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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-QSB

[X]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

   
 

OR

   

[   ]

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

COMMISSION FILE NUMBER 0-30414

ALR TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)

NEVADA

88-0225807

(State of other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)


114M Reynolda Village
Winston-Salem, North Carolina 27106
(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 [   ]


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PART I.   FINANCIAL INFORMATION

ITEM 1.   INTERIM FINANCIAL STATEMENTS

ALR TECHNOLOGIES INC.
Balance Sheets
($ United States)
June 30, 2004 and December 31, 2003


 

2004

 



(Unaudited)


2003


Assets

Current assets:

Cash

$

17,227

$

29,852

Accounts receivable, net of allowance of $2,163 (December 31, 2003 - $563)

54,220

128,903

Inventories (note 3)

92,293

113,633

Prepaid expenses and deposits




11,345




-


175,085

272,388

Fixed assets, net of accumulated depreciation




9,480




8,210




$


184,565


$


280,598


Liabilities and Shareholders' Deficiency

Current liabilities:

Accounts payable and accrued liabilities

$

2,478,020

$

2,161,133

Customer deposits

 

50,000

 

-

Promissory notes payable to a relatives of a director (note 4)

 

2,210,000

 

2,680,000

Promissory notes payable to directors

 

116,500

 

558,500

Current portion of promissory notes payable




2,566,500




2,534,903


7,421,020

7,934,536

Promissory notes payable

270,912

270,912

Shareholders' deficiency

Capital stock

75,000,000 common shares with a par value of $0.001 per share authorized,

     

41,078,446 issued (December 31, 2003 - 21,078,446)

 

41,078

 

21,078

Additional paid-in capital

9,135,732

5,491,835

Deficit

(16,721,341)

(13,474,927)

Accumulated other comprehensive income:

Cumulative translation adjustment


 





37,164


 





37,164


(7,507,367)

(7,924,850)

Basics of presentation (note 1)

Commitments (note 5)

       

Contingency (note 6)










         


$


184,565


$


280,598


 

 

See accompanying notes to interim financial statements
F-1

-2-


ALR TECHNOLOGIES INC.
Statements of Loss and Deficit
($ United States)
Three month and six month periods ended June 30, 2004 and 2003
(Unaudited)


 

Three months ended

Six months ended



2004


2003


2004


2003


 

 

 

 

 

Sales

$

59,999

$

26,578

$

266,533

$

39,044

 

 

 

 

 

 

 

 

 

Cost of sales




21,147




15,479




174,455




24,744


 

 

38,852

 

11,099

 

92,078

 

14,300

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Depreciation

 

941

 

745

 

1,481

 

1,490

Development costs

 

76,530

 

29,744

 

124,705

 

62,438

Foreign exchange loss

 

-

 

3,361

 

-

 

5,629

Interest

 

2,390,320

 

377,658

 

2,565,246

 

776,169

Professional fees

 

26,280

 

20,084

 

43,106

 

43,308

Rent

 

14,229

 

8,849

 

16,539

 

19,958

Selling, general and administrative




491,479




220,393




587,415




507,123






2,999,779




660,834




3,338,492




1,416,115


 

 

 

 

 

 

 

Loss and comprehensive loss

 

(2,960,927)

 

(649,735)

 

(3,246,414)

 

(1,401,815)

 

 

 

 

 

 

 

 

Deficit, beginning of period




(13,760,414)




(11,451,108)




(13,474,927)




(10,699,028)


 

 

 

 

 

 

 

 

 

Deficit, end of period


$


(16,721,341)


$


(12,100,843)


$


(16,721,341)


$


(12,100,843)


 

 

 

 

 

 

 

 

 

Loss per share, basic and diluted

 

(0.08)

 

(0.03)

 

(0.11)

 

(0.07)

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

basic and diluted




36,902,622




21,078,446




28,990,534




21,078,446


 

 

 

 

