ALR TECHNOLOGIES INC. - Quarter Report: 2009 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
|
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009 |
Commission file number 000-30414
ALR TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
3350 Riverwood Parkway, Suite 1900
Atlanta, Georgia 30339
(Address of principal executive offices, including zip code.)
(678) 881-0002
(telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 last 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
|
Large Accelerated Filer |
[ ] |
Accelerated Filer |
[ ] | ||
|
Non-accelerated Filer |
[ ] |
Smaller Reporting Company |
[X] | ||
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(Do not check if a smaller reporting company) |
|||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 76,078,446 as of August 10, 2009.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
|
ALR TECHNOLOGIES INC. | ||||||||
|
Interim Consolidated Balance Sheets | ||||||||
|
($ United States) | ||||||||
|
June 30 |
December 31 |
|||||||
|
2009 |
2008 |
|||||||
|
(Unaudited) |
(Audited) |
|||||||
|
Assets |
||||||||
|
Current assets: |
||||||||
|
Cash |
$ |
607 |
$ |
7,901 |
||||
|
Accounts receivable, net of allowance of $748 |
160 |
5,048 |
||||||
|
(December 31, 2008 - $748) |
||||||||
|
Prepaid expenses and deposits |
77,237 |
57,536 |
||||||
|
Deferred interest expenses (note 5) |
16,800 |
50,400 |
||||||
|
94,804 |
120,885 |
|||||||
|
Equipment, net of accumulated depreciation |
5,242 |
6,109 |
||||||
|
(net of accumulated depreciation of $25,438; |
||||||||
|
December 31, 2008 - $25,005) |
||||||||
|
$ |
100,046 |
$ |
126,994 |
|||||
|
Liabilities and Shareholders' Deficiency |
||||||||
|
Current liabilities: |
||||||||
|
Accounts payable and accrued liabilities |
$ |
1,130,843 |
$ |
1,088,256 |
||||
|
Payroll payable |
18,050 |
18,050 |
||||||
|
Interest payable (note 5) |
2,985,687 |
2,613,008 |
||||||
|
Advances payable (note 5) |
2,522,887 |
2,289,982 |
||||||
|
Promissory notes payable (notes 5 and 7) |
6,563,678 |
6,436,393 |
||||||
|
13,221,145 |
12,445,689 |
|||||||
|
Shareholders' deficiency |
||||||||
|
Capital stock (note 6) |
||||||||
|
350,000,000 common shares with a par |
||||||||
|
value of $0.001 per share authorized |
||||||||
|
76,078,446 issued |
||||||||
|
(December 31, 2008 - 76,078,446) |
76,078 |
76,078 |
||||||
|
Additional paid-in capital |
13,360,849 |
13,300,827 |
||||||
|
Accumulated deficit |
(26,558,026 |
) |
(25,695,600 |
) | ||||
|
(13,121,099 |
) |
(12,318,695 |
) | |||||
|
$ |
100,046 |
$ |
126,994 |
|||||
See accompanying Notes to Interim Consolidated Financial Statements
F-1
- 2 -
|
Interim Consolidated Statement of Loss and Deficit | |||||||||||||
|
($ United States) | |||||||||||||
|
(Unaudited) | |||||||||||||
|
| |||||||||||||
|
Three months Ended |
Six months Ended |
||||||||||||
|
June 30 |
June 30 |
||||||||||||
|
2009 |
2008 |
2009 |
2008 |
||||||||||
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Revenue |
|||||||||||||
|
Sales |
$ |
- |
$ |
7,199 |
$ |
- |
$ |
8,938 |
|||||
|
Cost of sales |
- |
1,023 |
- |
1,051 |
|||||||||
|
- |
6,176 |
- |
7,887 |
||||||||||
|
Expenses |
|||||||||||||
|
Depreciation |
434 |
304 |
867 |
610 |
|||||||||
|
Development costs |
46,500 |
46,522 |
115,250 |
237,336 |
|||||||||
|
Foreign exchange (gain) loss |
13,174 |
1,799 |
|
5,082 |
(4,977 |
) | |||||||
|
Interest |
210,797 |
185,316 |
448,633 |
353,712 |
|||||||||
|
Professional fees |
22,869 |
21,510 |
34,646 |
35,790 |
|||||||||
|
Rent |
8,582 |
13,384 |
15,702 |
26,573 |
|||||||||
|
