U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS UNDER SECTION 12(B) OR
12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
ALPHARx INC.
(Name of Small Business Issuer in its Charter)
Delaware 98-0177440
(State or Other Jurisdiction of IRS Employer ID Number
Incorporation or Organization)
75 East Beaver Creek, Unit 10,
Richmond Hill, Ontario, Canada L4B-1B8
(Address of Principal Executive Offices) (Zip Code)
(905)762-0745
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
Not Applicable Not Applicable
Securities to be registered under Section 12(g) of the Act:
Common Stock, $0.001 par value per share
(Title of Class)
<PAGE>
PART I
Item 1. Description of Business.
BUSINESS DEVELOPMENT AND SUMMARY
AlphaRx Inc. (hereinafter referred to as "AlphaRx" or the "Company") is a
development stage drug delivery company incorporated in the State of Delaware on
August 8, 1997. The Company formulates and commercializes controlled-release
therapeutic products using its proprietary drug delivery technologies, which it
believes, can be combined with a broad range of therapeutic products. The
Company is applying its proprietary drug delivery technologies and formulation
skills to:
Pain Management - developing generic versions of select brand name oral and
topical NSAID pharmaceuticals;
Oral Care Management - developing antimicrobial dental varnish, controlled
release mouth rinse and toothpaste; and
Nutraceuticals - developing bioavailable specialized supplements with
therapeutic benefits.
Immunomodulators - heterocyclic derivatives with immunostimulating and
anti-inflammatory activities.
The Company believes pharmaceutical companies are increasingly using
controlled-release drug delivery technologies to improve drug therapy.
Controlled-release drug delivery technologies generally provide more consistent
and appropriate drug levels in the bloodstream than immediate-release dosage
forms and thereby may improve drug efficacy and reduce side effects. These
technologies also allow for the development of "patient-friendly" dosage
formulations by reducing the number of times a drug must be taken, thereby
improving patient compliance. Controlled-release pharmaceuticals can be
especially beneficial for certain patient populations, such as the elderly, who
often require several medications with differing dosing regimens.
The Company believes the market for advanced drug delivery systems is large
and growing rapidly. Based on published data, the market for orally-administered
drugs that utilize sustained and controlled-release drug delivery systems is
expected to increase to approximately $50 billion in 2005 from approximately $10
billion in 1995. The Company also believes that pharmaceutical companies that do
not themselves have controlled-release drug delivery technology expertise will
rely upon third parties, such as AlphaRx, to apply such technologies to their
product candidates.
The Company intends to use its proprietary drug delivery technologies in
collaborative arrangements with pharmaceutical companies to formulate
controlled-release versions of their existing commercialized drugs as well as
drugs under development by them. By improving drug
2
<PAGE>
efficacy and reducing side effects, AlphaRx believes its drug delivery
technologies will provide pharmaceutical companies with the opportunity to
enhance the commercial value of their existing products and new drug candidates.
From the date of the Company's organization through the present, it was not
the subject of any bankruptcy, receivership or similar proceedings. There was
also no material reclassification, merger, consolidation, or purchase or sale of
a significant amount of assets not in the ordinary course of business.
BUSINESS OF ISSUER
PRINCIPAL PRODUCT AND SERVICES AND PRINCIPAL MARKETS
AlphaRx is engaged in developing novel formulations of existing drugs that
are insoluble or poorly soluble in water, utilizing its proprietary Bioadhesive
Colloidal Dispersion (BCD) drug delivery systems. The Company's strategy is to
develop patentable improved formulations of such drugs that are soluble in both
human and veterinary medicines. The Company's BCD drug delivery technology
includes two different approaches to improve the effectiveness of insoluble
drugs and provide new methods of delivery, namely, (i) CLD (Colloidal Lipid
Dispersion System) and (ii) SECRET (Self Emulsifying Controlled Release Tablet
System).
Insoluble or poorly soluble drugs are a major problem for the
pharmaceutical industry, with over one-third of the drugs listed in the United
States' Pharmacopoeia being insoluble or poorly soluble in water. Further, most
approaches used to overcome insolubility result in clinical problems ranging
from poor and erratic bioavailability to serious side effects. The BCD drug
delivery technology is designed to develop drugs with major medical advantages,
such as lower dosing, fewer side effects and alternative dosage forms, as well
as commercial advantages, such as extended patent protection and broader use.
The Company has a number of drugs under development, certain of which have
been successfully reformulated, utilizing its BCD technology. AlphaRx's central
strategy is to seek alliances with pharmaceutical companies which will assist
the Company in completing the reformulation and development of the drugs and
which will initiate clinical trials and commercialize the products.
PRODUCT PIPLELINE
The following is a list of some of AlphaRx's products in the development
pipleline:
--------------------------------------------------------------------------------
Brand Name Application Delivery Status
Method/Technology
--------------------------------------------------------------------------------
Pain Management
--------------------------------------------------------------------------------
Flexigan Arthritis Transdermal/CLD Pre-Clinical
--------------------------------------------------------------------------------
Indoflex Arthritis Transdermal/CLD Pre-Clinical
--------------------------------------------------------------------------------
Flexigan SR Arthritis Oral/SECRET Pre-formulation
--------------------------------------------------------------------------------
3
<PAGE>
--------------------------------------------------------------------------------
Indoflex SR Arthritis Oral/SECRET Pre-formulation
--------------------------------------------------------------------------------
Oral Health
--------------------------------------------------------------------------------
ChlorSM Anti-gingivitis, Oral/CLD Pre-Clinical
Mouth Rinse Anti-plaque
--------------------------------------------------------------------------------
ChlorSM Anti-gingivitis, Oral/CLD Pre-Clinical
Toothpaste Anti-plaque
--------------------------------------------------------------------------------
ChlorSM Varnish Anti-cavity Oral/Slow Release Pre-Clinical
--------------------------------------------------------------------------------
Nutraceuticals
--------------------------------------------------------------------------------
Q10 Biosomes Cardio Oral/SECRET Approved for sale in
Health Canada
--------------------------------------------------------------------------------
LipoLette Weight Oral/SECRET Formulation (final)
Control
--------------------------------------------------------------------------------
LipoBloc Cardio Oral/SECRET Formulation (final)
Health
--------------------------------------------------------------------------------
RejuvaNow Anti-aging Transdermal/CLD R & D
--------------------------------------------------------------------------------
SME Progesterone Menopause Transdermal/CLD R & D
--------------------------------------------------------------------------------
Overview of the Drug Delivery Industry
Drug delivery companies apply proprietary technologies to create new
pharmaceutical products utilizing drugs developed by others. These products are
generally novel, cost-effective dosage forms that may provide any of several
benefits, including better control of drug concentration in the blood, improved
safety and efficacy, and ease of use and improved patient compliance. The
Company believes drug delivery technologies can provide pharmaceutical companies
with a means of developing new products as well as extending existing patents.
The increasing need to deliver medication to patients efficiently and with
fewer side effects has accelerated the development of new drug delivery systems.
Today, medication can be delivered to a patient through many different means of
delivery, including transdermal (through the skin), injection, implant and oral
methods. These delivery methods, however, continue to have certain limitations.
Transdermal patches are often inconvenient to apply, can be irritating to the
skin and the rate of release can be difficult to control. Injections are
uncomfortable for most patients. Implants generally are administered in a
hospital or physician's office and frequently are not suitable for home use.
Oral administration remains the preferred method of administering medication.
Conventional oral drug administration, however, also has limitations in that
capsules and tablets have limited effectiveness in providing controlled drug
delivery, resulting frequently in drug release that is too rapid (causing
incomplete absorption of the drug), irritation to the gastrointestinal (GI)
tract and other side effects. In addition capsules and tablets cannot provide
localized therapy.
In recent years, drug delivery companies have been able to develop
innovative and efficient solutions to some of the limitations of conventional
oral drug administration. For example, the improved oral delivery system
developed by ALZA in the 1980's reduced the side effects and dosing frequency of
the hypertension drug, Procardia(R). The improved product,
4
<PAGE>
Procardia XL(R), resulted in substantially increased sales and the new
formulation extended the patent life on Procardia(R). The Company believes its
BCD Systems have the potential to offer similar opportunities of improved
therapy and extended patent life to pharmaceutical and biotechnology companies.
Bioadhesive Collodial Dispersion (BCD) Systems
The Company's proprietary oral and transdermal drug delivery technologies,
its BCD Systems, permit formulations of drug-containing polymeric units that
allow controlled delivery of an incorporated hydrophobic drug. Although the
Company's formulations are proprietary, the polymers utilized in its BCD Systems
are commonly used in the food and drug industries. By using different
formulations of the polymers, the Company believes its BCD Systems are able to
provide continuous, controlled delivery of drugs of varying molecular complexity
and solubility.
The BCD Systems are designed to provide orally and transdermally
administered, conveniently dosed, cost-effective drug therapy in a continuous,
controlled delivery over a multihour period. The Company believes its BCD
Systems may provide one or more of the following therapeutic advantages over
conventional methods of drug administration:
1. Enhanced Safety and Efficacy. The Company believes its BCD Systems may
improve the ratio of therapeutic effect to toxicity by decreasing the initial
peak concentrations of a drug, associated with toxicity, while maintaining
levels of the drug at therapeutic, subtoxic concentrations for an extended
period of time. Many drugs demonstrate optimal efficacy when concentrations are
maintained at therapeutic levels over an extended period of time. When a drug is
administered intermittently, the therapeutic concentration is often exceeded for
some period of time, and then rapidly drops below effective levels. Excessively
high concentrations are a major cause of side effects, while subtherapeutic
concentrations are ineffective.
2. Greater Patient and Caregiver Convenience. The Company believes its BCD
Systems may permit once-daily dosing for certain drugs that are currently
required to be administered several times daily, thereby promoting compliance
with dosing regimens. Patient noncompliance with dosing regimens has been
associated with increased costs by prolonging treatment duration, increasing the
likelihood of secondary or tertiary disease manifestation and contributing to
over-utilization of medical personnel and facilities. By improving patient
compliance, providers and third-party payors may reduce unnecessary expenditures
and improve therapeutic outcomes.
3. Expanding the Types of Drugs Capable of Oral Delivery. Some drugs,
including certain proteins (complex organic compounds of high molecular weight
containing numerous amino acids) and peptides (low molecular weight compounds
consisting of two or more amino acids), because of their large molecular size
and susceptibility to degradation in the GI tract, must currently be
administered by injection or by continuous infusion, which is typically done in
a hospital or other clinical setting. The Company believes its BCD Systems may
permit some of these drugs to be delivered orally and/or transdermally.
4. Proprietary Reformulation of Generic Products. The Company believes its
BCD Systems offer the potential to produce improved proprietary formulations of
off-patent drugs,
5
<PAGE>
differentiated from the existing generic products by reduced dosing
requirements, improved efficacy, decreased toxicity or additional indications.
Background
To be effective, drugs must reach an intended site in the body, at an
effective concentration, for an appropriate length of time. Traditional methods
of drug administration, such as oral ingestion, intramuscular and intravenous
injections and inhalation, are effective for a wide variety of drugs. Depending
upon the drug, however, each method may have disadvantages. For example, in oral
administration, a drug must pass through the gastrointestinal system to be
absorbed and may be metabolized or broken down in the stomach, intestines or
liver, resulting in the therapeutic availability of a lower amount of effective
drug. As a result, higher dosages of the drug must be used to produce the
desired effect, which may cause irritation of the gastrointestinal tract and
systemic toxicity.
