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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
|
[X] |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 |
|
|
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.
|
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 25, 2005: 76,078,446
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PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
ALR TECHNOLOGIES INC.
Interim Balance Sheets
($ United States)
June 30, 2005 and December 31, 2004
|
|
2005 |
|
|
|
|
|
(Unaudited) |
|
2004 |
|
|
Assets |
|
|
|
|
|
Current assets: |
||||
|
Cash |
$ |
937 |
$ |
16,632 |
|
Accounts receivable, net of allowance of $225 (Dec. 31, 2004 - $1,522) |
207,405 |
12,377 |
||
|
Inventories (note 3) |
78,410 |
79,169 |
||
|
Prepaid expenses and deposits |
|
22,000 |
|
- |
|
|
308,752 |
108,178 |
||
|
Fixed assets, net of accumulated depreciation |
|
10,042 |
|
9,930 |
|
|
$ |
318,794 |
$ |
118,108 |
|
Liabilities and Shareholders' Deficiency |
|
|
|
|
|
Current liabilities: |
||||
|
Accounts payable and accrued liabilities |
$ |
1,927,452 |
$ |
2,835,419 |
|
Customer deposits |
- |
65,455 |
||
|
Promissory notes payable to relatives of directors (note 4) |
2,670,000 |
2,320,000 |
||
|
Promissory notes payable to directors (note 4) |
123,205 |
175,457 |
||
|
Promissory notes payable (note 4) |
|
2,457,412 |
|
2,887,412 |
|
|
|
7,178,069 |
|
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 - 41,078,446) |
76,078 |
41,078 |
||
|
Additional paid-in capital |
11,636,308 |
9,569,732 |
||
|
Deficit |
(18,608,825) |
(17,813,609) |
||
|
Accumulated other comprehensive income: |
37,164 |
37,164 |
||
|
|
|
(6,859,275) |
|
(8,165,635) |
|
Basics of presentation (note 1) |
||||
|
Commitments (note 5) |
||||
|
Related party transactions (notes 4, 5 and 7) |
||||
|
Contingency (note 6) |
||||
| |
|
|
|
|
|
|
$ |
318,794 |
$ |
118,108 |
See accompanying notes to interim financial statements
-2-
ALR TECHNOLOGIES INC.
Interim Statement of Loss and Deficit
($ United States)
Three month and six month periods ended June 30, 2005 and 2004
(Unaudited)
|
Three Months Ended |
Six Months Ended |
|||
|
June 30, |
June 30, |
|||
| |
2005 |
2004 |
2005 |
2004 |
|
Sales |
253,387 |
59,999 |
301,936 |
266,533 |
|
Cost of sales |
54,916 |
21,147 |
67,040 |
174,455 |
| |
198,471 |
38,852 |
234,896 |
92,078 |
|
Expenses |
||||
|
Depreciation |
796 |
941 |
1,489 |
1,481 |
|
Development costs |
47,161 |
76,530 |
153,014 |
124,705 |
|
Foreign exchange loss (gain) |
(2,615) |
- |
(2,782) |
- |
|
Interest |
181,544 |
2,390,320 |
487,826 |
2,565,246 |
|
Loss on settlement of debt |
- |
400,000 |
- |
400,000 |
|
Professional fees |
38,959 |
26,280 |
72,665 |
43,106 |
|
Rent |
10,483 |
14,229 |
16,443 |
16,539 |
|
Selling, general and administration |
89,974 |
491,479 |
301,457 |
587,415 |
| |
366,302 |
3,399,779 |
1,030,112 |
3,738,492 |
|
Loss and comprehensive loss |
(167,831) |
(3,360,927) |
(795,216) |
(3,646,414) |
|
Deficit, beginning of period |
(18,440,994) |
(13,760,414) |
(17,813,609) |
(13,474,927) |
|
Deficit, end of period |
$(18,608,825) |
$(17,121,341) |
$(18,608,825) |
$(17,121,341) |
|
|
|
|
|
|
|
Loss per share, basic and diluted |
- |
(0.09) |
(0.01) |
(0.13) |
|
|
|
|
|
|
|
Weighted average shares outstanding, |
||||
|
- basic and diluted |
76,078,446 |
36,902,662 |
66,796,678 |
28,990,534 |
See accompanying notes to interim financial statements
-3-
ALR TECHNOLOGIES INC.
