalents is
computed using the treasury stock method or the if-converted method, as
applicable. The Company has excluded all outstanding options and warrants as
well as shares issued upon conversion of convertible debt from the calculation
of diluted net loss per share because these securities are anti-dilutive.
  Accordingly,
as of March 31, 2005, and December 31, 2004, the Company had common stock
equivalents of approximately 25,055,687 and 25,155,687 shares respectively,
related to options and warrants; and approximately 18,375,000 related to shares
to be issued upon the conversion of the convertible debt at December 31, 2004.
There was no convertible debt outstanding at March 31, 2005.
  NOTE
12: COMMITMENTS
AND CONTINGENCIES
  Leases:
  The
Company has commitments under various long-term operating lease agreements for
various premises. For the three months ended March 31, 2005 and 2004, total rent
of office space was approximately $40,000, and $36,000, respectively.
In addition to rent, the Company and its subsidiaries are responsible for
operating costs, real estate taxes and insurance. As of March 31, 2005, future
minimum annual rental commitments under operating leases are as follows:
  2005
    
    $
    4092006
    
    
    4182007
    
    
    3902008
    
    
    1862009
    
    
    98Thereafter
    
    
    1,112Total
    
    $
    2,613
 
 Legal
Matters:
  The
Company and its
subsidiaries are subject to claims and lawsuits arising in the ordinary course
of business. Management, in consultation with its legal advisors, believes that
the outcome of such legal matters are remote and unlikely to have a material
adverse effect on the Company’s financial position or operating
results.
  Key
Suppliers:
  The
Company purchases raw materials and components from a limited number of key
suppliers. A loss of any one of these suppliers would have a material adverse
effect on the Company’s operations.
  Other:
  As of
March 31, 2005, the Company has approximately $230,000 of outstanding
commitments related to capital projects currently in progress.
  F-10
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Tabular amounts are expressed in
thousands of U.S. dollars)**
 
 NOTE
13: SUBSEQUENT
EVENTS
  On April
1, 2005, the Company granted 300,000 stock options to the Company’s newly
appointed Chief Financial Officer under the 2003 Stock Option Plan with an
exercise price of $1.01. The options will vest over a three year
period.
  On April
6, 2005, our subsidiary, Inyx Pharma and Stiefel entered into a renewal of a
Promissory Note originally dated March 6, 2003 payable to Stiefel in the
principal amount of 2.5 million Great Britain Pounds. In connection with the
refinancing, Stiefel agreed to terminate its Option to convert such debt into 4
million shares of common stock of the Company. The new Note is payable quarterly
in three equal installments starting June 30, 2005. Furthermore, once the note
is paid off, the cross default condition on the Manufacturing and Supply
Agreement dated March 6, 2003, will be removed and a cancellation letter will be
reissued on December 31, 2005. The
effects of the renewal have been reflected in these financial
statements.
  Subsequent
to March 31, 2005, the Company issued a Promissory note for $780,000 to
Westernbank against the Term Loan A facility collateralized by the Company’s
capital expenditures. The term loan bears interest of prime plus 2% with monthly
repayments starting on July 1, 2005. Interest payments are due starting May 1,
2005.
  NOTE
14: STOCKHOLDERS’
DEFICIT
  Between
the period of January 14, 2005 and January 26, 2005 the Company issued 380,000
shares of its restricted common stock as payment of $304,000 of
principal due under the Laurus Note. On February 28, 2005, the Company
issued 300,000 five-year stock purchase warrants to Laurus in conjunction with a
waiver received for any Events of Default. The fair value of the warrants was
approximately $162,000 based on the Black-Scholes option pricing model with the
following weighted average assumption: a risk free interest rate of 3.14%, an
expected life of four years, a volatility factor of 57%, and a dividend yield of
0%. This amount was charged to interest and financing costs on the consolidated
statement of operations. Subsequently, on March 31, 2005, the Company issued
1,591,504 shares of the Company’s restricted common stock valued at
approximately $1.3 million as payment of certain early termination fees in
connection with the repayment of all amounts due to Laurus Funds as of March 31,
2005. Such repayment amounted to approximately $12.3 million.
  During
the three months ended March 31, 2005, the Company recorded approximately
$66,000 of additional paid-in capital resulting from stock options which vested
during the period. The fair value was calculated using the Black-Scholes option
pricing model with the following assumptions; a risk free interest rate of
3.14%, an expected life of four years, a volatility factor of 66%, and a
dividend yield of 0%. This amount is included in general and administrative
expenses in the consolidated statement of operations.
  NOTE
15: ACCUMULATED
COMPREHENSIVE LOSS
  The
accumulated comprehensive loss reflected in the consolidated statement of
changes in stockholders’ deficit and other comprehensive loss represents
accumulated foreign currency translation adjustments associated with the
conversion of the Company’s United Kingdom and Canadian subsidiary’s accounts to
US dollars. These amounts are not adjusted for income taxes as they relate to an
indefinite investment in a foreign subsidiary.
  NOTE
16 : WARRANTS
  During
the three months ended March 31, 2005, the Company issued to Laurus Funds,
300,000 five year warrants in conjunction with a waiver received and
certain amendments to the registration rights agreements withLaurus
Funds. The waiver waived any Events of Default that may have occurred
under the credit facility and term note due to Laurus Funds. These warrants
allow the holders to purchase the Company’s common stock at a price of $0.95 per
share. The fair value of these warrants was estimated using the Black-Scholes
option pricing model with the following weighted average assumption: a risk free
interest rate of 3.14%, an expected life of four years, a volatility factor of
57%, and a dividend yield of 0%. The value assigned to these warrants was
approximately $162,000 and was charged as interest and financing costs to the
Company’s consolidated statement of operations for the three months ended March
31, 2005.
  F-11
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Tabular amounts are expressed in
thousands of U.S. dollars)**
 
