UMeWorld Ltd - Quarter Report: 2010 March (Form 10-Q)

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

FORM 10-Q

[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended: March 31, 2010

OR

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

Commission File Number: 000-030813

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

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

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

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

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]                 No [   ]

The number of outstanding shares of registrant's Common Stock on May 13, 2010 was 92,371,192.

Transitional Small Business Disclosure Format.

Yes [   ]             No [X]

ALPHARX, INC.

FORM 10-Q

MARCH 31, 2010

TABLE OF CONTENTS

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See condensed notes to unaudited interim consolidated financial statements

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See condensed notes to unaudited interim consolidated financial statements

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See condensed notes to unaudited interim consolidated financial statements

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ALPHARx, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
(All amounts in US Dollars)

See condensed notes to unaudited interim consolidated financial statements

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NOTE 1. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying interim unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of all recurring accruals) considered necessary for fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the year ended September 30, 2010. Interim unaudited consolidated financial statements should be read in conjunction with the Company’s annual audited financial statements.

NOTE 2. NATURE OF BUSINESS AND GOING CONCERN

ALPHARx, INC. (the “Company”) was incorporated under the laws of the State of Delaware on August 7, 1997. The company is an emerging pharmaceutical company specializing in the formulation of human therapeutic products using proprietary drug delivery technologies.

The interim unaudited consolidated financial statements reflect the activities of AlphaRx Inc., 100% of AlphaRx Canada Limited and 85% of AlphaRx International Holdings Limited and AlphaRx Life Sciences Ltd. (AIH’s wholly owned subsidiary) collectively the “Company”. All material inter-company accounts and transactions have been eliminated.

The accompanying interim unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, they do not include any adjustments relating to the realization of the carrying value of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Continuance of the Company as a going concern is dependent on its future profitability and on the on-going support of its shareholders, affiliates and creditors. Factors relating to going concern issues include working capital deficiencies, operating losses, shareholders’ deficits, and continued reliance on external funding sources. In order to mitigate the going concern issues, the Company is constantly pursuing new business arrangements and striving to achieve profitability, and seeking capital funding on an ongoing basis via the issuance of promissory notes, and private placements.

NOTE 3. NOTES PAYABLE

The Company issued $142,486 in promissory notes during the six months ended March 31, 2010. (During the six months ended March 31, 2009 the Company issued $67,212 in promissory notes). These notes bear interest at 12% per annum and are repayable on the first anniversary date of issuance. Previously issued promissory notes bear interest at rates of 8% - 12% per annum. Prepayment of these notes prior to the first anniversary date is permitted.

See also note 8 – Related Party Transactions.

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NOTE 4. NON-CONTROLLING INTEREST

Effective June 22, 2006, AlphaRx International Holdings Ltd. (“AIH”) issued 1,500 shares of its common stock to New Super Limited (“NSL”) at a price of approximately $HK 6,667 per share or $HK 10 million in cash. (USD $1,288,826). There are 10,000 common shares outstanding of which 8,500 or 85% belong to the Company. With the consolidation of only 85% of AIH, a non-controlling interest was established, representing net amounts owing to the non-controlling shareholder. The capital infusion into AIH is accounted for as additional paid in capital on the interim consolidated financial statements of the Company.

NOTE 5. COMMON STOCK

The Company is authorized to issue 250,000,000 shares of common stock. As of March 31, 2010 and 2009 there were 92,371,192 shares of Common Stock issued and outstanding with a stated par value of $0.0001 per share. The Company did not issue any shares of Common Stock during the six months ended March 31, 2010 and 2009.

NOTE 6. STOCK OPTION PLANS

The Company has one Stock Option Plan (the “2008 Stock Option Plan”) under which officers, key employees, certain independent contractors, and independent directors may be granted options to purchase shares of the Company’s authorized but unissued Common Stock. All outstanding options currently expire no later than June 30, 2012. Proceeds received by the Company from exercises of stock options are credited to Common Stock and additional paid-in capital.

At the Company’s Annual General Meeting held November 26, 2008 a majority of stockholders approved amendments to the existing Stock Option Plans including, among others: (i) combining the 2004 and 2006 Plans into the 2008 Stock Option Plan for ease of administration; (ii) providing a cap for the number of options to be issued at 22,000,000; (iii) providing guidelines for exercise prices such that the exercise price of any newly granted option is never less than the market value or in the case of a 10%+ holder, never less than 110% of the market value on the date of grant; (iv) providing for a maximum term of 5 years for any option granted; (v) provide for a vesting schedule whereby vesting must occur over at least 18 months with no more than 1/6^th of the options granted vesting in any 3 month period; (vi) providing for the maximum number of options to be granted to any one individual in any 12 month period to be no more than 5% of the issued and outstanding common stock, and (vii) providing for a maximum number of options to be granted to any Investor Relations party to be no more than 2% of the issued and outstanding common stock.