Interim Statement of Shareholders' Deficiency and Comprehensive Loss
($ United States)
Six month period ended June 30, 2005
(Unaudited)
|
Capital Stock |
||||||
|
Accumulated |
||||||
|
Additional |
Other |
Total |
||||
|
Number of |
Paid in |
Comprehensive |
Shareholders' |
|||
| |
Shares |
Amount |
Capital |
Deficit |
Income |
Deficiency |
|
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 |
1,000,000 |
1,000 |
49,000 |
- |
- |
50,000 |
|
- non-related parties |
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 |
3,400,000 |
3,400 |
166,600 |
- |
- |
170,000 |
|
- relatives of directors |
18,500,000 |
18,500 |
906,500 |
- |
- |
925,000 |
|
- non-related parties |
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)) to: |
||||||
|
-relatives of a director |
- |
- |
51,033 |
- |
- |
51,033 |
|
-non-related parties |
- |
- |
26,252 |
- |
- |
26,252 |
|
Compensation cost of stock |
||||||
|
options irrevocably |
||||||
|
committed to be used to non- |
||||||
|
employees for services (note |
||||||
|
5(b)) |
- |
- |
136,798 |
- |
- |
136,798 |
|
Financing cost of stock |
||||||
|
options irrevocably |
||||||
|
committed to be issued in |
||||||
|
consideration of extension of |
||||||
|
repayment terms of |
||||||
|
promissory notes payable |
||||||
|
(note 5(b)) to: |
||||||
|
- a director |
- |
- |
86,876 |
- |
- |
86,876 |
|
- non-related parties |
- |
- |
50,617 |
- |
- |
50,617 |
|
Loss and comprehensive loss |
- |
- |
- |
(795,216) |
- |
(795,216) |
| |
76,078,446 |
$76,078 |
$11,636,308 |
$(18,608,825) |
37,164 |
$(6,859,275) |
See accompanying notes to financial statements
-4-
ALR TECHNOLOGIES INC.
Interim Statement of Cash Flows
($ United States)
Three month and six month periods ended June 30, 2005
(Unaudited)
|
|
Three Months Ended |
Six Months Ended |
||
|
June 30, |
June 30, |
|||
| |
2005 |
2004 |
2005 |
2004 |
|
Cash flows from operating activities (note 8): |
|
|
|
|
|
Cash received from customers |
17,749 |
12,075 |
41,453 |
389,616 |
|
Cash paid to suppliers and employees |
(276,076) |
(96,393) |
(350,983) |
(296,928) |
|
Interest paid |
(47,573) |
(91,741) |
(204,564) |
(147,562) |
|
Income taxes paid |
- |
- |
- |
- |
|
Net cash used in operating activities |
(305,900) |
(176,059) |
(514,094) |
(54,874) |
|
Cash flows from financing activities: |
||||
|
Promissory notes payable |
300,000 |
70,000 |
500,000 |
100,000 |
|
Repayment of promissory notes payable |
- |
(25,000) |
- |
(55,000) |
|
|
300,000 |
45,000 |
500,000 |
45,000 |
|
Cash flows from investing activities: |
||||
|
Purchase of fixed assets |
(1,373) |
(2,751) |
(1,601) |
(2,751) |
|
Increase (decrease) in cash during the period |
(7,273) |
(133,810) |
(15,695) |
(12,625) |
|
Cash, beginning of period |
8,210 |
151,037 |
16,632 |
29,852 |
|
Cash, end of period |
937 |
$ 17,227 |
937 |
17,227 |
|
|
|
|
|
|
|
Non-cash financing activities: |
||||
|
Common shares issued as full and final settlement of promissory |
||||
|
notes payable to: |
||||
|
- director and officer |
- |
- |
50,000 |
- |
|
- relatives of directors |
- |
1,342,000 |
- |
1,342,000 |
|
Common shares issued as full and final settlement of promissory |
||||
|
notes |
- |
- |
580,000 |
- |
|
Common shares issued as full and final settlement of accounts payable |
||||
|
and accrued liabilities payable to: |
||||
|
- director and officer |
- |
58,000 |
170,000 |
58,000 |
|
- relatives of directors |
- |
- |
925,000 |
- |
|
Common shares issued as full and final settlement of accounts |
||||
|
payable and accrued liabilities |
- |
- |
25,000 |
- |
|
Financing cost of stock options irrevocably committed to be issued in |
||||
|
consideration for promissory notes payable |
44,285 |
1,046,597 |
77,285 |
1,052,897 |
|
Compensation cost of stock options irrevocably committed to be issued |
||||
|
to non-employees for services |
- |
82,000 |