 Comparatively,
for the three months ended March 31, 2004, the Company issued 495,000 warrants
to Laurus Funds in conjunction with a credit facility established
in December 2003. These warrants allow the holders to purchase the Company’s
common stock at prices ranging from $1.25 to $1.75 per share. The fair value of
these warrants was estimated using the Black-Scholes option pricing model with
the following weighted average assumption: a risk free interest rate of 3.14%,
an expected life of four years, a volatility factor of 57%, and a dividend yield
of 0%. The value assigned to these warrants was approximately $309,000 and was
charged as interest and financing costs to the Company’s consolidated statement
of operations for the three months ended March 31, 2004.
  NOTE
17: SUPPLEMENTAL
CASH FLOW INFORMATION
 For
      the Three Months Ended
      March
      31,2005
    
    2004(Unaudited)**Supplemental
      Disclosure of Cash Flow Information:**Cash
      paid during the period for interest
    
    $
    644
    
    $
    28**Supplemental
      Disclosure of Non-Cash Financing Activities:**Issuance of
      380,000 shares as
      payment of debt and issuance of 1,591,504 shares for payment of
      termination fee toLaurus Funds (conversion price $0.80 per
      share)
    
    
    1,577
    
    
    -Issuance
      of stock options
    
    
    66
    
    
    356Warrants
      issued for consulting and financing fees
    
    
    162
    
    
    932Accelerated
      amortization of financing costs
    
    
    651
    
    
    -Accelerated
      amortization of debt discount
    
    
    1,445
    
    
    -**Supplemental
      Disclosure of Non-Cash Investing Activities**Acquisition
      of property, plant and equipment, under construction in
      progress
    
    
    275
    
    
    -
 F-12
  **UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS**
  The
following unaudited consolidated pro forma statements of operations presented
herein for the three months ended March 31, 2005 and March 31, 2004 give effect
to the acquisition of the business assets of Aventis PR as if the acquisition
had taken place at the beginning of the periods presented.
  The
historical financial data is derived from the historical financial statements of
both companies which were prepared in accordance with generally accepted
accounting principles in the United States of America. The preparation of the
unaudited pro forma statement of operations for Aventis PR included the
adjustment to back-out sales attributable to  Aventis intercompany sales
and customer contracts not renewed at the date of acquisition.
  The
acquisition was accounted for using the purchase method of accounting. The
unaudited pro forma financial data is not necessarily indicative of the
operations had the acquisition taken place at the beginning of the periods
presented and are 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
accompanying notes which should be read in conjunction with this unaudited pro
forma consolidated statement of operations.




**Unaudited
Consolidated Pro Forma Statement of Operations**
 **For
the Three Months ended March 31, 2005**
 (Expressed
in thousands of U.S. dollars)
  Pro
      formaAventis PR
    
    
    Inyx,
      Inc.
    
    
    Pro
      formaAdjustment
    
    
    
    
    
    Combined
      ProformaNet
      Revenues
    
    $
    3,670
    
    $
    2,677
    
    $
    -
    
    
    (1)
    
    $
    6,347Cost
      of sales
    
    
    1,981
    
    $
    2,535
    
    
    
    
    
    
    
    
    4,5161,689
    
    
    142
    
    
    -
    
    
    
    
    
    1,831Operating
      expenses:Research
      and development
    
    
    0
    
    
    357
    
    
    
    
    
    
    
    
    357General
      and administrative
    
    
    880
    
    
    1,841
    
    
    
    
    
    
    
    
    2,721Selling
    
    
    12
    
    
    134
    
    
    
    
    
    
    
    
    146Amortization
      of intangibles
    
    
    71
    
    
    161
    
    
    57
    
    
    (2)
    
    
    289Depreciation
      and amortization
    
    
    226
    
    
    47
    
    
    (29
    )
    
    (3)
    
    
    244Total
      operating expenses
    
    
    1,189
    
    
    2,540
    
    
    28
    
    
    
    
    
    3,757Loss
      from operations before interestand
      financing costs and income taxes
    
    
    500
    
    
    (2,398
    )
    
    (28
    )
    
    
    
    
    (1,926
    )Interest
      expense
    
    
    365
    
    
    4,612
    
    
    (3,778
    )
    
    (4)
    
    
    1,199Loss
      from operations beforeincome
      taxes
    
    
    135
    
    
    (7,010
    )
    
    3,750
    
    
    
    
    
    (3,125
    )Income
      taxes
    
    
    -
    
    
    -
    
    
    
    
    
    
    
    
    -Loss
      from operations
    
    $
    135
    
    $
    (7,010
    )
    $
    3,750
    
    
    
    
    $
    (3,125
    )


13
 
  **Unaudited
      Consolidated Pro Forma Statement of Operations****For
      the Three Months ended March 31, 2004**(Expressed
      in thousands of U.S. dollars)
  Pro
      formaAventis PR
    
    
    Inyx,
      Inc.
    
    
    Pro
      formaAdjustment
    
    
    
    
    
    Combined
      ProformaNet
      Revenues
    
    $
    3,035
    
    $
    4,526
    
    $
    -
    
    
    (1)
    
    $
    7,561Cost
      of sales
    
    
    1,954
    
    $
    3,911
    
    
    
    
    
    
    
    
    5,8651,081
    
    
    615
    
    
    -
    
    
    
    
    
    1,696Operating
      expenses:Research
      and development
    
    
    -
    
    
    287
    
    
    
    
    
    
    
    
    287General
      and administrative
    
    
    888
    
    
    2,104
    
    
    
    
    
    
    
    
    2,992Selling
    
    
    13
    
    
    84
    
    
    
    
    
    
    
    
    97Amortization
      of intangibles
    
    
    53
    
    
    42
    
    
    75
    
    
    (2)
    
    
    170Depreciation
      and amortization
    
    
    225
    
    
    152
    
    
    (28
    )
    
    (3)
    
    
    349Total
      operating expenses
    
    
    1,179
    
    
    2,669
    
    
    47
    
    
    
    
    
