10QSB 1 alpharx10qsb.htm ALPHARX, INC. - FORM 10-QSB AlphaRx, Inc. - Form 10-QSB - Prepared By TNT Filings Inc.

 

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended: December 31, 2004

OR

[_] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from: to

Commission File Number: 000-030813

AlphaRx, Inc.
(Name of Small Business Issuer in its Charter)

Delaware 98-0177440
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  

168 Konrad Crescent, Suite 200
Markham, Ontario, Canada L3R 9T9
(Address of principal executive offices)

Registrant's telephone number, including area code: (905) 479-3245

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock,
$.0001 par value (Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]

The number of outstanding shares of registrant's Common Stock on February 14, 2006 was 57,508,112.

Transitional Small Business Disclosure Format. Yes [ ] No [X]

1

ALPHARX, INC.

FORM 10-QSB

DECEMBER 31, 2005

TABLE OF CONTENTS

Unaudited Interim Consolidated Balance Sheets as of December  
     31, 2005 and September 30, 2005 3
   
Unaudited Interim Consolidated Statements of Operations for the three months  
     ended December 31, 2005 and December 31, 2004 4
   
Unaudited Interim Consolidated Statements of Changes in Shareholders' Equity  
     (Deficiency) 5
   
Unaudited Interim Consolidated Statements of Cash Flow for the three months  
     ended December 31, 2005 and December 31, 2004 6
   
Condensed Notes to Unaudited Interim Consolidated Financial Statements 7
   
Management's Discussion and Analysis of Financial Condition and Plan 11
     of Operation  
   
Other Information 15

2

ALPHARx, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2005 AND SEPTEMBER 30,2005
(UNAUDITED)

  December 31, September 30,
  2005   2005
CURRENT ASSETS      
       
    Cash and Cash Equivalents $ 55,618   $ 193,458
    Accounts Receivable, net 56,120   41,883
    Prepaid Expenses 10,024   17,043
    Inventory 73,724   81,166
       
          TOTAL CURRENT ASSETS 195,486   333,550
       
       
PROPERTY, PLANT & EQUIPMENT, net 217,752   232,975
OTHER ASSETS      
    Licensing Right (Note 3) 1   1
       
TOTAL ASSETS 413,239   566,526
       
CURRENT LIABILITIES      
    Accounts Payable and Accrued Liabilities 584,941   384,475
    Notes Payable (Note 4) 188,889   -
    Litigation Liabilities (Note 5 ) 25,000   25,000
          TOTAL CURRENT LIABILITIES 798,830   409,475
       
       
SHAREHOLDERS' EQUITY (DEFICIENCY)      
Common Stock: $ 0.0001 par value,      
    Authorized 250,000,000 shares; issued and      
    outstanding December 31, 2005 and September 30,      
    2005: 57,508,112 5,752   5,752
    Additional paid-in capital 12,663,054   12,163,243
    Deficit (13,054,397)   (12,011,944)
       
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) (385,591)   157,051
       
TOTAL LIABILITIES AND SHAREHOLDERS'      
EQUITY (DEFICIENCY) $ 413,239   $ 566,526

See condensed notes to consolidated financial statements

3

ALPHARx, INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)

Three months ended December 31,   2005   2004
         
SALES   $   21,812   $    8,946
         
COST OF SALES   7,436   4,428
         
          GROSS MARGIN   14,376   4,518
         
         
GENERAL AND ADMINISTRATIVE EXPENSES   181,483   145,468
STOCK BASED COMPENSATION EXPENSE   499,811   -
RESEARCH AND DEVELOPMENT EXPENSES   353,725   154,012
SALES AND MARKETING EXPENSE   5,475   147,848
DEPRECIATION   14,925   11,044
LOSS FROM OPERATIONS (1,041,043)   (454,260)
         
OTHER INCOME AND EXPENSES        
         
    Interest Income/(Expense), net   (1,410)   9,826
         
         
          LOSS BEFORE INCOME TAXES (1,042,453)   (444,434)
         
INCOME TAX   -   -
         
NET LOSS   $ (1,042,453)   $ (444,434)
         