136,798 |
92,000 |
|
Financing cost of stock options irrevocably committed to be issued in |
||||
|
consideration of extended loan repayment terms |
- |
- |
137,493 |
- |
|
Financing cost of stock options irrevocably committed to be issued |
||||
|
in consideration of accounts payable and accrued liabilities |
- |
496,000 |
- |
496,000 |
|
Compensation cost of stock options related to the modification of |
||||
|
previous stock option commitments to non-employees for services |
- |
315,000 |
- |
315,000 |
|
Financing cost related to the modification of previous stock option |
||||
|
and warrant commitments in consideration of promissory notes payable |
- |
708,000 |
- |
708,000 |
|
|
44,285 |
$4,047,597 |
$ 2,101,576 |
$ 4,063,897 |
See accompanying notes to interim financial statements
-5-
ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and six month periods ended June 30, 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 and six month periods ended June 30, 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 June 30, 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 and six month periods ended June 30, 2005 and 2004 would have been the pro forma amounts below:
|
Three months ended |
Six months ended |
|||
|
June 30, |
June 30, |
|||
|
2005 |
2004 |
2005 |
2004 |
|
|
Loss |
||||
|
As reported |
$ (167,831) |
$ (3,360,927) |
$ (795,216) |
$ (3,646,414) |
|
Add: |
||||
|
Employee stock based compensation, |
||||
|
as recorded |
- |
- |
- |
- |
|
Deduct: |
||||
|
Employee stock based compensation, |
||||
|
fair value method |
- |
- |
- |
- |
|
Pro forma |
$ (167,831) |
$ (3,360,927) |
$ (795,216) |
$ (3,646,414) |
|
Loss per share, basic and diluted |
||||
|
As reported |
(0.00) |
(0.09) |
(0.01) |
(0.13) |
|
Pro forma |
(0.00) |
(0.09) |
(0.01) |
(0.13) |
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 disease management companies, home care companies, pharmaceutical manufacturers, health management organizations, pharmacy benefits managers and certain clinics treating specific disease conditions. Sales to June 30, 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 international markets. As of June 30, 2005, management had recorded a provision of $180,275 (December 31, 2004 - $180,275) in respect of its Med Reminder inventory. Further information on this provision is included in the notes to the Company's December 31, 2004 financial statements.
The alternate use of this inventory is limited and, accordingly, if management is not successful in its plans, further write-downs to its investment in inventories may be required in the near term. The outcome of this matter cannot be predicted at this time.
-7-
ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements($ United States)
Three month and six month periods ended June 30, 2005 and 2004
(Unaudited)
4. Promissory notes payable
During the six month period ended June 30, 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 1.0% 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 six month period ended June 30, 2005, the Company received $100,000 from two relatives of a director in exchange for promissory notes payable. The promissory notes bear interest at 1% per month, are unsecured and due on demand. As further consideration, 400,000 options exercisable into common shares at the Company at an exercise price of $0.25 per share until June 15, 2010, were irrevocably committed to be issued (see note 5(b)).
During the six month period ended June 30, 2005, the Company received $100,000 in exchange for a promissory note payable. The promissory note bears interest at 1% per month, is unsecured and is due on demand. As further consideration, 400,000 options exercisable into common shares at the Company at an exercise price of $0.25 per share are until April 13, 2010, were irrevocably committed to be issued (see note 5(b)).