As a result of the new terms governing the Company’s 2008 Stock Option Plan, the maximum number of options that can still be issued totals 4,310,000, regardless of whether existing options are exercised or cancelled.

During the six months ended March 31, 2010 and 2009 no options were granted and no options were exercised. Additional details of the 2008 Plan, as at March 31, 2010 are as follows:

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The Company has adopted the fair value accounting for employee stock options. The Company did not record any stock based compensation expense during the six months ended March 31, 2010 and 2009. The Black-Scholes option-pricing model is used to calculate this expense. There are no further stock based compensation expenses to be recorded based on options granted to date and their existing terms and conditions. Multiplying the options by their exercise price and dividing the total obtained by the total outstanding options calculated the weighted average exercise price.

NOTE 7. WARRANTS

The Company did not issue any warrants, nor were any warrants exercised during the six-month period ended March 31, 2010 and 2009. Warrants to purchase 5,000,000 shares of Common Stock expired on December 31, 2009. The Company has the following warrants outstanding to purchase shares of Common Stock as of March 31, 2010:

See also subsequent event note 10 below.

NOTE 8: RELATED PARTY TRANSACTIONS

The Company sources some of its funding in the form of promissory notes from Michael Lee – President and CEO. The Company is indebted to Mr. Lee in the amount of $57,368 including accrued interest of $11,560 as of March 31, 2010. (March 31, 2009: $43,850 including accrued interest of $5,308). These promissory notes bear interest at 12% per annum and are unsecured.

NOTE 9: RECLASSIFICATIONS

Certain amounts have been reclassified to conform to current period presentation. Specifically the Company has adopted ASC TOPIC 810 – Non-controlling Interests in Consolidated Financial Statements. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a Company provides.

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NOTE 10. SUBSEQUENT EVENTS

On April 12, 2010 the Company issued warrants to purchase 3,740,150 shares of common stock at $0.085 per share. These warrants were issued in exchange for financial advisory services to be provided until September 30, 2010 and as added compensation to certain staff. These warrants expire on April 11, 2015.

On April 6, 2010 AlphaRx Canada Limited (“ACL”), a wholly-owned subsidiary of the Company signed a letter of intent with Pacific Orient Capital Inc. (“POC”) whereby POC will effect a qualifying transaction, as such term is defined in Toronto Venture Exchange policies, by acquiring all of the shares of ACL that are issued and outstanding at the time of closing of the transaction. The transaction, among other conditions, shall be conditional upon the completion of a concurrent public offering or private placement of CAD $1.5 million of shares of common stock at a value of no less than CAD $0.60 per share. In relation thereto the Company has received a non-refundable deposit during April, 2010 of CAD $25,000 to assist in the restructuring.

Management has reviewed subsequent events through the date of filing the quarterly report on Form 10-Q that includes these unaudited interim consolidated financial statements with the US Securities and Exchange Commission. There were no material subsequent events since May 6, 2010 (review completion date) that would require recognition or note disclosure in these financial statements.

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

The following discussion and analysis should be read in conjunction with the Financial Statements, including the condensed Notes thereto, appearing in this Form 10-Q. For additional information and complete financial statement note disclosure as of September 30, 2009, reference should be made to the annual Form 10-K filed during December 2009. Except for the historical information contained herein the foregoing discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected in the forward-looking statements discussed herein.

General

AlphaRx is a drug delivery company specializing in the development of innovative human therapeutic products for the pharmaceutical and consumer health care market. Our core competence is in the development of novel drug formulations for therapeutic molecules or compounds that have exhibited poor gastro intestinal absorption due to poor solubility or have yet be administerable to the human body with an acceptable delivery method. Our drug delivery system is versatile and offers significant flexibility in the development of suitable dosage formulations (i.e. oral, topical or parenteral) to meet the requirements of specific drug molecules. We are no longer pursuing direct marketing and sales of our market ready products, nor do we intend to pursue direct marketing and commercialization of any newly developed products. The absence of marketing expertise, and significant ongoing funding required to introduce and promote a product successfully into the market are the principal factors limiting our ability to directly market our proprietary products. We are and will continue to seek out established collaborative partners, distributors and licensees to commercialize and market our products in exchange for milestone payments and royalties.

