=========================================================================

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 SEPTEMBER 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)

September 30, 2004 and December 31, 2003

 

 

 

 

 

2004

 

 

 

(Unaudited)

 

2003

Assets

 

 

 

 

Current assets:

        

Cash

$

127

$

29,852

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

 

6,480

  

128,903

Inventories (note 3)

  

107,567

  

113,633

Prepaid expenses and deposits

 

10,000

 

-

124,174

272,388

         

Fixed assets, net of accumulated depreciation

 

8,386

 

8,210

 

$

132,560

$

280,598

Liabilities and Shareholders' Deficiency

 

 

 

 

Current liabilities:

        

Accounts payable and accrued liabilities

$

2,773,040

$

2,161,133

Promissory notes payable to relatives of directors (note 4)

  

2,290,000

  

2,680,000

Promissory notes payable to directors

 

119,471

  

558,500

Current portion of promissory notes payable

 

2,767,412

 

2,534,903

 

 

7,949,923

 

7,934,536
         

Promissory notes payable

  

-

 

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

  

9,535,732

  

5,491,835

Deficit

  

(17,431,337)

  

(13,474,927)

Accumulated other comprehensive income:

        
 

Cumulative translation adjustment

 

37,164

 

37,164

(7,817,363)

(7,924,850)

Basics of presentation (note 1)

        

Commitments (note 5)

        

Contingency (note 6)

        

Subsequent event (note 5(a))

 
 
 
 

 

$

132,560

$

280,598

 

See accompanying notes to interim financial statements

-2-

ALR TECHNOLOGIES INC.

Statements of Loss and Deficit

($ United States)

Three month and nine month periods ended September 30, 2004 and 2003

(Unaudited)

 
 

Three months ended

Nine months ended
 

2004

2003

2004

2003

           

Sales

$

68,786

$

8,064

$

335,319

$

47,108
                 

Cost of sales

 

29,347

 

5,886

 

203,802

 

30,630

 
 

39,439

 

2,178

 

131,517

 

16,478

                 

Expenses:

                
 

Depreciation

  

1,095

  

745

  

2,576

  

2,235
 

Development costs

  

25,031

  

35,000

  

149,736

  

97,438
 

Foreign exchange loss (gain)

  

2,670

  

(143)

  

2,670

  

5,486
 

Interest

  

158,102

  

225,989

  

2,723,348

  

1,002,158
 

Loss on settlement of debt (note 7)

  

-

  

-

  

400,000

  

-
 

Professional fees

  

10,545

  

8,245

  

53,651

  

51,553
 

Rent

  

11,308

  

9,247

  

27,847

  

29,205
 

Selling, general and administrative

 

140,684

 

208,051

 

728,099

 

715,174

 
 

349,435

 

487,134

 

4,087,927

 

1,903,249

                 

Loss and comprehensive loss

  

(309,996)

  

(484,956)

  

(3,956,410)

  

(1,886,771)
                 

Deficit, beginning of period

 

(17,121,341)

 

(12,100,843)

 

(13,474,927)

 

(10,699,028)

                 

Deficit, end of period

$

(17,431,337)

$

(12,585,799)

$

(17,431,337)

$

(12,585,799)

                 

Loss per share, basic and diluted

  

(0.01)

  

(0.02)

  

(0.12)

  

(0.09)
                 

Weighted average shares outstanding,

                

basic and diluted

 

41,078,446

 

21,078,446

 

33,049,249

 

21,078,446

 

 

 

 

See accompanying notes to interim financial statements

-3-

ALR TECHNOLOGIES INC.