See accompanying notes to interim financial statements
F-2

-3-


ALR TECHNOLOGIES INC.
Statement of Shareholders' Deficiency and Comprehensive Loss
($ United States)
Six month period ended June 30, 2004
(Unaudited)


 

Capital Stock


 

 

 

 

         

Accumulated

 
     

Additional

 

Other

Total

 

Number of

 

Paid in

 

Comprehensive

Shareholders'



Shares


Amount


Capital


Deficit


Income


Deficiency


 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2003

21,078,446

$

21,078

$

5,491,835

$

(13,474,927)

$

37,164

$

(7,924,850)

                       

Common shares issued as full and

                     

final settlement of accounts payable

                     

and accrued liabilities to a director

1,160,000

 

1,160

 

56,840

 

-

 

-

 

58,000

Common shares issued as full and

                     

final settlement of promissory notes

                     

payable to a relative of a director

                     

and a director

18,840,000

 

18,840

 

923,160

 

-

 

-

 

942,000

Compensation cost of stock options

                     

irrevocably committed to be used to

                     

non-employees for services

-

 

-

 

92,000

 

-

 

-

 

92,000

Financing cost of stock options

                     

irrevocably committed to be issued

                     

in consideration of promissory

                     

notes payable

-

 

-

 

1,052,897

 

-

 

-

 

1,052,897

Financing cost of stock options

                     

irrevocably committed to be issued

                     

in consideration of accounts

                     

payable and accrued liabilities

-

 

-

 

496,000

 

-

 

-

 

496,000

Compensation cost related to

                     

modification of previous stock

                     

option commitments for services

-

 

-

 

315,000

 

-

 

-

 

315,000

Financing cost related to the

                     

modification of previous stock

                     

option and warrant commitments in

                     

consideration of promissory notes

-

 

-

 

708,000

 

-

 

-

 

708,000

                       

Compensation loss














(3,246,414)








(3,246,414)




41,078,446


$


41,078


$


9,135,732


$


(16,721,341)


$


37,164


$


(7,507,367)


 

 

 

 

 

See accompanying notes to financial statements
F-3

-4-


ALR TECHNOLOGIES INC.
Statements of Cash Flows
($ United States)
Three month and six month periods ended June 30, 2004 and 2003
(Unaudited)


 

Three months ended

Six months ended



2004


2003


2004


2003


                 

Cash flows from operating activities (note 8):

               

Cash received from customers

$

12,075

$

12,811

$

389,616

$

41,146

Cash paid to suppliers and employees

 

(96,393)

 

(210,198)

 

(296,928)

 

(455,101)

Interest paid

 

(91,741)

 

(22,307)

 

(147,562)

 

(166,278)

Income taxes paid




-




-




-




-


Net cash used in operating activities

 

(176,059)

 

(219,694)

 

(54,874)

 

(580,233)

                 

Cash flows from financing activities:

               

Promissory notes payable

 

70,000

 

255,000

 

100,000

 

615,470

Repayment of promissory notes payable




(25,000)




-




(55,000)




-


Net cash provided by financing activities

 

45,000

 

255,000

 

45,000

 

615,470

                 

Cash flows from investing activities:

               

Purchase of fixed assets




(2,751)




-




(2,751)




-


                 

Increase (decrease) in cash during the period

 

(133,810)

 

35,306

 

(12,625)

 

35,237

                 

Cash, beginning of period

 

151,037

 

910

 

29,852

 

979

                 

Cash, end of period


$


17,227


$


36,216


$


17,227


$


36,216


                 

Non-cash financing activities:

               

Common shares issued as full and final settlement

               

of promissory notes

$

942,000

$

-

$

942,000

$

-

Common shares issued as full and final settlement of accounts

               

payable and accrued liabilities

 

58,000

 

-

 

58,000

 

-

Financing cost of stock options irrevocably committed to be

               

issued in consideration for promissory notes

 

1,036,640

 

94,304

 

1,052,897

 

261,365

Compensation cost of options irrevocably committed to be

               

issued to non-employees for services

 