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

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

If we cannot complete our research and development initiatives on a timely basis consequences to our operations could be significant to the point where the initiative would be delayed or even abandoned. We could also face the risk of competitors developing the same or similar products and being first to market. Finally, our failure to develop products on a timely basis could substantially impair our ability to generate revenues and materially harm our financial position.

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

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

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Recent Developments

We have been advised by Cypress Biosciences (“Cypress”), our development partner for Indaflex in the United States, that it is no longer funding any activities for Indaflex. Despite the termination of Indaflex activity in the United States, we continue to develop Indaflex for the Chinese market. We are currently working with our regulatory consultants, pending availability of stability data, in preparation for submission of a clinical trial application with the China State Food and Drug Association (“SFDA”) in order to begin human trials in China. These preparations are proceeding on schedule.

We entered into a collaboration agreement during August 2009 with Venturepharm Group, a China based company that provides world-class services for the biotechnology and pharmaceutical industries. Our objectives include the adaptation of our delivery technology to improve the quality and efficacy of pharmaceutical products selected for development in China. Venturepharm Group agrees to provide us with lab space, manufacturing facilities, regulatory services and distribution services all at a competitive rate. We subsequently entered into an agreement with Venturepharm Group for the provision of the active pharmaceutical ingredient for ARX 1088, an orally active interferon inducer intended for the treatment of Hepatitis. We are focused on commercializing ARX 1088 in China and South America.

We appointed Ms. Ruby Hui as the President of China Operations through our 85% subsidiary – AlphaRx Life Sciences Ltd. during the six months ended March 31, 2010. We have the following portfolio of short term and long term drug candidates which we will be attempting to commercialize mainly in the China market over the coming years. Patents or patents pending protect these product candidates:

We also signed a collaboration and licensing agreement with Riso Pharma Technology in September 2009. Under the agreement Riso Pharma Technology will undertake development and potential commercialization of ARX606T, which makes use of our proprietary formulation technology to deliver a safe and well-known growth factor topically to patients with severe wounds and ulcers.

We established a feasibility and option agreement in October 2008 with Gaia BioPharma Limited, a privately held early stage biopharmaceutical company. We concluded formulation development on GAI-122 during August 2009. GAI-122 is an investigational, injectable nanoemulsion of a Mitochondria-targeted neuroprotective agent formulated with our emulsion drug delivery technology. GAI-122 has been shown to provide significant neuro-protection in multiple in vitro and in vivo animal studies, suggesting that this injectable nanoemulsion formulation has the potential to treat patients with acute ischemic stroke or to prevent postoperative delirium.

GAI-122 is proceeding to the clinical trial materials manufacturing stage and is expected to enter clinical trials by the end of 2010. GAI-122 is protected by 4 United States patent applications and 2 Chinese patent applications.

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One of our most promising drug candidates is Zysolin that uses an inhalable version of the drug Tobramycin (an antibiotic used to treat Gram-negative bacteria) to treat Gram-negative pneumonia. We have completed animal testing on Zysolin and are in the process of preparing protocols for Phase I/II human trials. We have completed safety and efficacy testing on Streptomycin (a drug used to treat tuberculosis) and are seeking collaborative partner(s) to initiate human trials on this product candidate. We continue to test formulations and conduct research on Vansolin (MRSA- pneumonia) and Streptomycin (tuberculosis). The delivery route for all of the above product candidates is Intravenous (I.V.) or Intratracheal (I.T.).

Overview of Results of Operations

NOTE (1) Net Loss per share on a quarterly basis does not equal net Loss per share for the annual periods due to rounding.
NOTE (2) These amounts have been reclassified to conform to current presentation for the six months ended March 31, 2010 and March 31, 2009. Each subsequent quarter will also be restated accordingly at the end of each subsequent quarterly period as required.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2010, AS COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2009

The Company incurred a net loss of $328,596 for the six month period ended March 31, 2010 as compared to a net income of $2,381 generated for the same period a year ago, an increase of $330,977. Revenues during the six months ended March 31, 2010 were about $167,000 less than in the previous period and general and administrative expenses were about $137,000 higher than in previous period. These two items were the primary cause for the increase in net loss between periods.

Revenues

Total revenues for the six-month period ended March 31, 2010 were $100,290 as compared to $267,683 generated for the same period a year ago, a decrease of $167,393 or about 63%. Royalty revenues were comparable year over year at $33,319 for the six months ended March 31, 2010 as compared to $31,929 for the same period a year ago. The Company also generated licensing revenues in the amount of $36,971 for the six months ended March 31, 2010 with no comparable revenues for the same period a year ago. We also generated $30,000 in consulting revenues for the six months ended March 31, 2010 as compared to $235,754 in consulting revenues generated for the same period a year ago. We continue to pursue revenue opportunities in all forms (consulting, royalties and license fees).

