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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10QSB
|
[ x ] |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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|
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 |
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OR |
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|
[ ] |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the transition period from to |
COMMISSION FILE NUMBER 0-30414
ALR TECHNOLOGIES INC.
|
NEVADA |
88-0225807 |
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 27, 2005: 76,078,446
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PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
ALR TECHNOLOGIES INC.
Balance Sheets
($ United States)
March 31, 2005 and December 31, 2004
| |
2005 |
|
2004 |
|||
|
Assets |
||||||
|
Current assets: |
||||||
|
Cash |
$ |
8,210 |
$ |
16,632 |
||
|
Accounts receivable, net of allowance of $1,025 (Dec. 31, 2004 - $1,522) |
12,129 |
|
12,377 |
|||
|
Inventories (note 3) |
77,629 |
|
79,169 |
|||
|
Prepaid expenses and deposits |
|
15,330 |
|
|
-- |
|
|
|
113,298 |
|
108,178 |
|||
|
|
||||||
|
Fixed assets, net of accumulated depreciation |
|
9,465 |
|
|
9,930 |
|
|
|
$ |
122,763 |
|
$ |
118,108 |
|
|
Liabilities and Shareholders' Deficiency |
|
|
||||
|
Current liabilities: |
||||||
|
Accounts payable and accrued liabilities |
$ |
1,865,883 |
$ |
2,835,419 |
||
|
Customer deposits |
40,362 |
65,455 |
||||
|
Promissory notes payable to relatives of directors (note 4) |
2,520,000 |
2,320,000 |
||||
|
Promissory notes payable to directors |
124,835 |
175,457 |
||||
|
Promissory notes payable |
|
2,307,412 |
|
|
2,887,412 |
|
|
|
6,858,492 |
|
8,283,743 |
|||
|
|
||||||
|
Shareholders' deficiency |
||||||
|
Capital stock (note 5) |
||||||
|
350,000,000 common shares with a par value of $0.001 |
||||||
|
per share authorized, 76,078,446 issued |
||||||
|
(December 31, 2004 B 41,078,446) |
76,078 |
41,078 |
||||
|
Additional paid-in capital |
11,592,023 |
|
9,569,732 |
|||
|
Deficit |
(18,440,994) |
|
(17,813,609) |
|||
|
Accumulated other comprehensive income: |
||||||
|
Cumulative translation adjustment |
|
37,164 |
|
|
37,164 |
|
|
|
(6,735,729) |
|
(8,165,635) |
|||
|
Basics of presentation (note 1) |
||||||
|
Commitments (note 5) |
||||||
|
Related party transactions (note 5 and 7) |
||||||
|
Contingency (note 6) |
|
|
|
|
|
|
| |
$ |
122,763 |
|
$ |
118,108 |
|
See accompanying notes to interim financial statements
-2-
ALR TECHNOLOGIES INC.
Interim Statements of Loss and Deficit
($ United States)
Three month period ended March 31, 2005 and 2004
(Unaudited)
| |
|
2005 |
|
2004 |
|||
|
Sales |
$ |
48,549 |
$ |
206,534 |
|||
|
Cost of sales |
|
|
12,124 |
|
|
153,308 |
|
|
36,425 |
53,226 |
||||||
|
Expenses: |
|||||||
|
Depreciation |
693 |
540 |
|||||
|
Development costs |
105,853 |
48,175 |
|||||
|
Foreign exchange loss (gain) |
(167) |
B |
|||||
|
Interest |
306,282 |
174,926 |
|||||
|
Professional fees |
33,706 |
16,826 |
|||||
|
Rent |
5,960 |
2,310 |
|||||
|
Selling, general and administrative |
|
|
211,483 |
|
|
95,936 |
|
| |
|
|
|
663,810 |
|
|
338,713 |
|
Loss and comprehensive loss |
(627,385) |
(285,487) |
|||||
|
Deficit, beginning of period |
|
|
(17,813,609) |
|
|
(13,474,927) |
|
|
Deficit, end of period |
|
$ |
(18,440,994) |
|
$ |
(13,760,414) |
|
|
Loss per share, basic and diluted |
(0.01) |
(0.01) |
|||||
|
Weighted average shares outstanding, basic |
|||||||
|
and diluted |
|
|
57,411,779 |
|
|
21,078,446 |
|
See accompanying notes to interim financial statements
-3-
ALR TECHNOLOGIES INC.