82,000

 

-

 

92,000

 

7,000

Financing cost of stock options irrevocably committed to be

               

issued in consideration of accounts payable and accrued liabilities

 

496,000

 

-

 

496,000

 

-

Compensation cost related to the modification of stock option

               

commitments to non-employees for services

 

315,000

 

-

 

315,000

 

-

Financing cost related to the modification of stock option

               

and warrant commitment in consideration of promissory notes




708,000




-




708,000




-


                 


$


3,637,640


$


94,304


$


3,663,897


$


268,365


 

See accompanying notes to interim financial statements
F-4

-5-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and six month periods ended June 30, 2004 and 2003
(Unaudited)

  1. Basis of presentation

    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 the continued financial support of its creditors and 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 outstanding promissory notes payable 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 plans to obtain financing through the issuance of shares on the exercise of options and warrants and through future common share private place ments. 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, from the sources described above, 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. Significant accounting policies

    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, 2003. 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. Inventories

    The Company has expended significant efforts introducing its Human Prescription Reminders ("Med Reminders") to specified retail chains, pharmaceutical manufacturers, Contract Research Organizations, Health Management Organizations, Pharmacy Benefits Managers and certain clinics treating specific disease conditions. Sales to June 30, 2004 have not been sufficient for the Company to realize its investment in these inventories. Management plans to recover its investment in inventories through sales via the channels indicated above and through other, non-traditional sales channels not yet identified by management. As of June 30, 2004, management had recorded a provision of $160,000 in respect of its Med Reminder inventory.

F-5

-6-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and six month periods ended June 30, 2004 and 2003
(Unaudited)

  1. Inventories (continued)

    The alternate use of this inventory is limited and, accordingly, if management is not successful in its plans, they may be required to further write-down its investment in inventories in the near term. The outcome of this matter cannot be predicted at this time.

  2. Promissory notes payable

    During the six month period ended June 30, 2004, the Company received $30,000 from a relative of a director in exchange for a promissory note payable. The promissory note bears interest at 1% per month, is unsecured and is due on demand. As further consideration, 120,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share until March 31, 2009, were irrevocably committed to be issued (see note 5(b)).

    During the three month period ended June 30, 2004 the Company received $70,000 in exchange for a promissory note payable. The promissory note bears interest at 1% per month, is unsecured and is due on demand. As further consideration, 280,000 options exercisable into common shares at the Company at an exercise price of $0.25 per share are until June 30, 2009, were irrevocably committed to be issued (see note 5(b)).

  3. Capital stock

    a)     Authorized common shares

    The Company's issued common shares (41,078,446) plus common share issuance commitments related to outstanding stock options (75,701,463) exceeds the Company's authorized common shares of 75,000,000. The Company is in the process of increasing its authorized common shares, which it expects to complete by December 31, 2004.

    b)     Stock options:

    The Company has irrevocably committed to grant options to purchase common shares of the Company as follows:


     

     

    2004

     

    2003

       

    Weighted Average

     

    Weighted Average



    Number of Shares


    Exercise Price


    Number of Shares


    Exercise Price


     

     

     

     

     

    Outstanding, beginning of period

    35,259,000

    $0.25

    28,460,000

    $0.25

    Granted

    40,442,463

    0.25

    1,465,000

    0.25

    Expired or cancelled


    -




    -




    Outstanding, end of period


    75,701,463


    $0.25


    29,925,000


    $0.25


 

F-6

-7-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and six month periods ended June 30, 2004 and 2003
(Unaudited)

  1. Capital stock (continued)

    b)     Stock options (continued):

    The number of options outstanding and exercisable and the remaining contractual lives (in years) of the options at June 30, 2004 were as follows:


     

    Options Outstanding


     

    Number of Options

    Contractual Lives

    Number of Options

    Exercise Price


    Outstanding


    Remaining


    Exercisable


     

     

     

     