Additionally, the rate at which an orally administered drug is absorbed may
vary depending on several factors, including the drug's chemical properties, the
length of time the drug remains in the gastrointestinal tract and the patient's
meal patterns. Although the pharmaceutical industry has investigated a variety
of alternative approaches for addressing drug adverse events and loss of
efficacy following oral dosing, by enteric coating of tablets, formulating with
various waxes and cellulosic materials, microencapsulation and compressing
tablets in various layers, the beneficial effects are not always reproducible
from patient to patient or effective in modifying metabolic effects produced in
the liver.
Colloidal Lipid Dispersion (CLD) System
The Company's CLD system is a topical drug delivery technology which permit
pharmaceutical formulations (creams, gels, solutions, etc.) that enhance the
transdermal delivery of drugs into the skin or into the bloodstream. CLD
compounds, combined with polymers and adhesives, can also be used with patch
formats to achieve the transdermal delivery of selected drugs. The Company
believes that CLD compounds enhance the diffusion of drugs into and through the
skin by making the outer layer of the skin (stratum corneum) more permeable to
the drug molecule. Transdermal delivery provides an alternative to other methods
of drug administration (injection, oral dosage forms, inhalation, etc.), and may
allow selected drugs to be administered more effectively, at lower doses, with
fewer adverse events and improved patient compliance.
The Company's CLD system utilizes oil in water emulsions with a mean
droplet size of 100-200 nm that are suitable for incorporation of lipophilic
drugs. Drugs are dissolved in the liquid oil core or incorporated into the
oil/water interface, according to the drug's hydrophobicity. The Company
believes its CLD system is unique compared with other drug delivery systems
because its utility is dependent on the physico-chemical properties of the drug
(i.e. insolubility and surface properties) rather than the chemical structure
and reactivity.
AlphaRx develops specific CLD formulations for use with non-proprietary and
proprietary drugs, which it plans to commercialize through partnerships,
strategic alliances and license agreements with the pharmaceutical companies
manufacturing these products.
6
<PAGE>
Self Emulsifying Controlled Release Tablet (SECRET) Systems
The Company's SECRET system is a self-emulsifying, controlled release drug
delivery system for the systemic oral administration of hydrophobic (lipophilic)
drugs. Oral absorption improvement and bioavailability enhancement of
hydrophobic drugs are achieved using self-emulsifying oily preparations. In
combination with a biodegradable polymeric matrix, SECRET is capable of
delivering these drugs to the biological target in a sustained-release manner
over prolonged periods of time without the loss of bioavailability.
SECRET presents a novel way to increase the oral bioavailability of a
lipophilic substance over a desired target site in a prolonged and sustained
manner. More particularly, SECRET consists of a solid dispersion comprising the
lipophilic substance, a surfactant system having a melting point close to human
body temperature and an oil component in a biocompatible, biodegradable
polymeric matrix that does not interact with the entrapped compositions.
After the polymeric matrix erodes at the desired target site, it slowly
releases the entrapped compositions and, after mixing with body fluids, these
compositions undergo quick dissolution with resultant emulsification, thus an
oil-in-water emulsion is formed, the droplets of which have a diameter below
about 100 nm (0.1(mu)m). Emulsions having tiny droplets as those obtainable in
accordance with the SECRET formulations were hitherto obtainable only by
employing a complex homogenization procedure involving the use of intricate
equipment. Another feature of SECRET is the incorporation of a self-emulsifying
composition in a swellable polymeric matrix, which is suitable for tablet
formation, unlike conventional self emulsifying oily formulations that are
preferably encapsulated in a sealed soft or hard gelatin capsule.
SECRET is unique compared to other drug delivery systems because its
utility is dependent on the physico-chemical properties of the drug (i.e.
insolubility and surface properties) rather than the chemical structure and
reactivity.
Testing to date has demonstrated significant pharmaceutical and biological
advantages for AlphaRx's SECRET formulations as compared to standard Self
Emulsifying Drug Delivery System preparations.
The principal excipients used in SECRET formulations are highly
biocompatible and acceptable to the FDA. SECRET formulated water-insoluble drugs
offer the following benefits: (i) lower toxicity formulations; (ii) controlled
absorption with resultant reduction in peak to trough ratios; (iii) targeted
release of the drug to specific areas within the gastrointestinal tract; (iv)
absorption irrespective of the feeding state; (v) minimal potential for dose
dumping; (vi) improved oral bioavailability; (vii) enhanced stability; (viii)
improved dissolution rate; (ix) less irritation; (x) bioadhesive to mucous
membranes for maximum penetration; (xi) high drug payloads; and (xii) lower
production cost.
DISTRIBUTION METHODS OF THE PRODUCTS AND SERVICES
7
<PAGE>
The Company intends to have the BCD Systems used with as many
pharmaceutical products as possible. Its primary strategy is to establish
collaborative relationships with pharmaceutical and biotechnology companies to
develop improved therapeutic products utilizing its BCD Systems technology. The
products will be jointly developed, with the collaborative partner having
primary responsibility to clinically test, manufacture, market and sell the
product, and the Company retaining ownership of its technologies. The Company
believes that its partnering strategy will enable it to reduce its cash
requirements while developing a larger potential product portfolio. By providing
new formulations of existing products using the BCD Systems, the Company
believes it will not only be able to offer its partners improved products but
also may provide them with the ability to extend the life of their patents on
such products, especially attractive to pharmaceutical companies whose patents
on existing products are close to expiration. Collaborations with pharmaceutical
and biotechnology companies are expected to provide near-term revenues from
sponsored development activities and future revenues from license fees and
royalties relating to the sale of products.
The Company has identified as potential partners six companies it believes
have drugs which can derive potential benefits utilizing the BCD Systems and has
initiated preliminary discussions with some of these companies. There can be no
assurance that any of these discussions will lead to the Company's entering into
a development agreement with a collaborative partner or, if such agreement is
entered into, that such collaboration will lead to the successful development of
a product.
The Company also intends to develop over-the-counter (OTC) and/or
off-patent drug products utilizing its BCD Systems, either independently or
jointly by entering into collaborative partnerships with pharmaceutical,
biotechnology or other healthcare companies. To reduce costs and time-to-market,
the Company intends to select those products that treat indications with
clear-cut clinical end-points and that are reformulations of existing compounds
already approved by the FDA. The Company believes that products utilizing the
BCD Systems will provide favorable product differentiation in the highly
competitive generic and OTC drug product markets at costs below those of other
drug delivery systems, thereby enabling the Company and its collaborative
partners to compete more effectively in marketing improved off-patent and OTC
drug products. The Company is also seeking to establish alliances with overseas
sales and marketing partners for the initial sale of the Company's future
generic products. The Company believes that due to the more favorable regulatory
environments in some foreign countries, it may be able to generate revenues from
these markets while awaiting FDA approval in the United States.
NEW PRODUCTS
PAIN MANAGEMENT
Arthritis Overview
Arthritis is a condition in which one or more joints becomes inflamed. It
is the most common chronic condition in North America. Some forms of arthritis
(such as tendinitis and bursitis) can be cured completely but most forms are
chronic. Current treatment and therapy can
8
<PAGE>
only alleviate pain, relieve stiffness and prevent the disease from progressing
and deformities from occurring. Each of these diseases has a different cause and
may require different medications and treatments.
Arthritis afflicts an estimated 10% of the world's population. With over 40
million people afflicted by the disease in North America, arthritis costs the
U.S. economy between $54.6 and $64.8 billion per year in medical, care and lost
wages .
Osteoarthritis (OA) is a degenerative joint disease in which the cartilage
that covers the ends of bones in the joint deteriorates, causing pain and loss
of movement as the bones begin to rub against each other. OA is the most common
form of arthritis. The motion of the joint becomes more limited as the disease
progresses. The joints most commonly hit by osteoarthritis are the fingers,
hips, and knees. Rheumatoid arthritis (RA) is a systemic autoimmune disorder,
characterized by inflammation of the synovial lining of the joints leading not
only to joint damage but also to systemic symptoms such as fever, anemia, lack
of energy, and loss of appetite.
NSAIDs are drugs employed for their anti-inflammatory properties. They are
heterogeneous in chemical structure and diverse in mechanisms of action, but
they share the important property of inhibiting prostaglandin (PG) biosynthesis.
Although these drugs effectively inhibit inflammation, there is no evidence that
they alter the course of an arthritic disorder.
Products under Development
AlphaRx has two topical NSAID products under development:
----------------------------------------------------------------------
Brand Name Active Ingredient Status
-------------------- ---------------------------- --------------------
Flexigan 1.0% Diclofenac Pre-clinical
-------------------- ---------------------------- --------------------
Indoflex 1.5% Indomethacin Pre-clinical
----------------------------------------------------------------------
Flexigan - Flexigan is a clear, non-smelling topical formulation of CLD,
which transports and delivers one of the most effective and widely prescribed
NSAIDs, diclofenac, through the skin eliminating the problems typically
associated with oral NSAIDs.
Flexigan does not irritate the skin when the cream is applied topically
causing diclofenac to penetrate rapidly and deeply into the affected parts of
the body due to the CLD formulation. CLD are oil-in-water sub micron emulsions
composed of vegetable oil emulsified in aqueous medium with the aid of
phospholipids and synthetic coemulsifiers. CLD does not contain such chemical
enhancers as propylene glycol, alcohol or Azone and are therefore highly
acceptable and of low irritancy.
Indoflex - Like Flexigan, Indoflex is a topical NSAID formulation of
indomethacin in CLD.
9
<PAGE>
Controlled Release NSAIDs in Self Emulsifying Tablets
Oral NSAIDs, such as Indomethacin and Diclofenac have a pronounced
irritating action in the gastrointestinal (GI) level and stomach. Different
enteric-coated, extended-release, delayed-release, buffered capsules or tablets
or oral suspension formulations may reduce this side effect, however, they are
often in an undesirable range and costly to produce.
NSAIDs in emulsion are less irritating to the GI and also bioavailability
and absorption kinetic of active ingredient are also improved. Currently,
AlphaRx is developing two oral NSAID products that utilize the SECRET drug
delivery system:
----------------------------------------------------------------------
Brand Name Active Ingredient Status
-------------------- ---------------------------- --------------------
Flexigan SR Diclofenac Pre-formulation
-------------------- ---------------------------- --------------------
Indoflex SR Indomethacin Pre-formulation
----------------------------------------------------------------------
ORAL CARE MANAGEMENT
Overview
The worldwide oral care market is estimated to exceed $7.0 billion in
annual retail sales. Annual oral care sales in North America are estimated to be
$2.8 billion in 1999 and are projected to reach $3.0 billion by the year 2000.
It is estimated that the oral care products will grow at an annual rate of 10%
internationally for the next 10 years with the highest growth rate in developing
countries such as China.
The Company intends to be a provider of proprietary oral care products to
international consumers using a scientific approach that will significantly
reduce the long-term costs of dental care. The Company is focused on developing
and marketing proprietary oral care products to treat the cause of tooth decay
and gum disease. The Company seeks to establish distinctive brand identity
emphasizing the enhanced therapeutic benefits of its oral care products, which
will be communicated to both consumers and dental professionals.