General and Administrative Expenses

General and Administrative expenses consist primarily of personnel costs related to general management functions, finance, office overheads, as well as insurance costs and professional fees related to legal, audit and tax matters.

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General and Administrative expenses were $262,390 for the six month period ended March 31, 2010 as compared to $125,738 incurred for the same period a year ago, an increase of $136,652 or about 109%. We realized a foreign exchange loss of $38,973 during the six months ended March 31, 2010 as compared to a foreign exchange gain of $58,551 incurred in the same period a year ago, an increase in this expense of $97,524 between periods. We incurred travel expenses of $41,857 during the six months ended March 31, 2010 as compared to $23,815 incurred during the same period a year ago, an increase of $18,042 or about 76%. Increased travel to China to source out business opportunities as compared to previous year was the primary reason for the increased travel. We incurred $96,595 in total administrative staff costs for the six months ended March 31, 2010 as compared to $82,853 incurred in the same period a year ago, an increase of $13,742 or about 17%. These staff costs cover President of China Operations, President and CEO, CFO and office administrator for the Company and its subsidiaries.

Research and Development Expenses

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

Research and development expenses for the six months ended March 31, 2010 were $103,029 as compared to $87,221 incurred for the same period a year ago, an increase of $15,808 or about 18%. Staff costs including consultants were $76,559 as compared to $66,823 incurred during the same period a year ago, an increase of $9,736 or about 15%. This increase is due primarily to the strengthening of the Canadian dollar between periods resulting in higher US Dollar costs when translated. We currently have 3 full time staff. Research efforts will again increase in the future depending on the timing and availability of additional funds. We also seek collaborative partners in order to obtain third party funding for certain drug candidates that show commercial promise in exchange for commercialization rights.

Depreciation

Depreciation totalled $20,142 for the six months ended March 31, 2010 as compared to $32,344 incurred during the same period a year ago, a decrease of $12,202 or about 38%. Our capital asset purchases were minimized during the last two fiscal years totalling less than $17,000. Certain assets are now fully depreciated resulting in decreasing depreciation expense. Should any assets become permanently impaired they are written off to income as determined.

Loss from Operations

Loss from operations were $285,271 for the six months ended March 31, 2010 as compared to a net income of $22,380 incurred for the same period a year ago, a deterioration of $307,651.

Interest Expense

Interest expense for the six months ended March 31, 2010 was $42,719 as compared to interest expense of $21,974 generated during the same period a year ago. There were approximately $790,000 in promissory notes outstanding as of March 31, 2010 as compared to approximately $448,000 as of March 31, 2009 leading to an increase in interest expense.

Non-Controlling interest in gain/(loss) of Consolidated Subsidiaries

We reflected a non-controlling interest income of $606 for the six months ended March 31, 2010 as compared to a non-controlling interest loss of $1,975 for the same period a year ago. Non-Controlling interest represents our minority shareholder’s proportionate interest in our 85% owned subsidiary – AIH. The non-controlling interest resulted in the investment in our subsidiary AlphaRx International Holdings Ltd. by an independent third party – New Super Ltd. during June 2006.

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Net Loss

As a result of the above mentioned revenue and expense items, we incurred a net loss of $(328,596) for the six months ended March 31, 2010 as compared to a net income of $2,381 generated in the same period a year ago.

LIQUIDITY AND CAPITAL RESOURCES

As at March 31, 2010 the Company had a working capital deficiency of $1,294,580 as compared to a working capital deficiency of $978,820 as at September 30, 2009. The Company has also increased its stockholders’ deficiency to $1,230,974 as at March 31, 2010 compared to a stockholders’ deficiency of $900,583 as at September 30, 2009. We did not issue any stock during the six months ended March 31, 2010.

We have a licensing arrangement with Andromaco, which provides us with a small royalty stream. We entered into collaboration and licensing agreements with Riso Pharma Technology and Venturepharm Group in recent months. We entered into two co-development agreements during the three months ended December 31, 2008 and we continue to seek out new arrangements. We also have licensing arrangements with Proprius Pharmaceuticals Inc. which may provide us with milestone payments and/or royalty streams in the future. There is no assurance that such payments or royalty streams will materialize.

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

We currently do not have sufficient resources to complete the commercialization of any of our proposed products or to carry out our entire business strategy. Therefore, we will likely need to raise substantial additional capital to fund our operations in the future. We cannot be certain that any financing will be available when needed on acceptable terms or at all. Any additional equity financings will be dilutive to our existing stockholders, and debt financing, if available, may require additional stock to be issued and/or involve restrictive covenants on our business.