    3,895Loss
      from operations before interestand
      financing costs and income taxes
    
    
    (98
    )
    
    (2,054
    )
    
    (47
    )
    
    
    
    
    (2,199
    )Interest
      expense
    
    
    397
    
    
    1,026
    
    
    (716
    )
    
    (4)
    
    
    707Loss
      from operations beforeincome
      taxes
    
    
    (495
    )
    
    (3,080
    )
    
    669
    
    
    
    
    
    (2,906
    )Income
      taxes
    
    
    -
    
    
    393
    
    
    
    
    
    
    
    
    393Loss
      from operations
    
    $
    (495
    )
    $
    (2,687
    )
    $
    669
    
    
    
    
    $
    (2,513
    )
 **Notes
to unaudited pro forma consolidated statement of
operations**
  Pro forma
adjustments:
  (1)
    Aventis
      PR’s revenue represents all manufacturing revenues relating to the
      carved-out business of sanofi-aventis and was derived using the actual
      product volumes of the products acquired in the acquisition, extended at
      the newly negotiated unit prices for each one of these products.
  (2)
    Depreciation
      expense was adjusted to reflect the fair value of assets acquired as of
      the closing of the acquisition, based on valuations provided by a third
      party.
  (3)
    Amortization
      of intangible assets was recorded to reflect the amortization of purchased
      intangible assets subject to amortization including customer list and
      know-how.
  (4)
    For
      the three months ended March 31, 2005, the adjustments to interest and
      financing costs include the following: (i) increase to net interest
      expense of approximately $47,000 resulting from incurrence of new
      indebtedness to fund the acquisition and cancellation of prior debt; (ii)
      write off of previously deferred financing costs relating to Laurus Funds
      debt amounting to $651,000; (iii) accretion of debt discount on the
      convertible debt due to Laurus Funds amounting to $1.4 million; (iv)
      penalty to Laurus Funds in the amount of $1.6 million for early
      termination of financing arrangement; and (v) $168,000 for warrants issued
      to Laurus Funds for a waiver on Events of Default; For the three months
      ended March 31, 2004, the adjustments to interest and financing costs
      include the following: (i) increase to net interest expense of
      approximately $107,000 resulting from incurrence of new indebtedness to
      fund the acquisition and cancellation of prior debt; (ii) adjustment to
      reverse the write off of previously deferred financing costs relating to
      Laurus Funds debt amounting to $77,000; (iii) adjustment to reverse the
      amortization of debt discount on the convertible debt due to Laurus Funds
      amounting to $157,000; and (iv) $589,000 for the beneficial conversion on
      the convertible debt due to Laurus Funds.
  14
 **Item
2.** **** **MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
  **Forward
Looking Statements**
  Statements
that are not historical facts included in this report are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995 that involve risks and uncertainties that could cause actual results to
differ from projected results. Such statements address activities, events or
developments that the Company expects, believes, projects, intends or
anticipates will or may occur, including such matters as future capital,
business strategies, expansion and growth of the Company’s operations, cash
flow, marketing of products and services, and development of new products and
services. Factors that could cause actual results to differ materially
(“Cautionary Disclosures”) are described throughout this report. Cautionary
Disclosures include, among others: general economic conditions, the markets for
and market price of the Company’s products and services, the Company’s ability
to find, acquire, market, develop and produce new products and services, the
strength and financial resources of the Company’s competitors, the Company’s
ability to find and retain skilled personnel, labor relations, availability and
cost of material and equipment, the results of financing efforts, and regulatory
developments and compliance. All written and oral forward-looking statements
attributable to the Company are expressly qualified in their entirety by the
Cautionary Disclosures. The Company disclaims any obligation to update or revise
any forward-looking statement to reflect events or circumstances occurring
hereafter or to reflect the occurrence of anticipated or unanticipated
events.
  **General**
  Inyx,
Inc. (“Inyx”, “we”, “us”, “our”, or the “Company”) through its wholly-owned
subsidiaries, Inyx Pharma Limited (“Inyx Pharma”), Inyx Canada Inc. (“Inyx
Canada”), and Inyx USA Ltd. (“Inyx USA”) 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.
  On March
29, 2005, the Company has incorporated a wholly-owned subsidiary, Exaeris Inc.,
(“Exaeris”) a Delaware Corporation to manage and operate its contemplated
product development and marketing activities. As of the date of this report,
Exaeris had no active operations and is currently dormant.
  In
May  2005, the Company has incorporated a wholly-owned subsidiary, Inyx
Europe Limited (“Inyx Europe”) under the laws of England and Wales, to
pursue strategic and business development activities.
 