    $0.25


    75,701,463


    0.75 to 5.00


    71,701,463


    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 and loss per share for the three month and six month periods ended June 30, 2004 and 2003 would have been the proforma amounts below:


     

     

    Three months ended June 30,

     

    Six months ended June 30,

     

    2004

     

    2003

    2004

    2003

    Loss

           

    As reported

    $

    (2,960,927)

    $

    (649,735)

    $

    (3,246,414)

    $

    (1,401,815)

    Pro forma

    $

    (2,960,927)

    $

    (649,735)

    $

    (3,246,414)

    $

    (1,401,815)

                     

    Loss per share, basic and diluted

                   

    As reported

    $

    (0.08)

    $

    (0.03)

    $

    (0.11)

    $

    (0.07)

    Pro forma

    $

    (0.08)

    $

    (0.03)

    $

    (0.11)

    $

    (0.07)










    Unvested options at June 30, 2004 consist of 4,000,000 options which will vest based on achieving certain sales and performance targets. Compensation cost related to the unvested options is recorded over the service period or in the period in which the sales or performance targets are achieved or probable of being achieved.

    During the six month period ended June 30, 2004, the Company irrevocably committed to grant 1,450,000 options to non-employees in exchange for services. All of the options vested at the time of commitment and are exercisable into common shares of the Company at an exercise price of $0.25 per share for a period of five years. The compensation cost related to these options, being the fair value of the options, has been estimated to be $92,000, of which $25,000 has been charged to product development expense and $67,000 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 $0.06. The fair value of the options was determined using the Black Scholes option pricing model, using the expected life of the options, a volatility factor of 111%, a risk free rate of 3.00% and no assumed dividend rate.

 

F-7

-8-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and six month periods ended June 30, 2004 and 2003
(Unaudited)

  1. Capital stock (continued)

    b)     Stock options (continued):

    During the six month period ended June 30, 2004, the Company irrevocably committed to grant 400,000 options, in consideration of promissory notes payable (note 4). All of the options vested immediately and are exercisable into the Company's common shares at an exercise price for a period of five years. Financing cost related to these options, being the fair value of the options, has been estimated to be $23,300 and has been charged to interest expense. The weighted average per share fair value of the options irrevocably committed to be issued in the period was $0.06. The fair value of the options was determined using the Black Scholes option pricing model, using the expected life of the options, a volatility factor of 111%, a risk free rate of 3.00% and no assumed dividend rate.

    Also for consideration of promissory note proceeds received previously, the Company irrevocably committed to grant 16,516,500 options. All of the options vest immediately and are exercisable into the Company's common shares at an exercise price for a period of five years. Financing cost related to these options, being the fair value of the options, has been estimated to be $1,013,000, which charged to interest expense. The weighted average per share fair value of the options irrevocably committed to be issued in the period was $0.06. The value was determined using the Black Scholes option pricing model, using the expected life of the options, a volatility factor of 111%, a risk free rate of 3.00% and no assumed dividend rate.

    During the six month period ended June 30, 2004, interest expense includes $16,597 of amortized promissory note discounts related to options irrevocably committed to be issued in the year ended December 31, 2003.

    During the six month period ended June 30, 2004, the Company irrevocably committed to grant 8,075,963 options in consideration of outstanding accounts payable and accrued liabilities. All of the options vested immediately and are exercisable into the Company's common shares at an exercise price for a period of five years. Financing cost related to these options, being the fair value of the options, has been estimated to be $496,000 and has been charged to interest expense. The weighted average per share fair value of the options irrevocably committed to be issued in the period was $0.06. The fair value of the options was determined using the Black Scholes option pricing model, using the expected life of the options, a volatility factor of 111%, a risk free rate of 3.00% and no assumed dividend rate.