NET LOSS PER COMMON SHARE, BASIC &        
DILUTED   (0.02)   (0.01)
         
WEIGHTED AVERAGE NUMBER OF COMMON        
SHARES OUTSTANDING   57,508,112   56,490,117
         

See condensed notes to consolidated financial statements

4

ALPHARx, INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)

 

Common Stock

 Additional Retained Total
  Number of   Paid-in Earnings Shareholders'
  Shares Amount Capital (Deficit) Equity(Deficit)
           
Balance as of          
September 30,          
2004 52,304,642 $5,232 $9,580,035 $(7,159,820) $2,425,447
           
Conversion of          
Promissory          
Notes 5,203,470 520 510,988   511,508
           
Issuance of          
Stock Options          
for consulting services   62,300   62,300
           
Stock Based          
compensation expense   2,009,920   2,009,920
           
Net Loss for          
the year       (4,852,124) (4,852,124)
           
Balance as of          
September 30,          
2005 57,508,112 $5,752 $12,163,243 $(12,011,944) $157,051
           
Issuance of          
Stock Options          
for consulting services   50,922   50,922
           
Stock Based          
compensation expense   448,889   448,889
           
Net Loss for       (1,042,453) (1,042,453)
the period          
           
Balance as of          
December 31,          
2005 57,508,112 $5,752 $12,663,054 $(13,054,397) $(385,591)

See condensed notes to consolidated financial statements

5

ALPHARx, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)

Three months ended December 31,   2005   2004
         
CASH FLOWS FROM OPERATING ACTIVITIES        
    Net Loss $ (1,042,453) $ (444,434)
    Adjustments to reconcile net loss to net cash used in operating        
activities:        
    Depreciation and amortization   14,925   11,450
    Stock based compensation expense   499,811   -
        Changes in assets and liabilities:        
            (Increase)/decrease in Inventory   7,442   (59,573)
            Increase in Accounts Receivable   (14,237)   (853)
            Decrease in Prepaid Expenses   7,019   16,843
            Increase in Accounts Payable and Accrued Liabilities   200,466   71,273
         
NET CASH USED IN OPERATING ACTIVITIES   (327,027)   (405,294)
         
CASH FLOWS FROM INVESTING ACTIVITIES        
         
            Purchase of Machinery & Equipment, net   298   (26,348)
         
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES   298   (26,348)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
         
            Issuance (repayment) of Notes Payable   188,889   (665,900)
            Proceeds from Issuance of Common Stock (net)   -   511,508
         
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   188,889   (154,392)
         
NET DECREASE IN CASH   (137,840)   (586,034)
         
CASH, and cash equivalents, beginning of period   193,458   2,856,042
         
CASH, and cash equivalents, end of period $ 55,618 $ 2,270,008
         
         
         
Income Tax Paid $ 0 $ 0
Interest Paid $ 0 $ 0

See condensed notes to consolidated financial statements

6

ALPHARX INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)

NOTE 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of all recurring accruals) considered necessary for fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the year ended September 30, 2006. Interim financial statements should be read in conjunction with the Company's annual audited financial statements.

NOTE 2. NATURE OF BUSINESS AND GOING CONCERN

ALPHARX, INC. (the Company) was incorporated under the laws of the State of Delaware on August 7, 1997. The company is an emerging pharmaceutical company specializing in the formulation of therapeutic products using proprietary drug delivery technologies. The company was formally known as LOGIC TECH INTERNATIONAL, INC., and had its corporate name changed during the fiscal year of 2000.

Effective April 22, 2005 AlphaRx International Holdings Limited (a British Virgin Island company and a wholly-owned subsidiary of AlphaRx Inc.) entered into a Joint Venture agreement with Basin Industrial Limited (a British Virgin Islands Company and a wholly-owned subsidiary of Advance Pharmaceutical Co. Ltd.). The Joint Venture, AlphaAP Inc., will be involved in manufacturing and marketing of certain of the Company's existing products and certain future products in the far east. Alpha AP Inc. remains inactive as of December 31, 2005.