 15
  **The
Aventis PR Transaction**
  On March
31, 2005, through our wholly-owned subsidiary, Inyx USA, we acquired the
business assets of Aventis PR from Aventis Pharmaceuticals, Inc. (“Aventis
Pharmaceuticals”) a subsidiary of Aventis Pharmaceuticals, part of the  the
sanofi-aventis group, for approximately $22.7 million, including incremental
transaction costs of $2.6 million. Aventis PR is a pharmaceutical manufacturing
operation producing dermatological, respiratory and allergy products. Aventis PR
manufactured 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 Limited, incorporated under the
laws of England and Wales; Inyx Canada, Inc., formed as a federally incorporated
Canadian corporation; Inyx USA, Ltd., incorporated under the laws of Isle of
Man; and Inyx Realty, Inc. (“Inyx Realty”), a Florida corporation owned by the
Company through April 14, 2004. All intercompany accounts and transactions have
been eliminated in consolidation.
  **For
the Three Months Ended March 31, 2005 and 2004**
  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.
  **NET
REVENUES**
 Our
revenues are derived from pharmaceutical manufacturing and 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.
  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 certain strategic
customers. We expect that these types of revenues would include direct sales,
royalty payments and licensing fees of our planned 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 three months ended March 31, 2005 were approximately $2.7
million as compared to net revenues of approximately $4.5 million for the three
months ended March 31, 2004. Net revenues decreased by $1.8 million or
approximately 41% for the comparative three months. Net revenues for the three
months ended March 31, 2005 were impacted by several factors. There were
product quality issues with one of our major can suppliers during the month of
January that have led to a delay in the supply of cans required by a number of
our key customers in the saline, hydrocarbon and oral spray product areas. As a
result of the delay of the supply of products to these customers, approximately
$2.0 million in anticipated first quarter revenues have been delayed into
the third quarter this year. The quality issues with our can supplier have now
been rectified by that vendor. In addition, there were delays in two major
client contracts originally expected to respectively, start at the beginning of
2005 which did not commence because these clients did not receive their
required product regulatory approvals as anticipated. These delayed contracts
are now scheduled to start production in the third and fourth quarters of
2005, respectively. We expect these contracts to create approximately $4 million
in revenues in the second half of the year.
  For the
three months ended March 31, 2005, our three top customers accounted for
approximately $1.4 million or approximately 51% of our total net revenues.
During this period, these three customers were Generics UK Ltd. (“Generics UK”),
part of the Merck Generics group of companies, accounting for approximately
$662,000 in net revenues or approximately 25% of total revenues; Laboratoria
Aldo-Union (“Aldo-Union”), accounting for approximately $357,000 in net revenues
or approximately 13% of total revenues; and Advanced Medical Optics, Inc.
(“AMO”) accounting for approximately $350,000 in net revenue or approximately
13% of total revenues.
 16
 
 For the
three months ended March 31, 2004, our three largest customers accounted for
approximately $2.6 million in net revenues or approximately 58% of total net
revenues. During the three months ended March 31, 2004, our top three customers
were the Merck Generics group of companies (“Merck Generics”), a large
international generic drug marketing and distribution company, accounting for
approximately $1.6 million in net revenues or approximately 35% of total net
revenues; Genpharm Inc. (“Genpharm”), accounting for approximately $661,000 in
net revenues or approximately 15% of total net revenues; and SSL International
Plc (“SSL”), accounting for approximately $422,000 in net revenues or
approximately 9% of total net revenues. These customers were affected by the
noted component quality issues during the three months ended March 31, 2005.

As noted
above, 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.

In
addition, as a result of our acquisition of Aventis PR on March 31, 2005, we
have broadened our business base including adding a number of new clients. These
include Kos Pharmaceuticals, Inc., that we expect will be our largest client,
and sanofi-aventis that we expect will still have production requirements from
the Puerto Rico manufacturing site we acquired from them.

Also, we
believe our expertise in converting from CFC to CFC-free aerosol
pharmaceuticals, particularly the production of hydrolfuoroalkane (“HFA”)
non-ozone-depleting aerosol pharmaceutical products, should generate increasing
business as the Montreal Protocol continues to be implemented around the world.

**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, 2005 amounted to approximately $2.5
million or approximately 95% of net revenues.In
comparison, for the three months ended March 31, 2004,cost of
goods sold amounted to approximately $3.9 million, or approximately 86% of net
revenues of $4.5 million.

The cost
of goods sold as a percentage of revenues is consistently high in the
comparative periods due to the following factors:

(1) A
lower than required manufacturing capacity utilization has continued into 2005
as it has taken us time during 2005 to start-up two major client projects due to
their own required regulatory approvals for new CFC-free (or HFA) metered dose
inhaler products to be distributed in Europe, and the normal production
commissioning and validation processes involved in the pharmaceutical
manufacturing industry. We expect our cost of goods sold to be reduced as these
projects are ramped up to full production by the end of 2005. With more volume
throughput at our manufacturing facility, we can absorb more overhead costs and
therefore reduce our manufacturing costs.
(2) The
noted delay in the supply of cans from a key vendor in the first quarter of
2005, has led to less than expected manufacturing capacity utilization which has
led to less overhead absorption and a concomitant increase in cost of goods
sold.
 17
 
 Even
though we have experienced moderate raw material and labor price increases since
our reverse acquisition of Inyx Pharma, due to inflation and new vendor
relationships, we expect the cost of goods sold percentage to be maintained or
reduced as more customer contracts are initiated or renewed, and our capacity
utilization is enhanced. With improved fixed overhead cost absorption, we expect
to improve our profit margins.
 ****
 **GROSS
PROFIT**
  Gross
profit for the three months ended March 31, 2005 amounted to approximately
$142,000 on net revenues of $2.7 million or approximately 5% of net revenues. In
comparison, gross profit for the three months ended March 31, 2004 amounted to
approximately $615,000 on net revenues of approximately $4.5 million or
approximately 14% of net revenues.
 
 We
believe that our gross profit will improve with the additional volume and a more
favorable product mix later
  **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 as compared to the same period in
2004.
  Operating
expenses for the three months ended March 31, 2005 amounted to approximately
$2.5 or approximately 95% of net revenues of $2.7 million. In comparison,
operating expenses for the three months ended March 31, 2004 amounted to
approximately $2.7 million or approximately 59% of net revenues of $4.5 million.
  The
largest decrease to our operating expenses for the three months ended March 31,
2005 was a result of lower general and administrative expenses as compared to
the same period in 2004.
  **Research
and Development Costs**
  Research
and development costs for the three months ended March 31, 2005 were
approximately $357,000 or approximately 14% of our operating expenses and 13% of
our net revenues. In comparison, research and development costs for the three
months ended March 31, 2004 were approximately $287,000 or 11% of our operating
expenses and 6% of our net revenues.
  As part
of our strategy to evolve into a specialty pharmaceutical company with its own
proprietary products, we have started to incur research and development costs as
part of our operating expenses. These 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.
  We are
focusing our research and 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. As
noted above, one such example is our recent 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.
  18
 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 2005.
  **General
and Administrative Expenses**
  Our
General and Administrative expenses include corporate overhead costs,
administrative support, business and corporate development as well as support
costs incurred by our wholly owned subsidiaries.
  General
and administrative expenses amounted to approximately $1.9 million or 69% of net
revenues of $2.7 million for the three months ended March 31, 2005 compared to
general and administrative expenses of approximately $2.1 million or
approximately 46% of net revenues of $4.5 million for the three months ended
March 31, 2004.
  The
general and administrative expenses for the three month ended March 31, 2005
included costs related to the acquisition of Aventis PR amounting to
approximately $300,000. These costs were offset by lower insurance, legal and
consulting costs of approximately $170,000, lower investor relations and
communications costs of approximately $72,000 and an increase in the foreign
exchange gain of approximately $140,000.
 
