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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB

[X]

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

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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.
(Exact name of registrant as specified in its charter)

NEVADA

88-0225807

(State of other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)

114M Reynolda Village
Winston-Salem, North Carolina 27106

(Address of principal executive offices)

(336) 722-2254
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of November 15, 2005: 76,078,446

The Registrant is a Shell company. [   ]

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

 


PART I.   FINANCIAL INFORMATION

Item 1.     Interim Financial Statements

ALR TECHNOLOGIES INC.

Interim Balance Sheets

($ United States)

September 30, 2005 and December 31, 2004

 
 
 

2005


 

2004


 

(Unaudited)

   

Assets

       

Current assets:

       

Cash

$

600

$

16,632

Accounts receivable, net of allowance of $225 (December 31, 2004 - $1,522)

 

9,032

 

12,377

Inventories (note 3)


 

100,715


 

79,169


   

110,347

 

108,178

Fixed assets, net of accumulated depreciation


 

9,297


 

9,930


 

$


119,644


$


118,108


         

Liabilities and Shareholders' Deficiency

Current liabilities:

Accounts payable and accrued liabilities

$

928,567

$

801,513

Accounts payable and accrued liabilities to related parties

 

1,232,094

 

2,033,906

Customer deposits

-

65,455

Promissory notes payable to relatives of directors (note 4)

 

2,660,000

 

2,320,000

Promissory notes payable to directors (note 4)

 

130,049

 

175,457

Promissory notes payable (note 4)


 

2,407,412


 

2,887,412


 
 

7,358,122


 

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

 

11,729,236

 

9,569,732

Deficit

 

(19,080,956)

 

(17,813,609)

Accumulated other comprehensive income:



Cumulative translation adjustment




37,164




37,164


   

(7,238,478)

 

(8,165,635)

Basics of presentation (note 1)

Commitments (note 5)

Related party transactions (notes 4, 5 and 7)

Contingency (note 6)

Subsequent events (note 8)










 

$


119,644


$


118,108


         

See accompanying notes to interim financial statements
F-1

-2-


ALR TECHNOLOGIES INC.

Interim Statement of Loss and Deficit

Three month and nine month periods ended September 30, 2005 and 2004

(Unaudited)



 
 

Three months ended

 

Nine months ended

September 30


September 30


 

2005


 

2004


 

2005


 

2004


                   

Sales

$

11,081

$

68,786

 

$

313,017

$

335,319

Cost of sales


 

4,060


 

29,347


 
 

71,100


 

203,802


                   
 
 

7,021


 

39,439


 
 

241,917


 

131,517


                   

Expenses

                 
 

Depreciation

 

745

 

1,095

   

2,234

 

2,576

 

Development costs

 

128,424

 

25,031

   

281,438

 

149,736

 

Foreign exchange loss

 

10,493

 

2,670

   

7,711

 

2,670

 

Interest

 

150,796

 

158,102

   

638,622

 

2,723,348

 

Loss on settlement of debt

 

-

 

-

   

-

 

400,000

 

Professional fees

 

18,947

 

10,545

   

91,612

 

53,651

 

Rent

 

9,667

 

11,308

   

26,110

 

27,847

 

Selling, general and administration


 

160,080


 

140,684


 
 

461,537


 

728,099


                   
 
 

479,152


 

349,435


 
 

1,509,264


 

4,087,927


Loss and comprehensive loss

 

(472,131)

 

(309,996)

   

(1,267,347)

 

(3,956,410)

Deficit, beginning of period


 

(18,608,825)


 

(17,121,341)


 
 

(17,813,609)


 

(13,474,927)


                   

Deficit, end of period


$


(19,080,956)


$


(17,431,337)


 

$


(19,080,956)


$


(17,431,337)


                   
                   

Loss per share, basic and diluted


$


(0.01)


$


(0.01)


 

$


(0.02)


$


(0.12)


                   

Weighted average shares outstanding,

               
 

- basic and diluted


 

76,078,446


 

41,078,446


 
 

69,924,600


 

33,049,249


 

 

 

 

See accompanying notes to interim financial statements
F-2

-3-


ALR TECHNOLOGIES INC.