Statement of Shareholders' Deficiency and Comprehensive Loss

($United States)

Nine month period ended September 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

  

1,323,160

  

-

 

-

 

1,342,000

Compensation cost of stock

                      

options irrevocably committed to

                      

be used to non-employees for

                      

services

-

 

-

 

92,000

  

-

 

-

 

92,000

Financing cost of stock options

-

 

-

 

1,052,897

  

-

     

1,052,897

irrevocably committed to be

                      

issued in consideration of

                      

promissory notes payable

               

-

   

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
                       

Loss and comprehensive loss

 

 

 

 

 

 

(3,956,410)

 

 

 

(3,956,410)

 

41,078,446

$

41,078

$

9,535,732

$

(17,431,337)

$

37,164

$

(7,817,363)

 

 

See accompanying notes to financial statements

-4-

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

 

Three months ended

Nine months ended
 

2004

2003

2004

2003

   

Cash flows from operating activities (note 8):

  
 

Cash received from customers

$

68,126

$

16,599

$

457,742

$

57,745
 

Cash paid to suppliers and employees

  

(80,619)

  

(89,753)

  

(394,143)

  

(544,584)
 

Interest paid

  

(14,607)

  

38,843

  

(145,572)

  

(127,435)
 

Income taxes paid

 

-

 

-

 

-

 

-

 

Net cash used in operating activities

 

(27,100)

 

(34,311)

 

(81,973)

 

(614,544)

Cash flows from financing activities:

                
 

Promissory notes payable

  

140,000

  

-

  

240,000

  

615,470
 

Repayment of promissory notes payable

  

(130,000)

 

-

 

(185,000)

 

-
 

Loan and advances from shareholder

 

-

 

-

 

-

 

-

 

Net cash provided by financing activities

 

10,000

 

-

 

55,000

 

615,470

                 

Cash flows from investing activities:

                
 

Purchase of fixed assets

 

-

 

-

 

(2,752)

 

-

Increase (decrease) in cash during the period

  

(17,100)

  

(34,311)

  

(29,725)

  

926
                 

Cash, beginning of period

 

17,227

 

36,216

 

29,852

 

979

Cash, end of period

$

127

$

1,905

$

127

$

1,905

                 

Non-cash financing activities:

               

Common shares issued as full and final settlement of promissory notes


$


-


$


-


$


1,342,000


$


-

Common shares issued as full and final settlement of accounts payable and accrued liabilities

 


-

  


-

  


58,000

  


-

Financing cost of stock options irrevocably committed to be issued in consideration for promissory notes

 



-

  



-

  



1,052,897

  



261,365

Compensation cost of options irrevocably committed to be issued to non-employees for services

 



-

  



32,000

  



92,000

  



39,000

Financing cost of stock options irrevocably committed to be issued in consideration of accounts payable and accrued liabilities

 



-

  



-

  



496,000

  



-

Compensation cost related to the modification of stock option commitments to non- employees for services

 



-

  



-

  



315,000

  



-

Financing cost related to the modification of stock option and warrant commitment in consideration of promissory notes



 



-



 



-



 



708,000



 



-

 

$

-

$

32,000

$

4,063,897

300,365

 

See accompanying notes to interim financial statements

-5-

ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and nine month periods ended September 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. All 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 placements. 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, 2002. 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.

 

-6-

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

(a) Stock based compensation:

The Company applies APB Opinion No. 25 in accounting for its stock options issued to directors and employees. To September 30, 2004, all of the Company's options had been irrevocably committed to be issued to non-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 nine month periods ended September 30, 2004 and 2003 would have been the proforma amounts below:

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

Loss

                

As reported

$

(309,996)

$

(484,956)

$

(3,956,410)

$

(1,886,771)

Add: Employee stock based compensation, as recorded

 


-

 


-

  


-

  


-

Deduct: Employee stock based compensation, fair value method

 



-



 



-



 



-



 



-

Pro forma

$

(309,996)

$

(484,956)

$

(3,956,410)

$

(1,886,771)
                 

Loss per share, basic and diluted

               

As reported

$

(0.01)

$

(0.02)

$

(0.12)

$

(0.09)

Pro forma

$

(0.01)

$

(0.02)

$

(0.12)

$

(0.09)

3. Inventories

The Company's inventories consists solely of finished goods 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 September 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 September 30, 2004, management had recorded a provision of $160,000 (December 31, 2003 - $160,000) in respect of its Med Reminder inventory. Further information on this provision is included in the notes to the Company's December 31, 2003 financial statements

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.