 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, that 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, presently such
activities are primarily focused on expanding our pharmaceutical aerosol
manufacturing business with existing or potential clients.
  Selling
expenses were approximately $134,000 or approximately 5% of net revenues of $2.7
million for the three months ended March 31, 2005 compared to $84,000 or
approximately 2% of net revenues of approximately $4.5 million for the three
months ended March 31, 2004.
  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 periods. Since our reverse acquisition of Inyx Pharma, our sales and
marketing functions have been primarily focused on expanding our pharmaceutical
aerosol 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.
  19
 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.
  We
believe that once we commence marketing our own proprietary products, we may
also need to build or contract our own sales force. We expect to incur
substantial additional selling expenses once we undertake these types of
commercial activities. Initially though, until we can adequately afford the cost
of building or contracting our own sales force, we will depend on our customers’
distribution channels or strategic partners to market and sell the
pharmaceutical products that we are presently developing or planning to develop.
  **Depreciation
and Amortization**
  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
and amortization expenses were approximately $161,000 or 6% of net revenues of
$2.7 million for the three months ended March 31, 2005 compared $152,000 or 3%
of net revenues of approximately $4.5 million for the three months ended March
31, 2004.
  **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.
  The
amortization expenses for intangible assets for the three months ended March 31,
2005 was approximately $47,000 compared to $42,000 for the three months ended
March 31, 2004.
  Our
amortization expenses for intangible assets relates to 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 as well as a
technology patent acquired in late 2004. The customer list is amortized over a
period of 12 years, know-how is amortized over 10 years and the patent is
amortized over 7 years.
  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.
  The newly
acquired intangible assets relating to the acquisition of Aventis PR will be
amortized from the date of acquisition.
  **OPERATING
LOSS BEFORE INTEREST AND FINANCING COSTS AND INCOME TAX
BENEFIT**
  Loss from
operations before interest and financing costs and income tax benefit amounted
to approximately $2.4 million for the three months ended March 31, 2005 compared
to a loss of $2.1 million for the three months ended March 31,
2004.
  The
primary reason for the operating loss for the three months ended March 31, 2005
as compared to the same period in 2004 was due to lower gross profit related to
lower production volumes due to delays in customer start dates, resulting in
higher unabsorbed overhead costs.
  **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”).
  20
 For the
three months ended March 31, 2005, interest and financing costs totaled
approximately $4.6 million or 170% of net revenues of $2.7 million compared to
interest and financing costs of approximately $1.0 million or 23% of net
revenues of $4.5 million for the three months ended March 31, 2004.
  The
increase in interest and financing costs for the three months ended March 31,
2005 was attributable to the refinancing of the Laurus Funds convertible debt.
As a result of the refinancing on March 31, 2005, we accelerated the recognition
of the unamortized deferred charges of approximately $651,000 and unamortized
debt discount of approximately $1.4 million and incurred approximately $1.6
million as a fee for early repayment. Laurus Funds was also issued 300,000
stock purchase warrants with a fair value of approximately $162,000 as
compensation for a waiver received waiving any Events of Default that may occur
under the convertible debt due October 29, 2006 and the revolving facility due
December 30, 2006. Both of these instruments were refinanced on March 31, 2005
through Westernbank and Laurus Funds was paid in full.
  Additionally,
for the three months ended March 31, 2005, the Company accrued
approximately $465,000 in fees related to its 2004 equity financing
activities.
 
 In
addition, for the three months ended March 31, 2005, interest expense included
interest related to Laurus Funds, Stiefel Laboratories, Inc. (“Stiefel”) and
various other stockholders amounted to approximately
$324,000.
 
 For the
three months ended March 31, 2004, interest and financing costs were
approximately $1.0 million or approximately 23% of net revenues of approximately
$4.5 million. The interest and financing costs included approximately $589,000
for the beneficial conversion feature on the additional debt issued during the
three month period, $142,000 in amortization of debt discount related to the
convertible debt to Laurus Funds, approximately $77,000 in amortization of
deferred financing charges, approximately $218,000 in interest expense for the
notes payable to Laurus Funds, and a convertible promissory note payable to
Stiefel. In March of 2004, we received a waiver from Stiefel on the annual
interest payment due to them amounting to approximately $240,000 in
consideration for future product development services.
  **INCOME
TAX BENEFIT**
  We did
not record any provisions for United States federal or foreign taxes that may
result from future remittances of undistributed earnings of foreign
subsidiaries, because it is expected that such earnings will be permanently
reinvested in our foreign operations.
  **NET
LOSS**
 The net
loss for the three months ended March 31, 2005 was approximately $7 million or
approximately 260% of net revenues of $2.7 million  compared to a net loss
of $2.7 million or approximately 60% of net revenues of $4.5 million for the
three months ended March 31, 2004.
  The net
loss for the three months ended March 31, 2005 was primarily attributed to the
early repayment of the Laurus Funds convertible debt, associated termination
fees and interest costs, and the lower than expected production levels at
our Inyx Pharma operation. In comparison, the net loss for the three months
ended March 31, 2004 was the result of low manufacturing capacity utilization
due to delayed project implementation. We expect the utilization to improve as
more of these projects ramp up to full production and new projects are added.
  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 and develop our current and newly acquired business and establish
ourselves as a specialty pharmaceutical company.
 21
 