Interim Statement of Shareholders' Deficiency and Comprehensive Loss

($ United States)

Nine month period ended September 30, 2005

(Unaudited)

 
 
 

Capital Stock



Additional

 

Accumulated
Other


Total

 

Number

 

Paid in

 

Comprehensive

Shareholders'

 

of Shares


Amount


Capital


Deficit


Income


Deficiency


             

Balance, Dec. 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

                     

settlement of promissory notes

                     

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 payable to:

                     
 

directors and 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

                     

issued in consideration of

                     

promissory notes payable:

                     
 

relative of a director

-

 

-

 

58,979

 

-

 

-

 

58,979

 

non-related parties

-

 

-

 

26,252

 

-

 

-

 

26,252

Compensating cost of stock

                     

options issued to:

                     
 

non-employees for services

-

 

-

 

221,780

 

-

 

-

 

221,780

Financing cost of stock

                     

options issued in

                     

consideration of

                     

Extension of repayment

                     

terms:

                     
   

a director

-

 

-

 

86,876

 

-

 

-

 

86,876

   

non-related parties

-

 

-

 

50,617

 

-

 

-

 

50,617

                       

Loss and comprehensive loss


-


 

-


 

-


 

(1,267,347)


 

-


 

(1,267,347)


                       

Balance, Sept. 30, 2005


76,078,446


$


76,078


$


11,729,236


$


(19,080,956)


$


37,164


$


(7,238,478)


 

See accompanying notes to interim financial statements
F-3

-4-


ALR TECHNOLOGIES INC.

Interim Statement of Cash Flows

($ United States)

Three month and nine month periods ended September 30, 2005 and 2004

(Unaudited)



 

Three months ended

 

Nine Months Ended

 

September 30


 

September 30


 

2005


 

2004


 

2005


 

2004


Cash flows from operating activities (note 9):

                 
 

Cash received from customers

$

209,454

$

68,126

 

$

250,907

$

457,742

 

Cash paid to suppliers and employees

 

(148,608)

 

(80,619)

   

(617,529)

 

(394,143)

 

Interest paid

 

(1,183)

 

(14,607)

   

(87,809)

 

(145,572)

 

Income taxed paid


 

-


 

-


 
 

-


 

-


 

Net cash used in operating activities


 

59,663


 

(27,100)


 
 

(454,431)


 

(81,973)


Cash flows from financing activities:

                 
 

Promissory notes payable

 

-

 

140,000

   

500,000

 

240,000

 

Repayment of promissory notes payable


 

(60,000)


 

(130,000)


 
 

(60,000)


 

(185,000)


 
 

(60,000)


 

10,000


 
 

440,000


 

55,000


Cash flows from investing activities:

                 
 

Purchase of fixed assets

 

-

 

-

   

(1,601)

 

(2,752)

Increase (decrease) in cash during the period

 

(337)

 

(17,100)

   

(16,032)

 

(29,725)

Cash, beginning of period


 

937


 

17,227


 
 

16,632


 

29,852


Cash, end of period


$


600


$


127


 

$


600


$


127


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

 

non-related parties

 

-

 

-

   

580,000

 

-

Common shares issued as full and final settlement of

                 

accounts payable and accrued liabilities payable to:

                 
 

director and officer

 

-

 

-

   

170,000

 

58,000

 

relatives of directors

 

-

 

-

   

897,500

 

-

 

a company controlled by a relative of a director

 

-

 

-

   

27,500

 

-

 

non-related parties

 

-

 

-

   

25,000

 

-

Financing cost of stock options issued in consideration

                 
 

for promissory notes payable

 

7,946

 

-

   

85,231

 

1,052,897

Compensation cost of stock options issued to

                 
 

non-employees for services

 

84,982

 

-

   

221,780

 

92,000

Financing cost of stock options issued in consideration

                 
 

of extended loan repayment terms

 

-

 

-

   

137,493

 

-

Financing cost of stock options issued in consideration

                 
 

of accounts payable and accrued liabilities

 

-

 

-

   

-

 

496,000

Compensation cost of stock options related to the modification

                 
 

of previous stock option

 

-

 

-

   

-

 

315,000

Financing cost related to the modification of previous stock

                 
 

option and warrant commitments in consideration of

                 
 

promissory notes payable


 

-


 

-


 
 

-


 

708,000


 
 

$


92,928


$


-


 

$


2,194,504


$


4,063,897


See accompanying notes to interim financial statements
F-4

-5-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and nine month periods ended September 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 are either due on demand or have 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.