During the six month period ended June 30, 2005, the Company received $50,000 each from a relative of a director and an unrelated third party in exchange for promissory notes payable. The promissory notes bear interest at 1% per month, are unsecured and are due on demand. As further consideration for the promissory note payable to the unrelated third party, 200,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share until December 1, 2009 were irrevocably committed to be issued (see note 5(b))
During the six month period ended June 30, 2005, a promissory repayable in Canadian dollars to a director was decreased by $2,252 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 $0.001 per share. The amendment become effective on January 6, 2005. As the Board of Directors had the unrestricted ability to increase the authorized share capital to levels that would allow for the exercise of the committed option grants described in Note 5(b) below. These options are considered to have been granted for accounting purposes.
-8-
ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements($ United States)
Three month and six month periods ended June 30, 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:
|
Six months ended |
Six months ended |
|||
|
June 30, 2005 |
June 30, 2004 |
|||
|
Weighted |
Weighted |
|||
|
Number of |
Average |
Number of |
Average |
|
|
Shares |
Exercise Price |
Shares |
Exercise Price |
|
|
Outstanding, beginning of period |
76,541,463 |
$0.25 |
35,259,000 |
$0.25 |
|
Granted |
6,500,000 |
0.25 |
40,442,463 |
0.25 |
|
Expired or cancelled |
(250,000) |
0.25 |
- |
- |
|
Outstanding, end of period |
82,791,463 |
$0.25 |
75,701,463 |
$0.25 |
The number of options outstanding and exercisable and the remaining contractual lives (in years) of the options at June 30, 2005 were as follows:
|
Options Outstanding |
|||
|
Number of Options |
Contractual Lives |
Number of Options |
|
|
Exercise Price |
Outstanding |
Remaining |
Exercisable |
|
$0.25 |
82,791,463 |
0.07 to 4.96 |
79,291,463 |
Unvested options at June 30, 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 six month period ended June 30, 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 options 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 six month period ended June 30, 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. 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 and six month periods ended June 30, 2005 and 2004
(Unaudited)
5. Capital stock (continued)
b) Stock options (continued):
During the six month period ended June 30, 2005, the Company irrevocably committed to grant 1,800,000 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. The gross proceeds of the promissory notes allocated to options, based on the relative fair value of the options, has been estimated to be $77,285 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 $0.04. The fair value of the options was determined using the Black Scholes option pricing model, using the expected life of the options, volatility factors of 192% to 205%, a risk free rates of 3.98% to 4.18% 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 six months ended June 30, 2005, the Company issued 22,900,000 common shares to related parties (note 7) and 12,100,000 common shares to other than 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 June 30, 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 months and six month periods ended June 30, 2005 and 2004
(Unaudited)
7. Related party transactions
Related party transactions for the six month period ended June 30, 2005, included the following:
|
2005 |
2004 |
|||
|
1,000,000 (2004 - 10,000,000) common shares issued to a relative |
||||
|
of a director for full and final settlement of outstanding |
||||
|
promissory notes payable |
$ |
50,000 |
$ |
700,000 |
|
3,400,000 (2004 - 10,000,000) common shares issued to a |
||||
|
director and an officer for full and final settlement of outstanding |
||||
|
promissory notes payable and accounts payable and accrued |
||||
|
liabilities |
170,000 |
700,000 |
||
|
18,500,000 (2004 - Nil) common shares issued to relatives of a |
||||
|
director 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 directors and relatives of directors in consideration of |
||||
|
promissory notes payable or their due date extension |
137,909 |
282,300 |
||
|
Financing cost related to options irrevocably committed to be |
||||
|
issued to directors, relatives of a directors, companies controlled |
||||
|
by directors and an officer 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, officers |
|
|
||
|
and relatives of directors |
- |
717,000 |
||
|
Interest on promissory notes payable |
137,859 |
138,536 |
||
|
Management compensation directors and officer |
|
174,600 |
|
167,100 |
| |
$ |
1,595,368 |
$ |
3,089,936 |
Accounts payable and accrued liabilities includes $1,060,358 (December 31, 2004 - $2,033,906) owing to related parties.
