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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended: June 30, 2012
o Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from: ________ to ________
Commission File Number: 000-030813
(Name of Small Business Issuer in its Charter)
31/F, Tower One, Times Square
1 Matheson Street, Causeway Bay, Hong Kong
(Address of principal executive offices)
Registrant's telephone number, including area code: (852) 2824-8716
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of outstanding shares of registrant's Common Stock on August 13, 2012 was 19,036,000.
June 30, 2012
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTERIM CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 2012 AND SEPTEMBER 30, 2011
(All amounts in US Dollars)
See condensed notes to interim consolidated financial statements
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2012 AND 2011
(All amounts in US Dollars)
See condensed notes to interim consolidated financial statements
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
FOR THE PERIOD ENDED JUNE 30, 2012
(All amounts in US Dollars)
See condensed notes to interim consolidated financial statements
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
See condensed notes to interim consolidated financial statements
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2012 AND 2011
(All amounts in US Dollars)
CONDENSED NOTES TO UNADUDTED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
NOTE 1. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying interim unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q 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, 2012. Interim unaudited consolidated 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 was engaged in the development of proven therapies by reformulating FDA approved and marketed drugs using its proprietary drug delivery technology. On November 4, 2011 the Company terminated its drug development business and to pursue acquisition opportunities in digital media with an intense focus on China.
The interim unaudited consolidated financial statements reflect the activities of AlphaRx Inc., 100% of AlphaRx Canada Limited and 80% of AlphaRx International Holdings Limited and AlphaRx Life Sciences Ltd. (AIH’s wholly owned subsidiary) collectively the “Company”. All material inter-company accounts and transactions have been eliminated.
The accompanying interim unaudited 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. Factors relating to going concern issues include working capital deficiencies, operating losses, shareholders’ deficits, and continued reliance on external funding sources. In order to mitigate the going concern issues, the Company is constantly pursuing new business arrangements and striving to achieve profitability, and seeking capital funding on an ongoing basis via the issuance of promissory notes, and private placements.
NOTE 3. NOTES PAYABLE
The Company issued $7,993 in promissory notes during the three months ended June 30, 2012. These notes bear interest at 12% per annum and are repayable on the first anniversary date of issuance. Previously issued promissory notes bear interest at rates of 8% - 12% per annum. Prepayment of these notes prior to the first anniversary date is permitted.
See also note 8 – Related Party Transactions.
NOTE 4. NON-CONTROLLING INTEREST
Effective June 22, 2006, AlphaRx International Holdings Ltd. (“AIH”) issued 1,500 shares of its common stock to New Super Limited (“NSL”) at a price of approximately $HK 6,667 per share or $HK 10 million in cash (USD $1,288,826). There were 10,000 common shares outstanding of which 8,500 or 85% belong to the Company. With the consolidation of only 85% of AIH, a non-controlling interest was established, representing net amounts owing to the non-controlling shareholder. The capital infusion into AIH is accounted for as additional paid in capital on the interim consolidated financial statements of the Company.
On May 18, 2010, AlphaRx International Holdings Ltd. (“AIH”) issued 625 shares of its common stock to New Super Limited (“NSL”) at a price of approximately $HK 2,166 per share, or $HK1,353,750 in cash (USD$173,292), representing a further 5% non-controlling interest and increasing the total of the non-controlling interest to 20% after the infusion.
NOTE 5. COMMON STOCK
The Company is authorized to issue 250,000,000 shares of common stock. As of June 30, 2012 there were 19,036,000 shares of Common Stock issued and outstanding with a stated par value of $0.0001 per share.
On January 11, 2012, the Company reached an out of court settlement with its former scientists and as a result, 1,060,000 shares were returned to treasury and were cancelled. The outstanding common stock reduced from 95,935,047 to 94,875,047.
On March 14, 2012, the Company completed a private placement of 300,000 Units in exchange for $15,000. The outstanding common stock increased to 95,175,047.
On April 20, 2012, a five (5) share for one (1) share reverse stock split of the Company’s common stock was approved by the Board of Directors and by the written consent of the stockholders. The reverse split was declared effective by the Financial Industry Regulatory Authority (FINRA) on May 25. The Company’s common stock began trading on a split-adjusted basis on May 29, 2012. With a round-up adjustment for friction shares, the current outstanding common stock is 19,036,000 shares.