 

-7-

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

4. Promissory notes payable

During the three month period ended September 30, 2004, the Company received $80,000 from two relatives of directors in exchange for promissory notes payable. The promissory notes bear interest at 7.5% per annum, are unsecured and are due on demand.

During the three month period ended September 30, 2004, the Company received $60,000 in exchange for a promissory note payable. The promissory note bears interest at 7.5% per annum,, is unsecured and is due on demand.

During the nine month period ended September 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 nine month period ended September 30, 2004 the Company received $70,000 in exchange for three promissory notes payable. The promissory notes bear interest at 1% per month, are unsecured and are 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)).

During the nine month period ended September 30, 2004, a promissory repayable in Canadian dollars to a director was increased by $2,971 due to unfavorable exchange rate changes.

5. Capital stock

a) Authorized common shares

As at September 30, 2004, the Company's issued common shares (41,078,446) plus common share issuance commitments related to outstanding stock options (75,701,463) exceeded the Company's authorized common shares of 75,000,000. On November 16, 2004 the Company's Board of Directors filed a Definitive Information Statement (the "Information Statement") pursuant to Section 14(c) of the Securities Exchange Act with the Securities and Exchange Commission and mailed the statement to the Company's shareholders. The Information Statement was filed and mailed in connection with the Board of Directors approval to amend the Company's Articles of Incorporation to increase its authorized capital to 350,000,000 shares of common stock with a par value of $0.0001 per share. The amendment will become effective on or about December 6, 2004, twenty-one days after the Information Statement was mailed. The amendment will become effective on or about December 6, 2004, twenty-one days after the information statement was mailed. The amendment is not subject to shareholder or regulatory approval. As the Board of Directors had the unrestricted ability to increase the authorized share capital to levels that would allow for the exercise of the committed option grants described in Note 5(b) below. Then options are considered to have been granted for accounting purposes.

 

-8-

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

5. Capital stock (continued)

b) Stock options:

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

2004

 

2003


 


Number of Shares

Weighted Average Exercise Price


Number of Shares

Weighted Average Exercise Price

         

Outstanding, beginning of period

35,259,000

$0.25

28,460,000

$0.25

Granted

40,442,463

0.25

2,485,000

0.25

Expired or cancelled

-

 

(100,000)

0.25

Outstanding, end of period

75,701,463

$0.25

30,845,000

$0.25

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

 

Options Outstanding

 


Exercise Price

Number of Options Outstanding

Contractual Lives Remaining

Number of Options Exercisable

       

$0.25

75,701,463

0.50 to 4.75

71,701,463

Unvested options at September 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 nine month period ended September 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.

During the nine month period ended September 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 of $0.25 for a period of five years. Financing, being the gross proceeds of the promissory notes allocated to options, based on the relative 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.

 

-9-

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

5. Capital stock (continued)

b) Stock options (continued):

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 $1,029,597, which 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 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 nine month period ended September 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 nine month period ended September 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 of $0.25 per share for a period of five years. Financing cost, 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 nine months ended September 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 on promissory note financings. 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.

6. Contingency

Accounts payable and accrued liabilities, as of September 30, 2004, includes $180,666 of amounts owing to a supplier, which the Company is in the process of disputing. 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.

 

-10-

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

7. Related party transaction

Related party transactions for the nine month period ended September 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


$

700,000

$

-

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

 

700,000

 

-

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


 


-

 

$

2,784,300

$

-

During the three months ending September 30, 2004, the Company issued 20,000,000 common shares to a director and a relative of a director in formal settlement of promissory notes payable and accounts payable and accrued liabilities of $1,000,000. The fair value of the common shares considered of $1,400,000 was determined based on the quoted market priced of the common shares at the issue date, resulting in a loss on debt settlement of $400,000. Common shares issued are restricted from sale for a period of one year from the issue date in accordance with securities regulations.