Interim Statement of Shareholders' Deficiency and Comprehensive Loss
($ United States)
Three month period ended March 31, 2005
(Unaudited)
|
|
Capital Stock |
|
|
|
||
|
|
Number of |
Amount |
Additional |
Deficit |
Accumulated |
Total |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
41,078,446 |
$ 41,078 |
$ 9,569,732 |
$(17,813,609) |
$ 37,164 |
$(8,165,635) |
|
|
|
|
|
|
|
|
|
Common shares issued as full and final settlement of promissory note payable to a director, at fair value |
1,000,000 |
1,000 |
49,000 |
-- |
-- |
50,000 |
|
|
|
|
|
|
|
|
|
Common shares issued as full and final settlement of promissory notes payable, at fair value |
11,600,000 |
11,600 |
568,400 |
-- |
-- |
580,000 |
|
|
|
|
|
|
|
|
|
Common shares issued as full and final settlement of accounts payable and accrued liabilities to directors and an officer, at fair value |
3,400,000 |
3,400 |
166,600 |
-- |
-- |
170,000 |
|
|
|
|
|
|
|
|
|
Common shares issued as full and final settlement of accounts payable and accrued liabilities to relatives of directors, at fair value |
18,500,000 |
18,500 |
906,500 |
-- |
-- |
925,000 |
|
|
|
|
|
|
|
|
|
Common shares issued as full and final settlement of accounts payable and accrued liabilities, at fair value |
500,000 |
500 |
24,500 |
-- |
-- |
25,000 |
|
|
|
|
|
|
|
|
|
Financing cost of stock options irrevocably committed to be issued in consideration of promissory notes payable (note 5 (b)) |
-- |
-- |
33,000 |
-- |
-- |
33,000 |
|
|
|
|
|
|
|
|
|
Compensation cost of stock options irrevocably committed to be used to non-employees for services (note 5 (b)) |
-- |
-- |
103,125 |
-- |
-- |
103,125 |
|
|
|
|
|
|
|
|
|
Financing cost of stock options irrevocably committed to be issued to a director in consideration of extension of repayment terms of promissory notes payable (note 5 (b)) |
-- |
-- |
86,876 |
-- |
-- |
86,876 |
|
|
|
|
|
|
|
|
|
Financing cost of stock options irrevocably committed to be issued in consideration of extension of repayment terms of promissory notes payable (note 5 (b)) |
-- |
-- |
50,617 |
-- |
-- |
50,617 |
|
|
|
|
|
|
|
|
|
Compensation cost on the vesting of stock options irrevocably committed to non-employees for achievement of performance commitments (note 5 (b)) |
-- |
-- |
33,673 |
-- |
-- |
33,673 |
|
|
|
|
|
|
|
|
|
Loss and comprehensive loss |
|
|
|
(627,385) |
(627,385) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,078,446 |
$76,078 |
$11,592,023 |
$ (18,440,994) |
$ 37,164 |
$ (6,735,729) |
See accompanying notes to interim financial statements
-4-
ALR TECHNOLOGIES INC.