-11-
ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and six month periods ended June 30, 2005 and 2004
(Unaudited)
8. Reconciliation of loss to net cash used in operating activities
|
Three months ended |
Six months ended |
|||||||
|
June 30, |
June 30, |
|||||||
|
|
2005 |
2004 |
2005 |
2004 |
||||
|
Loss |
$ |
(167,831) |
$ |
(3,360,927) |
$ |
(795,216) |
$ |
(3,646,414) |
|
Adjustments to reconcile loss to net cash |
||||||||
|
used in operating activities: |
||||||||
|
Depreciation |
796 |
941 |
1,489 |
1,481 |
||||
|
Amortization of discount related to options |
||||||||
|
issued in consideration for promissory |
||||||||
|
notes |
- |
6,640 |
- |
16,597 |
||||
|
Loss on settlement of debt |
- |
400,000 |
- |
400,000 |
||||
|
Compensation cost of options irrevocably |
||||||||
|
committed to be issued for services |
- |
82,000 |
136,798 |
92,000 |
||||
|
Financing cost of options irrevocably |
||||||||
|
committed to be issued in consideration of |
||||||||
|
promissory notes payable and extending |
44,285 |
1,046,597 |
214,778 |
1,052,897 |
||||
|
terms of repayment |
||||||||
|
Financing cost of options irrevocably |
||||||||
|
committed to be issued in consideration of |
||||||||
|
accounts payable and accrued liabilities |
- |
496,000 |
- |
496,000 |
||||
|
Compensation cost related to the |
||||||||
|
modification of previous option |
||||||||
|
commitments for services |
- |
315,000 |
- |
315,000 |
||||
|
Financing cost related to the modification |
||||||||
|
of previous option and warrant |
||||||||
|
commitments in consideration of |
||||||||
|
promissory notes |
- |
708,000 |
- |
708,000 |
||||
|
Increase in promissory note payable to a |
||||||||
|
director due to change in exchange rate |
(1,630) |
- |
(2,252) |
- |
||||
|
Increase (decrease) in accounts receivable |
(195,273) |
(47,924) |
(195,025) |
74,683 |
||||
|
Decrease (increase) in inventories |
(10,613) |
18,869 |
(9,073) |
21,340 |
||||
|
(Increase) decrease in prepaid expenses |
(6,670) |
(4,325) |
(22,000) |
(11,345) |
||||
|
Increase in accounts payable and accrued |
||||||||
|
liabilities |
61,569 |
105,070 |
42,033 |
316,887 |
||||
|
Increase (decrease) in customer deposits |
|
(5,249) |
|
- |
|
(30,342) |
|
50,000 |
|
Net cash used in operating activities |
$ |
(305,900) |
$ |
(176,059) |
$ |
(514,094) |
$ |
(54,874) |
-12-
ITEM 2. MANAGEMENTS 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 June 30, 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.
-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 use 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. Options and warrants are valued using an option pricing model which requires estimates of the expected lives of the awards, volatility, risk-free interest rates and dividend rates. Changes in these assumptions 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 and to organizations representing specific therapeutic categories. 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 were completed in 2004. Additional contracts are planned for as the Company completes development of its home health monitoring system. The Company will also utilize advertising/promotion and publicity activities to pharmaceutical manufacturers, contract research organizations, independent pharmacies and consumers.
Sales revenue was $253,387 in the quarter ended June 30, 2005 and $301,936 for the six months ended June 30, 2005 as compare to $59,999 in the second quarter of 2004 and $266,533 for the six months ended June 30, 2004.
-14-
Development costs increased to $47,161 in the quarter ended June 30, 2005 and $153,014 for the six months ended June 30, 2005 from $76,530 in the second quarter of 2004 and $124,705 for the six months ended June 30, 2004. Development costs incurred in the second quarter of 2005 related to the allocation of additional programming resources required for the development of the PC 500 LCD (Liquid Crystal Display) Med Reminders and the ALRT Interactive Response System (AIRS). Development costs for the three months and six months ended June 30, 2005 include $Nil and $41,070 of non-cash compensation costs related to options issued for services in the period.