 

 

F-5

-6-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and nine month periods ended September 30, 2005 and 2004
(Unaudited)

(a)   Stock based compensation:

The Company applies APB Opinion No. 25 in accounting for its stock options issued or committed to be issued to directors and employees. To September 30, 2005, all but 100,000 of the Company's stock options had been issued to non-employees. Had the Company determined compensation costs for stock options issued to employees and directors based on the fair value of its stock options under SFAS No. 123, the Company's loss and loss per share for the three month and nine month periods ended September 30, 2005 and 2004 would have been the pro forma amounts below:

Three months ended

Nine months ended

 

September 30,

September 30,

 

2005

2004

2005

2004

Loss

       

As reported

$ (472,131)

$ (309,996)

$(1,267,347)

$ (3,956,410)

Add:

       

Employee stock based compensation,

       

as recorded

-

-

-

-

Deduct:

       

Employee stock based compensation,

       

fair value method


5,691


-


5,691


-


Pro forma

$ (477,822)

$ (309,996)

$(1,273,038)

$ (3,956,410)

Loss per share, basic and diluted

       

As reported

(0.01)

(0.01)

(0.02)

(0.12)

Pro forma


(0.01)


(0.01)


(0.02)


(0.12)



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 September 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, through international markets and through non-traditional sales channels, if required. As of September 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.

F-6

-7-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and nine month periods ended September 30, 2005 and 2004
(Unaudited)


4.   Promissory notes payable

During the nine month period ended September 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 nine month period ended September 30, 2005, the Company received $150,000 from two relatives of a director in exchange for two promissory notes payable. The promissory notes bear interest at 1% per month, are unsecured and due on demand. As further consideration, a total of 600,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share until June 15, 2010 and September 30, 2010 were irrevocably committed to be issued (see note 5(b)).

During the nine month period ended September 30, 2005, the Company received $150,000 in exchange for two promissory notes payable. The promissory notes bear interest at 1% per month, are unsecured and are due on demand. As further consideration, 400,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share until April 13, 2010, were irrevocably committed to be issued (see note 5(b)).

During the nine month period ended September 30, 2005, a promissory note repayable in Canadian dollars to a director was increased by $4,592 due to unfavorable 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 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, those options outstanding prior to the effective date were considered to have been granted for accounting purposes.

b)   Stock options:

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

F-7

-8-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and nine month periods ended September 30, 2005 and 2004
(Unaudited)

5.   Capital stock (continued)

 

Nine months ended

Nine months ended

 

September 30, 2005

September 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

35,150,000

0.25

40,442,463

0.25

Expired or cancelled


(1,060,000)


0.25


-


-


Outstanding, end of period


110,631,463


$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 September 30, 2005 were as follows:

 

Options Outstanding

 
 

Number of Options

Contractual Lives

Number of Options

Exercise Price

Outstanding

Remaining

Exercisable

$0.25

110,631,463

0.17 to 5.00

80,531,463

Unvested options at September 30, 2005 consist of 30,100,000 options which will vest based on achieving certain sales and performance targets, including 20,000,000 to two directors and 3,000,000 to an officer of the Company. Compensation cost related to the unvested options is recorded over the service period or at the beginning of the period in which the sales or performance targets are achieved or probable of being achieved. During the nine month period ended September 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 issued in the period was $0.05. The fair value of the options was determined using the Black Scholes options pricing model, using the expected life of the options, a weighted average volatility factor of 212%, a weighted average risk-free interest rate of 3.88% and no assumed dividend rate.

During the nine months ended September 30, 2005, the Company irrevocably committed to grant 26,500,000 options to non-employees, including 20,000,000 to two directors and 3,000,000 to an officer of the Company, and 100,000 options to an employee which will vest upon the Company achieving various performance milestones in connection with a new product being developed by the Company. The achievement of the performance milestones is not determinable as at September 30, 2005 and, accordingly, the Company has recognized $nil compensation to September 30, 2005. The Company estimates the probability of the achievement of these milestones on a regular basis and adjusts the compensation recorded up to the beginning period where the performance targets are probable of being achieved.

During the nine month period ended September 30, 2005, the Company irrevocably committed to grant 3,625,000 options to non-employees and 100,000 to an employee 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 options committed to non-employees, being the fair value of the options, has been estimated to be $188,107, of which $104,952 has been charged to product development expense and $83,155 has been charged to selling, general and administrative expense. The weighted average per share fair value of the options 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, volatility factors from 193% to 222%, risk-free interest rates from 3.73% to 4.18% and no assumed dividend rate.