Interim Statements of Cash Flows
($ United States)
Three month periods ended March 31, 2005 and 2004
(Unaudited)
| |
2005 |
2004 |
|||
|
Cash flows from operating activities (note 8): |
|||||
|
Cash received from customers |
$ |
23,704 |
$ |
377,541 |
|
|
Cash paid to suppliers and employees |
(74,907) |
(200,535) |
|||
|
Interest paid |
(156,991) |
(55,821) |
|||
|
Income taxes paid |
|
-- |
|
-- |
|
|
Net cash used in operating activities |
(208,194) |
|
121,185 |
||
|
Cash flows from financing activities: |
|||||
|
Promissory notes payable |
200,000 |
|
30,000 |
||
|
Repayment of promissory notes payable |
-- |
|
(30,000) |
||
|
Net cash provided by financing activities |
200,000 |
-- |
|||
|
Cash flows from investing activities: |
|||||
|
Purchase of fixed assets |
(228) |
|
-- |
||
|
Increase (decrease) in cash |
(8,422) |
121,185 |
|||
|
Cash, beginning of period |
|
16,632 |
|
29,852 |
|
|
Cash, end of period |
$ |
8,210 |
$ |
151,037 |
|
|
Non-cash financing activities: |
|||||
|
Common shares issued as full and final settlement of promissory notes payable to a director |
$ |
50,000 |
$ |
-- |
|
|
Common shares issued as full and final settlement of promissory notes payable |
580,000 |
-- |
|||
|
Common shares issued as full and final settlement of accounts payable and accrued liabilities payable to directors and an officer |
170,000 |
-- |
|||
|
Common shares issued as full and final settlement of accounts payable and accrued liabilities payable to relatives of directors |
925,000 |
-- |
|||
|
Common shares issued as full and final settlement of accounts and accrued liabilities |
25,000 |
-- |
|||
|
Financing cost of stock options irrevocably committed to be issued in consideration for promissory notes payable |
33,000 |
|
-- |
||
|
Compensation cost of options irrevocably committed to be issued to non-employees for services or on the vesting of options issued to non-employees on the achievement of performance commitments |
136,798 |
10,000 |
|||
|
Financing cost of stock options irrevocably committed to be issued in consideration for extension of repayment terms of promissory notes payable |
137,493 |
-- |
|||
|
Amortization of discount related to options issued in consideration for promissory notes |
|
-- |
|
16,257 |
|
| |
$ |
2,057,291 |
$ |
26,257 |
|
See accompanying notes to interim financial statements
-5-
ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month periods ended March 31, 2005 and 2004
(Unaudited)
1. Basis of presentation
These financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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, 2004. 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 periods ended March 31, 2005 and 2004
(Unaudited)
(a) Stock based compensation:
The Company applies APB Opinion No. 25 in accounting for its stock options issued to directors and employees. To March 31, 2005, 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 periods ended March 31, 2005 and 2004 would have been the proforma amounts below:
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Loss |
|
|
|
|
|
|
|
|
|
As reported |
|
|
|
|
$ |
(627,385) |
$ |
(285,487) |
|
Add: Employee stock based compensation, as recorded |
|
|
|
|
|
-- |
|
-- |
|
Deduct: Employee stock based compensation, fair value method |
|
|
|
|
|
-- |
|
-- |
|
Pro forma |
|
|
|
|
$ |
(627,385) |
$ |
(285,487) |
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic and diluted |
|
|
|
|
|
|
|
|
|
As reported |
|
|
|
|
$ |
(0.01) |
$ |
(0.01) |
|
Pro forma |
|
|
|
|
$ |
(0.01) |
$ |
(0.01) |
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 March 31, 2005 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 March 31, 2005, management had recorded a provision of $180,275 (December 31, 2004 - $180,275) in respect of its Med Reminder inventory. Further information on this provision is included in the notes to the Company's December 31, 2004 financial statements
The alternate use of this inventory is limited and, accordingly, if management is not successful in its plans, they may be required to further write-down its investment in inventories in the near term. The outcome of this matter cannot be predicted at this time.
-7-
ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month periods ended March 31, 2005 and 2004
(Unaudited)
4. Promissory notes payable
During the three month period ended March 31, 2005, the Company received $200,000 from a relative of a director in exchange for promissory notes payable. The promissory note is due on demand, bears interest at 1% per month and is secured under a general security agreement. As further consideration, 800,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share until January 7, 2010, were irrevocably committed to be issued (see note 5(b)).
During the three month period ended March 31, 2005, a promissory repayable in Canadian dollars to a director was reduced by $622 due to favorable exchange rate changes.