NOTE 6. STOCK OPTION PLANS
The Company has one Stock Option Plan (the “2008 Stock Option Plan”) under which officers, key employees, certain independent contractors, and independent directors may be granted options to purchase shares of the Company’s authorized but unissued Common Stock. All outstanding options currently expire no later than June 30, 2012. Proceeds received by the Company from exercises of stock options are credited to Common Stock and additional paid-in capital.
At the Company’s Annual General Meeting held November 26, 2008 a majority of stockholders approved amendments to the existing Stock Option Plans including, among others: (i) combining the 2004 and 2006 Plans into the 2008 Stock Option Plan for ease of administration; (ii) providing a cap for the number of options to be issued at 22,000,000; (iii) providing guidelines for exercise prices such that the exercise price of any newly granted option is never less than the market value or in the case of a 10%+ holder, never less than 110% of the market value on the date of grant; (iv) providing for a maximum term of 5 years for any option granted; (v) provide for a vesting schedule whereby vesting must occur over at least 18 months with no more than 1/6th of the options granted vesting in any 3 month period; (vi) providing for the maximum number of options to be granted to any one individual in any 12 month period to be no more than 5% of the issued and outstanding common stock, and (vii) providing for a maximum number of options to be granted to any Investor Relations party to be no more than 2% of the issued and outstanding common stock.
As a result of the new terms governing the Company’s 2008 Stock Option Plan, the maximum number of options that can still be issued totals 4,310,000, regardless of whether existing options are exercised or canceled.
During the three months ended June 30, 2012, no options were granted and no options were exercised. Additional details of the 2008 Plan, as at June 30, 2012 are as follows:
The Company has adopted the fair value accounting for employee stock options. The Company has recorded $6,558 stock based compensation expense during the three months ended March 31, 2012. The Black-Scholes option-pricing model is used to calculate this expense. There are no further stock based compensation expenses to be recorded based on options granted to date and their existing terms and conditions. Multiplying the options by their exercise price and dividing the total obtained by the total outstanding options calculated the weighted average exercise price.
NOTE 7. WARRANTS
On April 12, 2010, the Company issued 3,740,150 warrants to purchase 3,740,150 shares of Common Stock at $0.085 per share, expiring on April 11, 2015. The warrants were issued in exchange for financial advisory services to be provided for the period from April 11, 2010 until September 30, 2010. The total fair value of the warrants has been estimated to be $262,090 using the Black-Scholes option pricing model based on the following assumptions: dividend yield of 0%, expected volatility of 103.86%, risk-free interest rate of 3%, and an expected life of 5 years. The company recorded $262,090 in stock based compensation for the year ended September 30, 2010. There were 150,000 warrants issued and no warrant exercised during the three months ended March 31, 2012. The Company has the following warrants outstanding to purchase shares of Common Stock as of June 30, 2012:
NOTE 8: RELATED PARTY TRANSACTIONS
On January 23, 2012, Michael Lee, President & CEO of the Company agreed to forgo an aggregate of $117,300 of accrued salaries owed to him by AlphaRx.
The Company sources some of its funding in the form of promissory notes from Michael Lee – President and CEO. The Company is indebted to Mr. Lee in the amount of $72,094 including accrued interest of $22,491 as of June 30, 2012. The directors did not loan any funds to the Company during the three months ended June 30, 2012. These promissory notes bear interest at 12% per annum and are unsecured.
NOTE 9: RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB updated FASB ASC Subtopic 810-10, Consolidation (formerly SFAS No. 160). This guidance establishes accounting and reporting standards for non-controlling interests in subsidiaries. The guidance clarifies that a non-controlling interest in a subsidiary be accounted for as a component of equity, but separate from the parent’s equity. Furthermore, the amount of consolidated net income attributable to the parent and the non-controlling interest must be clearly identified and presented on the face of the Consolidated Statements of Operations. The Company adopted the provisions of the guidance effective October 1, 2009 and the provisions are being applied prospectively, except for the presentation and disclosure requirements, which have been applied retrospectively. The adoption did not have a material impact on our consolidated financial statements.
Recent Issued Standards
In April 2011, the FASB issued ASU 2011-03, Consideration of Effective Control on Repurchase Agreements, which deals with the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 changes the rules for determining when these transactions should be accounted for as financings, as opposed to sales. The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 is not expected to have a material impact on the Company’s financial condition or results of operation.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and IFRS, and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material effect on its operating results or financial position.