Traditional dentistry is shifting away from treating symptoms (i.e.
drilling and filling cavities) and moving towards taking preventive action to
treat the cause of tooth decay and gum disease. This shift is caused by mounting
scientific evidence that tooth decay and gum disease are medical conditions
caused by chronic low-grade bacterial infections that can be prevented and
treated with antimicrobial agents such as Chlorhexidine and Fluoride.
Secondly, in response to rising costs and decreasing access to dental
treatments, consumers' interest in self-diagnosis and preventive treatment have
grown dramatically. Additionally, consumers are becoming increasingly aware of
the importance of oral hygiene. Consumers are looking for value and product
innovation that emphases therapeutic values.
10
<PAGE>
The Company is focused on developing and marketing therapeutic oral care
products based on proprietary formulations and technologies. The Company's
products treat the bacterial infections that cause tooth decay and gingivitis.
Through scientific studies it has been shown that our formulations stop the
demineralization of tooth enamel.
The Company believes that the effectiveness of oral care products depend on
how long its active agents stay in the mouth. Most of the commercially available
oral care formulations have suffered from a number of drawbacks, including lack
of suitability of the carrier for its intended use. Most of these known
formulations suffer an inability to carry a large amount of the active agent and
to ensure a controlled and prolonged release thereof at the desired site. This
inability is particularly undesirable, since most biologically active agents
must remain at the desired site for a prolonged period in order to be effective.
The Company's oral care products are based on the active ingredients
chlorhexidine and sodium fluoride in proprietary formulations that effectively
control the release of chlorhexidine in the oral cavity over an extended period
of time to provide a sustained antimicrobial activity against tooth
"demineralization" (whereby sodium fluoride induces the uptake of minerals, such
as calcium and phosphate), which enhances tooth "remineralization".
Role of Bacteria in Dental Pathology
Although there are many origins for the conditions commonly treated by
dentists (ranging from tumors of the oral cavity to trauma induced tooth
injuries), a common feature of the two major dental diseases is the role played
by bacteria. In particular it is well established that tooth decay and most gum
diseases result from bacterial infections.
Tooth decay, or caries, refers to a hole or cavity in the surface of the
tooth. Depending on the length of time from its inception, the hole may
penetrate only the top surface of the tooth (the enamel) or may penetrate past
the dentin (the bone-like material which is the main constituent of the tooth)
into the pulp. The scientific literature has established quite clearly that one
species of bacteria, Streptococcus mutans (S. mutans - actually a group of seven
closely related bacteria) is responsible for the onset of tooth decay. This
bacterium grows on the surface of the teeth in almost all individuals. In the
presence of sugars and starches in the diet, S. mutans metabolizes the
carbohydrate and produces acids. Acids demineralize the calcium phosphates that
are the major mineral constituent of tooth enamel and the decay process begins.
The Company's proprietary oral care products, kill S. mutans to prevent further
cavities. The evidence for the primary role of S. mutans in tooth decay is
manifold, including the following: significant correlation between S. mutans
counts in saliva and plaque and the incidence of caries.(i) the correlation of
S. mutans counts and the progression of tooth decay; (ii) S. mutans can be
isolated from the tooth surface before initiation of a cavity; (iii) infection
of experimental animals with S. mutans procedures high incidence of caries; (iv)
immunization of experimental animals with S. mutans significantly reduces the
incidence of caries; (v) S. mutans produces copious amounts of extracellular
polysaccharide, a key component of plaque;(vi) S. mutans metabolism of sucrose
rapidly produces an organic acid which demineralizes tooth enamel.
11
<PAGE>
Due to the aging of the population, gum disease is becoming a more
prevalent disease than tooth decay,. It is characterized by the pulling away of
the gums from the teeth due to the presence of plaque on the surface of the
teeth. Plaque is a mixture of bacteria, bacterial products and saliva which is
the medium in which bacteria grow. It is believed that bacterial metabolic
products in plaque are toxic to the cells of the gum tissue (gingiva) leading to
inflammation (gingivitis or the more severe periodontitis) and the receding of
the gum tissue from the teeth. If left untreated, the supporting tissue of the
gums becomes so loose that the teeth are lost.
Chlorhexidine in Dentistry and Oral Health
The bisbiguanide chlorhexidine (CHX) was first described more than 40 years
ago and is the most thoroughly studied antimicrobial substance used orally. CHX
is bactericidal against gram-positive and gram-negative bacteria and yeasts.
The antibacterial activity of CHX is associated with the absorption by the
bacteria. At neutral pH, the positively charged CHX molecule is absorbed on the
surface of the bacteria, where it reacts with negatively charged membrane
components. Under acid conditions the absorption decreases, resulting in a
reduced antibacterial effect. At low concentrations CHX causes disorganisation
of the cytoplasmic membrane, making the bacteria permeable to the drug which
inhibits essential metabolic events. At higher concentrations CHX coagulates
cytoplasmic constituents and prevents the bacterial cells from recovering.
Compared with other substances, CHX shows its special effectiveness in the
fact that plaque is considerably reduced, the development of caries and
gingivitis is interrupted, effects that certainly are related to its high
substantively. CHX is absorbed in sub-MIC concentrations for a few hours on the
outer surface of the teeth, as well as the oral mucous membrane and is slowly
released. Therefore the metabolism of the bacteria is effected. In vivo studies
show that acid production in the plaque is inhibited for extended periods of
time and the growth rate of bacteria reduced.
In patients with high caries activity and high counts of mutans
streptococci, CHX is employed as an adjunct to other preventive measures.
Combinations of chlorhexidine with fluoride is also possible. The best clinical
effect, resulting in a considerable caries reduction, has been obtained when
persons highly colonized with mutans streptococci have been treated with gels
and when the results of the antimicrobial measures have been verified by
microbiological examination. Sustained release devices, like varnishes, reduce
the numbers of mutans streptococci in a patient's mouth to levels below
detection for long periods.
Older persons are at an increased risk of root caries since they may be
impaired, take multiple medications or have partials. Treatment strategies
should include antimicrobial agents for both the remineralization of early
lesions and prevention of further root caries. In periodontal treatment, CHX is
used for post-operative rinsings and as an adjunct to oral hygiene and
mechanical debridement. This means that CHX has a significant inhibitory effect
on gingivitis, but that it cannot dissolve already formed plaque.
12
<PAGE>
People who have been treated with chemotherapy and radiotherapy for
neoplasms in the head and neck regions are more vulnerable to dental diseases.
In the long term, however, periodontal diseases and caries can be controlled
with appropriate use of CHX and fluoride.
Scientific and clinical studies have shown that children treated with CHX
had 50% less caries. In those children with high counts of S. mutans, the
incidence of caries was reduced by 80%. The treatment of first-time mothers with
CHX reduced the S. mutans level and incidence of caries in their children (It is
well established that young children pick up S. mutans from their parents).
Strategy
The Company's objective is to develop a variety of oral care products based
on proprietary formulations that treat the cause of tooth decay and gingivitis.
The Company has developed a strategic plan to accomplish this goal. The
Company's primary strategies are to:
1. Focus initially on therapeutic mouth rinse and toothpaste: The Company
will seek to establish distinctive brand identity emphasizing the enhanced
therapeutic benefits of its products, which will be communicated to both
consumers and dental professionals.
2. Marketing to Dental Professionals. The Company's goal is to continue to
build awareness of its proprietary technologies and its products in the dental
community. The Company will continue its efforts in educating the dental
community regarding the enhanced therapeutic benefits of its products.
3. Obtain the CDA and ADA Seal of Approval. The Company believes that the
CDA Seal of Approval will enhance the standing of ChlorSM colloidal mouth rinse
with both the dental community and consumers.
4. Conduct Further Testing: The Company believes that a heightened
understanding of the chemistry required to treat the cause of tooth decay and
prevent demineralization of tooth enamel will lead to stronger protection from
competition. Further clinical testing is being conducted to establish efficacy
and marketing claims.
5. Collaborate with Corporate Partners in Certain Product Areas and
International Markets: The Company intends to seek domestic and international
strategic alliances with consumer product companies that will assist in the
marketing and manufacturing of oral care products outside of North America.
Description of Products
The Company has the following products to treat the bacterial infections
that cause tooth decay and gingivitis:
----------------------------------------------------------------------
Product Description Active Ingredient(s)
---------------------------------- -----------------------------------
ChlorSM Mouth Rinse Chlohexidine w/NaF
----------------------------------------------------------------------
ChlorSM Toothpaste Chlorhexidine w/MFP
---------------------------------- -----------------------------------
ChlorSM Dental Varnish Chlorhexidine, Thymol, NaF
----------------------------------------------------------------------
13
<PAGE>
ChlorSM colloidal mouth rinse
ChlorSM colloidal mouth rinse is a proprietary sustained release
formulation of chlorhexidine available by prescription in North America. ChlorSM
colloidal mouth rinse is an advanced mouth rinse formulation based on BCD, a
proprietary lipid based drug delivery technology which is highly mucoahesive and
capable of carrying a high load of active agents. BCD effectively controls the
release of Chlorhexidine in oral cavity over an extended period of time to
provide an effective and sustained protection.
Antimicrobial Dental Varnish
ChlorSM dental varnish is a proprietary two-stage formulation which
contains the combination of chlorhexidine and thymol that kills S. mutans to
prevent cavities. ChlorSM's proprietary sustained release formulation eliminates
the staining effect of chlorhexidine and keeps the two active agents in contact
with the bacteria for 8-24 hours and reduces the number of S. mutans bacteria to
extremely low levels for months.
SME (Sub Micron Emulsion) colloidal toothpaste and mouth rinse
ChlorSM SME toothpaste is a proprietary controlled release therapeutic
toothpaste based on the BCD drug delivery system. The active agents in the SME
toothpaste are Chlorhexidine and Fluoride; it has been proven clinically that
the combination of the two active agents has a positive synergetic effect. The
SME toothpaste will inhibit demineralization of tooth enamel and provide cavity
prevention and pain relieving properties for individuals with exposed dentin
caused by receding gums. The Company, utilizing the BCD formulation, has
successfully retained the antimicrobial property of the active agent
Chlorhexidine in toothpaste form under a stable and controlled release
environment. The Company believes that there is no Chlorhexidine toothpaste
commercially available in North America.
NUTRACEUTICALS
The total United States retail market for nutritional supplements is
highly fragmented and historically has grown rapidly, generating $12 billion in
1998 sales, as compared to $5.0 billion in 1994. AlphaRx believes that this
growth was due to a number of factors, including: (i) increased interest in
healthier lifestyles; (ii) the publication of research findings supporting the
positive health effects of certain nutritional supplements; and (iii) the aging
of the "Baby Boomer" generation combined with the tendency of consumers to
purchase more nutritional supplements as they age.
Various publicly traded nutritional supplement companies have recently
announced, however, that there appears to be a slow-down in sales of nutritional
supplements. AlphaRx believes that this slow-down may be the result of, among
other things, the lack of any recent industry-wide "hit" products such as St.
John's Wort. AlphaRx's controlled-release drug delivery
14
<PAGE>
technologies can provide patent protection for a nutritional product that has
not been patented or for which the patent is expiring or has expired. Patented
methods of controlled drug delivery may extend product life and provide a
nutritional supplement manufacturer with a competitive advantage over regular
products delivered by conventional means. The controlled delivery of certain
nutritional products can also result in the approval of new therapeutic
indications, thereby expanding the utility of and the market for those products.