  In
addition, as a result of our acquisition of Aventis PR on March 31, 2005, we
have broadened our business base including adding a number of new clients. These
include Kos Pharmaceuticals, Inc., that we expect will be our largest client,
and sanofi-aventis that we expect will still have production requirements from
the Puerto Rico manufacturing site we acquired from them. We expect our
profitability opportunities to improve with a more favourable product
mix.
 ****
 **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, 2005, we had approximately $51.7 million in contractual obligations
that are due through 2019. These financial obligations include both short-term
and long-term debt interest and principal repayments, and amounts owed for
operating leases.
  As of
March 31, 2005, our current assets, including cash and cash equivalents,
accounts receivable, inventory and other current assets amounted to
approximately $8.9 million. Current liabilities amounted to approximately $20.1
million and include approximately $7.6 million in accounts payable and other
current liabilities, $3.5 million in deferred revenues and approximately $9
million for the current portion of our long-term debt obligations which includes
approximately $2.4 million on the revolving line of credit, and $4 million due
to Stiefel which was refinanced subsequent to the period end and therefore has
been classified as a current liability.
  As an
emerging specialty pharmaceutical company, we are 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 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.
  We also
continue to incur operating losses since our reverse acquisition of Inyx Pharma
on April 28, 2003. For the three months ended March 31, 2005, such losses
amounted to approximately $7 million. These losses are primarily as a result of
low gross profit margins due to the underutilization of our manufacturing
capacity, research and development costs as we continue the development of our
own proprietary pharmaceutical products, interest and financing costs, and a
number of business and corporate development costs including added payroll
expenses, and external consulting costs and fees associated with our efforts to
grow our Company and evolve into an integrated pharmaceutical company.
  In 2005,
we believe that we can achieve profitability by continuing to intensify our
sales and marketing efforts to increase the number of customer purchase orders
and contracts for our contract development and manufacturing services. As noted
above, we also believe that we can establish new sources of revenue by providing
pharmaceutical consulting services to the industry, and by marketing our own
proprietary pharmaceutical products. Based on pharmaceutical industry profit
margins for proprietary products, we expect that the successful development and
manufacturing of our own proprietary products will provide us with greater
operating margins and improve our performance and overall profitability
opportunities.
  22
 Until
that time, we will continue to depend on our credit facilities, and placements
of equity and debt securities, to assist us with our working capital
requirements and to continue implementing our business development strategies,
capital expenditure plans, and proprietary product development and
commercialization initiatives.
  **Capital
Resources**
  On March
31, 2005 the Company obtained a new non-dilutive asset based secured credit
facility from Westernbank Puerto Rico totaling $46 million. The facility is
comprised of a revolving loan (the “Revolver”) of up to $10 million for purposes
of working capital, a series of three term loans (Term loan “A”, “B” and “C”)
amounting in aggregate to up to $31 million for purpose of refinancing the
indebtedness to Laurus Funds and purchasing the assets of Aventis PR, and a
mezzanine loan (Term loan “D”) of up to $5 million for the purpose of funding
construction or new equipment. The revolver is secured by the eligible
receivables and inventory. The term notes are collateralized by substantially
all the property of the Company and its subsidiaries whether now owned or
thereafter to be acquired. Interest is based on Westernbank’s prime
rate.
  The
amounts drawn on the above credit facility on the date of closing were used to
pay $19.7 million for the acquisition of the assets of Aventis PR, approximately
$12.3 million was used to refinance the indebtedness due to Laurus funds,
approximately $681,000 was used to pay for various acquisition transaction
related costs and approximately $643,000 for financing costs .
  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 first three term loans bear interest at the Westernbank prime
rate plus 2.0% payable monthly, with monthly principle repayments
commencing on July 1, 2005 through maturity. The mezzanine term loan bears
interest at the rate of 15.0% with monthly principal payments commencing on July
1, 2005 through maturity.
  In
connection with the Company's repayment of the $12.3 million Credit Facility
with Laurus Funds, all of the liens and security interest in the assets of Inyx
Pharma, Ltd held by Laurus Funds were unconditionally released and transferred
to Westernbank Puerto Rico pursuant to the Release Agreement dated March 31,
2005.
  On March
31, 2005, the Company received a $3.5 million advance from Aventis PR for
strategic and business development activities to be carried out by the Company
during 2005. This amount was recorded as deferred revenues on the Company’s
consolidated balance sheet and will be recognized into income as revenue is
earned.
  We expect
to meet our short term liquidity requirements through net cash provided by
operations and borrowings under the Debt Agreement with Westernbank. We believe
that this source of cash will be sufficient to meet the Company’s operating
needs and planned capital expenditures for at least the next twelve
months.
 
 **Analysis
of Cash Flows**
  **For
the Three Months Ended March 31, 2005 and 2004**
  At March
31, 2005, we had cash of approximately $3.3 million as compared to cash of
$753,000 at March 31, 2004.
 