5. Capital stock
a) Authorized common shares
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 $0.0001 per share. The amendment became effective on January 6, 2005. As the Board of Directors had the unrestricted ability to increase the authorized share capital to levels that would allow for the exercise of the committed option grants described in Note 5(b) below. These options are considered to have been granted for accounting purposes.
-8-
ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month periods ended March 31, 2005 and 2004
(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:
|
|
|
March 31, 2005 |
|
December 31, 2004 |
|
|
Number of Shares |
Weighted Average Exercise Price |
Number of Shares |
Weighted Average Exercise Price |
|
|
|
|
|
|
|
Outstanding, beginning of period |
76,541,463 |
$0.25 |
35,259,000 |
$0.25 |
|
Granted |
5,500,000 |
0.25 |
220,000 |
0.25 |
|
Expired or cancelled |
-- |
|
-- |
-- |
|
Outstanding, end of period |
82,041,463 |
$0.25 |
35,479,000 |
$0.25 |
The number of options outstanding and exercisable and the remaining contractual lives (in years) of the options at March 31, 2005 were as follows:
|
|
Options Outstanding |
|
|
|
Exercise Price |
Number of Options Outstanding |
Contractual Lives Remaining |
Number of Options Exercisable |
|
|
|
|
|
|
$0.25 |
82,041,463 |
0.01 to 4.96 |
78,541,463 |
Unvested options at March 31, 2005 consist of 3,500,000 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 quarter ended March 31, 2005, 500,000 options were vested on the achievement of certain performance targets. The compensation cost related to these options, being the fair value of the options, has been estimated to be $33,673 which has been charged to selling, general and administrative expense. The weighted average per share fair value of the options irrevocably committed to be issued in the period was $0.07. 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 220%, a risk free rate of 4.18% and no assumed dividend rate.
During the three month period ended March 31, 2005, the Company irrevocably committed to grant 1,875,000 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 from the commitment date. The compensation cost related to these options, being the fair value of the options, has been estimated to be $103,125, of which $41,070 has been charged to product development expense and $62,055 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 $0.06. The fair value of the options was determined using the Black Scholes option pricing model, using the expected life of the options, a volatility factor of 221%, a risk free rate of 3.86% and no assumed dividend rate.
-9-
ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month periods ended March 31, 2005 and 2004
(Unaudited)
5. Capital stock (continued)
b) Stock options (continued):
During the three month period ended March 31, 2005, the Company irrevocably committed to grant 800,000 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 from the commitment date. Financing cost related to these options, 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 $33,000 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 $0.05. 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 221%, a risk free rate of 3.73% and no assumed dividend rate.
Also, in consideration of the extension of repayment terms of promissory note proceeds received previously, the Company irrevocably committed to grant 2,825,000 options of which 1,785,000 options were granted to a director and 1,040,000 options were issued to other non-related parties. 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 from the commitment date. Financing cost related to these options, being the fair value of the options, has been estimated to be $137,493, 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 $0.05. The value was determined using the Black Scholes option pricing model, using the expected life of the options, a volatility factor of 221%, a risk free rate of 3.73% and no assumed dividend rate.
c) Shares issued in settlement of liabilities:
During the three months ended March 31, 2005, the Company issued 22,900,000 common shares to related parties (note 7) and 12,100,000 common shares to other then related parties in settlement of accounts payable and accrued liabilities and promissory notes payable. These shares have been recorded at their estimated fair value at the date of settlement of $0.05 per share. Common shares issued are restricted from sale for a period of one year from the issue date in accordance with securities regulations.