The consolidated financial statements reflect the activities of the Company, AlphaRx Canada Limited and AlphaRx International Holdings Limited – its wholly owned subsidiaries. All material inter-company accounts and transactions have been eliminated.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, they do not include any adjustments relating to the realization of the carrying value of assets or the amounts and classification of liabilities that might be necessary should the company be unable to continue as a going concern. Continuance of the company as a going concern is dependent on its future profitability and on the on-going support of its shareholders, affiliates and creditors.

NOTE 3. LICENSING RIGHTS

The Company acquired world-wide exclusive commercialization rights for VT-1 from Select Therapeutics Inc. in January 2003 with the intention of commercializing this drug. Having unsuccessfully attempted to resell these commercialization rights, they have been written down to a nominal value due primarily to prohibitive development costs, and the fact that there is no market for these rights.

NOTE 4. NOTES PAYABLE

The Company issued approximately $188,000 in promissory notes during the three months ended December 31, 2005. These notes bear interest at 12% per annum and are repayable on the first anniversary date of issuance.

7

During the three months ended December 31, 2004, the Company converted $520,347 in convertible promissory notes into 5,203,470 shares of common stock plus warrants to purchase 10,406,940 shares of common stock at an exercise price of $0.30 per share. These warrants expire during September and October, 2007. The remaining notes outstanding after conversion were repaid with proceeds from the private placement completed during September, 2004.

NOTE 5. LITIGATION LIABILITY

The Company is a defendant in a lawsuit filed by a prospective investor alleging breach of contract, which seeks damages totalling $25,000. The Company believes the suit is without merit, however, to remain conservative, the entire claim has been accrued in the financial statements.

NOTE 6. COMMON STOCK

The Company is authorized to issue 250,000,000 shares of common stock. As of December 31, 2005, there remains issued and outstanding 57,508,112 shares of such common stock which has a stated par value of $0.0001 per share.

There were no shares issued during the three months ended December 31, 2005. During the three months ended December 31, 2004, $520,347 of convertible promissory notes were converted into 5,203,470 shares of common stock at $0.10 per share and 10,406,940 warrants to purchase shares of common stock at an exercise price of $0.30 per share.

NOTE 7. STOCK OPTION PLANS

The Company has a Stock Option Plan (the "Plan") under which officers, key employees, certain independent contractors, and non-employee directors may be granted options to purchase shares of the Company's authorized but unissued common stock. This Plan was terminated during fiscal 2001. Under this Plan, the option exercise price is $0.10. Outstanding stock options granted under the Plan will remain in effect until the expiration date specified in those options. Options currently expire no later than 10 years from the grant date and generally vest within five years. Proceeds received by the Company from exercises of stock options are credited to common stock and additional paid-in capital. Additional information with respect to the Plan's stock option activity is as follows:

  Number of Weighted
  Shares Average
    Exercise
    Price
Options outstanding and exercisable at    
December 31, 2005 1,150,000 $0.10

The Company adopted a new option plan on February 10, 2003 under which options to purchase 1,500,000 common shares will be granted to certain key employees, consultants and directors. Under the Plan, the option exercise price and its fair market value are determined to be $0.50 -$0.69. All options will expire on February 10, 2008 and will vest, and become exercisable in three instalments. Proceeds received by the Company from exercises of stock options are credited to common stock and additional paid-in capital. Additional information with respect to the Plan's stock option activity is as follows:

  Number of Weighted
  Shares Average
    Exercise
    Price
  8  
Outstanding at February 10, 2003 (plan adoption) 0  
Granted during fiscal 2003 645,000 $0.63
Exercised 0 $0.00
Cancelled 75,000 $0.63
Outstanding as of December 31, 2005 570,000 $0.63
Options exercisable at December 31, 2005 570,000 $0.63

The Company granted 645,000 stock options to consultants during fiscal 2003. We recognized $280,594 in administrative expenses related to the granting of these options during fiscal 2003. The fair value of each option granted during 2003 was determined using the Black-Scholes Option Pricing Method.