The Company's enabling technology offers the following benefits:
1. Broad Application to Health Maintenance Regiments. The Company believes
that its enabling technology is applicable to a broad range of specialized
health maintenance products designed to address popular health issues such as
elevated LDL cholesterol, obesity, menopause and anti-aging.
2. Low Risk of Adverse Side Effects. The Company's nutraceutical products
are designed to be bioavailable, non-toxic and well tolerated.
3. Convenient Oral Dosage Form. The Company's nutraceutical products are
designed to be potent at low dosage levels, thereby permitting oral
administration either in a convenient capsule or tablet form or transdermal
administration in a lotion or cream form.
Product Pipeline
The Company currently has the following products in different stages of
development designed to address various health maintenance conditions:
--------------------------------------------------------------------
Products Intended Indication
-------------------------- -----------------------------------------
LipoLette Obesity, Weight Control
-------------------------- -----------------------------------------
LipoBloc Cholesterol Lowering
-------------------------- -----------------------------------------
Q10 Biosomes Cardiovascular
-------------------------- -----------------------------------------
Dual C Biosomes General Health
Dual E Biosomes
ACE Biosomes
Reishi Biosomes
-------------------------- -----------------------------------------
RejuvaNow Anti-aging, Anti-wrinkles
-------------------------- -----------------------------------------
SME Progesterone Menopause
-------------------------- -----------------------------------------
AL208 Hair Loss
--------------------------------------------------------------------
Core Product Descriptions
LipoLette is a dual weight loss system, controlled release natural
supplement that promotes weight control through: (i) suppressing appetite; (ii)
blocking the fat absorption; and (iii) stimulating thermogenesis. LipoLette
contains certain hydrophobic active ingredients which are clinically proven to
be safe and non-toxic. The Company believes that its BCD drug delivery
technologies may enhance the bioavailability of these active ingredients
significantly.
15
<PAGE>
LipoBloc is a controlled release formulation of hydrophobic phytosterols.
Phytosterols have been clinically proven to inhibit cholesterol absorption in
the GI Tract and lower LDL in serum levels. The therapeutic usage of
phytosterols have been limited because of its poor solubility in water as well
as in oil. The suggested therapeutic dosages are 2.5-5.0 grams per day for a
15-20% reduction in serum cholesterol levels. The latest clinical studies have
indicated that the same or even significantly better reduction could be achieved
with smaller dosages such as 100 - 300 mg per day using oil solubilized form of
phytosterols. In one clinical study 300 mg phytosterols formulation with 29%
maximum water solubility within 180 minutes demonstrated 38% reduction in serum
cholesterol levels. In vitro, LipoBloc with 100 mg phyosterols demonstrated 100%
solubility in water in 60 minutes using USP 24 [/11] dissolution methodology.
The Company believes that LipoBloc is the most bioavailable phytosterol
formulation in the market, the Company also believes that LipoBloc may have a
positive effect in atherosclerotic plaque regression.
Q10 Biosomes is a controlled release formulation of CoEnzyme Q10 and
Vitamin E which are clinically proven to promote cardiovascular health. The
Company believes that its Q10 Biosomes has better bioavailability than other
commercially available CoEnzyme Q10 products because of its superior water
solubility.
Strategy
The Company's objective is to develop a variety of nutraceutical products
based on proprietary formulations that have therapeutic values. The Company has
developed a strategic plan to accomplish this goal. The Company's primary
strategies are to:
1. Focus initially on therapeutic vitamin supplements: The Company will
seek to establish distinctive brand identity emphasizing the enhanced
therapeutic benefits of its products, which will be communicated to both
consumers and medical professionals.
2. Marketing to Medical Professionals. The Company's goal is to continue to
build awareness of its proprietary technologies and its products in the dental
community. The Company will continue its efforts in educating the dental
community regarding the enhanced therapeutic benefits of its products.
3. Conduct Further Testing: The Company believes that a heightened
understanding of the chemistry required to treat chronic diseases using
nutraceuticals will lead to stronger protection from competition. Further
clinical testing is being conducted to establish efficacy and marketing claims.
4. Collaborate with Corporate Partners in Certain Product Areas and
International Markets: The Company intends to seek domestic and international
strategic alliances with consumer product companies that will assist in the
marketing and manufacturing of nutraceutical products outside of North America.
5. Expand through Acquisitions: The Company believes that it can rapidly
and cost-effectively build its customer base through strategic acquisitions of
complementary businesses,
16
<PAGE>
products, services and technologies. The Company is presently examining a
variety of acquisition strategies designed to expand the Company's market
shares.
COMPETITION
There are other companies that have oral drug delivery technologies that
compete with the BCD Systems. The competitors have oral tablet products designed
to release the incorporated drugs over time. Each of these companies has a
patented technology with attributes different from those of the Company's, and
in some cases with different sites of delivery to the GI tract. The Company
believes that it is the only drug delivery company that is currently using
polymeric based colloidal dispersion controlled release technologies to develop
products for oral and transdermal drug delivery systems for enhanced solubility
and bioavailability of poorly water soluble drugs. The Company believes that
this combination of oral and transdermal drug delivery technologies
differentiates the Company from other oral drug delivery companies and will
enable the Company to attract pharmaceutical companies to incorporate their
proprietary drugs into the BCD Systems and also to differentiate any OTC and/or
off-patent drugs that utilize the BCD Systems from those of other drug delivery
companies.
Competition in the areas of pharmaceutical products and drug delivery
systems is intense and is expected to become more intense in the future.
Competing technologies may prove superior, either generally or in particular
market segments, in terms of factors such as cost, consumer satisfaction or drug
delivery profile. The Company's principal competitors in the business of
developing and applying drug delivery systems all have substantially greater
financial, technological, marketing, personnel and research and development
resources than the Company. In addition, the Company may face competition from
pharmaceutical and biotechnology companies that may develop or acquire drug
delivery technologies. Many of the Company's potential collaborative partners
have devoted and are continuing to devote significant resources in the
development of their own drug delivery systems and technologies. Products
incorporating the Company's technologies will compete both with products
employing advanced drug delivery systems and with products in conventional
dosage forms. New drugs or future developments in alternate drug delivery
technologies may provide therapeutic or cost advantages over any potential
products which utilize the BCD Systems. There can be no assurance that
developments by others will not render any potential products utilizing the BCD
Systems noncompetitive or obsolete. In addition, the Company's competitive
success will depend heavily on entering into collaborative relationships on
reasonable commercial terms, commercial development of products incorporating
the BCD Systems, regulatory approvals, protection of intellectual property and
market acceptance of such products.
RAW MATERIALS AND SUPPLIERS
The Company uses GRAS (Generally Regarded As Safe) materials such as
polymers that are commonly used in the food and drug industries.
CUSTOMERS
The Company currently does not have any customers.
17
<PAGE>
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS,
ROYALTY AGREEEMNTS OR LABOR CONTRACTS
Patents
It is the policy of the Company to file patent applications in the United
States and foreign jurisdictions. The Company currently has three pending United
States patent applications and has applied for patents in two foreign countries
which are still pending. No assurance can be given that the Company's patent
applications will be approved or that any issued patents will provide
competitive advantages for the BCD Drug Delivery Systems or the Company's
technologies or will not be challenged or circumvented by competitors. With
respect to any patents which may issue from the Company's applications, there
can be no assurance that claims allowed will be sufficient to protect the
Company's technologies. Patent applications in the United States are maintained
in secrecy until a patent issues, and the Company cannot be certain that others
have not filed patent applications for technology covered by the Company's
pending applications or that the Company was the first to file patent
applications for such technology. Competitors may have filed applications for,
or may have received patents and may obtain additional patents and proprietary
rights relating to, compounds or processes that may block the Company's patent
rights or compete without infringing the patent rights of the Company. In
addition, there can be no assurance that any patents issued to the Company will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or commercial advantage to the
Company.
The Company also relies on trade secrets and proprietary know-how which it
seeks to protect, in part, through confidentiality agreements with employees,
consultants, collaborative partners and others. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any such breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. Although
potential collaborative partners and the Company's research partners and
consultants are not given access to proprietary trade secrets and know-how of
the Company until they have executed confidentiality agreements, these
agreements may be breached by the other party thereto or may otherwise be of
limited effectiveness or enforceability.
Trademarks
The Company has filed applications in the United States and China Patent
and Trademark Office to register the word mark "ChlorSM" and "Oralife" for oral
care products, such as medicated mouth rinse, professional dental gels and
varnish. The Company also registered the following trademarks, "Alpha-Source"
and "AlphaRx" in Canada and "AlphaRx", "LipoLette", "LipoBloc" and
"PhytoScience" in the United States for nutraceutical products. In connection
with the Company's anticipated Internet web site, the Company has registered
with Network Solutions, Inc. the internet domain name "AlphaRx.com." and
"LTII.com" for its corporate website.
18
<PAGE>
Proprietary Information
Much of the Company's technology is dependent upon the knowledge,
experience and skills of key scientific and technical personnel. To protect the
Company's rights to its proprietary technology, the Company's policy requires
all employees and consultants to execute confidentiality agreements that
prohibit the disclosure of confidential information to anyone outside the
Company. These agreements also require disclosure and assignment to the Company
of discoveries and inventions made by such persons while devoted to Company
activities.
GOVERNMENT REGULATION
The Company is subject to regulation under various federal laws
regarding pharmaceutical products and also various federal and state laws
regarding, among other things, occupational safety, environmental protection,
hazardous substance control and product advertising and promotion. In connection
with its research and development activities, the Company is subject to federal,
state and local laws, rules, regulations and policies governing the use,
generation, manufacture, storage, air emission, effluent discharge, handling and
disposal of certain materials and wastes. The Company believes that it has
complied with these laws and regulations in all material respects and it has not
been required to take any action to correct any material noncompliance.
FDA Approval Process. In the United States, pharmaceutical products,
including any drugs utilizing the BCD Drug Delivery Systems, are subject to
rigorous regulation by the FDA. If a company fails to comply with applicable
requirements, it may be subject to administrative or judicially imposed
sanctions such as civil penalties, criminal prosecution of the company or its
officers and employees, injunctions, product seizure or detention, product
recalls, total or partial suspension of production, FDA withdrawal of approved
applications or FDA refusal to approve pending new drug applications, premarket
approval applications, or supplements to approved applications.
Prior to commencement of clinical studies involving human beings,
preclinical testing of new pharmaceutical products is generally conducted on
animals in the laboratory to evaluate the potential efficacy and the safety of
the product. The results of these studies are submitted to the FDA as a part of
an IND application, which must become effective before clinical testing in
humans can begin. Typically, clinical evaluation involves a time consuming and
costly three-phase process. In Phase I, clinical trials are conducted with a
small number of subjects to determine the early safety profile and the
pharmacokinetic pattern of a drug. In Phase II, clinical trials are conducted
with groups of patients afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase
III, large-scale, multi-center, comparative trials are conducted with patients
afflicted with a target disease in order to provide enough data to demonstrate
the efficacy and safety required by the FDA. The FDA closely monitors the
progress of each of the three phases of clinical testing and may, at its
discretion, re-evaluate, alter, suspend or terminate the testing based upon the
data which have been accumulated to that point and its assessment of the
risk/benefit ratio to the patient.