 Cash
Flows from Operating Activities for the Three
Months Ended March 31, 2005
  The net
cash generated by operating activities for three months ended March 31, 2005 was
approximately $4.0 million compared to cash utilization of approximately $3.2
million for the three months ended March 31, 2004.
  23
 For the
three months ended March 31, 2005, the net cash generated in operating
activities included a net loss of $7 million adjusted for non-cash charges
totaling $4.2 million consisting primarily of $2.1 million of amortization of
financing cost and debt discounts, $1.6 million due to the issuance of equity
securities as compensation of interest and penalties to Laurus Funds, and $0.2
million of depreciation and amortization, an additional $64,000 provision for
inventory obsolescence and $90,000 of all other changes. Working Capital changes
generated a net $7 million with uses generated by reductions to prepaid and
increased inventories offset by an increase in accounts payable and accrued
liabilities as well as $3.5 million in deferred revenues attributable to
business development activities with sanofi-aventis, and a decrease in accounts
receivable.
  The net
cash used in operating activities for the three months ended March 31, 2004
amounted to approximately $3.1 million. Our net cash used in operations was
primarily the result of a $2.7 million net loss from continuing operations of
the business, adjusted by non-cash charges including depreciation and
amortization of approximately $1.1 million, a reserve for bad debts and obsolete
inventory amounting to approximately $450,000, and net securities issuance costs
of approximately $430,000. These non-cash charges were offset by a deferred
income tax asset of approximately $390,000, consisting of a net operating loss
carried forward. Working capital changes reducing cash flow from operations were
due to increases to our inventory amounting to approximately $210,000, and an
increase to our prepaid deposits and other current assets amounting to
approximately $1.3 million, resulting from increasing new sales and business
development activities. Working capital changes increasing cash flow from
operations were due primarily to a decrease of accounts receivable of
approximately $200,000, an increase in accounts payable and accrued liabilities
of approximately $135,000 and a decrease in deferred revenue totaling
approximately $190,000.
  Cash
Flows from Investing Activities for the Three Months Ended March 31,
2005
  The net
cash used in investing activities for the three months ended March 31, 2005
amounted to approximately $22.9 million compared to approximately 58,000 for the
comparative period in 2004.
  For the
three months ended March 31, 2005, $22.7 million of the capital expenditures
related to property, plant and equipment as well as purchased intangibles
acquired by Inyx USA in the Aventis PR transaction completed on March 31, 2005
and approximately $120,000 related to construction in progress costs in
preparation for a new customer contract to be serviced from our newly acquired
Puerto Rico plant.
  For the
three months ended March 31, 2004, we spent approximately $58,000 on the
acquisition of office equipment and computers.
  Cash
Flows from Financing Activities for the Period Ended December 31,
2004
  For the
three months ended March 31, 2005, the net cash provided by financing activities
approximated $21.7 million compared to approximately $3.2 million for the three
months ended March 31, 2004.
  The
proceeds for the three months ended March 31, 2005 included $34 million from the
issuance of debt compared to $3.2 million for the three months ended March 31,
2004. The borrowings were offset by the repayment of short-term and long-term
debt and financing fees totaling approximately $12.5 million for the three
months ended March 31, 2005 and 34,000 for the three months ended March 31,
2004.
  **External
Sources of Liquidity**
  Financing
Activities
  On March
31, 2005 the Company obtained a new non-dilutive asset based secured credit
facility from Westernbank totaling $46 million. On March 31, 2005, we drew
approximately $33.4 million under the facility. The facility is comprised of a
Revolving loan of up to $10 million for purposes of working capital, a series of
three term loans amounting in aggregate to up to $31 million for purposes of
refinancing the indebtedness to Laurus Funds and purchasing the assets of
Aventis PR, and a Mezzanine loan of up to $5 million of purposes of funding
construction or new equipment. The facility is collateralized by all the
property of the Company and its subsidiaries whether now owned or acquired
hereafter.
  24
 As of
March 31, 2005, we have availability of $7.6 million under the revolver and $5
million under the term loan A for capital expenditures.
  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 first three term loans bear interest at the Westernbank prime
rate plus 2.0% with monthly repayments commencing on July 1, 2005 through
maturity. The mezzanine term loan bears interest at the rate of 15.0% with
monthly principal payments commencing on July 1, 2005 through maturity.
  In
connection with the Company's repayment of the $12.3 million Credit Facility
with the Laurus Funds, all of the liens and security interest in the assets of
Inyx Pharma, Ltd held by Laurus Funds were unconditionally released and
transferred to Westernbank Puerto Rico pursuant to the Release Agreement dated
March 31, 2005.
  Certain
Indebtedness and Other Matters
  Inyx
Pharma had received a working capital credit facility in the form of an
unsecured convertible debt instrument (the “Stiefel Loan”) from one of its
customers, Stiefel Laboratories, Inc. (“Stiefel”). Headquartered in Coral
Gables, Florida, Stiefel is a privately held pharmaceutical company which has a
number of domestic and international operations.
  The
principal amount of the Stiefel Loan is approximately $4 million, and was due on
March 6, 2007, however was renewed by the Company on April 6, 2005. The new
terms on the Stiefel Loan include the repayment of the entire loan in three
equal installments starting on June 30, 2005 and the termination of its Option
to convert their debt into 4 million shares of the Company’s stock. Furthermore,
once the note is paid off, the cross default condition on the Manufacturing and
Supply Agreement dated March 6, 2003, will be removed and a cancellation letter
will be issued on December 31, 2005. As of
March 31, 2005, the outstanding amount owed under the Stiefel Loan totaled
approximately $4.2 million in principal and interest.
  In
addition to our credit facilities, as 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. As of March 31, 2005, the
outstanding amount owned to such stockholders was approximately $642,000 in
principal and interest.
  As of
March 31, 2005, we have capital lease obligations amounting to approximately
$185,000 for two capital leases. These leases include computer equipment and
copier. The major component of these capital lease costs is our new business
information technology system, the Sage 500 Management Information System (Sage
500 MIS), which has now become operational. The lease for the Sage 500 MIS will
expire by 2006 and is guaranteed by our Chairman/CEO.
  For the
three months ended March 31, 2005, interest and financing costs amounted to
approximately $4.6 million, which included the write-off 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 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%.
  In
comparison, for three months ended March 31, 2004, the total amount of interest
expensed on all of our Company’s borrowings amounted to approximately $1.0
million. This amount of interest consisted of approximately $215,000 of interest
paid and $811,000 of interest accrued. For the three months ended March 31,
2004, the weighted average interest rate paid on gross outstanding debt during
the year was approximately 6.7%.
  25
 Capital
Expenditures
  For the
three months ended March 31, 2005, the capital expenditures related primarily to
the acquisition of tangible and intangible identifiable assets from Aventis PR,
which was completed on March 31, 2005.
  On a
short-term basis, recent equity financings and customer funding have provided us
with sufficient capital to fund our immediate capital expenditure
plans.
  Commencing
in the second half of 2005, we will require an additional $5.0 million in
funding over twenty four months for capital expenditures, in order to
improve our pharmaceutical manufacturing technologies, production capabilities,
and plant quality and safety systems so that we are able to pursue expanding
commercial and product manufacturing opportunities with existing and potential
multinational pharmaceutical and biotechnology clients. Our new credit facility
with Westernbank provides for up to $5.0 million in funding new capital
equipment purchases
  On a
longer term basis, in order to continue to strengthen our position in the
pharmaceutical aerosol sector, we will require further capital e xpenditures
to enhance our aerosol manufacturing and quality control systems at our
manufacturing facilities. We estimate that on a longer term basis we will
require approximately $15 million over 5 years for such expenditures. These
include expenditures for new filling and packaging equipment and
production facility enhancements to improve our capabilities to introduce new
pharmaceutical aerosol products for increasing market opportunities in the
respiratory sector including dry powder inhaler manufacturing technology and
isobutene filling capabilities . Planned investments will also be to support the
maintenance of our facilities to meet ongoing regulatory compliance
requirements, including adherence to good manufacturing practice, and the
health, safety and environmental aspects of our pharmaceutical operations.
 Future
Commitments
  As of
March 31, 2005, we have commitments under various long-term lease agreements for
premises including those for our office and development and production
facilities. These property leases range from one to fifteen years depending on
the specific property. We also have a number of operating and capital leases for
office equipment, fork lifts and staff automobiles in the United Kingdom.
  As of
March 31, 2005, we had operating lease contractual obligations totaling
approximately **$** 2.6
million due to various vendors over the next ten years.
  With
regard to our vendor and suppliers, due to the purchase of the business assets
of Miza UK out of Administration, we continue to be on pre-payments and cash on
delivery (COD) payment terms with a number of our suppliers in Europe. These
include all of our key component suppliers, including 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; and Nussbaum & Guhl, which also
provides us with cans.
  26
 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.
 