F-8

-9-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and nine month periods ended September 30, 2005 and 2004
(Unaudited)


5.   Capital stock (continued)

b)   Stock options (continued):

During the nine month period ended September 30, 2005, the Company irrevocably committed to grant 1,800,000 options, in consideration of promissory notes payable (note 4). In addition, the Company irrevocably committed to grant 200,000 options, in consideration of a customer deposit. 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, have been estimated to be $85,231 and has been charged to interest expense. The weighted average per share fair value of the options 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 196%, risk-free interest rates of 3.72% 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 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 nine months ended September 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 September 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.

F-9

-10-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three months and nine month periods ended September 30, 2005 and 2004
(Unaudited)


7.   Related party transactions

Related party transactions for the nine month period ended September 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 promising notes payable

       

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 issued to directors and relative of directors

       

in consideration of promissory notes payable or their due date extension

 

145,855

 

282,300

Financing cost related to options issued to directors, relative 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

 

211,046

 

213,032

Management compensation directors and officer




304,650




304,650


 


$


1,806,551


$


3,301,982



8.   Subsequent events:

Subsequent to September 30, 2005, the Company received promissory note financing of $100,000 from an unrelated party. The promissory note bears interest at 1% per month, is unsecured and due on demand.

Subsequent to September 30, 2005, the Company irrevocably committed to issue a total of 350,000 stock options to non-employees for services. The options vested immediately and are exercisable into a total of 350,000 common shares at an exercise price of $0.25 per share to October 17, 2005.

 

 

 

F-10

-11-


ALR TECHNOLOGIES INC.
Notes to Interim Financial Statements
($ United States)
Three month and nine month periods ended September 30, 2005 and 2004
(Unaudited)

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

 

Three months ended

Nine months ended

 

September 30,


September 30,


   

2005

 

2004

 

2005

 

2004

Loss

$

(472,131)

$

(309,996)

$

(1,267,347)

$

(3,956,410)

Adjustments to reconcile loss to net cash used in

               

operating activities:

               

Depreciation

 

745

 

1,095

 

2,234

 

2,576

Amortization of discount related to options issued

               

in consideration for promissory notes

 

-

 

-

 

-

 

16,597

Loss on settlement of debt

 

-

 

-

 

-

 

400,000

Compensation cost of options

               

Compensation cost of options issued for services

 

84,982

 

-

 

221,780

 

92,000

Financing cost of options issued in consideration

               

of promissory notes payable and extending

               

terms of repayment

 

7,946

 

-

 

222,724

 

1,052,897

Financing cost of options issued in consideration

               

of accounts payable and accrued liabilities

 

-

 

-

 

-

 

496,000

Compensation cost related to the modification

               

of previous option issued for services

 

-

 

-

 

-

 

315,000

Financing cost related to the modification of

               

previous option and warrant issued in

               

consideration of promissory notes

 

-

 

-

 

-

 

708,000

Increase (decrease) in promissory note payable to

               

a director due to change in exchange rate

 

6,844

 

2,971

 

4,592

 

2,971

Decrease in accounts receivable

 

198,373

 

47,740

 

3,345

 

122,423

Decrease (increase) in inventories

 

(22,305)

 

(15,274)

 

(21,546)

 

6,066

(Increase) decrease in prepaid expenses

 

22,000

 

1,345

 

-

 

(10,000)

Increase in accounts payable and

               

accrued liabilities

 

233,209

 

295,019

 

445,242

 

669,907

Increase (decrease) in customer deposits


 


-


 


(50,000)


 


(65,455)


 


-


Net cash used in operating activities


$


59,663


$


(27,100)


$


(454,431)


$


(81,973)


 

 

 

 

F-11

-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 able to continue as a going concern, it would likely not be able to realize on its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the financial statements. As described in note 1 to the interim financial statements, at September 30, 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 irrevocably committed to be issued in consideration for debt. The Company allocates the proceeds received from long term debt between the liability and the options and warrants irrevocably committed to be 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 $11,082 in the quarter ended September 30, 2005 and $313,017 for the nine months ended September 30, 2005 as compare to $68,786 in the third quarter of 2004 and $335,319 for the nine months ended September 30, 2004.