Selling, general and administration |
101,117 |
135,670 |
242,246 |
283,379 |
|||||||||
|
403,473 |
404,505 |
862,426 |
932,423 |
||||||||||
|
Net loss |
(403,473 |
) |
(398,329 |
) |
(862,426 |
) |
(924,536 |
) | |||||
|
Accumulated deficit, beginning of period |
(26,154,553 |
) |
(24,322,697 |
) |
(25,695,600 |
) |
(23,796,490 |
) | |||||
|
Accumulated deficit, end of period |
$ |
(26,558,026 |
) |
$ |
(24,721,026 |
) |
$ |
(26,558,026 |
) |
$ |
(24,721,026 |
) | |
|
Loss per share, basic and diluted |
$ |
(0.01 |
) |
$ |
(0.01 |
) |
$ |
(0.01 |
) |
$ |
(0.01 |
) | |
|
Weighted average shares outstanding, |
|||||||||||||
|
- basic and diluted |
|
76,078,446 |
76,078,446 |
76,078,446 |
76,078,446 |
||||||||
See accompanying Notes to Interim Consolidated Financial Statements
F-2
- 3 -
|
Interim Consolidated Statement of Shareholders' Deficiency and Comprehensive Loss | |||||||||||||
|
($ United States) | |||||||||||||
|
Six Months Ended June 30, 2009 and Year Ended December 31, 2008 | |||||||||||||
|
(Unaudited) | |||||||||||||
|
Accumulated |
|
||||||||||||
|
Capital Stock |
Additional |
Other |
|
Total |
|||||||||
|
Number |
Paid in |
Accumulated |
Comprehensive |
Shareholders’ |
|||||||||
|
of Shares |
Amount |
Capital |
Deficit |
Income(Loss) |
Deficiency |
||||||||
|
Balance, December 31, 2007 (audited) |
76,078,446 |
$ |
76,078 |
$ |
12,951,235 |
$ |
(23,796,490 |
) |
$ |
- |
$ |
(10,769,177 |
) |
|
Stock-based compensation |
349,592 |
349,592 |
|||||||||||
|
Loss and comprehensive loss |
- |
- |
- |
(1,899,110 |
) |
(1,899,110 |
) | ||||||
|
Balance, December 31, 2008 (audited) |
76,078,446 |
76,078 |
13,300,827 |
(25,695,600 |
) |
(12,318,695 |
) | ||||||
|
Stock-based compensation |
60,022 |
60,022 |
|||||||||||
|
Loss and comprehensive loss |
(862,426 |
) |
(862,426 |
) | |||||||||
|
Balance, June 30, 2009 (unaudited) |
76,078,446 |
$ |
76,078 |
$ |
13,360,849 |
$ |
(26,558,026 |
) |
$ |
- |
$ |
(13,121,099 |
) |
See accompanying Notes to Interim Consolidated Financial Statements
F-3
- 4 -
|
Interim Statement of Cash Flows | |||||||||||||
|
($ United States) | |||||||||||||
|
(Unaudited ) | |||||||||||||
|
Three months Ended |
Six months Ended |
||||||||||||
|
June 30 |
June 30 |
||||||||||||
|
2009 |
2008 |
2009 |
2008 |
||||||||||
|
Cash flows from operating activities: |
|||||||||||||
|
Cash received from customers |
$ |
1,763 |
$ |
1,424 |
$ |
4,888 |
$ |
2,331 |
|||||
|
Cash paid to suppliers and employees |
(921 |
) |
(290,465 |
) |
(130,736 |
) |
(350,166 |
) | |||||
|
Interest paid |
(1,615 |
) |
(2,701 |
) |
(2,145 |
) |
(6,467 |
) | |||||
|
Net cash provided by (used in) operating |
|||||||||||||
|
activities |
(773 |
) |
(291,742 |
) |
(127,993 |
) |
(354,302 |
) | |||||
|
Cash flows from financing activities: |
|||||||||||||
|
Promissory notes payable |
- |
390,000 |
120,699 |
450,000 |
|||||||||
|
Net cash provided by financing activities |
- |
390,000 |
120,699 |
450,000 |
|||||||||
|
Increase (decrease) in cash during the period |
(773 |
) |
98,258 |
(7,294 |
) |
95,698 |
|||||||
|
Cash, beginning of period |
1,380 |
413 |
7,901 |
2,973 |
|||||||||
|
Cash, end of period |
$ |
607 |
$ |
98,671 |
$ |
607 |
$ |
98,671 |
|||||
|
Non-cash operating activities: |
|||||||||||||
|
Stock-based compensation |
|||||||||||||
|
Financing costs |
$ |
- |
$ |
- |
$ |
37,772 |
$ |
104,534 |
|||||
|
Compensation costs |
- |
- |
22,250 |
143,791 |
|||||||||
|
$ |
- |
$ |
- |
$ |
60,022 |
$ |
248,325 |
||||||
See accompanying Notes to Interim Consolidated Financial Statements
F-4
- 5 -
ALR TECHNOLOGIES INC.
