===============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10QSB
|
[X] |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| OR | |
|
[ ] |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
COMMISSION FILE NUMBER 0-30414
ALR TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
|
NEVADA |
88-0225807 |
101 N. Chestnut Street
Suite 307
Winston-Salem, North Carolina 27101
(Address of principal executive offices)
(336) 722-2254
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 2002: 21,078,446
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALR TECHNOLOGIES INC.
Balance Sheets
($ United States)
June 30, 2002 and December 31, 2001
|
2002 |
|
|||
|
Assets |
||||
|
Current assets: |
||||
|
Cash |
$ |
84,146 |
$ |
65,705 |
|
Accounts receivable, net of allowance of $nil |
|
|
||
|
Inventories |
2,225 |
- |
||
|
Prepaid expenses, deposits and advances |
104,684 |
35,235 |
||
|
192,616 |
101,939 |
|||
|
Deferred financing costs |
638,570 |
- |
||
|
Fixed assets, net of accumulated depreciation |
8,946 |
7,831 |
||
|
$ |
840,132 |
$ |
109,770 |
|
|
Liabilities and Shareholders' Deficiency |
||||
|
Current liabilities: |
||||
|
Accounts payable and accrued liabilities |
$ |
1,033,136 |
$ |
1,161,812 |
|
Current portion of promissory notes payable (note 3) |
3,417,697 |
2,996,667 |
||
|
4,450,833 |
4,158,479 |
|||
|
Promissory notes payable (note 3) |
769,062 |
409,912 |
||
|
Shareholders' deficiency |
||||
|
Capital stock (note 4) |
||||
|
75,000,000 common shares with a par value of $0.001 per share authorized, 21,078,446 issued (December 31, 2001 - 21,078,446) |
|
|
||
| Additional paid-in capital |
4,632,714 |
3,678,214 |
||
|
Deficit |
(9,070,719) |
(8,195,077) |
||
|
Accumulated other comprehensive income: |
37,164 |
37,164 |
||
|
(4,379,763) |
(4,458,621) |
|||
|
Subsequent event (note 6) |
$ |
840,132 |
$ |
109,770 |
See accompanying notes to financial statements
-2-
ALR TECHNOLOGIES INC.
Statements of Loss and Comprehensive Loss and Deficit
($ United States)
Three month and six month periods ended June 30, 2002 and 2001
(Unaudited)
|
Three Months Ended |
Six Months Ended |
||||||||
|
2002 |
2001 |
2002 |
2001 |
||||||
|
Sales |
$ |
- |
$ |
91,339 |
$ |
- |
$ |
364,156 |
|
|
Cost of Sales |
- |
50,214 |
- |
194,320 |
|||||
|
- |
41,125 |
- |
169,836 |
||||||
|
Expenses: |
|||||||||
|
Depreciation |
779 |
743 |
1,313 |
1,487 |
|||||
|
Development costs |
7,610 |
9,978 |
20,665 |
25,330 |
|||||
|
Foreign exchange loss (gain) |
2,044 |
2,774 |
2,196 |
(159) |
|||||
|
Interest |
239,677 |
86,920 |
354,273 |
692,464 |
|||||
|
Professional fees |
20,073 |
37,199 |
35,606 |
82,308 |
|||||
|
Rent |
15,862 |
12,850 |
23,717 |
25,972 |
|||||
|
Selling, general and administrative |
264,520 |
311,761 |
437,872 |
1,020,067 |
|||||
|
550,565 |
462,225 |
875,642 |
1,847,469 |
||||||
|
Loss and comprehensive loss |
(550,565) |
(421,100) |
(875,642) |
(1,677,633) |
|||||
|
Deficit, beginning of period |
(8,520,154) |
(5,770,421) |
(8,195,077) |
(4,513,888) |
|||||
|
Deficit, end of period |
$ |
(9,070,719) |
$ |
(6,191,521) |
$ |
(9,070,719) |
$ |
(6,191,521) |
|
|
Loss per share, basic and diluted |
$ |
(0.03) |
$ |
(0.02) |
$ |
(0.04) |
$ |
(0.08) |
|
|
Weighted average shares outstanding, basic and diluted |
21,078,446 |
21,078,446 |
21,078,446 |
21,078,446 |
|||||
See accompanying notes to financial statements
-3-
ALR TECHNOLOGIES INC.