19
<PAGE>
The results of the preclinical and clinical testing on drugs are submitted
to the FDA in the form of an NDA for approval prior to commencement of
commercial sales. In responding to an NDA, the FDA may grant marketing approval,
request additional information or deny the application if the FDA determines
that the application does not satisfy its regulatory approval criteria. There
can be no assurance that approvals will be granted on a timely basis, if at all.
Failure to receive approval for any products utilizing the BCD Drug Delivery
Systems could have a material adverse effect on the Company.
OTC products that comply with monographs issued by the FDA are subject to
various FDA regulations such as cGMP requirements, general and specific OTC
labeling requirements (including warning statements), the restriction against
advertising for conditions other than those stated in product labeling, and the
requirement that in addition to approved active ingredients OTC drugs contain
only safe and suitable inactive ingredients. OTC products and manufacturing
facilities are subject to FDA inspection, and failure to comply with applicable
regulatory requirements may lead to administrative or judicially imposed
penalties. If an OTC product differs from the terms of a monograph, it will, in
most cases, require FDA approval of an NDA for the product to be marketed.
Other Regulations. Even if required FDA approval has been obtained with
respect to a product, foreign regulatory approval of a product must also be
obtained prior to marketing the product internationally. Foreign approval
procedures vary from country to country and the time required for approval may
delay or prevent marketing. In certain instances the Company or its
collaborative partners may seek approval to market and sell certain of its
products outside of the U.S. before submitting an application for U.S. approval
to the FDA. The regulatory procedures for approval of new pharmaceutical
products vary significantly among foreign countries. The clinical testing
requirements and the time required to obtain foreign regulatory approvals may
differ from that required for FDA approval. Although there is now a centralized
EU approval mechanism in place, each EU country may nonetheless impose its own
procedures and requirements, many of which are time consuming and expensive, and
some EU countries require price approval as part of the regulatory process.
Thus, there can be substantial delays in obtaining required approval from both
the FDA and foreign regulatory authorities after the relevant applications are
filed, and approval in any single country may not be a meaningful indication
that the product will thereafter be approved in another country.
RESEARCH AND DEVELOPMENT
The Company conducts its research and development activities through
collaborative arrangements with universities, contract research organizations
and independent consultants. The Company is also dependent upon third parties to
conduct clinical studies, obtain FDA and other regulatory approvals and
manufacture and market a finished product.
The Company anticipates incurring significant development expenditures in
the future as the Company continues its efforts to develop its present
technologies and new formulations and as it begins to research other
technologies and to expand clinical studies of certain products. The Company
plans to establish laboratory facilities to conduct research and development and
manufacture of batch forms for clinical evaluations.
20
<PAGE>
MANUFACTURING
The Company does not intend to manufacture its products for the North
America market at the outset, but will instead utilize contract manufacturers.
For the balance of the worldwide markets, the Company may seek to sublicense or
enter into joint ventures or strategic partnerships with major consumer product
companies or other third parties on either an exclusive or non-exclusive basis.
Manufacturing arrangements in these markets are likely to be reflected in any
agreements establishing such relationships and may place primary manufacturing
responsibilities on others.
EMPLOYEES
The Company presently has four full-time employees and one part-time
employee.
RISK FACTORS
You should carefully consider the risks described below together with all
of the other information included herein before making an investment decision.
If any of the following risks actually occurs, our business, financial condition
or results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
Market Subject to Rapid Technological Change; Dependence on New Products.
The pharmaceutical market is characterized by rapidly changing technology,
evolving industry standards and continuous improvements in products and
services. Our success depends on the advantages of our technology and our
ability to formulate in a timely manner, utilizing our technology, improved
pharmaceutical products capable of being commercialized by us or our
collaborating partners.
Competition.
The pharmaceutical industry is highly competitive and we will compete
with pharmaceutical companies that have financial, technical and marketing
resources significantly greater than ours. A significant amount of
pharmaceutical research is also being conducted at universities and other
not-for-profit research organizations. Accordingly, technologies and products
superior to or competitive with ours may be developed, resulting in our
technology and potential products becoming obsolete or non-competitive.
Early Stage of Development; Working Capital Deficit; Limited Revenues; Limited
Operating History.
We are at an early stage of development and are subject to all the business
risks associated with a new enterprise, including constraints on our financial
and personnel resources, lack of established credit facilities and collaborative
partnering relationships, and uncertainties
21
<PAGE>
regarding product development and future revenues. As of March 31, 2000, we had
an accumulated deficit of $1,122,442, and anticipate that we will continue to
incur substantial additional operating losses for at least the next several
years, which should increase as our research and development efforts expand. We
have had no revenues to date from collaborative research and development
arrangements and feasibility studies nor any revenues from product sales and
there can be no assurance as to when or whether we will be able to develop
significant sources of revenue or that our operations will become profitable. We
have only a limited history of operations, consisting primarily of development
of our technology and products
No Assurance of Successful Product Development.
Our research and development programs are at an early stage and substantial
additional research and development will be necessary to develop the BCD drug
delivery systems, as to the success of which there can be no assurance. Further,
products developed utilizing the BCD drug delivery systems will require clinical
testing, regulatory approval and substantial additional investment prior to
commercialization. There can be no assurance that any such products will be
successfully developed, prove to be safe and efficacious in clinical trials,
meet applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs, be eligible for third-party reimbursement from
governmental or private insurers, be successfully marketed or achieve market
acceptance.
No Assurance of FDA Approval; Government Regulation.
We can provide no assurance that any products developed by us will receive
FDA approval and/or comply with United States or foreign governmental
regulations.
No Manufacturing, Marketing or Sales Capabilities.
We do not have internal manufacturing, marketing or sales resources and do
not intend to acquire or establish our own dedicated manufacturing facilities
for the foreseeable future. Rather, our manufacturing strategy will be to
utilize the facilities of our collaborative partners or to develop manufacturing
relationships with established contract manufacturers to manufacture any
products developed utilizing our technology. Additionally, we do not intend to
establish an internal sales and marketing capability, but will seek to rely on
our collaborative partners or distributor arrangements to market and sell any
products developed utilizing our technology.
Manufacturers of products utilizing our technology will be subject to
applicable cGMP requirements prescribed by the FDA or other rules and
regulations prescribed by foreign regulatory authorities. There can be no
assurance that we will be able to enter into manufacturing agreements either
domestically or abroad with companies whose facilities and procedures comply
with cGMP or applicable foreign standards. Should such agreements be entered
into, we will be dependent on such manufacturers for continued compliance with
cGMP and applicable foreign standards. Our inability to contract on acceptable
terms with qualified suppliers for the manufacture of any products utilizing our
BCD drug delivery systems or delays or difficulties in our relationships with
such manufacturers, would have a material adverse effect on us.
22
<PAGE>
Uncertainty Regarding Patents and Proprietary Rights.
Our success will depend in part on our ability to obtain and maintain
patent protection for our technologies and to preserve our trade secrets. We
currently have three pending United States patent applications, and have applied
for patents in two foreign countries. No assurance can be given that our patent
applications will be approved or that any issued patents will provide
competitive advantages for the BCD drug delivery systems or that our
technologies will not be challenged or circumvented by competitors. Patent
applications in the United States are maintained in secrecy until a patent
issues, and we cannot be certain that others have not filed patent applications
for technology covered by our pending applications or that we were the first to
file patent applications for such technology. Competitors may have filed
applications for, or may have received patents and may obtain additional patents
and proprietary rights relating to, compounds or processes that may block our
patent rights or compete without infringing our patent rights. Additionally,
there can be no assurance that any patents issued to us will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
proprietary protection or commercial advantage to us.
We also rely on trade secrets and proprietary know-how which we seek to
protect, in part, through confidentiality agreements with employees,
consultants, collaborative partners and others. There can be no assurance that
these agreements will not be breached, that we will have adequate remedies for
any such breach or that our trade secrets will not otherwise become known or be
independently developed by competitors.
The pharmaceutical industry has experienced extensive litigation regarding
patent and other intellectual property rights. Accordingly, we could incur
substantial costs in defending ourselves in suits that may be brought against us
claiming infringement of the patent rights of others or in asserting our patent
rights in a suit against another party. We may also be required to participate
in interference proceedings declared by the United States Patent and Trademark
Office for the purpose of determining the priority of inventions in connection
with our patent applications or other parties patent applications. Adverse
determinations in litigation or interference proceedings could require us to
seek licenses (which may not be available on commercially reasonable terms) or
subject us to significant liabilities to third parties, and could therefore have
a material adverse effect on us.
Need for Additional Financing
We anticipate no increase in levels of operating expenses without a
corresponding increase in revenues. We may experience periods of rapid growth
including increased staffing levels. Such growth could place a significant
strain on our management, operational, financial and other resources. Our
ability to manage growth effectively will require us to develop our management
information systems capabilities and improve our operational and financial
systems. Moreover, we will need to train, motivate and manage our employees and
attract senior managers and technical professionals. Any failure to expand these
areas and implement and improve such systems, procedures and controls in an
efficient manner at a pace consistent with our business could have a material
adverse effect on our business, financial condition and results
23
<PAGE>
of operations. We will require additional financing to expand, maintain public
awareness of products and provide working capital for our anticipated growth.
There can be no assurance that such financing will be available or, if available
that the terms thereof will be attractive to us. The lack of additional
financing may adversely affect our ability to meet objectives.
Future Capital Requirements.
Our future capital requirements will depend upon many factors, including
the development of new products, the expansion of our sales and marketing
efforts and the status of competitive products, if any. There can be no
assurance that any additional financing will be available to us on acceptable
terms, or at all. If additional funds are raised by issuing equity securities,
further dilution to the existing stockholder will result. If adequate funds are
not available, we may be required to delay, scale back or eliminate our research
and development or manufacturing programs or obtain funds through arrangements
with partners or others that may require us to relinquish rights to certain of
our technologies or potential products or other assets. Accordingly, the
inability to obtain such financing could have a material adverse effect on our
business, financial condition and results of operations.
Product Liability
Our business involves exposure to potential product liability risks that
are inherent in the production and manufacture of pharmaceutical products. Any
such claims could have a material adverse effect on us. We do not currently have
any product liability insurance. Although we intend to apply for product
liability insurance, there can be no assurance that we will be able to obtain or
maintain such insurance on acceptable terms, that we will be able to secure
increased coverage as the commercialization of the BCD drug delivery systems
proceeds or that any insurance will provide adequate protection against
potential liabilities.
Dependence on Key Personnel
Due to the specialized and sophisticated nature of our business, we are
highly dependent on the continued service of, and on its ability to attract and
retain, qualified technical, marketing and managerial personnel. There can be no
assurance that we will be able to continue to attract and retain qualified
personnel necessary for the development of our business.
Control by Principal Stockholders; Absence of Cumulative Voting
Our principal stockholders presently hold approximately 72% of the Common
Stock. As our stockholders do not have the right of cumulative voting for the
election of Directors, the existing principal stockholders are and will continue
to be able to elect all of our Directors and control our affairs.
24
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Since its inception in August 1997, the Company has devoted substantially
all its efforts to research and development conducted on its own behalf with the
BCD Drug Delivery Systems. The Company's primary activities since inception
(August 7, 1997) have been, in addition to research and development,
establishing its offices and research facilities, recruiting personnel, filing
patent applications, developing a business strategy and raising capital.