The Company did not grant any stock options during fiscal 2004. The Company, via written consent from a majority of the holders of common stock, approved the adoption of a new option plan during July, 2004. Under this plan the Company can issue up to 24,000,000 options to purchase common stock. Under this plan the Company granted the following options to employees and consultants during fiscal 2005 and during the first quarter of fiscal 2006 ending December 31st, 2005:

  Number of Weighted
  Shares Average
    Exercise
    Price
Outstanding at July 24, 2004 (plan adoption) 0  
Granted during fiscal 2004 0  
Granted during fiscal 2005 20,710,000 $0.16
Granted during Q1, fiscal 2006 3,290,000 $0.075
Exercised/Cancelled 0  
Outstanding as of December 31, 2005 24,000,000 $0.15
Options exercisable at December 31, 2005 13,320,000 $0.16

Additional information with respect to the Plan's stock option activity is as follows:

Grant Date

Quantity

Option

Expiry

Fair Value

Risk

Expected

Expected

Expected

 

Granted

Price

 

 

Free

Life

Volatility

Dividend

 

 

 

 

 

Rate

 

 

 

Nov 15,

13,220,000

$0.15

Nov 15,

$1,448,922

2.32%

10

185%

NIL

2004

 

to

2014

 

 

years

 

 

 

 

$0.50

 

 

 

 

 

 

Jan 10,

7,000,000

$0.15

Feb 8,

$1,045,056

2.02%

10

177%

NIL

2005

 

 

2015

 

 

years

 

 

Feb 8,

390,000

$0.15

Feb 8,

$53,894

1.93%

10

156%

NIL

2005

 

 

2015

 

 

years

 

 

May 25,

100,000

$0.13

May 25,

$7,627

2.00%

10

70%

NIL

2005

 

 

2015

 

 

years

 

 

Oct 17,

3,290,000

$0.075

Oct 17,

$244,559

4.50 %

10

75%

NIL

2005

 

 

2015

 

 

years

 

 

 

24,000,000

 

 

$2,800,058

 

 

 

 

Of these options, 600,000 which were granted to consultants vest immediately, and the remaining 23,400,000 vest on the first anniversary of the grant date.

9

The Company has adopted the fair value accounting for employee stock options as per SFAS 123(R) using the modified retrospective application method, effective April 1, 2005. Resultingly, the Company recorded $2,009,920 in stock based compensation expense during fiscal 2005 and $499,811 during the three months ended December 31, 2005 using the Black-Scholes option pricing model. The Company also recorded $62,300 in administrative expenses during 2005 related to the options granted to consultants using the Black-Scholes option pricing model. There remains $228,027 in stock compensation to be expensed over the vesting period of these options.

Had the Company continued to use APB 25, and not reflected employee stock based compensation expense, net loss and net loss per share both pre-tax and after tax basis would have been as follows:

  As reported using Pro Forma per
  SFAS 123(R) APB 25
     
Stock Based compensation $ 499,811 $ 1,857
     
Net Loss (pre-tax/after tax) $(1,042,453) $(544,499)
     
Basic and Diluted Loss per share $(0.02) $(0.01)

NOTE 8. WARRANTS

The Company has the following warrants outstanding to purchase common stock at December 31, 2005:

  Warrants issued in conjunction with financing costs whereby one  
  warrant entitles the holder to purchase one share of common stock  
  at an exercise price of $1.10, expiring December 19, 2007. 670,275
     
  Warrants issued in conjunction with financing costs whereby one  
  warrant entitles the holder to purchase one share of common stock  
  at an exercise price of $0.65 expiring June 17, 2006. 75,524
     
  Warrants issued in return for financial advisory services whereby  
  one warrant entitles the holder to purchase one share of common  
  stock at an exercise price of $0.05, expiring September 1, 2007.  
  This warrant can only be exercised after January 29, 2005. 3,000,000
     
  Warrants issued in conjunction with financing costs whereby one  
  warrant entitles the holder to purchase one share of common stock  
  at an exercise price of $0.15, expiring September 1, 2007. 2,994,642
     
  Warrants issued in conjunction with financing costs whereby one  
  warrant entitles the holder to purchase one share of common stock  
  at an exercise price of $0.30, expiring September 1, 2007. 2,287,669
     
  Warrants issued in conjunction with conversion of promissory  
  notes and in conjunction with the private placement completed  
  during July and September, 2004. One warrant entitles the holder  
  to purchase one share of common stock at an exercise price of  
  $0.30. Expiry dates: July 21, 2007 – 27,505,378; September 1,  
  2007 – 12,426,114; October 13, 2007 – 5,204,160. 45,135,652
     
    54,163,762

10

NOTE 9: RECLASSIFICATIONS

Certain amounts in 2004 have been reclassified to conform to current year's presentation.