In June 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a material effect on its operating results or financial position. However, it will impact the presentation of comprehensive income.
In September 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.
NOTE 10: PROPOSED RESTRUCTURING
On April 9, 2010 AlphaRx Canada Limited (“ACL”), a wholly-owned subsidiary of the Company signed a non-binding letter of intent with Pacific Orient Capital Inc. (“POC”), a Capital Pool Company listed on the Toronto Venture Exchange, whereby POC will effect a Qualifying Transaction (the “Transaction”), as such term is defined under the policies of the Toronto Venture Exchange (the “Exchange”), by acquiring all of the shares of ACL that are issued and outstanding at the time of closing of the transaction. The letter of intent was subsequently amended on June 9, 2010. The transaction is to be completed by a) the acquisition of ACL by way of a share exchange through the issuance of one common share of POC for every common share of ACL at a deemed price of CAD$0.40 per share; and b) the acquisition by AlphaRx International Holdings Ltd. (“AIH”), the Company’s 80% owned subsidiary, of an exclusive, royalty free licence from the Company, to commercialize the prescription drug Indaflex in Mexico and Asia for a period of 15 years; and c) the acquisition of a sub-licence by POC from AIH to commercialize the prescription drug Indaflex in Mexico and Asia for 8,250,000 Common shares of POC at a deemed price of CAD$0.40 per share. The transaction, among other conditions, shall be conditional upon the completion of a concurrent public offering or private placement of CAD $1.34 million of shares of common stock at a value of no less than CAD $0.40 per share. In relation thereto the Company has received a non-refundable deposit during April, 2010 of CAD $25,000 to assist in the restructuring. Completion of the proposed Transaction is conditional on the execution of a definitive agreement to be negotiated by the parties, acceptance and approval by the Exchange and the satisfaction of the minimum listing requirements of the Exchange.
On Feb 28, 2011, the Company announced that it had terminated its proposed Transaction with Pacific Orient Capital Inc., as the parties were not able to satisfy the closing conditions of the proposed Transaction.
NOTE 11. TRANSACTION ADJUSTMENTS
Additional accumulated differences derived from the beginning balances of Non-controlling Interest and Additional-paid-in capital carryover from previous periods is adjusted to reflect the correct balancing figures. This adjustment is a change of accounting estimation on applicable foreign exchange rate on various transactions and its carryover effects. This change of estimation is not material and has no impact on current period statement of income or operation results.
NOTE 12. RECLASSIFICATIONS
Certain amounts from prior year have been reclassified to conform to current year’s presentation.
NOTE 13. SUBSEQUENT EVENTS
On June 21, 2012, the Company signed a binding letter of intent to acquire all of the issued and outstanding shares of UMeLook Holdings Limited (“UmeLook”). The transaction is expected to close on or before August 17, 2012. The acquisition of UMeLook is to be completed as a share exchange through the issuance of 70,000,000 common shares of AlphaRx Inc. to the shareholders of UMeLook at a deemed price of $0.30 per share in exchange for all of the issued and outstanding shares in the capital of UMeLook. The common shares to be issued pursuant to the acquisition will not be registered for sale under the United States Securities Act of 1933, as amended (the "U.S. Securities Act") and will be subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the U.S. Securities Act.
The Company has evaluated all other subsequent events through August 14, 2012, the date these consolidated financial statements were issued, and determined that there were no other subsequent events or transactions that require recognition or disclosures in the financial statements other than aforementioned events.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the information contained in the consolidated financial statements of the Company and the notes thereto appearing elsewhere herein and in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company's Annual Report on Form 10-K for the year ended September 30, 2011. Readers should carefully review the risk factors disclosed in this Form 10-K and other documents filed by the Company with the SEC.
As used in this report, the terms "Company", "we", "our" and "us" refer to AlphaRx, Inc., a Delaware corporation.
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "management believes" and similar language. The forward-looking statements are based on the current expectations of the Company and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. Actual results may differ materially from results anticipated in these forward-looking statements. We base the forward-looking statements on information currently available to us, and we assume no obligation to update them.
Investors are also advised to refer to the information in our previous filings with the Securities and Exchange Commission (SEC), especially on Forms 10-K, 10-Q and 8-K, in which we discuss in more detail various important factors that could cause actual results to differ from expected or historic results. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks and uncertainties or potentially inaccurate assumptions.