Statements of Cash Flows
($ United States)
Six month periods ended June 30, 2002 and 2001
(Unaudited)
|
2002 |
2001 |
|||
|
Cash flows from operating activities (note 5): |
||||
|
Cash received from customers |
$ |
- |
$ |
342,128 |
|
Cash paid to suppliers and employees |
(650,001) |
(1,904,207) |
||
|
Interest paid |
(218,130) |
(97,000) |
||
|
Net cash used by operating activities |
(868,131) |
(1,659,079) |
||
|
Cash flows from financing activities: |
||||
|
Loan proceeds |
1,020,000 |
2,000,000 |
||
|
Repayment of promissory notes payable |
(131,000) |
(323,148) |
||
|
Net cash provided by financing activities |
889,000 |
1,676,852 |
||
|
Cash flows from investing activities: |
||||
|
Purchase of fixed assets |
(2,428) |
(1,458) |
||
|
Increase in cash during the period |
18,441 |
16,315 |
||
|
Cash, beginning of period |
65,705 |
3,105 |
||
|
Cash, end of period |
$ |
84,146 |
$ |
19,420 |
|
Supplemental cash flow information: |
||||
|
Income taxes paid |
$ |
- |
$ |
- |
|
Non-cash financing and investing activities: |
||||
|
Compensation cost of options issued for services |
$ |
54,500 |
$ |
397,300 |
|
Financing cost of options and warrants issued in consideration for promissory notes or their due date extension |
|
|
||
|
$ |
954,500 |
$ |
927,300 |
See accompanying notes to financial statements
-4-
ALR TECHNOLOGIES INC.
Notes to Financial Statements
($ United States)
Six month periods ended June 30, 2002 and 2001
(Unaudited)
1. Future operations
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis which presumes the realization of assets and the discharge of liabilities and commitments in the normal course of operations for the foreseeable future.
The Company's ability to continue as a going concern is dependent upon its ability to obtain financing to repay its current obligations and fund working capital and its ability to achieve profitable operations. A significant portion of the Company's debt financing is either due on demand or has a maturity date of less than one year. The Company will seek to obtain creditors' consents to delay repayment of these loans until it is able to replace this financing with funds generated by operations, replacement debt or from equity financings through private placements or the exercise of options and warrants. While the Company's creditors have agreed to extend repayment deadlines in the past, there is no assurance that they will continue to do so in the future. Management hopes to realize sufficient sales in future periods to achieve profitable operations. The resolution of the going concern issue is dependent upon the realization of management's plans. There can be no assurance provided that the Company will be able to raise sufficient debt or equity capital on satisfactory terms. If management is unsuccessful in obtaining financing or in achieving profitable operations, the Company will be required to cease operations. The outcome of these matters cannot be predicted at this time.
The financial statements do not give effect to any adjustments which could be necessary should the Company be unable to continue as a going concern and, therefore, be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts differing from those reflected in the financial statements.
2. Basis of presentation
The information included in the accompanying interim financial statements is unaudited and should be read in conjunction with the annual audited financial statements and notes thereto contained in the Company's Report on Form 10-KSB for the fiscal year ended December 31, 2001. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire fiscal year.
3. Promissory notes payable
During the six month period ended June 30, 2002, the Company received a $100,000 loan in exchange for a promissory note payable. The promissory note bears interest at 1% per month, is unsecured and is due on December 31, 2003. As further consideration for the loan, 400,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share until January 31, 2007 were irrevocably committed to be issued (see note 4(a)).
During the six month period ended June 30, 2002, the Company received a $350,000 loan in exchange for a promissory note payable. The promissory note bears interest at 1% per month, is unsecured and is due on December 31, 2003. As further consideration for the loan, 1,400,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share until February 5, 2007 were irrevocably committed to be issued (see note 4(a)).
-5-
ALR TECHNOLOGIES INC.
Notes to Financial Statements (continued)
($ United States)
Six month periods ended June 30, 2002 and 2001
(Unaudited)
3. Promissory notes payable (continued)
During the six month period ended June 30, 2002, the Company received a $250,000 loan in exchange for a promissory note payable. The promissory note bears interest at 1% per month, is unsecured and is due June 27, 2002. The due date was later extended to December 31, 2002 in conjunction with the $1,000,000 loan commitment described below.
During the six month period ended June 30, 2002, the Company received two loans totaling $200,000 in exchange for a promissory note payable. The promissory notes bear interest at 1% per month, are unsecured and are due December 31, 2002. These loans represent the first two advances in a $1,000,000 total loan commitment. As further consideration for this loan commitment and the extension of the due date for a $250,000 loan from June 27, 2002 to December 31, 2002, 7,800,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share until May 28, 2007 were irrevocably committed to be issued (see notes 4(a) and 6).