NOTE 10: SUBSEQUENT EVENT

Subsequent to December 31, 2005 and up to February 13, 2006 the Company has issued Promissory Notes totalling approximately USD $73,340. These Promissory Notes bear interest at the rate of 12% per annum and are due on the first anniversary date of issuance.

11

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATION

The following discussion and analysis should be read in conjunction with the Financial Statements, including the Notes thereto, appearing in this Form 10-QSB. Except for the historical information contained herein the foregoing discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected in the forward-looking statements discussed herein.

General

AlphaRx is a drug delivery company specializing in the development of innovative therapeutic products for the pharmaceutical and consumer health care market. Our core competence is in the development of novel drug formulations for therapeutic molecules or compounds that have exhibited poor G.I. absorption due to poor solubility or have yet be administerable to the human body with an acceptable delivery method. Our drug delivery system is versatile and offers significant flexibility in the development of suitable dosage formulations (i.e. oral, topical or parenteral) to meet the requirements of specific drug molecules.

During 2003 we initiated commercialization of our products commencing with sales of Flexogan in the Canadian market. It became evident during 2005 that we required more substantial financial resources to pursue Flexogan marketing strategy. We determined that completion of Phase II clinical trials was the best course of action with the resources remaining. Should we be successful in raising additional funding we will continue to pursue completion of Phase II trials as our primary objective.

We signed a licensing agreement with Andromaco in August 2003 for the commercialization of our lead pharmaceutical products "Indaflex" in Mexico. Mexican health authorities gave approval to Andromaco to start sales of Indaflex in Mexico. We collected our first royalties from Indaflex sales in the year ended September 30, 2005.

We established a wholly-owned subsidiary – AlphaRx International Holdings Limited in April, 2005 and entered into a Joint Venture Agreement with Basin Industrial Limited (a wholly-owned subsidiary of Advance Pharmaceutical Co. Ltd.). The joint venture – AlphaAP Inc., will be involved in the manufacture and marketing of certain existing and future products in the far east.

We have one pharmaceutical drug in the clinical trial stage (Phase 1 completed in March, 2005, Phase II underway as of November, 2005), and several pharmaceutical drugs in the preclinical stage.

The costs incurred for each of these initiatives to date cannot be readily determined because (i) there is no clear distinction between initiatives in order to be able to differentiate between them; (ii) all initiatives have a common goal and that is to adopt our Bioadhesive Colloidal Dispersion drug delivery system to the specific drug in order to improve that drug's effectiveness; and (iii) we do not maintain a time control system to differentiate research and development activities.

The nature, timing and estimated costs to complete a project and anticipated completion dates cannot be estimated because: (i) the nature of research is experimental and we could encounter unforeseen situations which could significantly delay project completion or require us to abandon the project; (ii) timing to complete a project depends, to a certain extent, on financial resources and we cannot predict with any degree of certainty that financial resources will be available when needed to complete any specific project and (iii) cost estimates cannot be predicted with any acceptable degree of accuracy due to unforeseen issues arising during the clinical stages or the approval stages of any specific initiative.

If we cannot complete our research and development initiatives on a timely basis consequences to our operations could be significant to the point where the initiative would be delayed or even abandoned. We would also face the risk of competitors developing the same or similar products and being first to market.

12

Finally, our failure to develop products on a timely basis could substantially impair our ability to generate revenues and materially harm our financial position.

We cannot predict the timing of material net cash inflows from significant projects due to a number of factors including (i) availability of financial resources required to market a new product, (ii) our lack of experience in bringing a new product to market successfully and gaining market share; (iii) competitors' products and the nature and timing of their marketing initiatives.