    During the six months ended June 30, 2004, the Company modified the terms of 7,300,000 previous options commitments for services and 13,850,000 previous option commitments in consideration of promissory notes to extend the expiry date of the options to June 30, 2009. In addition, the Company issued 12,000,000 options to purchase common shares, with an exercise price of $0.25 per share to June 30, 2009, in exchange for previous warrant commitments. Compensation cost related to the modification of previous option commitments for services was estimated to be $315,000, of which $10,000 has been charged to product development expense and $305,000 has been charged to selling, general and administrative expense. Financing cost related to the modification of previous option and warrant commitments in consideration of promissory notes payable has been estimated to be $708,000, which has been charged to interest expense. Compensation cost and financing cost have been estimated as the fair value of the options, using the Black Scholes option pricing model, using the expected lives of the options, a volatility factor of 111%, a risk free rate of 3.0% and no assumed dividend rate.

 

F-8

-9-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three months and six month periods ended June 30, 2004 and 2003
(Unaudited)

  1. Contingency

    Accounts payable and accrued liabilities, as of June 30, 2004, includes $180,666 of amounts owing to a supplier, which the Company disputes. The outcome of this matter cannot be determined at this time. The gain on settlement of the account payable, if any, will be recorded in the period that an agreement with the supplier is reached and the amount becomes determinable.

  2. Related party transaction

    Related party transactions for the six month period ended June 30, 2004, included the following:




    2004


    2003


    10,000,000 common shares issued to a relative of a director for full

     

     

     

     

    and final settlement of outstanding promissory notes payable

    $

    500,000

    $

    -

    10,000,000 common shares issued to a director for full and final

     

     

     

     

    settlement of outstanding promissory notes payable and accounts

     

     

     

     

    payable and accrued liabilities

     

    500,000

     

    -

    Financing cost related to options irrevocably committed to be issued

     

     

     

     

    to relatives of directors in consideration of promissory notes payable

     

    6,300

     

    -

    Financing cost related to options irrevocably committed to be

     

     

     

     

    issued to directors and relatives of directors in consideration

     

     

     

     

    of promissory note proceeds received previously

     

    276,000

     

    -

    Financing cost related to options irrevocably committed to be

     

     

     

     

    issued to directors and relatives of directors in consideration of

     

     

     

     

    outstanding accounts payable and accrued liabilities

     

    385,000

     

    -

    Compensation and financing costs related to modification of

     

     

     

     

    previous option and warrant commitments to directors and

     

     

     

     

    relatives of directors




    717,000




    -




    $


    2,384,300


    $


    -


    Common shares issued are restricted from sale for a period of one year from the issue date in accordance with securities regulations.

 

 

 

 

F-9

-10-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and six month periods ended June 30, 2004 and 2003
(Unaudited)

  1. Reconciliation of loss to net cash used in operating activities


     

    Three months ended June 30,

    Six months ended June 30,



    2004




    2003




    2004




    2003


     

     

     

     

     

     

     

     

     

    Loss

    $

    (2,960,927)

    $

    (649,735)

    $

    (3,246,414)

    $

    (1,401,815)

    Adjustments to reconcile loss to net cash

                   

    used in operating activities:

                   

    Depreciation

    941

    745

    1,481

    1,490

    Amortization of discount related to options

     

     

     

     

    issued in consideration for promissory notes

     

    6,640

     

    224,072

     

    16,597

     

    478,612

    Common shares issued as full and final

                   

    settlement of outstanding accounts

                   

    payable and accrued liabilities

     

    58,000

     

    -

     

    58,000

     

    -

    Compensation cost of options irrevocably

     

     

     

     

    committed to be issued for services

     

    82,000

     

    -

     

    92,000

     

    7,000

    Financing of options irrevocably committed to

                   

    be issued in consideration of promissory notes

                   

    payable

     

    1,046,597

     

    -

     

    1,052,897

     

    -

    Financing cost of options irrevocably committed

                   

    to be issued in consideration of accounts payable

                   

    and accrued liabilities

     

    496,000

     

    -

     

    496,000

     

    -

    Compensation cost related to the modification of

                   

    previous option commitments for services

     

    315,000

     

    -

     