ALPHARx, INC. (the “Company”) was incorporated under the laws of the State of Delaware on August 7, 1997. The Company was engaged in the development of proven therapies by reformulating FDA approved and marketed drugs using its proprietary drug delivery technology. On November 4, 2011 the CEO, Board and management adopted a corporate development strategy that will shift the primary business of the Company from drug development to pursuing acquisition opportunities in digital media with an intense focus on China. On June 21, 2012, the Company signed a binding letter of intent to acquire all of the issued and outstanding shares of UMeLook Holdings Limited (“UmeLook”). UMeLook is a digital media startup with an intense focus on China. UMeLook’s first product is an online video distribution platform tapping into the power of full motion video, helping advertisers large and small to get attention and reaching the masses. The proposed transaction is expected to close on or before August 17, 2012. The proposed acquisition of UMeLook is to be completed as a share exchange through the issuance of 70,000,000 common shares of AlphaRx Inc. to the shareholders of UMeLook at a deemed price of $0.30 per share in exchange for all of the issued and outstanding shares in the capital of UMeLook. The common shares to be issued pursuant to the acquisition will not be registered for sale under the United States Securities Act of 1933, as amended (the "U.S. Securities Act") and will be subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the U.S. Securities Act.
On April 20, 2012, the Company effected a consolidation of its share capital on the ratio of one new share for five old shares. The consolidation was declared effective by the Financial Industry Regulatory Authority (FINRA) on May 25. The Company’s common stock began trading on a split-adjusted basis on May 29, 2012.
On November 4, 2011 we adopted a corporate development strategy which terminated our drug development business and to pursue acquisition opportunities in digital media with an intense focus on China. There can be no assurance that the Company will find a suitable acquisition opportunity or consummate an acquisition in digital media.
On June 28, 2010, we terminated our licensing agreement with Cypress Biosciences (“Cypress”), our world-wide (except Mexico and Asia) development partner for Indaflex.
On April 9, 2010, we entered into a non-binding letter of intent with Pacific Orient Capital Inc. (“Pacific”), a Capital Pool Company listed on the TSX Venture Exchange, concerning the proposed acquisition of AlphaRx Canada Limited ("ACL"), a wholly owned subsidiary of the Company. The letter of intent was subsequently amended on June 9, 2010. The proposed acquisition, if completed, will constitute Pacific's qualifying transaction pursuant to the policies of the TSX Venture Exchange Inc. (the "Exchange"). On Feb 28, 2011, the Company announced that it had terminated its proposed Transaction with Pacific Orient Capital Inc., as the parties were not able to satisfy the closing conditions of the proposed Transaction.
Overview of Results of Operations
NOTE (1) Net Loss per share on a quarterly basis does not equal net Loss per share for the annual periods due to rounding.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2012 AS COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2011
The Company incurred a net loss of $23,483 for the nine month period ended June 30, 2012 as compared to a net loss of $412,662 incurred for the same period a year ago, a decrease of $389,179. Revenues during the nine months ended June 30, 2012 were about $167,893 more than in the previous period; general and administrative expenses and research development expenses were about $222,705 and $186,496 less than in previous period respectively. These two items were the primary cause for the decrease in net loss between periods.
Total revenues for the nine-month period ended June 30, 2012 were $273,978 as compared to $106,085 generated for the same period a year ago, an increase of $167,893 or about 158%. We continue to pursue revenue opportunities in all forms (consulting, royalties and license fees).
General and Administrative Expenses
General and Administrative expenses consist primarily of personnel costs related to general management functions, finance, office overheads, as well as insurance costs and professional fees related to legal, audit and tax matters.
General and Administrative expenses were $222,705 for the nine month period ended June 30, 2012 as compared to $409,201 incurred for the same period a year ago, a decrease of $186,496 or about 46%. The decrease is primarily due to cut down of professional fees, salary and insurance costs.
Research and Development Expenses
Research and development expenses include costs for scientific personnel, supplies, equipment, and outsourced clinical and other research activities.
Research and development expenses for the nine months ended June 30, 2012 were $0 as compared to $16,577 incurred for the same period a year ago, a decrease of $16,577 or about 100%. The Company terminated its drug development business on November 11, 2011 and does not currently foresee any R&D expenses in the near future.