 

 

-11-

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

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

 

Three months ended September 30,

Nine months ended September 30,
 
 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

Loss

$

(309,996)

$

(484,956)

$

(3,956,410)

$

(1,886,771)

Adjustments to reconcile loss to net cash used in operating activities:

               

Depreciation

 

1,095

  

745

  

2,576

  

2,235

Amortization of discount related to options issued in consideration for promissory notes

 



-

  



68,730

  



16,597

  



547,342

Common shares issued as full and final settlement of outstanding accounts payable and accrued liabilities

 



-

 



-

 



58,000

  



-

Loss on settlement of debt

 

-

  

-

 

400,000

  

-

Compensation cost of options irrevocably committed to be issued for services

 



-

  



32,000

 



92,000

  



39,000

Financing of options irrevocably committed to be issued in consideration of promissory notes payable

 



-

  



-

 



1,052,897

  



-

Financing cost of options irrevocably committed to be issued in consideration of accounts payable and accrued liabilities

 




-

  




-

 




496,000

  




-

Compensation cost related to the modification of previous option commitments for services

 



-

  



-

 



315,000

  



-

Financing cost related to the modification of previous option and warrant commitments in consideration of promissory notes

 




-

  




-

 




708,000

  




-

Increase in promissory note payable to a director due to change in exchange rate

 



2,971

      



2,971

    

Increase (decrease) in accounts receivable

 


47,740

  


8,265

  


122,423

  


10,367

Decrease (increase) in inventories

 

(15,274)

  

3,504

  

6,066

  

(92,355)

(Increase) decrease in prepaid expenses

 


1,345

  


10,457

  


(10,000)

  


63,705

Increase in accounts payable and accrued liabilities

 


295,021

  


326,944

  


611,907

  


701,933

Increase (decrease) in customer deposits


 


(50,000)


 


-


 


-


 


-

Net cash used in operating activities

$

(27,100)

$

(34,311)

$

(81,973)

$

(614,544)

 

-12-

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 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.

Critical Accounting Policies

The preparation of our financial statements in conformity with generally accepted accounting principles 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 in note 1 to the interim financial statements, at September 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 promissory 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.

 

-13-

Inventories. Inventories are recorded at the lower of cost, determined on a weighted average cost basis, and net realizable value. Net realizable value reflects the current estimated net selling price or value in used of the item in inventory in a non-forced sale. The Company assesses the need for inventory write-downs based on its assessment of the estimated net realizable value using assumptions about future demand and market conditions. When the results of these assumptions differs from the Company's projections, an additional inventory write-down may be required.

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. Changes in assumptions about future stock prices and other criteria will impact the allocation of the consideration, including the amounts ultimately charged against income as interest expense.

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. Changes in sales terms could materially impact the extent and timing of revenue recognition.

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 have been 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.

Sales revenue increased to $68,786 in the quarter ended September 30, 2004 and $335,319 for the nine months ended September 30, 2004 from $8,064 in the third quarter of 2003 and $47,108 for the nine months ended September 30, 2003.

 

-14-

Development costs increased to $25,031 in the quarter ended September 30, 2004 and $149,736 for the nine months ended September 30, 2004 from $35,000 in the third quarter of 2003 and $97,438 for the nine months ended September 30, 2003. Development costs incurred in the third 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 nine months ended September 30, 2004 include $nil and $35,000 of non-cash compensation costs related to options issued for services in the period.

Interest expense decreased to $158,102 for the quarter ended September 30, 2004 and increased to $2,723,348 for the nine months ended September 30, 2004 as compared with $225,989 for the quarter ended September 30, 2003 and $1,002,158 for the nine months ended September 30, 2003. During the quarter ended and nine months ended September 30, 2004, Company incurred non-cash interest expense of $nil and 2,256,897, respectively. The non-cash interest consisted of the following; $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, and $708,000 was expensed relating to the modification of previous option and warrant commitments in consideration of promissory notes 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 $nil during the third quarter of 2004 and $16,597 for the nine months ended September 30, 2004 as compared to $68,730 and $547,342, 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.