The Company has experienced significant operating losses since its
inception, and expects to incur substantial and continuing losses for the
foreseeable future. The Company incurred a net loss of approximately $797,117
for the year ended September 30, 1999, resulting in an accumulated deficit of
approximately $1,007,849. To date, the Company has received only limited
revenue, all of which has been from interest earned from invested funds.
The Company intends to continue investing in the further development of its
drug delivery technologies and to actively seek collaborators and licensees to
accelerate the development and commercialization of products incorporating its
BCD Drug Delivery Systems. Depending upon a variety of factors, including
collaborative arrangements, available personnel and financial resources, the
Company will conduct or fund clinical trials on such products and will undertake
the associated regulatory activities. The Company will need to make additional
capital investments in laboratories and related facilities, including the
purchase of laboratory and pilot scale manufacturing equipment. As additional
personnel are hired in 2000 and beyond, expenses can be expected to increase
from their 1999 levels.
Results of Operations
The Company commenced operations in August 1997. Because of the difference
in the length of the reported periods, the comparison of the period from
inception to September 30, 1997 to the year ended September 30, 1998 is not
meaningful and has not been presented.
1999 Compared to 1998
Losses for 1999 were $797,117 or $572,062 more than the losses for fiscal
1998. This increase is due to higher R&D costs.
Research and development expenses have risen by nearly 600% to $530,688
primarily consisting of legal and professional fees for preparation of patent
applications and laboratory service & supply expenses.
General and administrative expenses in 1999 were $270,173 compared to
$136,424 for the same period last year. The increase was due to increased
professional fees.
Liquidity and Capital Resources
Since inception, the Company has financed operations principally from the
sale of common stock and expects to continue this practice to fund its ongoing
activities.
25
<PAGE>
The Company currently does not have sufficient resources to complete the
commercialization of any of its proposed products or to carry out its business
strategy. Therefore, the Company will likely need to raise substantial
additional capital to fund its operations sometime in the future. The Company
cannot be certain that any financing will be available when needed. Any
additional equity financings may be dilutive to its existing shareholders, and
debt financing, if available, may involve restrictive covenants on its business.
The Company expects to continue to spend capital on:
1. research and development programs;
2. preclinical studies and clinical trials;
3. regulatory processes; and
4. establishment of its own commercial scale manufacturing and marketing
capabilities or a search for third party manufacturers and marketing partners to
manufacture and market our products for us.
The amount of capital the Company may need will depend on many factors,
including the:
1. progress, timing and scope of its research and development programs;
2. progress, timing and scope of its preclinical studies and clinical
trials;
3. time and cost necessary to obtain regulatory approvals;
4. time and cost necessary to establish its own sales and marketing
capabilities or to seek marketing partners to market our products for us;
5. time and cost necessary to respond to technological and market
developments;and
6. new collaborative, licensing and other commercial relationships that the
Company may establish.
The Company currently has no capital commitments other than the payment of
rent on its facilities lease.
Forward-Looking Statements
AlphaRx is a development stage company. Certain of the information
contained in this document constitutes "forward-looking statements", including
but not limited to those with respect to the future revenues, the Company's
development strategy, involve known and unknown risks, uncertainties, and other
factors which may cause the actual results, performance or achievements of the
Company 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 commercialized its 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, the Company is 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 the Company's documents filed
from time to time with the United States Securities and Exchange Commission.
26
<PAGE>
Item 3. Description of Property.
The Company leases approximately 1,100 square feet in Richmond Hill,
Ontario, under a lease which expires on November 30, 2001. The Company believes
that its existing properties are sufficient for its administrative and research
and development needs for the foreseeable future. Since the Company presently
intends to rely on outside manufacturers to manufacture its products, it does
not have a manufacturing facility.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information with respect to ownership
of the Company's securities by its officers and directors and by any person
(including any "group") who is the beneficial owner of more than 5% of the
Company's common stock. The total number of shares authorized is 10,000,000
shares of Common Stock, each of which has a par value of $0.001. 4,712,833
shares of Common Stock have been issued and are outstanding.
Name and Address Amount and Nature of Percent of
Of Owner Beneficial Owner Class
-------------------- -------------------- ----------
Michael Lee (1)(2)(3) 3,376,000 shares 72%
Anna May Lee (1)(2) 400,000 shares 8%
Sai Ming Wong (3)(4) 100,000 shares 2%
(1) Related by blood or marriage
(2) The address of Michael Lee and Anna May Lee is c/o AlphaRx, Inc., 75 East
Beaver Creek, Unit 10, Richmond Hill, Ontario, Canada, L4B-1B8
(3) Directors and Officers
(4) The address of Sai Ming Wong is 7805 Bayview Avenue, Apartment 510,
Thornhill, Ontario, Canada L3T 7N1
Item 5. Directors, Executive Officers and Significant Employees
MANAGEMENT, EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors of the Company are as
follows:
Name Age Position
---- --- --------
Michael M. Lee 36 Chairman of the Board,
President & Director
Sai Ming Wong, MD 59 Executive Vice-President & Director
Joseph Schwartz, Ph.D 47 Chief Scientist & Director
27
<PAGE>
Michael Weisspapir, MD, Ph.D 51 Senior Scientist
Sandro Persia 31 Secretary/Treasurer and Director
The Officers and Directors of the Company are set forth below:
Michael M. Lee, Mr. Lee is a founder of the Company. Mr. Lee has over 15
years of business experience in the areas of high tech development,
marketing and corporate finance. In 1984, he co-founded Logic Tech Corp. in
Toronto, Canada where he co-developed LogicDent Dental Practice Management
Software and served as Logic Tech Corp's Executive Vice President and
Director until 1991. From 1992 to 1995, Mr. Lee was a Vice President,
Pacific Region of GeoFin Partners LLC, a US merchant banking company
engaged in project finance and funds management. From 1995 to 1996, Mr. Lee
served as banking consultant for 2 international commercial banks based in
Asia. Mr. Lee holds a B.Sc. in Applied Mathematics from the University of
Western Ontario.
Sai Ming Wong, M.D., Dr. Wong practiced medical research in China from 1965
to 1980. Dr Wong was the chief surgeon of the medical unit that provided
medical and research services for the first China atomic testing. Dr. Wong
served as the Director of Product Development at the China Academy of
Medical Sciences from 1970 to 1980, where he was the leader of a research
team which specialized in the development of drug formulations. From 1980 -
1992, Dr. Wong served as General Manager of China National Light Industries
Corp., a China state owned company based in Hong Kong, where Dr. Wong was
responsible for the daily operation of the company. Dr. Wong earned his
degree in Medicine from the Beijing Capital University of Medical Sciences.
Joseph Schwarz, Ph.D. Mr. Schwarz is the chief scientist of the Company.
Mr. Schwarz has extensive experience in the research and development of
controlled release drug delivery systems, his areas of expertise cover
controlled delivery of drugs, targeted drug delivery, biodegradable
nanoparticles and nanocapsules, colloidal and microcorpusculate drug
delivery systems, submicron emulsions (SME), transdermal delivery (topical
and systemic), transdermal patches preformulation and technology
development. Mr. Schwarz was the recipient of the Young Scientist Award in
1977 and 1978 and the Institute Award in 1979, both from the Academy of
Science, Moscow and the Institute award in 1986 from the Biotechnology
Institute of Moscow. Mr. Schwarz has published more than 40 articles in
various scientific journals and has written 16 patents and patent
applications. Mr. Schwarz was the senior scientist at Pharmos Corp., a
publicly traded U.S. Pharmaceuticals, prior to joining the Company.
Michael Weisspapir, M.D., Ph.D. Dr. Weisspapir has 19 years of successful
experience in experimental medicine and extensive experience in
interdisciplinary research and development in experimental pharmacology,
immunopharmacology, toxicology and neuroscience. Dr. Weisspapir was a
professor at the Faculty of Medicine at Chelyabinsk State Medical Institute
where he taught courses in pharmacology, toxicology and clinical
28
<PAGE>
chemistry. Prior to joining the Company, Dr. Weisspapir held a variety of
research positions at the University of Tel Aviv and Rabin Medical Center,
Israel and the University Health Network, University of Toronto, Canada.
Dr. Weisspapir received a Ph.D. in Pharmacology, Internship in Pediatrics
and degree in Medicine from the Chelyabinsk State Medical Institute in
Russia.
Sandro Persia, Mr. Persia joined Logic Tech Corp. in 1989 as Marketing
Manager and promoted to Vice President in 1996. Mr. Persia has extensive
business experience in high tech marketing and sales. Mr. Persia holds a
diploma in business administration from the Seneca College.
Advisory Board
The purpose of the Advisory Board is to give advice, lend expertise in
their respective areas, and assist the Company in developing business. No
compensation has been paid to date to members of the Advisory Board. Any
compensation paid in the future to members of the Advisory Board will be
determined by the Board of Directors based upon the Services rendered. The
members of the Advisory Board are not empowered to perform any acts on behalf of
the Company. The Advisory Board members have no rights to stock ownership or
stock options. No conflicts of interest currently exist between the Advisory
Board members' abilities to advise the Company and their own personal business
dealing. However, the Advisory Board members have agreed that in the event such
conflicts arise in the future, they will promptly resign.
Dr. Gerald Pearson, D.D.S., Dr. Pearson has been a practicing periodontist
in Toronto, Canada since 1979. Dr. Pearson has held various consulting and
staff positions in Canadian hospitals. Dr. Pearson is an instructor and
lecturer at the Post Graduate Department of Periodontics, Faculty of
Dentistry, University of Toronto. Dr. Pearson has been active in various
professional organizations, including the International Academy of
Dentistry, the International College of Dentists Dental Association and the
Canadian Academy of Periodontists.
Prof. Shizhen Wang, Ms. Wang has been a research scientist in China since
1976. From 1984-1985, Ms. Wang took charge of the research of the
identification method of EDTA, a national program mandated by the Chinese
government. From 1985-1988, Ms. Wang took charge of the national seventh
five-year program in the identification method of liposoluble Vitamin A, D,
E, and K. From 1988-1998, Ms. Wang was the director of the National Center
for Food Quality Supervision Inspection. Ms. Wang acquired the position of
Senior Engineer/Professor in 1987.
All directors will hold office until the next annual stockholder's meeting
and until their successors have been elected or qualified or until their death,
resignation, retirement, removal, or disqualification. Vacancies on the board
will be filled by a majority vote of the remaining directors. Officers of the
Company serve at the discretion of the Board of Directors.
No director, officer, significant employee or consultant has been convicted
in a criminal proceeding, exclusive of traffic violations.
29
<PAGE>
No director, officer, significant employee or consultant has been
permanently or temporarily enjoined, barred, suspended or otherwise limited from
involvement in any type of business, securities or banking activities.
No director, officer, significant employee or consultant has been convicted
of violating a federal or state securities or commodities law.
Item 6. Executive Compensation
Any compensation received by officers and directors of the Company will be
determined from time to time by the Board of Directors. No compensation has been
paid to date to anyone and there are no employment agreements with any of the
Company's executive officers. Officers and Directors will be reimbursed for any
out-of-pocket expenses incurred on behalf of the Company.
Item 7. Certain Relationships and Related Transactions
None applicable.