During the six month period ended June 30, 2002, the Company received a $50,000 loan in exchange for a promissory note payable. The promissory note bears interest at 1% per month, is unsecured and is due December 31, 2002. As further consideration for the loan, 200,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share until May 18, 2007 were irrevocably committed to be issued (see note 4(a)).
During the six month period ended June 30, 2002, the Company received a $70,000 loan in exchange for a promissory note payable. The promissory note bears interest at 1% per month, is unsecured and is due December 31, 2003. As further consideration for the loan, 280,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share until May 30, 2007 were irrevocably committed to be issued (see note 4(a)).
During the six month period ended June 30, 2002, the Company repaid $131,000 of promissory notes payable and the maturity dates of promissory notes payable to a relative of a director totaling $500,000 and a promissory note payable to a director totaling $50,000 were extended to September 30, 2002 from June 30, 2002.
4. Capital stock:
a) Stock options:
The Company has irrevocably committed to grant options to purchase common shares of the Company as follows:
|
2002 |
2001 |
|||
|
|
Weighted Average Exercise Price |
|
Weighted Average Exercise Price |
|
|
Outstanding, beginning of period |
16,740,000 |
$0.25 |
13,870,000 |
$0.25 |
|
Granted |
10,180,000 |
$0.25 |
1,970,000 |
$0.25 |
|
Expired or cancelled |
(60,000) |
$0.25 |
(200,000) |
$0.50 |
|
Outstanding, end of period |
26,860,000 |
$0.25 |
15,640,000 |
$0.25 |
-6-
ALR TECHNOLOGIES INC.
Notes to Financial Statements (continued)
($ United States)
Six month periods ended June 30, 2002 and 2001
(Unaudited)
4. Capital stock and additional paid in capital (continued):
a) Stock options (continued):
The number of options outstanding and exercisable and the remaining contractual lives (in years) of the options at June 30, 2002 were as follows:
|
Options Outstanding |
|||
|
|
Number of Options Outstanding |
Contractual Lives Remaining |
Number of Options Exercisable |
|
$0.25 |
26,860,000 |
2.63 to 4.92 |
24,360,000 |
The Company applies APB Opinion No. 25 in accounting for its stock options issued to directors and employees. Had the Company determined compensation costs for stock options issued to employees and directors based on the fair value of its stock options under SFAS No. 123, the Company's loss for the six month period ended June 30, 2002 would have been the pro forma amounts below:
|
2002 |
2001 |
|
|
Loss |
||
|
As reported |
$ (875,642) |
$ (1,677,633) |
|
Pro forma |
$ (875,642) |
$ (1,677,633) |
|
Loss per share, basic and diluted |
||
|
As reported |
$ (0.04) |
$ (0.08) |
|
Pro forma |
$ (0.04) |
$ (0.08) |
During the six month period ended June 30, 2002, the Company irrevocably committed to grant 100,000 options to non-employees in exchange for services. All of the options vested at the time of commitment. The compensation cost related to these options has been estimated to be $8,000 which has been charged to selling, general and administrative expense. The weighted average per share fair value of the options irrevocably committed to be issued in the period was $0.08. The fair value of the options was determined using the Black Scholes Method, using the expected life of the options, a volatility factor of 140%, a risk free rate of 5.00% and no assumed dividend rate.
During the six month period ended June 30, 2002, 850,000 of the Company's previously issued options vested. Unvested options at June 30, 2002 consist of 2,500,000 options, which will vest based on the Company achieving certain sales targets. Compensation cost related to the unvested options is recorded over the service period or in the period in which the sales targets are achieved or probable of being achieved. During the period, compensation cost related to these options totaling $46,500 was recorded and charged to selling, general and administrative expense. The fair value of the options was determined using the Black Scholes Method, using the expected life of the options, a volatility factor of 140%, a risk free rate of 4.50% and no assumed dividend rate.
During the six month period ended June 30, 2002, the Company irrevocably committed to grant 10,080,000 options, in consideration of the promissory notes payable or of an extension to their original due date. All of the options vested immediately. The estimated fair value of the options was $900,000 of which $745,000, related to the $1,000,000 loan commitment and due date extension described in note 3, has been included in deferred financing costs and $155,000 has been recorded as a discount to the applicable promissory notes. The deferred financing costs and discount are being amortized to interest over the term of the related promissory notes. During the six month period ended June 30, 2002, $134,610 was amortized to interest expense. The weighted average per share fair value of the options irrevocably committed to be issued in the period was $0.09. The fair value of the options was determined using the Black Scholes Method, using the expected life of the options, a volatility factor of 140%, risk free rates of 4.50 % to 5.00% and no assumed dividend rate.