Notes to Interim Consolidated Financial Statements
($ United States)
Six months Ended June 30, 2009 and 2008
(Unaudited)
1. Basis of presentation
ALR TECHNOLOGIES, INC. (the "Company") was incorporated under the laws of the State of Nevada on March 24, 1987 as Mo Betta Corp. On December 28, 1998, the Company changed its name from Mo Betta Corp. to ALR Technologies Inc. The Company has developed a line of medication compliance reminder devices and compliance monitoring systems
that will assist people with taking their medications and treatments on time and allow for heath care professionals to remotely monitor and intervene as necessary if a person is noncompliant.
In April 2008, the Company incorporated a wholly-owned subsidiary in Canada and its activities have been included in the Company’s consolidated financial statements.
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis which presumes the realization of assets and the discharge of liabilities and commitments in the normal course of operations for the foreseeable future.
Several adverse conditions cast substantial doubt on the validity of this assumption. The Company has incurred significant operating losses over the past several fiscal years (Six months period ended June 30, 2009 - $862,426; 2008 - $924,536; 2007 -$812,172), is currently unable to self-finance operations, has working
capital deficit of $13,126,341 as at June 30, 2009, $12,324,804 as at December 31, 2008 (2007 - $10,773,657), a deficit of $26,558,026 as at June 30, 2009 , $25,695,600 as at December 31, 2008 (2007 - $23,796,490), limited resources, no source of operating cash flow and no assurances that sufficient funding will be available to conduct further product development and operations.
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 is overdue
and now due on demand. 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 Company is currently financed by loans from a relative of a director of the Company.
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.
F-5
- 6 -
ALR TECHNOLOGIES INC.
Notes to Interim Consolidated Financial Statements
($ United States)
Six months Ended June 30, 2009 and 2008
(Unaudited)
2. Significant accounting policies
The information included in the accompanying interim consolidated 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-K for the fiscal year ended December 31, 2008. 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.
a) Stock-based compensation:
Prior to January 1, 2006, the Company applied APB Opinion No. 25 in accounting for its stock options issued to directors and employees. Effective January 1, 2006, the Company applies FASB No. 123R in accounting all its stock options issued.
b) Basic and diluted net loss per common share
Basic net loss per common share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the year. Diluted net loss per common share is calculated by dividing the net loss by the sum of the weighted average number of common shares outstanding and the dilutive common equivalent shares
outstanding during the year. Common equivalent shares consist of the shares issuable upon exercise of stock options and warrants calculated using the treasury stock method. Common equivalent shares are not included in the calculation of the weighted average number of shares outstanding for diluted net loss per common share when the effect would be anti-dilutive.
c) Principles of consolidation
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Canada ALRTech Health Systems Inc. (incorporated in British Columbia, Canada). All significant inter-company balances and transactions have been eliminated.
d) Recent accounting pronouncements
Effective April 1, we adopted Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 165, Subsequent Events (“SFAS 165”). This Statement establishes general standards of accounting for
and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In general, these events will be recognized if the condition existed at the date of the balance sheet, and will not be recognized if the condition did not exist at the balance sheet date. Disclosure is required for non-recognized events if required to keep the financial statements from being misleading. The guidance in this Statement is very similar to current guidance provided
in auditing literature and, therefore, will not result in significant changes in practice. Subsequent events have been evaluated through the date our interim financial statements were issued - the filing time and date of our second-quarter 2009 Quarterly Report on Form 10-Q.
F-6
- 7 -
ALR TECHNOLOGIES INC.