We intend to continue investing in the further development of our drug delivery technologies and to actively seek collaborators and licensees to accelerate the development and commercialization of products incorporating our drug delivery systems. Depending upon a variety of factors, including collaborative arrangements, available personnel and financial resources, we will conduct or fund clinical trials on such products and will undertake the associated regulatory activities.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2005, AS COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2004

The Company incurred a net loss of $1,042,453 for the three month period ended December 31, 2005 as compared to a loss of $444,434 incurred for the same period a year ago, an increase of $598,019 or approximately 135%. The increase stems primarily from an increase in stock based compensation expense of $499,811 with no comparable expense in the same period a year ago. We are also focusing on research and development activities related primarily to clinical trials of Indaflex and preclinical activities for various new formulations.

Sales

Sales for the three months ended December 31, 2005 were $21,812 as compared to $8,946 generated for the same period a year ago, an increase of $12,866 or 144%. We generated $5,273 in royalties during the three months ended December 31, 2005 with no comparable royalties during the same period a year ago. The remaining increase resulted from repeat orders from existing customers.

Gross Margin

Cost of Sales for the three months ended December 31, 2005 was $7,436 as compared to $4,428 incurred for the same period a year ago. Resulting Gross Margin increased to $14,376 or approximately 66% of sales as compared to Gross Margin of $4,518 or approximately 51% of sales for the same period a year ago. Excluding royalties our gross margin for the three months ended December 31, 2005 was 55%.

General and Administrative Expenses

General and Administrative expenses consist primarily of personnel costs related to general management functions, finance, inventory logistics, office overheads, as well as insurance costs and professional fees related to legal, audit and tax matters. General and Administrative expenses for the three months ended December 31, 2005 were $181,483 as compared to $145,468 incurred for the same period a year ago, an increase of $36,015 or approximately 25%. Financial advisory fees of $30,000 were incurred during the three months ended December 31, 2005 with no comparable expense during the same period a year ago.

Stock Based Compensation Expense

We decided to adopt fair value accounting for employee stock options as per SFAS 123(R) using the modified retrospective application method, effective April 1, 2005. As a result we expensed $499,811 in stock based compensation during the three months ended December 31, 2005 with no comparable expense during the same period a year ago. There remains $228,027 in stock based compensation to be expensed over the vesting period of the options granted.

13

Research and Development Expenses

Research and development expenses include costs for scientific personnel, supplies, equipment, outsourced clinical and other research activities.

Research and development expenses for the three months ended December 31, 2005 were $353,725 as compared to $154,012 incurred for the same period a year ago, an increase of $199,793 or about 130%. The increase relates primarily to Phase II Indaflex clinical trials being undertaken, and ongoing research and development of other over the counter products. We expect to increase research and development expenses over the remainder of 2006 as we accelerate the development and testing of our Indaflex drug candidate.

Sales and Marketing

We determined to curtail sales and marketing expenditures for Flexogan based on increasing competition in the pain relief segment of the market and our available financial resources. Sales and marketing expenditures were $5,475 for the three months ended December 31, 2005 as compared to $147,848 incurred during the same period a year ago, a decrease of $142,373 or about 96%. We continue to seek collaborative partners to market and sell our Flexogan line of products.

Depreciation

Depreciation totalled $14,925 during the three months ended December 31, 2005 as compared to $11,044 incurred during the same period a year ago, an increase of $3,881 or about 35%. The increase stems from increased capital expenditures during fiscal 2005. There were no capital expenditures during the three month period ended December 31, 2005.

Loss from Operations

Loss from operations were $1,041,043 for the three months ended December 31, 2005 as compared to a loss of $454,260 incurred for the same period a year ago, an increase of $586,783 or approximately 129%. Stock based compensation expense of $499,811 with no comparable prior period expense was primarily the cause of the increased loss from operations.

September 30, 2005 Financial Statements:

The September 30, 2005 Financial Statements filed with our annual 10K on December 29, 2005 had Total Assets and Total Liabilities and Shareholders' Equity reported as $556,526. The figure should have read $566,526.