6. Contingency
Accounts payable and accrued liabilities, as of March 31, 2005, 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 month periods ended March 31, 2005 and 2004
(Unaudited)
7. Related party transaction
Related party transactions for the three month period ended March 31, 2005, included the following:
|
|
2005 |
2004 |
||
|
1,000,000 common shares issued to a director for full and final settlement of outstanding promissory notes payable |
$ |
50,000 |
$ |
-- |
|
|
|
|
|
|
|
3,400,000 common shares issued to directors and an officer for full and final settlement of outstanding accounts payable and accrued liabilities |
|
170,000 |
|
-- |
|
|
|
|
|
|
|
18,500,000 common shares issued to relatives of directors for full and final settlement of outstanding accounts payable and accrued liabilities |
|
925,000 |
|
-- |
|
|
|
|
|
|
|
Financing cost related to options irrevocably committed to be issued to a relative of directors in consideration of promissory notes payable |
|
33,000 |
|
-- |
|
|
|
|
|
|
|
Financing cost related to options irrevocably committed to be issued to director in consideration of extension of repayment terms of a promissory note payable |
|
86,876 |
|
-- |
|
|
$ |
1,264,876 |
$ |
-- |
During the three month March 31, 2005, the Company issued a total of 22,900,000 common shares to directors, officer and relatives of directors in formal settlement of promissory notes payable, accounts payable and accrued liabilities of $1,145,000. These shares have been recorded at their estimated fair value at the date of settlement of $0.05 per share. Common shares issued are restricted from sale for a period of one year from the issue date in accordance with securities regulations.
-11-
ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month periods ended March 31, 2005 and 2004
(Unaudited)
8. Reconciliation of loss to net cash used in operating activities
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Loss |
$ |
(627,385) |
$ |
(285,487) |
|
Adjustments to reconcile loss to net cash used in operating activities: |
|
|
|
|
|
Depreciation |
|
693 |
|
540 |
|
Amortization of discount related to options issued in consideration for promissory notes |
|
- |
|
16,257 |
|
Foreign exchange gain on promissory note payable to a director |
|
(622) |
|
-- |
|
Compensation cost of options irrevocably committed to be issued for services |
|
136,798 |
|
10,000 |
|
Financing of options irrevocably committed to be issued in consideration of promissory notes payable |
|
33,000 |
|
-- |
|
Financing cost of options irrevocably committed to be issued in consideration of extension of repayment terms of promissory notes payable |
|
137,493 |
|
-- |
|
Decrease in accounts receivable |
|
248 |
|
122,607 |
|
(Increase) decrease in inventories |
|
1,540 |
|
2,471 |
|
Increase in prepaid expenses and deposits |
|
(15,330) |
|
(7,020) |
|
Increase in accounts payable and accrued liabilities |
|
150,464 |
|
211,817 |
|
Increase (decrease) in customer deposits |
|
(25,093) |
|
50,000 |
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
$ |
(208,194) |
$ |
121,185 |
-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, 2004. 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 U.S. generally accepted accounting principles 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 March 31, 2005, 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.
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.
-13-
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.
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 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 decreased to $48,549 in the quarter ended March 31, 2005 from $206,534 in the first quarter of 2004. The major reason for the decrease was lack of large customer sales during the quarter.
Development costs increased to $105,853 in the quarter ended March 31, 2005 from $48,175 in the first quarter of 2004. Development costs incurred in the first quarter of 2005 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 ended March 31, 2005 include $41,070 of non-cash stock-based compensation costs related to options issued for services in the period.
-14-
Interest expense increased to $306,282 - for the quarter ended March 31, 2005 as compared with $174,926 for the quarter ended March 31, 2004. During the quarter ended March 31, 2005, the Company incurred non-cash interest expense of $170,493 in comparison with $16,257 during the first quarter of 2004. The non-cash interest consisted of $33,000 for options irrevocably committed to be issued in consideration for promissory notes payable and $137,493 for options irrevocably committed to be issued in consideration for extension of repayment terms of promissory notes payable. The overall increase in interest expense is the result of the Company's increased reliance on debt financing and cost to obtain extensions on debt obligations.
Professional fees were $33,706 - for the quarter ended March 31, 2005 as compared with $16,826 for the same period in 2004. Fees were higher in the first quarter of 2005 primarily due to fees for accounting services obtained in the period.
Selling, general and administrative expenses were $211,483 for the quarter ended March 31, 2005 as compared to $95,936 in 2004. Included in selling, general and administrative expenses is $95,728 - related to options committed to be issued in exchange for services provided by non-employees as compared to no such expenses over the same periods in 2004.