Notes to Interim Consolidated Financial Statements
($ United States)
Six months Ended June 30, 2009 and 2008
(Unaudited)
In April 2009, the FASB issued three FASB Staff Positions (FSP’s) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP 157-4), clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP No. 115-2 and FSP No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, (FSP 115-2 and FSP 124-2), establish a new model for measuring other-than-temporary impairments for debt securities, including criteria for when to recognize
a write-down through earnings versus other comprehensive income. FSP No. 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments”, expand the fair value disclosures required for all financial instruments within the scope of SFAS, No. 107, “Disclosures about Fair Value of Financial Instruments” (FSP 107-1 and APB 28-1) to interim periods. All of these FSP’s are effective for interim and annual periods ending after June 15, 2009, our quarter ended June 30,
2009. The adoption of these FSP’s will not have a material impact on our consolidated results of operations and financial condition. However, adoption of FSP 107-1 and APB 28-1 during the quarter ended June 30, 2009 resulted in increased disclosures in our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, “The ‘FASB Accounting Standards Codification’ and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168”). SFAS 168 establishes the “FASB Accounting Standards Codification” (“Codification”), which officially
launched July 1, 2009, to become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The subsequent issuances of new standards will be in the form of Accounting Standards Updates that
will be included in the Codification. Generally, the Codification is not expected to change U.S. GAAP. All other accounting literature excluded from the Codification will be considered non-authoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company is currently evaluating the impact of adoption of SFAS 168 but does not expect adoption to have a material impact on results of operations,
cash flows or financial position.
3. Inventories
|
June 30 |
December 31 |
||||||
|
2009 |
2008 |
||||||
|
(Unaudited) |
(Audited) |
||||||
|
Inventories, at cost |
$ |
263,520 |
$ |
263,520 |
|||
|
Provision for decline of value |
(263,520 |
) |
(263,520 |
) | |||
|
$ |
Nil |
$ |
Nil |
The Company's inventories consists of product parts and 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 December 31, 2008 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 December 31, 2008, management had recorded a provision of $263,520 (December 31, 2008 - $263,520) in respect of its Med Reminder inventory.
- 8 -
ALR TECHNOLOGIES INC.
Notes to Interim Consolidated Financial Statements
($ United States)
Six months Ended June 30, 2009 and 2008
(Unaudited)
4. Prepaid expenses and deposits
The Company's prepaid expenses include $77,000 prepaid commission expenses.
5. Promissory notes payable
During the six months ended June 30, 2009, the Company received a total of $120,699 from a relative of a director in exchange for promissory notes payable. The promissory note is due on demand with interest at 1.0% per month and is secured by a floating charge against assets of the Company. As further consideration, 483,000 options
exercisable into common shares of the Company at an exercise price of $0.25 per share for a period of five years were issued.
During the year ended December 31, 2008, the Company entered into an agreement with a non-related party whereby the Company received a total $450,000 over a four-month period starting from March 2008 in exchange for promissory notes payable. The promissory note is due for repayment
on September 30, 2009 with interest at 1.0% per month and is unsecured. As further consideration, 1,800,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share until March 31, 2013 were issued. The stock-based compensation arising from this stock option has been estimated to be $104,534 using the Black-Scholes option pricing model and amortized as interest expenses over the loan period. As of June 30, 2009, the unamortized interest was $16,800.
During the six month period ended June 30, 2009, a promissory note repayable in Canadian dollars to a director increased by $6,076 due to unfavorable exchange rate changes with the United States dollars.
|
June 30 |
December 31 | ||||
|
2009 |
2008 | ||||
|
(Unaudited) |
(Audited) | ||||
|
Interest payable to: |
|||||
|
Relatives of directors |
$ |
1,438,487 |
$ |
1,257,586 | |
|
Companies controlled by directors |
5,790 |
5,790 | |||
|
Directors |
81,833 |
69,545 | |||
|
Non-related parties |
1,459,577 |
1,280,087 | |||
|
$ |
2,985,687 |
$ |
2,613,008 | ||
|
June 30 |
December 31 | ||||
|
2009 |
2008 | ||||
|
(Unaudited) |
(Audited) | ||||
|
Advances payable to: |
|||||
|
Relatives of directors |
$ |
15,468 |
$ |
19,335 | |
|
Companies controlled by directors |
1,213,191 |
1,089,663 | |||
|
Directors |
1,294,228 |
1,180,984 | |||
|
$ |
2,522,887 |
$ |
2,289,982 | ||
F-8
- 9 -
|
Notes to Interim Consolidated Financial Statements | ||||
|
($ United States) | ||||
|
Six months Ended June 30, 2009 and 2008 | ||||
|
(Unaudited) | ||||
|
June 30 |
December 31 | |||
|
2009 |
2008 | |||
|
(Unaudited) |
(Audited) | |||
|
Promissory notes payable to relatives of directors: |
||||
|
Promissory notes payable to a relative of a director, secured by a general security |