Loss on settlement of debt

During the nine months ended September 30, 2004, the Company issued 20,000,000 common shares to a director and a relative of a director in formal settlement of promissory notes payable and accounts payable and accrued liabilities of $1,000,000. The fair value of the common shares issued of $1,400,000 was determined based on the quoted market priced of the common shares at the issue date, resulting in a loss on debt settlement of $400,000.

Professional fees were $10,545 for the quarter ended September 30, 2004 and $53,651 for the nine months ended September 30, 2004 as compared with $8,245 and $51,553 for the same periods in 2003. Fees were higher in the third quarter of 2004 primarily due to fees for accounting services obtained in the period.

The selling, general and administrative expenses were $140,684 for the quarter ended September 30, 2004 and $728,099 for the nine months ended September 30, 2004 as compared to $208,051 and $715,174 for the same periods in 2003. Included in selling, general and administrative expenses is $nil (three months) and $407,000 (nine months) related to options committed to be issued in exchange for services provided by non-employees as compared to $32,000 and $39,000 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 September 30, 2004.

The loss of $309,996 for the quarter ended September 30, 2004 and $3,956,410 for the nine months ended September 30, 2004 has increased from a loss of $484,956 and $1,886,771 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.

 

-15-

Liquidity and Capital Resources

Cash Balances and Working Capital

As of September 30, 2004, the Company's cash balance was $127 compared to $17,227 at June 30, 2004, $151,037 at March 31, 2004 and $29,852 as at December 31, 2003. As of September 30, 2004, the Company had a working Capital deficiency of $7,825,749 as compared to a working capital deficiency of $7,245,935 as of June 30, 2004, $7,930,795 as of March 31, 2004 and $7,662,148 as at December 31, 2003.

Short and Long Term Liquidity

As at September 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.

All 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 nine months ended September 30, 2004 totaled $27,100 and $81,973, respectively, as compared with cash used by operating activities of $34,311 and $614,544 for the same periods in 2003. The decrease 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

During nine months ended September 30, 2004, the Company received loans totaling $240,000, which consisted of $30,000 in the first quarter and additional $30,000 in the third quarter from a relative of a director, $50,000 in the third quarter from another relative of another director, $70,000 in the second quarter from two unrelated individuals and $60,000 in the third quarter from an unrelated individual. In addition, a total of 20,000,000 common shares were issued in the second quarter. 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 the Company's statement of operations during the second quarter and for the nine months ended September 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.

 

-16-

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.

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 ended 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.

On November 16, 2004 the Company's Board of Directors filed a Definitive Information Statement ("Information Statement") pursuant to Section 14(c) of the Securities Exchange Act with the Securities and Exchange Commission and mailed the statement to the Company's shareholders. The Information Statement was filed and mailed in connection with the Board of Directors approval to amend the Company's Articles of Incorporation to increase its authorized capital to 350,000,000 shares of common stock with a par value of $0.0001 per share. The amendment will become effective on or about December 6, 2004, twenty-one days after the Information Statement was mailed. The amendment is not subject to shareholder or regulatory approval. As the Board of Directors had the unrestricted ability to increase the authorized share capital to levels that would allow for the exercise of the committed option grants described in Note 5(b) below. Then options are considered to have been granted for accounting purposes.

Item 3. Defaults upon senior securities

There were no defaults upon senior securities in the quarter. However there are liabilities totaling $5,176,883 for outstanding promissory notes that are due on demand or are due prior to September 30, 2005. The promissory note holders have not demanded payment as of the date of this report.

 

-17-

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

Item 6. Exhibits and Reports on Form 8K

(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 September 30, 2004.

 

 

 

 

 

 

 

 

-18-

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 1st day of December, 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 CruittPresident and a Member of the Board of Directors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-19-