-8-
ALR TECHNOLOGIES INC.
Notes to Financial Statements (continued)
($ United States)
Six month periods ended June 30, 2002 and 2001
(Unaudited)
4. Capital stock and additional paid in capital (continued):
b) Warrants:
At June 30, 2002, the Company had irrevocably committed to issue a total of 12 million warrants, exercisable into common shares of the Company at an exercise price of $0.25 per share until December 31, 2005.
The Company has also agreed to extend the closing date of the sale of up to 3 million warrants at a price of $0.25 per warrant to September 30, 2002. The 3 million warrants are exercisable into common shares at $0.001 per share. These warrants will expire thirty days from the effective date of a registration statement filed with the United States Securities Commission registering the warrants and shares of common stock underlying the warrants.
5. Reconciliation of loss to net cash provided (used) by operating activities
|
Six month periods ended June 30, |
|||||
|
2002 |
2001 |
||||
|
Loss |
$ |
(875,642) |
(1,677,633) |
||
|
Adjustments to reconcile loss to net cash used by operating activities: |
|||||
|
Depreciation |
1,313 |
1,487 |
|||
|
Amortization of deferred financing costs and discount related to options issued in consideration for promissory notes or their due date extension |
152,610 |
10,000 |
|||
|
Compensation cost of options issued for services |
54,500 |
397,300 |
|||
|
Amortization of discount related to warrants issued in consideration for a loan |
|
|
|||
|
Increase in accounts receivable |
(562) |
(16,771) |
|||
|
Increase in inventories |
(2,225) |
(410,177) |
|||
|
Increase in prepaid expenses, deposits and advances |
(69,449) |
(188,387) |
|||
|
Decrease in accounts payable and accrued liabilities |
(128,676) |
(304,898) |
|||
|
Net cash used by operating activities |
$ |
(868,131) |
$ |
(1,659,079) |
|
6. Subsequent event
Subsequent to June 30, 2002, the company received an additional $300,000 in loans pursuant to a $1,000,000 loan commitment (see note 3).
-9-
Forward Looking Statements
The following information must be read in conjunction with the unaudited Financial Statements and Notes thereto included in Item 1 of this Quarterly Report and the audited Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis or Plan of Operations contained in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001. Except for the description of historical facts contained herein, the Form 10Q-SB contains certain forward-looking statements concerning future applications of the Company's technologies and the Company's proposed services and future prospects, that involve risk and uncertainties, including the possibility that the Company will: (i) be unable to commercialize services based on its technology, (ii) ever achieve profitable operations, or (iii) not receive additional financing as required to support future operations, as detailed herein and under "Item 2, Management Discussion and Analysis" and from time to time in the Company's future filings with the Securities and Exchange Commission and elsewhere. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
Item 2. Management Discussion and Analysis
Overview
ALR Technologies Inc. is in the business of designing, marketing and distributing medical reminder compliance devices. The monthly Pet Reminder™ was launched in 2001 with the launch of products for the human market in fiscal 2002. The Reminders for the human market will be distributed directly to retail chain pharmacy organizations, managed care organizations, pharmaceutical manufacturers and through pharmaceutical distribution companies for resale to smaller/independent pharmacies. The Company intends to target initially customers located in the United States and Canada because North America is the largest single pharmaceutical market in the world.
Late in the second quarter of 2002, the Company began the introduction of its basic medication reminders for the human market.
The Company is continuing to offer the 30-day Pet Reminder™ through its distributors who sell the Reminder exclusively to veterinary clinics and hospitals who will in turn sell the Pet Reminder™ to pet owners.
Given the human and financial resources available to the Company, Management is focusing its marketing efforts to distributing models with the widest appeal.
Results of Operations
There were no sales for the quarter ended June 30, 2002 as compared with sales of $91,339 for the quarter ended June 30, 2001. On a year to date basis, there were no sales in the first six months of fiscal 2002 as compared with sales of $354,156 for the six months ended June 30, 2001 The Company's efforts in the quarter were directed to introducing its Human Prescription Reminders to specified retail chain and pharmaceutical manufacturer customers .
Development costs decreased to $7,610 in the quarter ended June 30, 2001 from $9,978 in the second quarter of 2001. Year to date development costs decreased slightly from $25,330 for the first six months of fiscal 2001 to $20,665 for the first six months of the current year.