Item 8. Description of Securities
Common Stock
As of March 31, 2000, there were 4,712,833 shares of Common Stock issued
and outstanding. The holders of Common Stock (i) have equal ratable to dividends
from funds legally available therefore, when, as and if declared by the Board of
Directors; (ii) are entitled to share ratably in all of the assets of the
company available for distribution to holders of Common Stock upon liquidation,
dissolution or winding up of the affairs of the Company; (iii) do not have
preemptive, subscription or conversion rights, or redemption or sinking fund
provisions applicable thereto; and (iv) are entitled to one non-cumulative vote
per share in person or by proxy on all matters on which stockholders may vote at
all meetings of stockholders.
All outstanding shares of Common Stock are fully paid and non-assessable,
with no personal liability attaching to the ownership thereof. The holders of
Common Stock do not have cumulative voting rights, which means that the holders
of more than 75% of such outstanding shares, voting at an election of Directors,
can elect all of the Directors if they so choose and, in such event, the holders
of the remaining shares will not be able to elect any of the Directors.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters
30
<PAGE>
Management intends to have Company's shares quoted on the OTC Bulletin
Board following the effective date of this registration statement.
Although the Company's shares are authorized to trade on the Pink Sheets,
the Company is not aware of any such trading.
As of March 31, 2000, the Company had 45 shareholders of record. The Company has
never paid a dividend, and has no intention of paying dividends for the
foreseeable future.
Item 2. Legal Proceedings
The Company is not a party to any litigation.
Item 3. Changes in and Disagreements with Accountants
Not applicable.
Item 4. Recent Sales of Unregistered Securities
In June 8, 1998, the Company authorized and issued an aggregate of 27,500
shares of Common Stock for an acquisition.
In August 31, 1998, the Company issued an aggregate of 200,000 shares of
Common Stock for a total purchase price of $1,000,000. The proceeds were used
for research and development and working capital.
In October 15, 1999, the Company issued an aggregate of 315,333 shares of
Common Stock to existing shareholders for a total purchase price of $31,533. The
proceeds were used for working capital.
In December 31, 1999, the Company issued an aggregate of 170,000 shares of
Common Stock for a total purchase price of $85,000. The proceeds were used for
working capital.
Item 5. Indemnification of Directors and Officers
At present the Company has not entered into individual indemnity agreements
with its Officers or Directors. The Company's By-Laws and Certificate of
Incorporation, however, provide a blanket indemnification that the Company shall
indemnify, to the fullest extent under Delaware law, its directors and officers
against certain liabilities incurred with respect to their service in such
capabilities. In additions, the Certificate of Incorporation provides that the
personal liability of directors and officers to the Company and its stockholders
for monetary damages will be limited.
The Company is exploring the possibility of obtaining directors and
officers liability insurance. The Company has obtained several premium
quotations but has not entered into any
31
<PAGE>
contract with any insurance company to provide said coverage. There is no
assurance that the Company will be able to obtain such insurance.
32
<PAGE>
PART F/S
ALPHARX, INC.
FINANCIAL STATEMENTS AND ACCOUNTANT'S AUDIT REPORT
SEPTEMBER 30, 1999 AND 1998 AND THE SIX MONTHS ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITOR'S REPORT...............................................................1
BALANCE SHEETS FOR THE YEARS ENDED SEPTEMBER 30, 1999 and 1998.............................2
LIABILITIES AND SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1999 and 1998.......2
INCOME STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1999 and 1998..........................3
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR
ENDED SEPTEMBER 30, 1999...................................................................4
STATEMENTS OF RETAINED DEFICITS FOR THE YEARS ENDED SEPTEMBER 30,
1999 and 1998..............................................................................5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1998
and SEPTEMBER 30, 1999.....................................................................6
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY INFORMATION.................................10
SCHEDULE OF SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES FOR
THE YEAR ENDED SEPTEMBER 30, 1999.........................................................11
ACCOUNTANTS' COMPILATION REPORT...........................................................12
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
BALANCE SHEET MARCH 31, 2000..............................................................13
LIABILITIES AND SHAREHOLDERS' EQUITY......................................................13
INCOME STATEMENTS FOR THE SIX MONTHS ENDED MARCH 31, 2000.................................14
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY MARCH 31, 2000...............................15
STATEMENT OF RETAINED DEFICITS FOR THE SIX MONTHS ENDED MARCH 31,
2000......................................................................................16
STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2000...........................17
NOTES TO FINANCIAL STATEMENTS MARCH 31, 2000..............................................18
SCHEDULE OF SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES FOR
THE SIX MONTHS ENDED MARCH 31, 2000.......................................................21
</TABLE>
34
<PAGE>
PHILIP K. YEUNG C.P.A. Tel: (626) 573-9945
8450 E. Garvey Avenue, Suite 210 Fax: (626) 573-9947
Rosemead, CA 91770 E-Mail: [email protected]
--------------------------------------------------------------------------------
Independent Auditor's Report
Board of Directors
ALPHARX Inc.
Markham, Ontario, Canada
We have audited the accompanying balance sheets of AlphaRx, Inc. (a Development
Stage Company) as of September 30, 1999 and 1998, and the related income
statements, statements of changes in shareholder's equity, retained deficits,
and cash flow for each of the years then ended. These financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ALPHARX Inc. as of September
30, 1999 and 1998, and the results of its operations, cash flows, income,
changes in shareholder's equity, and retained deficits for the years then ended
in conformity with generally accepted accounting principles.
/s/ Philip K. Yeung, C.P.A.
February 2, 2000
F-1
<PAGE>
ALPHARX, INC.
(A Development Stage Company)
BALANCE SHEETS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 and 1998
ASSETS
<TABLE>
<CAPTION>
September 30,
----------------------
1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,562 $128,510
Sales tax receivables 1,621
--------
TOTAL CURRENT ASSETS 130,131
PROPERTY, PLANT & EQUIPMENT, at cost
Less accumulated deprecation of $6,526 (note 2) 3,235
Less accumulated deprecation of $2,460 (note 2) 7,301
--------
OTHER ASSETS
Investment (note 4) 46,408
--------
TOTAL ASSETS $ 51,205 $137,432
======== ========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999 and 1998
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 19,026 $ 6,729
Loan from shareholders (note 4) 29,407
--------
36,136
SHAREHOLDER'S EQUITY
Common Stock, common, $ 0.001 par value,
Authorized 10,000,000 shares, issued and
outstanding 4,227,500 shares (note 5) $ 4,228
Additional paid-in capital 1,035,800
Deficit (1,007,849)
---------
Common Stock, common, $0.001 par value,
Authorized 10,000,000 shares, issued and
outstanding 4,082,500 shares (note 6) $ 4,083
Additional paid in capital 310,945
Deficit (213,732)
TOTAL SHAREHOLDER'S EQUITY 32,179 101,296
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 51,205 $137,432
========= ========
</TABLE>
See independent auditor's report.
The accompanying notes are an integral part of this statement.
F-2
<PAGE>
ALPHARX, INC.
INCOME STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 and 1998
<TABLE>
<CAPTION>
September 30,
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
SALES $ 0 $ 0
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 800,842 255,055
--------- ---------
LOSS FROM OPERATION (800,842) (255,055)
OTHER INCOME
Interest Income $ 915 $ 1,642
Gain on sale of investment 2,810 9,681
--------- ---------
3,725 11,323
LOSS BEFORE INCOME TAXES (797,117) (213,732)
INCOME TAX 0 0
--------- ---------
NET LOSS $(797,117) $(213,732)
========= =========
</TABLE>
See independent auditor's report.
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
ALPHARX, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock
------------ Additional Retained Total
Number of Paid-in Earnings Shareholders'
Shares Amount Capital (Deficits) Equity
--------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at 4,082,500 $ 4,083 $ 310,945 (213,732) $ 104,296
September 30,
1998
Prior Period 3,000
adjustment
(note 6)
Issuance of
stock
Common 145,000 145 724,855 725,000
(note 5)
Net income for (797,117) (797,117)
the year
ending September
30, 1999
Balance at 4,227,500 $ 4,228 $1,035,800 (1,007,849) $ 32,179
September 30, ========= ========== ========== ========== ==========
1999
</TABLE>
See independent auditor's report.
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
ALPHARX, INC.
STATEMENTS OF RETAINED DEFICITS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 and 1998
RETAINED DEFICITS
<TABLE>
<CAPTION>
September 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Beginning balance, October, 1997 0
Net loss for the period (213,732)
---------
Ending balance, September 30, 1998 $(213,732)
As previously reported $ (213,732)
Adjustment for overstatement of
research & development expense (note 6) 3,000
-----------
Beginning balance, October 1, 1998 (Revised) (210,732)
Net loss for the period (797,117)
-----------
Ending balance, September 30, 1999 $(1,007,849)
-----------
</TABLE>
See independent auditor's report.
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
ALPHARX, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 and SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
September 30,
-----------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(797,117) $(213,732)
Depreciation Amount 4,066 2,460
Prior Period Adjustment (note 6) 3,000
Adjustments to reconcile note income to net cash
Cash provided by operating activities:
Changes in assets and liabilities:
Decrease in Sales Tax Receivable 1,621 1,545
Increase in Accounts Payable 12,297 5,512
Decrease in Prepaid and Deposit 3,623
Decrease of Research and Development 18,177
Decrease in Organization Costs 6,309
--------- ---------
NET CASH USED BY OPERATIONS ACTIVITIES $(776,133) $(179,196)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment (46,408)
Purchase of Computer Equipment (9,761)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Stock 145 83
Increase in Additional Paid-In Capital 724,855 274,945
Repayment of shareholders' loan (29,407)
Proceeds from Shareholders Loan 29,407
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 95,593 $ 304,435
NET INCREASE IN CASH (126,948) 115,478
CASH AS OF SEPTEMBER 30, 1997 13,032
--- ---- ------
CASH AS OF SEPTEMBER 30, 1998 128,510 128,510
--------- =========
CASH AS OF SEPTEMBER 30, 1999 $ 1,562
=========
</TABLE>
SUPPLEMENTARY DISCLOSURE:
The statement of cash flows using indirect method as defined under Statement of
Financial Accounting Standard of No. 95.
See independent auditor's report.
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
ALPHARX, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 and 1998
NOTE 1. FORMATION AND ORGANIZATION OF BUSINESS
ALPHARX, Inc. (the Company) was incorporated under the laws of the State of
Delaware on August 8, 1997. The company is still in its developing stage and had
no active business operations as of September 30, 1999. The company was formally
known as LOGIC TECH INTERNATIONAL, INC., and had its corporate name amended
during the fiscal year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of ALPHARX, INC. is presented to
assist in understanding the Company's financial statements. The financial
statements and notes are representations of the Company's management who is
responsible for their integrity and objectivity. These accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Cash and Cash Equivalent
For purpose of these statements, cash equivalent included cash on hand, cash in
bank, and all short-term debt securities purchased with a maturity period of
three months or less.
Depreciation
The company's property, plant, and equipment are depreciated using the Modified
Accelerated Cost Recovery System Method, with recovery period of 3 years.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated by using
Modified Accelerated Cost Recovery System Method for financial reporting as well
as income tax reporting purposes at rates based on the following estimated
useful lives:
Machinery and Equipment 3 years
The company capitalizes expenditures that materially increase assets' lives and
expense ordinary repairs and maintenance to operating as incurred. When assets
are sold or disposed or otherwise fully depreciated, the cost and related
accumulated deprecation are removed from the accounts and any gain or loss is
included in the statement of income and related earnings.