Depreciation totalled $2,275 for the nine months ended June 30, 2012 as compared to $32,061 incurred during the same period a year ago, a decrease of $29,786 or about 93%. Our capital asset purchases were minimized during the last fiscal year. Certain assets are now fully depreciated resulting in decreasing depreciation expense. Should any assets become permanently impaired they are written off to income as determined.
Gain from Operations
Gain from operations were $48,998 for the nine months ended June 30, 2012 as compared to a net loss of $335,177 incurred for the same period a year ago, a decrease of $384,175 or about 115%.
Interest expense for the nine months ended June 30, 2012 was $72,658 as compared to interest expense of $77,485 generated during the same period a year ago. The decrease is due to the repayment of promissory notes.
Non-Controlling interest in gain/(loss) of Consolidated Subsidiaries
We reflected a non-controlling interest loss of $750 for the nine months ended June 30, 2012 as compared to a non-controlling interest gain of $640 for the same period a year ago. Non-Controlling interest represents our minority shareholder’s proportionate interest (which is 20%) in our 80% owned subsidiary – AIH. The non-controlling interest resulted in the investment in our subsidiary AlphaRx International Holdings Ltd. by an independent third party – New Super Ltd. during June 2006. On 5/18/2010, New Super Ltd. had infused an additional $173,237 in exchange of an additional 5% ownership of our subsidiary AlphaRx International Holdings Ltd.
As a result of the above mentioned revenue and expense items, we incurred a net loss of $23,483 for the nine months ended June 30, 2012 as compared to a net loss of $412,662 generated in the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
As at June 30, 2012 the Company had a working capital deficiency of $1,328,200 as compared to a working capital deficiency of $1,286,815 as at September 30, 2011. The Company has also increased its stockholders’ deficiency to $1,328,200 as at June 30, 2012 compared to a stockholders’ deficiency of $1,277,025 as at September 30, 2011.
We have a licensing arrangement with Andromaco, which provides us with a small royalty stream. We also have licensing arrangements with Gaia BioPharma Limited which may provide us with milestone payments and/or royalty streams in the future. There is no assurance that such payments or royalty streams will materialize.
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 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 stockholders, and debt financing, if available, may require additional stock to be issued and/or 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 licensees and distribution 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 or to retain sales and marketing partners to market our products;
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 one leased auto and for certain research equipment.
We expect to explore to spend capital on:
1. digital media business
2. identify digital media partners / acquisition target
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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Management assessed our internal control over financial reporting as of June 30, 2012. Management based its assessment on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this assessment, management has concluded that as of June 30, 2012, our internal control over financial reporting was ineffective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. We noted that there is a lack of segregation of certain duties at the Company due to the small number of employees with responsibility for general administrative and financial matters. This constitutes a deficiency in financial reporting. We therefore conclude that our disclosure controls over financial reporting were ineffective as of and for the nine months ended June 30, 2012. At this time, management has decided that considering the employees involved and the control procedures in place, the risks associated with such lack of segregation of duties are insignificant and the potential benefits of adding additional employees to clearly segregate duties do not justify the additional expenses associated with such increases. Management will periodically re-evaluate this situation. If the volume of business increases and sufficient capital is secured, it is the Company’s intention to further increase staffing to mitigate the current lack of segregation of duties within the general, administrative and financial functions.
Changes in Internal Controls
Management has evaluated the effectiveness of the disclosure controls and procedures as of June 30, 2012. Based on such evaluation, management has concluded that the disclosure controls and procedures were ineffective for their intended purpose described above. There were no changes to the internal controls during the quarter ended June 30, 2012 that have materially affected or that are reasonably likely to affect the internal controls.
Limitation on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Such limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures, such as simple errors or mistakes or intentional circumvention of the established process
PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On June 29, 2011, the Company filed a Statement of Claim (the “Claim”) in the Ontario Superior Court of Justice (the “Court”) against 2 former scientists of the Company for violations of the Company’s policies and procedures, and breach of fiduciary duty. The Claim was settled on January 11, 2012.
ITEM 1A – RISK FACTORS
The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements that we make in this Report and elsewhere (including oral statements) from time to time. Any of the following risks could materially and adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this Report.
Risks Related to our Business
Risks Related to our Industry
Risks Related to Digital Media business
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
ITEM 4 - MINE SAFETY DISCLOSURES
ITEM 5 - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
Pursuant to the requirements of Section 13 or 15(d) 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.