||||
|
agreement bearing interest at the rate of 1% per month, due on demand |
$ |
2,150,027 |
$ |
2,029,328 |
|
Promissory notes payable to a relative of a director, secured by a general security |
||||
|
agreement bearing interest at the rate of 1.25% per month, due on demand |
251,347 |
251,347 | ||
|
Promissory notes payable to relatives of a director, secured by a general security |
||||
|
agreement bearing interest at the U.S. bank prime rate plus 1%, due on demand |
500,000 |
500,000 | ||
|
Promissory notes payable, unsecured, from relatives of a director, bearing interest |
||||
|
at 0.625% per month, with $50,000 repayable on October 5, 2004 and $60,000 |
||||
|
repayable on July 28, 2006, which did not occur; currently due on demand with |
||||
|
The same interest rate |
110,000 |
110,000 | ||
|
Promissory notes payable, unsecured, from relatives of a director, bearing interest |
||||
|
at 1% per month, due on demand |
295,000 |
295,000 | ||
|
3,306,374 |
3,185,675 | |||
|
Promissory notes payable to directors: |
||||
|
Promissory notes payable to a director, unsecured, bearing interest at 1% per |
||||
|
month, due on demand (Cdn $151,000) |
129,892 |
123,306 | ||
|
129,892 |
123,306 | |||
|
Promissory notes payable to unrelated parties: |
||||
|
Promissory notes payable to, unsecured, bearing interest at 1% per month, |
||||
|
Repayable September 30, 2009. |
450,000 |
450,000 | ||
|
$50,000 repayable on December 31, 2004, which did not occur; currently all due |
||||
|
on demand with the same interest rate |
2,136,500 |
2,136,500 | ||
|
Promissory notes payable, unsecured, bearing interest at 0.625% per month, with |
||||
|
$40,000 repayable on December 31, 2004, which did not occur; currently all due |
||||
|
on demand with the same interest rate |
40,000 |
40,000 | ||
|
Promissory notes payable, secured by a guarantee from a director and relative of a |
||||
|
director, bearing interest at 1% per month, with $200,000 repayable on July 31, |
||||
|
2003, which did not occur; currently all due on demand |
230,000 |
230,000 | ||
|
Promissory note payable, unsecured, non-interest bearing , repayable on July 17, |
||||
|
2005, which did not occur: currently due on demand |
270,912 |
270,912 | ||
|
3,127,412 |
3,127,412 | |||
|
Total current promissory notes payable |
$ |
6,563,678 |
$ |
6,436,393 |
F-9
- 10 -
Notes to Interim Consolidated Financial Statements
($ United States)
Six months Ended June 30, 2009 and 2008
(Unaudited)
6. Capital stock
a) Authorized share capital:
350,000,000 common shares with a par value of $0.001 per share
b) Stock options:
The Company accounts for its employee stock-based compensation arrangements in accordance with provisions of SFAS No. 123R “Share Based Payments”.
During the six months ended June 30, 2009, the Company granted 483,000 options in consideration of providing $120,699 loan to the Company. Compensation cost related to these options, being the fair value of the options, has been estimated to be $71,372 and charged to interest expense. The weighted average per share fair value of
these options issued in the period was $0.08. The fair value of the options was determined using the Black-Scholes option pricing model, using the expected life of the options of 5 years, volatility factors of 221% risk-free interest rates of 1.67% and no assumed dividend rate. The Company apply zero forfeiture rate in calculating stock based compensation expenses.
During the year ended December 31, 2008, the Company granted 6,128,000 options. Of the total granted, 3,000,000 were granted with vesting conditions based on certain performance targets. Even though a final measure of the value of compensation cost does not occur until performance is complete, the estimated fair value
of these options was recognized as at December 31, 2008 in the amount of $84,210 and charged to product development costs. This amount has been prorated based on the expected performance period. In consideration of providing loan advances aggregating $569,328 to the Company, 2,278,000 options were granted and vested immediately. Compensation costs related to these options, being the fair value of the options, has been estimated to be $121,591 of which $71,191 has been charged to interest
expense and $50,400 has been classified as deferred interest expenses. The balance of the 850,000 stock options were granted for services and vested immediately. Compensation costs related to these options, being the fair value of the options, have been estimated to be $143,791 and have been charged to product development costs. The weighted average per share fair value of options issued in the period was $0.13 per option. The fair value of the options was determined using the Black-Scholes option pricing model,
using the expected life of the options of 5 years, volatility factors of 188%, risk-free interest rate of 2.72% and zero dividend rate. The Company applies zero forfeiture rate in calculating stock-based compensation expenses.
During the year ended December 31, 2008, the Company cancelled 9,500,000 stock options from a director and 1,000,000 stock options from non-employees, all of which were not vested nor recorded as stock-based compensation expense prior to cancellation. The remaining 2,000,000 stock options that were vested immediately were
cancelled as per settlement agreement with a former consultant.