Income Taxes
The company is a C Corporation that subjects to accrual of federal tax according
to tax laws. There is no income tax for year ended since the company was under a
development stage and did not have active business operations. The State of
Delaware does not impose tax on corporation net income.
See independent auditor's report.
F-7
<PAGE>
ALPHARX, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 and 1998
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued.)
Research and Development (R&D)
All research and development cost were charged to expense for the period ended.
These costs included traveling to explore and evaluate new products and
negotiating marketing rights, products licensing, and various legal and
professional fees incurred for preparation of patent applications. A total of
$530,688 R&D expense had been spent during the interim period.
NOTE 3. PROPERTY, PLANT & EQUIPMENT
Life Year
Machinery & Equipment $ 9,761 3
Less accumulated depreciation 6,526
----------
$ 3,235
==========
NOTE 4. INVESTMENTS
The Company had acquired common stocks of a foreign company located in Hong
Kong. The total amounted invested is $46,408. The securities invested are not
publicly traded.
NOTE 5. LOAN FROM SHAREHOLDERS
The shareholders had advanced to the Company in several
occasions. The advances are unsecured, and non-interest
bearing which are due upon demand. 29,407
NOTE 6. RELATED PARTY TRANSACTION
During the period, the Company purchased 55,000 common shares of Logic Tech
Corporation, for cash of $24,356 and an issuance of 27,500 common shares at
$0.001 per shares as consideration. The shares were then redeemed by Logic Tech
Corporation at $34,064. As a result, the Company made a profit of $9,681 from
this transaction. A major shareholder who holds 83% of the common shares of
Logic Tech International Inc. is the brother of the sole shareholder of Logic
Tech Corporation.
F-8
<PAGE>
ALPHARX, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 and 1998
NOTE 7. COMMON STOCK
The Company is authorized to issue 10,000,000 shares of common stock. As of
September 30, 1999, 4,228,000 shares of such common stock had been issued and
outstanding, each share bears a par value of $0.001.
NOTE 8. PRIOR PERIOD ADJUSTMENTS
A prior period adjustment is made by adjusting the current period's beginning
retained earnings balance for the error's effect on prior years' earnings. A
discovery of $3,000 inter-account transfer was mis-categorized as R&D expense
from the prior period financial statements. A restatement of $3,000 had been
corrected on beginning retained earnings and on net expense of the preceding
year. There is no income tax adjustment applicable to the prior period
adjustment due to business inactive operation and no net income tax imposed by
the State of Delaware. The components of net income, retained earnings, and
other affected accounts of those prior periods had been restated.
See independent auditor's report.
F-9
<PAGE>
PHILIP K. YEUNG C.P.A. Tel: (626) 573-9945
8450 E. Garvey Avenue, Suite 210 Fax: (626) 573-9947
Rosemead, CA 91770 E-Mail: [email protected]
--------------------------------------------------------------------------------
Independent Auditor's Report on Supplementary Information
Board of Directors
ALPHARX, Inc.
Markham, Ontario, Canada
We have audited the accompanying financial statements of AlphaRx, Inc. as of and
for the year ended September 30, 1999 and 1998, and have issued our report
thereon dated February 2, 2000. Our audit was conducted for the purpose of
forming an opinion on the basis financial statements taken as a whole. The
information contained in Schedule I is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as whole.
/s/ Philip K. Yeung, C.P.A.
February 2, 2000
F-10
<PAGE>
ALPHARX, INC.
SCHEDULE OF SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
FOR THE YEAR ENDED SEPTEMBER 30, 1999
Automobile $ 4,988
Bank charges 449
Delivery & postage 1,030
Depreciation 4,066
Dues & subscriptions 27
Filing fees 5,000
Insurance 423
Interest expenses 169
License 483
Meals & entertainment 850
Medical expenses 396
Office supplies 7,898
Professional fees 215,121
Research & Development 530,688
Telephone 15,005
Travel 14,248
--------------
TOTAL $ 800,841
==============
See independent auditor's report.
The accompanying notes are an integral part of this
statement.
F-11
<PAGE>
ACCOUNTANTS' COMPILATION REPORT
Board of Directors
ALPHARX Inc.
Richmond Hill, Ontario, Canada
We have compiled the accompanying balance sheet of ALPHARX, INC. as of March 31,
2000, and the related income statements, statements of changes in shareholders'
equity, retained deficits and cash flows for the six months then ended in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of the management. We have not audited or
reviewed the accompanying financial statement, and accordingly, do not express
an opinion or any other form of assurance thereon.
Los Angeles, California
June 8, 2000
F-12
<PAGE>
ALPHARX, INC.
(A Development Stage Company)
BALANCE SHEET
MARCH 31, 2000
ASSETS
CURRENT ASSETS
Cash $ 5,395
PROPERTY, PLANT & EQUIPMENT, at cost
less accumulated depreciation
of $8,904 (note 3) 13,848
OTHER ASSETS
Investment 46,408
-----------
TOTAL ASSETS $ 65,651
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 8,753
Notes Payable 25,969
-----------
TOTAL LIABILITIES 34,722
SHAREHOLDERS' EQUITY
Common Stock, common, $ 0.001 par value,
Authorized 10,000,000 shares, issued and
outstanding 4,712,833 shares (note 4) $ 4,713
Additional paid-in capital 1,148,658
Deficit (1,122,442)
-----------
TOTAL SHAREHOLDERS' EQUITY 30,929
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 65,651
===========
See accountant's compilation report
The accompanying notes are an integral part of this statement
F-13
<PAGE>
ALPHARX, INC.
INCOME STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 2000
SALES -0-
SELLING, GENERAL & ADMINISTRATION EXPENSES (115,506)
---------
LOSS FROM OPERATION (115,506)
OTHER INCOME
Interest Income $ 10
Other Income 903
---------
913
LOSS BEFORE INCOME TAXES (114,593)
INCOME TAX -0-
NET LOSS $ 114,593
=========
See accountant's compilation report
The accompanying notes are an integral part of this statement
F-14
<PAGE>
ALPHARX INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
MARCH 31, 2000
<TABLE>
<CAPTION>
Common Stock
--------------------------- Additional Retained Total
Number of Paid-in Earnings Shareholders'
Shares Amount Capital (Deficits) Equity
--------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at 4,227,500 $ 4,228 $1,035,800 (1,007,849) $ 32,179
September 30,
1999
Issuance of
Stock
Common 485,333 485 112,858 113,343
(note 5)
Net loss for (114,593) (114,593)
the six months
ending March 31, 2000
--------- ---------- ---------- ---------- ----------
Balance at 4,712,833 $ 4,713 $1,148,658 (1,122,442) $ 30,929
March 31, ========= ========== ========== ========== ==========
2000
</TABLE>
See accountant's compilation report
The accompanying notes are an integral part of this statement
F-15
<PAGE>
ALPHARX, INC.
STATEMENT OF RETAINED DEFICITS
FOR THE SIX MONTHS ENDED MARCH 31, 2000
RETAINED DEFICITS AT BEGINNING OF YEAR
Beginning balance, September 30 ,1999 $ (1,007,849)
Net loss for the period (114,593)
-----------------
Ending balance, March 31, 2000 $ (1,122,442)
=================
See accountant's compilation report
The accompanying notes are an integral part of this statement
F-16
<PAGE>
ALPHARX, INC.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $(114,593)
Depreciation Amount 2,378
Adjustments to reconcile note income to net cash
Cash provided by operating activities:
Changes in assets and liabilities:
Decrease in Accounts Payable (10,273)
Increase in Notes Payable 25,969
---------
NET CASH USED BY OPERATING ACTIVITIES $ (96,519)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Furniture & Fixtures (7,587)
Purchase of Machinery & Equipment (5,404)
---------
NET CASH USED BY INVESTING ACTIVITIES $ (12,991)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds form Issuance of Stock 485
Increase in Additional Paid-In Capital 112,858
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 113,343
NET INCREASE IN CASH 3,833
CASH AS OF SEPTEMBER 30, 1999 1,562
---------
CASH AS OF MARCH 31, 2000 $ 5,395
=========
See accountant's compilation report
The accompanying notes are an integral part of this statement
F-17
<PAGE>
ALPHARX, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1. FORMATION AND ORGANIZATION OF BUSINESS
ALPHARX, INC. (the Company) was incorporated under the laws of the State of
Delaware on August 8, 1997. The company is still in its developing stage and had
no active business operation as of March 31, 1999.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of ALPHARX, INC. is presented to
assist in understanding the Company's financial statements. The financial
statements and notes are representations of the Company's management who is
responsible for their integrity and objectivity. These accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Cash and Cash Equivalent
For purpose of these statements, cash equivalent included cash on hand, cash in
bank, and all short-term debt securities purchased with a maturity of three
months or less.
Depreciation
The company's property, plant, and equipment are depreciated using the Modified
Accelerated Cost Recovery System Method, with recovery period of 3 years & 7
years.
See accountant's compilation report
F-18
<PAGE>
ALPHARX, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued.)
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated by using
Modified Accelerated Cost Recovery System Method for financial reporting as well
as income tax reporting purposes at rates based on the following estimated
useful lives:
Machinery and Equipment 3 years
Furniture and Fixtures 7 years
The company capitalizes expenditures that materially increase assets' lives and
expense ordinary repairs and maintenance to operating as incurred. When assets
are sold or disposed or otherwise fully depreciated, the cost and related
accumulated deprecation are removed from the accounts and any gain or loss is
included in the statement of income and related earnings.
Income Taxes
The company is a C Corporation that subjects to accrual of federal tax according
to tax laws. There is no income tax for year ended since the company was under a
development stage and did not have active business operations. The State of
Delaware does not impose tax on corporation net income.
Research and Development (R&D)
All research and development cost were charged to expense for the period ended.
These costs included traveling to explore and evaluate new products and
negotiating marketing rights, products licensing, and various legal and
professional fees incurred for preparation of patent applications. A total of
$29,783 R&D expense had been spent during the interim period.
See accountant's compilation report
F-19
<PAGE>
ALPHARX, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 3. PROPERTY, PLANT & EQUIPMENT
Life Year
Machinery & Equipment $ 11,096 3
Furniture & Fixtures 11,656 7
----------
Less accumulated depreciation 8,904
----------
$ 13,848
==========
NOTE 4. COMMON STOCK
The Company is authorized to issue 10,000,000 shares of common stock. As of
March 31, 2000, 4,712,833 shares of such common stock had been issued and
outstanding, each share bears a par value of $0.001.
See accountant's compilation report
F-20
<PAGE>
ALPHARX, INC.
SCHEDULE OF SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
FOR THE SIX MONTHS ENDED MARCH 31, 2000
Automobile $ 2,344
Bank Charges 210
Delivery & Postage 1,723
Depreciation 2,379
Donations 14
Dues & Subscription 336
Insurance 2,286
Interest expense 298
License 735
Office expense 4,975
Office supplies 203
Postage 282
Professional fees 61,080
Rent 2,198
Research & Development (note 2) 29,783
Security 394
Telephone 2,775
Temporary labor 241
Travel & Meals 2,186
Utility 1,064
--------
TOTAL $115,506
========
See accountant's compilation report
The accompanying notes are an integral part of this statement
F-21
<PAGE>
PART III
Item 1. Index to Exhibits
3.1 Articles of Incorporation
3.2 By-Laws
27.1 Financial Data Schedule
35