    315,000

     

    -

    Financing cost related to the modification of

                   

    previous option and warrant commitments in

                   

    consideration of promissory notes

     

    708,000

     

    -

     

    708,000

     

    -

    Increase (decrease) in accounts receivable

    (47,924)

    (13,767)

    74,683

    2,102

    Decrease (increase) in inventories

    18,869

    12,795

    21,340

    (95,859)

    (Increase) decrease in prepaid expenses

    (4,325)

    (35,629)

    (11,345)

    53,248

    Increase in accounts payable and accrued

                   

    liabilities

     

    105,070

     

    241,825

     

    316,887

     

    374,989

    Increase in customer deposits




    -




    -




    50,000




    -


                     

    Net cash used in operating activities


    $


    (176,059)


    $


    (219,694)


    $


    (54,874)


    $


    (580,233)


 

 

 

F-10

-11-


ITEM 2.   MANAGEMENT DISCUSSION AND ANALYSIS

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, 2003. Except for the description of historical facts contained herein, the Form 10-QSB 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 from time to time in the Company's future filings with the Securities and Exchan ge 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.

Critical Accounting Policies

The preparation of our financial statements in conformity with generally accepted accounting policies in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results may differ from these estimates under different assumptions or conditions. We believe the accounting polices that are most critical to our financial condition and results of operations and involve management's judgment and/or evaluation of inherent uncertain factors are as follows:

Basis of Presentation. The financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations. If the Company were not to continue as a going concern, it would likely not be able to realize on its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the financial statements. As described note 1 to the interim financial statements, at June 30, 2004, there are certain conditions that exist which raise substantial doubt about the validity of this assumption. The Company's ability to continue as a going concern is dependent upon continued financial support of its creditors and its ability to obtain financing to repay its current obligations and fund working capital and its ability to achieve profitable operations. The Company will seek to obtain creditors consent to delay repayment of its outstanding promisso ry notes payable until it is able to replace this financing with funds generated from operations, replacement debt or from equity financing 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 plans to obtain financing through the issuance of additional debt, the issuance of shares on the exercise of options and warrants and through future common share private placements. Management hopes to realize sufficient sales in future years to achieve profitable operations. Failure to achieve management's plans may result in the Company curtailing operations or writing assets and liabilities down to liquidation values, or both.

 

 

-12-


Inventories. Inventories are recorded at the lower of cost, determined on a weighted average cost basis, and net realizable value.

Options and warrants issued in consideration for debt. The Company allocates the proceeds received from long term debt between the liability and the options and warrants issued in consideration for the debt, based on their relative fair values, at the time of issuance. The amount allocated to the options or warrants is recorded as additional paid in capital and as a discount to the related debt. The discount is amortized to interest expense on a yield basis over the term of the related debt.

Revenue recognition. The Company recognizes sales revenue at the time of delivery when title has transferred to the customer, persuasive evidence of an arrangement exists, the fee is fixed and determinable and the sales proceeds are collectible. Provisions are recorded for product returns based on historical experience. Sales revenue, in transactions for which the Company does not have sufficient historical experience, are recognized when the return privilege period has expired.

Stock-based compensation. The Company accounts for its employee stock-based compensation arrangements in accordance with provisions of Accounting Principles Board ("APB") Opinion No. 25. "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense for stock options, common stock and other equity instruments issued to non-employees for services received based upon the fair value of the equity instruments issued, as the services are provided and the securities earned.

Results of Operations

Management is focusing the majority of its efforts on introducing and marketing its line of medication reminders and compliance systems to the health management industry. ALRT Med Reminders are being marketed and sold directly to disease management companies, health insurance providers, pharmaceutical manufacturers, retail pharmacy chains, contract research organizations, and through distribution companies for resale to independent pharmacies. The Company is first targeting customers located in United States because of market potential but has also established selling operations/agreements for sales and distribution in Canada, Europe, Australia and South America.