The loss of $627,385 for the quarter ended March 31, 2005 has increased from a loss of $285,487 for the same period in 2004, largely 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 March 31, 2005, the Company's cash balance was $8,210 compared to $16,632 as at December 31, 2004. As of March 31, 2005, the Company had a working capital deficiency of $6,745,194 - as compared to a working capital deficiency of $8,175,565 as at December 31, 2004.
Short and Long Term Liquidity
As at March 31, 2005, 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 totaled $208,194 - as compared with cash generated by operating activities of $121,185 - for the same period in 2004. The increase in cash used in operations relates primarily to an increase in cash amounts paid for interest owing to promissory note payable holders.
-15-
Cash Proceeds from Financing Activities
During three months ended March 31, 2005, the Company received a loan of $200,000 from a relative of a director. In addition, a total of 35,000,000 common shares were issued in the first quarter.
500,000 restricted common stocks were issued to Sidney Chan, the Company's CEO, in consideration of his forgiveness of interest payable of $25,000.
|
- |
2,220,000 restricted of common stock were issued to Stanley Cruitt, the Company's president, in consideration of his forgiveness of promissory notes in the amount of $50,000 and accounts payable in the amount of $61,000. |
|
- |
500,000 restricted common stocks were issued to a company controlled by Jarek Tichy, the Company's Chief Scientific Officer, in consideration of his forgiveness of accounts payable in the amount of $25,000. |
|
- |
17,950,000 restricted common stocks were issued to relatives of a director in consideration of their forgiveness of interest payable in the amount of $897,500. |
|
- |
550,000 and 1,180,000 restricted common stocks were issued to two private companies separately controlled by two directors and their relatives in consideration of its forgiveness of accounts payable in the amount of $27,500 and $59,000, respectively. |
|
- |
11,600,000 restricted common stocks were issued to four promissory note payable holders in consideration of their forgiveness of promissory note payable totaling $580,000. |
|
- |
500,000 restricted common stocks were issued to two consultants in consideration of their forgiveness of accounts payable in the amount of $25,000. |
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.
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.
-16-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no legal proceedings in the quarter.
ITEM 2. CHANGES IN SECURITIES
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 $0.001 per share. The amendment became effective on January 6, 2005. 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, the options are considered to have been granted for accounting purposes.
A total of 35,000,000 common shares were issued in the quarter ended March 31, 2005.
500,000 restricted common stocks were issued to Sidney Chan, the Company's CEO, in consideration of his forgiveness of interest payable of $25,000.
|
- |
2,220,000 restricted of common stock were issued to Stanley Cruitt, the Company's president, in consideration of his forgiveness of promissory notes in the amount of $50,000 and accounts payable in the amount of $61,000. |
|
- |
500,000 restricted common stocks were issued to a company controlled by Jarek Tichy, the Company's Chief Scientific Officer, in consideration of his forgiveness of accounts payable in the amount of $25,000. |
|
- |
17,950,000 restricted common stocks were issued to relatives of a director in consideration of their forgiveness of interest payable in the amount of $897,500. |
|
- |
550,000 and 1,180,000 restricted common stocks were issued to two private companies separately controlled by two directors and their relatives in consideration of its forgiveness of accounts payable in the amount of $27,500 and $59,000, respectively. |
|
- |
11,600,000 restricted common stocks were issued to four promissory note payable holders in consideration of their forgiveness of promissory note payable totaling $580,000. |
|
- |
500,000 restricted common stocks were issued to two consultants in consideration of their forgiveness of accounts payable in the amount of $25,000. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities in the quarter. However there are liabilities totaling $4,952,247 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.
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
-17-
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 a Form 8K during the three month period ended March 31, 2005.
-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 27th day of May, 2005.
|
ALR TECHNOLOGIES INC. |
||
|
BY:/s/ Sidney Chan |
||
|
Sidney Chan |
||
|
|
||
|
Stanley Cruitt |
||
-19-