 

 

-14-


Development costs increased to $128,424 in the quarter ended September 30, 2005 and $281,438 for the nine months ended September 30, 2005 from $25,031 in the third quarter of 2004 and $149,736 for the nine months ended September 30, 2004. Development costs incurred in the third 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 nine months ended September 30, 2005 include $63,882 and $104,952 of non-cash compensation costs related to options issued for services in the period. Development costs for the three months and nine months ended September 30, 2004 include $Nil and $35,000 of non-cash compensation costs related to options issued for services in the period.

Interest expense decreased to $150,796 for the quarter ended September 30, 2005 and $638,622 for the nine months ended September 30, 2005 as compared with $158,102 for the quarter ended September 30, 2004 and $2,723,348 for the nine months ended September 30, 2004. During the quarter ended and nine months ended September 30, 2005, the Company incurred non-cash interest expense of $7,946 and $222,724 respectively. The non-cash interest for the nine months ended September 30, 2005 consisted of $85,231 for options issued in consideration for promissory notes payable and customer deposits and $137,493 for extending the repayment terms of the promissory notes payable. Interest expense for the quarter ended and nine months ended September 30, 2004, included non-cash interest expense of $Nil and $2,256,897 respectively. Interest expense for the quarter ended and nine months ended September 30, 2004, also included amortization of interest discounts related to stock options and warrants issued in consideration for promissory notes payable in the amount of $Nil and $16,597 respectively. 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 September 30, 2005. During the nine months ended September 30, 2004, the Company issued 20,000,000 common shares to a director and a relative of a director in formal settlement of promissory notes payable and accounts payable and accrued liabilities of $1,000,000. The fair value of the common shares issued of $1,400,000 was determined based on the quoted market priced of the common shares at the issue date, resulting in a loss on debt settlement of $400,000.

Professional fees were $18,947 for the quarter ended September 30, 2005 and $91,612 for the nine months ended September 30, 2005 as compared with $10,545 and $53,651 for the same periods in 2004. Fees were higher in the third quarter of 2005 primarily due to fees for accounting services obtained in the period.

The selling, general and administrative expenses were $160,080 for the quarter ended September 30, 2005 and $461,537 for the nine months ended September 30, 2005 as compared to $140,684 and $728,099 for the same periods in 2004. Included in selling, general and administrative expenses is $21,100 for the three months ended September 30, 2005 and $116,828 for the nine months ended September 30, 2005, relating to options issued in exchange for services provided by non-employees as compared to $Nil 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 nine months ended September 30, 2005.

 

-15-


The loss of $467,131 for the quarter ended September 30, 2005 and $1,267,347 for the nine months ended September 30, 2005 decreased from a loss of $309,996 and $3,956,410 for the same periods in 2004. The largest component of this decrease 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.

Liquidity and Capital Resources

Cash Balances and Working Capital

As of September 30, 2005, the Company's cash balance was $600 compared to $937 as at June 30, 2005, $8,210 as at March 31, 2005 and $16,632 as at December 31, 2004. As of September 30, 2005, the Company had a working capital deficiency of $7,247,775 as compared to a working capital deficiency of $6,869,317 as at June 30, 2005, $6,745,194 as at March 31, 2005 and $8,175,565 as at December 31, 2004.

Short and Long Term Liquidity

As at September 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 generated by the Company in operating activities during the three months was $59,663 while cash used in operating activities for the nine months ended September 30, 2005 was $454,431 as compared with cash used by operating activities of $27,100 and $81,973 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 nine months ended September 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:

 

-16-


-

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 Titchy, 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.

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

(a)     Evaluation of Disclosure Controls and Procedures: Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports our files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

(b)     Changes in Internal Control over Financial Reporting: There were no changes in our internal control over financial reporting identified in connection with our evaluation of these controls as of the end of the period covered by this report that could have significantly affected those controls subsequent to the date of the evaluation referred to in the previous paragraph, including any correction action with regard to significant deficiencies and material weakness.

-17-


There were no changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any deficiencies or material weaknesses of internal controls that would require corrective action.


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 prior to the effective date.

A total of 35,000,000 common shares were issued in the quarter ended September 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 Titchy, 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.     DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon senior securities in the period. However there are liabilities totalling $5,197,461 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.

-18-


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.

 

 

 

 

 

 

 

 

 

 

-19-


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 5th day of December, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-20-