Interest expense decreased to $181,544 for the quarter ended June 30, 2005 and $487,826 for the six months ended June 30, 2005 as compared with $2,390,320 for the quarter ended June 30, 2004 and $2,565,246 for the six months ended June 30, 2004. During the quarter ended and six months ended June 30, 2005, the Company incurred non-cash interest expense of $44,285 and $214,778 respectively. Interest expense for the quarter ended and six months ended June 30, 200, included non-cash interest expense of $2,250,597 and $2,256,897 respectively. The non-cash interest for the six months ended June 30, 2005 consisted of $77,285 for options irrevocably committed to be issued in consideration for promissory notes payable and $137,493 for extending the repayment terms of the promissory notes payable. The Company continues to rely on debt financing and cost to obtain extensions on debt obligations.
Loss on settlement of debt
The Company did not incur any loss on settlement of debt during the current quarter ended June 30, 2005. During the six months ended June 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 $38,959 for the quarter ended June 30, 2005 and $72,665 for the six months ended June 30, 2005 as compared with $26,280 and $43,106 for the same periods in 2004. Fees were higher in the second quarter of 2005 primarily due to fees for accounting services obtained in the period.
The selling, general and administrative expenses were $89,974 for the quarter ended June 30, 2005 and $301,457 for the six months ended June 30, 2005 as compared to $491,479 and $587,415 for the same periods in 2004. Included in selling, general and administrative expenses is $nil (three months) and $95,728 (six months) related to options committed to be issued in exchange for services provided by non-employees as compared to $372,000 and $372,000 over the same periods in 2004. The decrease relates primarily to the Company's reduced commitment to irrevocably options issued for services during the six months ended June 30, 2005.
The loss of $167,831 for the quarter ended June 30, 2005 and $795,216 for the six months ended June 30, 2005 decreased from a loss of $3,360,927 and $3,646,414 for the same periods in 2004. The largest component of this increase was due to decrease 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 June 30, 2005, the Company's cash balance was $937 compared to $8,210 at March 31, 2005 and $16,632 as at December 31, 2004. As of June 30, 2005, the Company had a working capital deficiency of $6,869,317 as compared to a working capital deficiency of $6,745,194 as of March 31, 2005 and $8,175,565 as at December 31, 2004.
Short and Long Term Liquidity
As at June 30, 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 and six months ended June 30, 2005 totalled $305,900 and $514,094, respectively, as compared with cash used by operating activities of $176,059 and $54,874 for the same periods in 2004. The increase in cash used in operations relates primarily to a decrease in cash amounts received from customers and increase in cash amounts paid to suppliers.
Cash Proceeds from Financing Activities
During six months ended June 30, 2005, the Company received loans totalling $500,000, which consisted of $200,000 from a relative of a director in the first quarter and additional $150,000 from two relatives of a director and $150,000 from two non-related parties in the second quarter.
In addition, a total of 35,000,000 common shares were issued in the period as follows:
|
- |
500,000 restricted common stocks were issued to Sidney Chan, the Company CEO, in consideration of his forgiveness of interest payable of $25,000. |
|
- |
3,400,000 restricted 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 $120,000. |
|
- |
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. |
-16-
|
- |
550,000 restricted common stocks were issued to a private company controlled by a director and his relative in consideration of its forgiveness of accounts payable in the amount of $27,500. |
|
- |
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.
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.
-17-
A total of 35,000,000 common shares were issued in the quarter ended June 30, 2005:
|
- |
500,000 restricted common stocks were issued to Sidney Chan, the Company CEO, in consideration of his forgiveness of interest payable of $25,000. |
|
- |
3,400,000 restricted 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 $120,000. |
|
- |
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 restricted common stocks were issued to a private company controlled by a director and his relative in consideration of its forgiveness of accounts payable in the amount of $27,500. |
|
- |
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. DEFULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities in the period. However there are liabilities totalling $5,250,617 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
ITEM 6. EXHIBITS
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. |
-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 22nd day of August, 2005.
|
ALR TECHNOLOGIES INC.(Registrant) |
||
|
BY: |
/s/ Sidney Chan |
|
|
Sidney Chan, Chairman, Chief Executive Officer and a member of the Board of Directors |
||
|
BY: |
/s/ Stanley Cruitt |
|
|
Stanley Cruitt, President and a Member of the Board of Directors |
||
-19-