F-10
- 11 -
ALR TECHNOLOGIES INC.
Notes to Interim Consolidated Financial Statements
($ United States)
Six months Ended June 30, 2009 and 2008
(Unaudited)
6. Capital stock (continued)
A summary of stock option activity is as follows:
|
Six months Ended |
Year Ended | |||||||||||
|
June 30, 2009 |
December 31, 2008 | |||||||||||
|
(Unaudited) |
(Audited) | |||||||||||
|
Weighted |
Weighted | |||||||||||
|
Average |
Average | |||||||||||
|
Number of |
Exercise |
Number of |
Exercise | |||||||||
|
Shares |
Price |
Shares |
Price | |||||||||
|
Outstanding, beginning of period |
106,575,463 |
$ |
0.25 |
118,196,463 |
$ |
0.25 | ||||||
|
Granted |
483,000 |
0.25 |
6,128,000 |
0.25 | ||||||||
|
Cancelled |
- |
0.25 |
(12,500,000 |
) |
0.25 | |||||||
|
Expired |
(61,542,463 |
) |
0.25 |
(5,249,000 |
) |
0.25 | ||||||
|
Outstanding, end of period |
45,516,000 |
$ |
0.25 |
106,575,463 |
$ |
0.25 | ||||||
|
Exercisable, end of period |
29,991,000 |
$ |
0.25 |
89,550,463 |
$ |
0.25 | ||||||
The aggregate intrinsic value represents the total pre-tax intrinsic value for in-the-money options, based on the $0.08 closing stock price of the Company’s common stock on the NASDAQ over the counter market on June 30, 2009, which would have been received by the option holders had all option holders exercised their options
as of that date. As of June 30, 2009, none of the stock options outstanding was in-the-money.
Unvested options at June 30, 2009 consist of 15,525,000 options which will vest based on achieving certain sales and performance targets, including 9,750,000 to two directors and 250,000 to a relative of a director of the Company. Compensation cost related to the 17,025,000 unvested options granted between 2004 to 2009, which value
is estimated to be $1,948,758 will be recorded in the period in which the sales or performance targets are achieved or probable of being achieved.
7. Legal actions
Accounts payable and accrued liabilities as of June 30, 2009 includes $180,666 (December 31, 2008 -$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.
During the year ended December 31, 2008, a note payable creditor commenced legal action against the Company to enforce repayment of all outstanding notes payable and interest. As of June 30, 2009, the total outstanding notes payable and interest payable was $42,000. The Company has agreed to settle this balance
and is currently awaiting for final approval by Superior Court Judge. The payment on settlement will be recorded subsequent to the period end.
F-11
- 12 -
ALR TECHNOLOGIES INC.
Notes to Interim Consolidated Financial Statements
($ United States)
Six months Ended June 30, 2009 and 2008
(Unaudited)
7. Legal actions (continued)
During the period, two other notes payable creditors commenced legal action against the Company to enforce repayment of all outstanding notes payable and interest. As of June 30, 2009, the total outstanding notes payable and interest payable to these two creditors were $1,035,536 and $912,949 respectively.
8. Related party transactions
Related party transactions for the six months ended June 30, 2009 and 2008 included the following:
|
2009 |
2008 | |||
|
(Unaudited) |
(Unaudited) | |||
|
Product development costs |
||||
|
Directors and officers |
$ |
30,000 |
$ |
30,000 |
|
Stock-based compensation in product development |
||||
|
Directors and officers |
6,488 |
129,467 | ||
|
Interest expense |
||||
|
Directors and officers |
12,289 |
6,213 | ||
|
Relatives of directors |
180,900 |
172,077 | ||
|
Stock-based compensation in interest expense |
||||
|
Relatives of directors |
37,772 |
- | ||
|
Compensation |
||||
|
Directors and officers |
159,900 |
159,900 | ||
|
Relatives of directors |
18,000 |
18,000 | ||
|
$ |
445,349 |
$ |
515,657 |
All transactions with related parties were incurred in the normal course of operations and measured at the exchange amount, which is the amount of considerations established and agreed upon by the transacting parties.
Interest on promissory notes payable to related parties, management compensation and compensation paid to a relative of a director have been recorded at the exchange amount, which is the amount agreed to by the parties. Options granted to related parties have been recorded at their estimated fair value as disclosed note 6(b).
9. Commitments:
During 2000, the Company entered into three-year contracts with certain executive officers and directors providing the following annual compensation.