We expect to continue to spend capital on:

1. research and development programs;
2. preclinical studies and clinical trials;
3. regulatory processes; and
4. third party licensees and distribution partners to manufacture and market our products for us.

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

1. the progress, timing and scope of our research and development programs;
2. the progress, timing and scope of our preclinical studies and clinical trials;
3. the time and cost necessary to obtain regulatory approvals;
4. the time and cost necessary to establish or to retain sales and marketing partners to market our products;
5. the time and cost necessary to respond to technological and market developments; and
6. new collaborative, licensing and other commercial relationships that we may establish.

The inability to raise capital would have a material adverse effect on the Company. We currently have no capital commitments other than one leased auto and for certain research equipment.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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ITEM 3. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer and Principle Accounting Officer, we have evaluated the effectiveness of the design and operation of our “disclosure controls and procedures,” as such term is defined in Rules 13a-15e promulgated under the Exchange Act as of the date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer and Principal Accounting Officer have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report to provide reasonable assurance that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Management is aware that there is a lack of segregation of certain duties at the Company due to the small number of employees with responsibility for general administrative and financial matters. This constitutes a deficiency in financial reporting. However, at this time, management has decided that considering the employees involved and the control procedures in place, the risks associated with such lack of segregation of duties are insignificant and the potential benefits of adding additional employees to clearly segregate duties do not justify the additional expenses associated with such increases. Management will periodically reevaluate this situation. If the volume of business increases and sufficient capital is secured, it is the Company’s intention to further increase staffing to mitigate the current lack of segregation of duties within the general, administrative and financial functions.

Management’s Report on Internal Control over Financial Reporting

Management assessed our internal control over financial reporting as of March 31, 2010. Management based its assessment on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.

Based on this assessment, management has concluded that as of March 31, 2010, our internal control over financial reporting was ineffective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. We noted that there is a lack of segregation of certain duties at the Company due to the small number of employees with responsibility for general administrative and financial matters. This constitutes a deficiency in financial reporting. We therefore conclude that our disclosure controls over financial reporting were ineffective as of and for the six months ended March 31, 2010. At this time, management has decided that considering the employees involved and the control procedures in place, the risks associated with such lack of segregation of duties are insignificant and the potential benefits of adding additional employees to clearly segregate duties do not justify the additional expenses associated with such increases. Management will periodically re-evaluate this situation. If the volume of business increases and sufficient capital is secured, it is the Company’s intention to further increase staffing to mitigate the current lack of segregation of duties within the general, administrative and financial functions.

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Changes in Internal Controls

Management has evaluated the effectiveness of the disclosure controls and procedures as of March 31, 2010. Based on such evaluation, management has concluded that the disclosure controls and procedures were ineffective for their intended purpose described above. There were no changes to the internal controls during the six months ended March 31, 2010 that have materially affected or that are reasonably likely to affect the internal controls.

Limitation on the Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control weaknesses or shortfalls, if any, within a company have been detected. Such limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures, such as simple errors or mistakes or intentional circumvention of the established process.

Evaluation of Disclosure Controls and Procedures.

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer and Principle Accounting Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, 2010. The Company's Chief Executive Officer and Chief Financial Officer and Principle Accounting Officer concluded that the Company's disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules and forms.

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PART II: OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There are currently no legal proceedings against the Company or any of its subsidiaries.

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

We did not issue nor purchase any equity securities during the six months ended March 31, 2010 and 2009. Warrants to purchase 5,000,000 shares of Common Stock expired on December 31, 2009. There were 92,371,192 shares of Common Stock issued and outstanding as of December 31, 2009 and 2008 and there would be 109,631,192 shares of Common Stock issued and outstanding if all warrants and assigned options were exercised as of March 31, 2010. There remains 4,310,000 unassigned options as of March 31, 2010 which have been previously approved for issuance.

We issued warrants to purchase 3,740,150 shares of common stock at $0.085 per share as of April 12, 2010. These warrants were issued in exchange for financial advisory services to be provided until September 30, 2010. These warrants expire on April 11, 2015.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

N/A

ITEM 4 - OTHER INFORMATION

None.

ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K

(ii) REPORTS ON FORM 8-K

Not applicable

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SIGNATURES:

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

DATED: May 14, 2010

ALPHARx, INC.

By: /S/ Michael M. Lee                                              
Michael M. Lee, Chief Executive Officer

Directors:

By: /S/ Michael M. Lee                                               
Michael M. Lee, Director

By: /S/ David Milroy                                                  
David Milroy, Director

By: /S/ Ford Moore                                                     
Ford Moore, Director

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