Contracts with companies that will provide selling support to medical supply companies and health services providers as well as contracts with companies that sell directly to institutions and large medical practices are expected to be completed in first half of 2004. An agreement with one entity was completed in 2002 and two additional agreements were completed in 2003. Company management will provide much of the selling activity to contract research organizations and to pharmaceutical manufacturers. The company will also utilize advertising/promotion and publicity activities to pharmaceutical manufacturers, contract research organizations, independent pharmacies and consumers.

Development costs increased to $76,530 in the quarter ended June 30, 2004 and $124,705 for the six months ended June 30, 2004 from $29,744 in the second quarter of 2003 and $62,438 for the six months ended June 30, 2003. Development costs incurred in the second quarter of 2004 relate to the allocation of additional programming resources required for the development of the PC 500 LCD (Liquid Crystal Display) Med Reminders and the ALRT Interactive Response System (AIRS). Development costs for the three months and six months ended June 30, 2004 include $25,000 and $35,000 of non-cash compensation costs related to options issued for services in the period.

 

 

-13-


Interest expense increased to $2,790,320 - for the quarter ended June 30, 2004 and $2,965,246 for the six months ended June 30, 2004 as compared with $377,658 for the quarter ended June 30, 2003 and $776,179 for the six months ended June 30, 2003. During the three months and six ended June 30, 2004, Company incurred non-cash interest expense of $2,250,597 and 2,256,897, respectively. The non-cash interest consisted of the following; $1,046,597 (three months) and $1,052,897 was expensed for options irrevocably committed to be issued in consideration for promissory notes payable, $496,000 for options irrevocably committed to be issued in consideration of accounts payable and accrued liabilities, $708,000 was expensed relating to the modification of previous option and warrant commitments in consideration of promissory notes and $400,000 was expensed related to the loss on the full and final settlement of certain outstanding accounts payable and accrued liabilities and promissory no tes payable in exchange for common shares. Interest expense also includes the amortization of discounts related to stock options and warrants committed to be issued in consideration for promissory notes payable amounted to $6,640 in the second quarter of 2004 and $16,597 for the six months ended June 30, 2004as compared to $224,072and $478,612, respectively, in 2003. The overall increase in interest expense result of the Company's increased reliance on debt financing and cost to obtain extensions on debt obligations.

Professional fees were $26,280 for the quarter ended June 30, 2004 and $43,106 for the six months ended June 30, 2004 as compared with $20,084and $43,308 for the same periods in 2003. Fees were higher in the second quarter of 2004 primarily due to fees for accounting services obtained in the period.

The selling, general and administrative expenses were $491,749for the quarter ended June 30, 2004 and $587,415 for the six months ended June 30, 2004 as compared to $220,393 and $507,123 for the same periods in 2003. Included in selling, general and administrative expenses is $397,000 (three months) and $407,000(six months) related to options committed to be issued in exchange for services provided by non-employees as compared to $nil and $7,000 over the same periods in 2003. The increase relates primarily to the Company's commitment to irrevocably modify options previously issued for services during the quarter ended June 30, 2004.

The loss of $3,360,927for the quarter ended June 30, 2004 and $3,646,414 for the six months ended June 30, 2004 has increased from a loss of $649,753and $1,401,815 for the same periods in 2003. The largest component of this increase was due to an increase in non-cash interest and compensation costs related to options committed to be issued as consideration for promissory notes payable, services, and modifications of previous option and warrant commitments.

Liquidity and Capital Resources

Cash Balances and Working Capital

As of June 30, 2004, the Company's cash balance was $17,227compared to $151,037at March 31, 2004 and $29,852 as at December 31, 2003. As of June 30, 2004, the Company had a working Capital deficiency of $7,245,935 as compared to a working capital deficiency of $7,930,795 as of March 31, 2004 and $7,662,148 as at December 31, 2003.

Short and Long Term Liquidity

As at June 30, 2004, the Company does not have the current financial resources and committed financing to enable it to meet its overheads, purchase commitments and debt obligations over the next 12 months.