 **Item 3. Quantitative and qualitative Disclosure
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. 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. We neither hold nor issue financial instruments for
trading purpose.

Interest
Rate Risk. The carrying value of long-term debt at March 31, 2005, including
current maturities approximated $31 million. A hypothetical 1% increase in
the prime interest rates applicable to our long-term debt at March 31, 2005,
would be approximately $217,000 or 9.5% of the carrying value.

Foreign
Exchange Rate Risk. Our functional currency is the U.S. Dollar, the financial
statements of the 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 revenue 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. In 2004, more than 80% of our consolidated sales were
realized in Great Britain pounds (including a Canadian customer), the balance of
the consolidated sales were to customers in the European Union and realized in
Euros. 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 the three month period ended March 31, 2005 a hypothetical 1%
increase in the exchange rates between the British pound and the U.S. dollar
would have an impact of approximately $27,000 or a 1.01% reduction to gross
profits.

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. Such fluctuations could adversely affect the value
of our revenues and the results of our operations stated in U.S.
Dollars.
**Item
4. Controls and Procedures**
a)
    Within
      the 90-day period prior to the date of this report, we carried out an
      evaluation, under the supervision and with the participation of our
      management, including the Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of the design and operation of our
      disclosure controls and procedures pursuant to Rule 13a-14 of the
      Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that
      evaluation, the Chief Executive officer and Chief Financial Officer
      concluded that our disclosure controls and procedures are effective in
      timely alerting them to material information relating to the Company
      required to be included in our Exchange Act filings. The two Executive
      Officers responsible for the financial reporting and disclosure are in
      direct control of the books and records of the Company and are involved
      first-hand in the decision making process for material
      transactions.b)
    There
      have been no significant changes in our internal controls or in other
      factors, which could significantly affect internal controls subsequent to
      the date we carried out our evaluation.
 
 27
  PART II —
OTHER INFORMATION
 **Item
2. Unregistered sales of equity securities**
  The
following securities were issued in the first quarter ended March 31, 2005
pursuant to exemptions from registration provided by Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder and not otherwise
reported on Form 8-K.
 
 Between
the period of January 14, 2005 and January 26, 2005,the Company issued 380,000
shares of the Company’s restricted common stock, par value $.001 per share to
Laurus Funds, the holders of the Convertible Note due 2006, for the conversion
of $304,000 of principal amounts owed under the Laurus Note. The Laurus Note has
a conversion price of $0.80 per share.
  On
February 28, 2005 the Company granted 300,000 five-year stock purchase warrants
to purchase 300,000 shares of the Company’s common stock at a price of $0.95 per
share, to Laurus Funds in conjunction with a waiver and certain amendments to
the registration rights agreements with Laurus Funds.
  On March
31, 2005 the Company issued 1,591,504 shares of the Company’s restricted common
stock as payment for certain early termination fees in connection with the
repayment of all amounts due to Laurus Funds as of March 31, 2005, including the
repayment of the 7% Convertible Note and the borrowings under the Laurus
Facility.
  **Item 6.
Exhibits**
 
  21.1
    Subsidiaries
      of Registrant31.1
    Certification
      by CEO pursuant to 18 USC Section 1350 as adopted bySection
      302 of the Sarbanes-Oxley Act of 2002.31.2
    Certification
      by CFO pursuant to 18 USC Section 1350 as adopted bySection
      302 of the Sarbanes-Oxley Act of 2002.32.1
    Certification
      by CEO pursuant to 18 USC Section 1350 as adopted bySection
      906 of the Sarbanes-Oxley Act of 2002.32.2
    Certification
      by CFO pursuant to 18 USC Section 1350 as adopted bySection
      906 of the Sarbanes-Oxley Act of 2002.
 28
 **SIGNATURES**
  In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 Date:  May 20,
2005
 INYX, INC.By:
    /s/ John
      HamerskiJohn
      Hamerski,
      Vice
      President and CFO
 
 
 29