Interest expense was up to $239,677 for the quarter ended June 30, 2002 as compared with $86,920 for the quarter ended June 30, 2001. On a year to date basis, interest totaled $354,273 for the six months ended June 30, 2002 as compared to $692,464 in the prior year. Included in the total reported interest is $152,610 (2001 - $540,000) related to the amortization of the discount related to stock options and warrants committed to be issued in consideration for loans. Excluding amortization of discount, the increase in interest expense relates to the Company's increased reliance on debt financing.
-10-
The Company incurred professional fees of $20,073 for the quarter ended June 30, 2002 as compared with $37,199 for the quarter ended June 30, 2001. Year to date professional fees for the six months ended June 30, 2002 were $35,606, down from $82,308 for the same period in fiscal 2001. Fees were higher in the prior period primarily due to legal costs related to litigation in the first quarter of 2001.
Rent expense of $15,862 for the quarter ended June 30, 2002 and $23,717 for the six months ended June 30, 2002 was relatively unchanged from the $12,850 and $25,972 reported in the same periods in fiscal 2000.
The selling, general and administrative expenses were $264,520 for the quarter ended June 30, 2002 as compared to $311,761 for the quarter ended June 30, 2001. For the six month periods ended June 30, selling, general and administrative expenses decreased to $437,872 in fiscal 2002 from $1,020,067 in fiscal 2001. Of the total decrease of $582,195 over the comparative period, $342,800 relates to the fair value of stock options committed to be issued for selling, general and administrative services. The balance of the decrease relates primarily to decreased marketing and selling costs.
The loss of $550,565 for the quarter ended June 30, 2002 was up from a loss of $421,100 for the quarter ended June 30, 2001. For the six month periods, the loss decreased to $875,642 from $1,677,633. The largest component of this decrease was due to a decrease in non-cash charges of $387,390 related to the amortization of the discounts related to stock options and warrants committed to be issued in consideration for promissory notes, $342,800 related to the value of stock options committed to be issued for selling, general and administrative and product development services, and the reduction in marketing and selling costs.
Liquidity and Capital Resources
Cash Balances
As of June 30, 2002, the Company's cash balance was $84,146 compared to $65,705 at December 31, 2001.
Short and Long Term Liquidity
With respect to the Company's short-term liquidity, the Company's "current ratio" (current assets divided by current liabilities) as of June 30, 2002 was 0.05 compared to 0.02 at December 31, 2001. The greater the current ratio, the greater the short-term liquidity for the Company.
The Company anticipates that its current financial resources and committed financing will be sufficient to enable it to meet its overheads and purchase commitments through to the end of the third quarter of fiscal 2002. The Company has additional loan commitments at June 30, 2002 totaling $800,000 of which $300,000 was received subsequent to the period end. The company expects sales of it's Human Medication Reminder products to begin in the third quarter but that the level of sales orders will not become significant until the last quarter of the year.
A significant portion of the Company's debt financing is either due on demand or has a maturity date of less than one year. The Company will seek to obtain creditors' consents to delay repayment of these loans until it is able to replace this financing with funds generated by operations, replacement debt or from equity financings through private placements or the exercise of options and warrants. While the Company's creditors have agreed to extend repayment deadlines in the past, there is no assurance that they will continue to do so in the future. Failure to obtain either replacement financing or creditor consent to delay the repayment of existing financing could result in the Company having to curtail operations.
-11-
Cash Used in Operating Activities
Cash used by the Company in operating activities during the six months ended June 30, 2002 totaled $868,131 as compared with cash used by operating activities of $1,659,079 for the six months ended June 30, 2001. The decrease in cash used is primarily due to the costs incurred in acquiring inventory of the Pet Reminder™ and paying down existing accounts payable in the first quarter of fiscal 2001.
Cash Proceeds from Financing Activities
In the first six months of fiscal 2002, the Company received loans totaling $1,020,000. Part of the proceeds of these financings was used to pay down existing debt ($131,000). In January 2001, the Company arranged a $2,000,000 loan from a relative of the Chief Executive Officer and Director of the Company. Part of the proceeds of this financing was used to pay down existing debt ($323,148).
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are attached hereto:
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on June 14, 2002.
-12-
SIGNATURES
In accordance with 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.
| ALR Technologies Inc. | |
| August 14, 2002 dated |
/s/ Sidney Chan Sidney Chan, Chief Executive Officer |
| August 14, 2002 dated |
/s/ Stanley Cruitt Stanley Cruitt, President |