LIQUIDITY AND CAPITAL RESOURCES

As at December 31, 2005 the Company had working capital deficiency of $(603,344) compared to a working capital deficiency of $(75,925) as at September 30, 2005. We issued $188,000 in promissory notes during the three months ended December 31, 2005 and intend to continue to issue such promissory notes until we can source more permanent funding. We have issued additional financing in the form of promissory notes in the amount of $73,340 from January 1, 2006 until February 13, 2006. These notes are repayable within one year and bear interest at 12% per annum.

Since inception, we have financed operations principally from the sale of Common Stock and issuance of promissory notes and expect to continue this practice to fund our ongoing activities.

We currently do not have sufficient resources to complete the commercialization of any of our proposed products or to carry out our entire business strategy. Therefore, we will likely need to raise substantial

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additional capital to fund our operations in the future. We cannot be certain that any financing will be available when needed on acceptable terms or at all. Any additional equity financings will be dilutive to our existing shareholders, and debt financing, if available, may involve restrictive covenants on our business.

We expect to continue to spend capital on:

  1. research and development programs;

  2. preclinical studies and clinical trials;

  3. regulatory processes; and

  4. third party manufacturers and marketing partners to manufacture and market our products for us.

The amount of capital we may need will depend on many factors, including:

  1. the progress, timing and scope of our research and development programs;

  2. the progress, timing and scope of our preclinical studies and clinical trials;

  3. the time and cost necessary to obtain regulatory approvals;

  4. the time and cost necessary to establish sales and marketing capabilities or to retain sales and marketing partners to market our products for us;
  5. the time and cost necessary to respond to technological and market developments; and
  6. new collaborative, licensing and other commercial relationships that we may establish.

The inability to raise capital would have a material adverse effect on the Company. We currently have no capital commitments other than the payment of rent on our facilities lease, and for certain research equipment.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Certain of the information contained in this document constitutes "forward-looking statements", including but not limited to those with respect to the future revenues, our development strategy, involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the risks and uncertainties associated with a drug delivery company which has not successfully commercialized our first product, including a history of net losses, unproven technology, lack of manufacturing experience, current and potential competitors with significant technical and marketing resources, need for future capital and dependence on collaborative partners and on key personnel. Additionally, we are subject to the risks and uncertainties associated with all drug delivery companies, including compliance with government regulations and the possibility of patent infringement litigation, as well as those factors disclosed in our documents filed from time to time with the United States Securities and Exchange Commission.

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer and Principal Accounting Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of December 31, 2005. The Company's Chief Executive Officer and Chief Financial Officer and Principal Accounting Officer concluded that the Company's disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules and forms.

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PART II: OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

Farhad Walji vs. AlphaRx, Inc. and AlphaRx Canada Limited filed in the Supreme Court of British Columbia on August 23, 2002. Farhad Walji has filed a claim asking for $25,000 plus interest for allegedly providing $20,000 pursuant to a subscription agreement to purchase common shares of AlphaRx's stock and damages resulting from lost opportunity. The Company has denied any liability in this case and is currently defending this action vigorously. Nonetheless, the value of the entire claim has been accrued in our financial statements as a current liability.

ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

We did not issue any stock during the three month period ending December 31, 2005. During the three months ended December 31, 2004 we issued 5,203,470 shares of common stock pursuant to the conversion of $520,347 in convertible debt. We also issued warrants to purchase 10,406,940 shares of common stock at $0.30 per share in connection with the conversion of debt.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 - OTHER INFORMATION

None.

ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS.

31.1 Certification of C.E.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of C.F.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Michael Lee pursuant to Section 1350 of Chapter 63 of Title 18 United States Code.
32.2 Certification of Marcel Urbanc pursuant to Section 1350 of Chapter 63 of Title 18 United States Code.

(b) REPORTS ON FORM 8-K

Not applicable

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SIGNATURES:

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATED: February 14, 2006

  ALPHARx, INC.
   
  By:  /S/ Michael M. Lee                
  Michael M. Lee, Chief Executive Officer
   
   
  Directors:
   
  By:  /S/ Michael M. Lee                 
  Michael M. Lee, Director
   
   
  By:  /S/ David Milroy                     
  David Milroy, Director
   
   
  By:  /S/ Ford Moore                        
  Ford Moore, Director

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