F-12
- 13 -
Notes to Interim Consolidated Financial Statements
($ United States)
Six months Ended June 30, 2009 and 2008
(Unaudited)
|
$ |
144,000 | ||
|
Stanley Cruitt |
$ |
156,600 | |
|
Dr. Jaroslav Tichy |
$ |
60,000 |
The contracts are automatically renewed annually after the initial three-year term, and may be terminated by the Company at any time, effective thirty days after delivery of notice, without any further compensation.
The terms of Mr. Chan's contract also provides for a commission of 1% of net sales during the term of the agreement as well as a bonus payment on commencement of commercial production of the Pet Reminder. In addition, if more than 50% of the Company's stock or assets are sold, Messrs. Chan, Cruitt and Tichy will be compensated for
entering into non-compete agreements based on the selling price of the Company or its assets as follows:
2% of sales price up to $24,999,999 plus
3% of sales price between $25,000,000 and $49,999,999 plus
4% of sales price between $50,000,000 and $199,999,999 plus
5% of sales price in excess of $200,000,000
The terms of Mr. Cruitt's contract was amended in 2008 as a result of his resignation as President on June 16, 2008. Mr. Cruitt was originally entitled to 4,000,000 options with a five-year term exercisable at $0.25 per share of which 2,000,000 stock options vested immediately and the remaining 2,000,000 options subject to sales
and performance targets were cancelled in 2008.
10. Reconciliation of net loss to net cash used in operating activities
|
Three months Ended |
Six months Ended |
||||||||||||||
|
June 30 |
June 30 |
||||||||||||||
|
2009 |
2008 |
2009 |
2008 |
||||||||||||
|
Net loss for the period |
$ |
(403,473 |
) |
$ |
(398,329 |
) |
$ |
(862,426) |
$ |
(924,536 |
) | ||||
|
Add items not affecting cash: |
|||||||||||||||
|
Depreciation |
434 |
304 |
867 |
|
610 |
||||||||||
|
Foreign exchange on note payable |
10,070 |
1,342 |
6,586 |
(4,576 |
) | ||||||||||
|
Stock-based compensation: |
|||||||||||||||
|
Product development |
- |
- |
22,250 |
143,791 |
|||||||||||
|
Interest |
16,800 |
16,800 |
71,372 |
20,534 |
|||||||||||
|
Selling, general and administration |
- |
- |
- |
||||||||||||
|
Non-cash working capital items: |
|||||||||||||||
|
Receivable and advances |
1,763 |
(30,775 |
) |
4,888 |
(31,607 |
) | |||||||||
|
Inventories |
- |
1,023 |
- |
(20,974 |
) | ||||||||||
|
Prepaid expenses |
(2 |
) |
(2,200 |
) |
(19,701 |
) |
(2,300 |
) | |||||||
|
Accounts payable and accrued liabilities |
373,635 |
120,093 |
648,171 |
464,756 |
|||||||||||
|
$ |
(773 |
) |
$ |
(291,742 |
) |
$ |
(127,993 |
) |
$ |
(354,302 |
) | ||||
F-13
- 14 -
ALR TECHNOLOGIES INC.
Notes to Interim Consolidated Financial Statements
($ United States)
Six months Ended June 30, 2009 and 2008
(Unaudited)
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and bank loan. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the short maturities
of those instruments. The Company’s bank loan consists of its revolving credit facility. The carrying value of the revolving credit facility approximates fair value as the interest rate fluctuates with market conditions.
12. Subsequent event
Subsequent event has been evaluated through August 10, 2009, the date these financial statements were issued. There was no event that requires disclosure.
F-14
- 15 -
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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, 2008. Except for the description of historical facts contained herein, the Form 10Q 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 accounting principles generally accepted in the United States of America 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, 2009, 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.
Prepaid expenses and deposits. Prepaid expenses and deposits primarily consists of prepaid commission expenses for market development purposes.
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 differ from the Company's projections, an additional inventory write-down may be required.
- 16 -
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, is recognized when the return privilege period has expired. Changes in sales terms could materially impact the extent and timing of revenue recognition.
Stock-Based Compensation. The Company follows the provisions of SFAS 123(R), “Share-Based Payment”. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing
model. The Company took into consideration guidance under SFAS 123(R) and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating assumptions. The expected option life is derived from assumed exercise rates based upon historical exercise patterns and represents the period of time that options granted are expected to be outstanding. The expected volatility is based upon historical volatility of our shares using daily price observations over an observation period of five years. The risk-free
rate is based on the U.S. treasury rate in effect at the time of grant for periods similar to the expected option life. Due to the Company’s history with respect to forfeitures of incentive stock options, the estimate of expired or cancelled options included in the above option valuation was zero.