 

 

-14-


The majority 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 these financings 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.

Cash Used in Operating Activities

Cash used by the Company in operating activities during the three months and six months ended June 30, 2004 totaled $176,059 and $54,874, respectively, as compared with cash used by operating activities of $219,649 and $580,233 for the same periods in 2003. The increase in cash used in operations relates primarily to a decrease in cash amounts paid to suppliers due to the Company's lack of funds..

Cash Proceeds from Financing Activities

In the first and second quarters of fiscal 2004, the Company received loans totaling $100,000,which consisted of $30,000 in the first quarter from a relative of a director and $70,000 in the second quarter from two individuals . In addition, a total of 20,000,000 common shares were issued in the quarter ending June 30, 2004. 10,000,000 restricted shares of common stock were issued to Stanley Cruitt, the Company's president, in consideration of his forgiveness of promissory notes and accounts payable owed to Mr. Cruitt by the Company in the amount of $500,000 and 10,000,000 restricted shares of common stock to Christine Kan, the wife of Sidney Chan, the Company's chief executive officer, in consideration of her foregiveness of promissory notes owed to Ms. Kan by the Company in the amount of $500,000. A loss on the settlement of the accounts payable and accrued liabilities and promissory notes payable of $400,000 has been included in interest expense for the three months and six months end ed June 30, 2004.

Off Balance Sheet Arrangements.

The Company has no off balance sheet financing arrangements that have or are reasonably likely to have a current or future effect on the Company s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that is material to investors.

ITEM 3.   CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Sidney Chan, the Company's Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company s disclosure controls and procedures (as such term is defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act )) as of the end of the period covered by this quarterly report (the Evaluation Date). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company required to be included in our reports filed or submitted under the Exchange Act.

 

 

-15-


Changes in Internal Controls

There were no significant changes in the Company's internal controls or, to the Company's knowledge, in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the date the Company carried out this evaluation.


PART II - OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

There were no legal proceedings in the quarter.

ITEM 2.   CHANGES IN SECURITIES

A total of 20,000,000 common shares were issued in the quarter ending June 30, 2004. 10,000,000 restricted shares of common stock were issued to Stanley Cruitt, the Company's president, in consideration of his forgiveness of promissory notes and accounts payable owed to Mr. Cruitt by the Company in the amount of $500,000 and 10,000,000 restricted shares of common stock to Christine Kan, the wife of Sidney Chan, the Company's chief executive officer, in consideration of her foregiveness of promissory notes owed to Ms. Kan by the Company in the amount of $500,000.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon senior securities in the quarter. However there are liabilities totaling $0 for outstanding promissory notes that are due on demand or are due prior to June 30, 2005. The promissory note holders have not demanded payment as of the date of this report.

ITEM 4.   SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

No matters were submitted to security holders for a vote during the quarter.

ITEM 5.   OTHER MATTERS

None

 

 

 

 

-16-


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a)     The following Exhibits are attached hereto:

 

Exhibit No.

Document Description

     
 

31.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-15(a) and Rule 15d-15(a), promulgated under the Securities Exchange Act of 1934, as amended.

 
 

32.1

Certification of Chief Executive Officer and Chief Financial Officer Pursuant To 18 U.S.C. Section 1350, as adopted pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002.

(b)     Reports on Form 8K

The Company filed no reports on Form 8K during the three month period ended June 30, 2004.

 

 

 

 

 

 

 

 

 

 

-17-


SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 21st day of September, 2004.

 

ALR TECHNOLOGIES INC.
(Registrant)


 

BY:

/s/ Sidney Chan

   

Sidney Chan

   

Principal Executive Officer, Treasurer, Principal Financial Officer and a member of the Board of Directors

     
 

BY:

/s/ Stanley Cruitt

   

Stanley Cruitt

   

President and a Member of the Board of Directors

 

 

 

 

 

 

 

 

 

 

 

 

 

-18-