Valuation of Long-lived Assets The Company assesses the potential impairment of long-lived tangible and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. Changes in the operating strategy can significantly reduce the estimated useful life of such assets.
Results of Operations
Management is focusing the majority of its efforts on introducing and marketing the HealthEConnect health management platform and its diabetes management system to the healthcare industry. A health services company based in Georgia has been signed on and has successfully gained customer
commitments to implement the HealthEConnect diabetes management system. Corporations that are self-insured are being targeted due to the potential benefits they can achieve with the ALRT HealthEConnect and CHC system. Expected results are better health outcome with their employees and dependents along with lower cost of care for these targeted individuals with diabetes.
The Company is first targeting customers located in United States and in Canada. Pilot programs have been established in each and with pilot outcome results now becoming available, extensive selling activities are being planned for currently in process.
Development costs were $115,250 for the quarter ended June 30, 2009 as compared with $237,336 for the quarter ended June 30, 2008. Development costs incurred during the first quarter of 2009 related to the allocation
of additional programming resources required for the development of the ALRT500 LCD (Liquid Crystal Display) Med Reminders and the ALRT Interactive Response System (AIRS).
Development costs for the six months ended June 30, 2009 and 2008 include $22,250 and $237,336, respectively, of stock-based compensation recognized in the period.
Interest expense was $448,633 for the six months ended June 30, 2009 as compared with $353,712 for the six months ended June 30, 2008. The amount for the six months period included $71,372 relating to options
issued in exchange for $120,699 loan received during the period which loans were repayable at demand secured by a floating charge against the Company’s assets.
- 17 -
Professional fees were $34,646 for the six months ended June 30, 2009 as compared with $35,790 for the six months ended June 30, 2008. Fees were slightly lower due to less accounting and audit services obtained
in the period.
The selling, general and administrative expenses were $242,246 for the six months ended June 30, 2009 as compared to $283,379 for the six months ended June 30, 2008. The decrease relates primarily to lower compensation
expenses incurred during the current period.
Net loss of $862,426 for the six months ended June 30, 2009 decreased from a loss of $924,536 for the same period in 2008 mainly due to decrease in product development costs as the produce development is close
to maturing stage.
Liquidity and Capital Resources
Cash Balances and Working Capital
As of June 30, 2009, the Company's cash balance was $607 compared to $7,901 as of December 31, 2008. As of June 30 2009, the Company had a working capital deficiency of $13,126,341 as compared to a working capital deficiency of $12,324,804 as of December 31, 2008.
Short and Long Term Liquidity
As of June 30, 2009, 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 Provided by (Used in) Operating Activities
Cash used by the Company in operating activities during the six months ended June 30, 2009 was $127,993 in comparison with $354,302 used during the same period last year. The decrease was mainly due to decreased payments to suppliers during the current period.
Cash Proceeds from Financing Activities
During the six months ended June 30, 2009, the Company received $120,699 loan from a relative of a director as compared to $450,000 from a non-related party in the six months period of 2008.
Off Balance Sheet Arrangement
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.
- 18 -
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 is overdue and now due on demand. 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 Company is currently financed by loans from a relative of a director of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES.
PART II
ITEM 1A. RISK FACTORS
The Company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information under this item.
ITEM 6. EXHIBITS
The following Exhibits are attached hereto:
|
Exhibit No. |
Description |
|
31.1 |
Certification of Principal Executive and Principal Financial Officer pursuant Section 302 |
|
of the Sarbanes-Oxley Act of 2002. | |
|
32.1 |
Certification of Chief Executive and Chief Financial Officer pursuant Section 906 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 17th day of August, 2009.
|
ALR TECHNOLOGIES INC. | ||
|
(Registrant) | ||
|
BY: |
SIDNEY CHAN | |
|
Sidney Chan | ||
|
President, Principal Executive Officer, Principal Accounting Officer, Principal Financial Officer Secretary/Treasurer and Director | ||
- 20 -
|
Exhibit No. |
Description |
|
31.1 |
Certification of Principal Executive and Principal Financial Officer pursuant Section 302 |
|
of the Sarbanes-Oxley Act of 2002. | |
|
32.1 |
Certification of Chief Executive and Chief Financial Officer pursuant Section 906 of the |
|
Sarbanes-Oxley Act of 2002. | |
- 21 -