ALR TECHNOLOGIES INC. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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)

88-0225807

(I.R.S. Employer Identification No.)

7400 Beaufont Springs Drive Suite 300

Richmond, VA 23225

(Address of principal executive offices, including zip code.)

(804) 554-3500

(Telephone number, including area code)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 last 90 days. YES [ ] NO [ x ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (SS 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 242,777,909 as of December 29, 2017.

ALR TECHNOLOGIES INC.

Index

PART I. FINANCIAL INFORMATION

ALR TECHNOLOGIES INC.

Condensed Consolidated Financial Statements

September 30, 2016 and 2015

(unaudited)

ALR TECHNOLOGIES INC.

Condensed Consolidated Balance Sheets

($ United States)

See accompanying notes to the condensed consolidated financial statements.

ALR TECHNOLOGIES INC.

Condensed Consolidated Statements of Operations

($ United States)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

ALR TECHNOLOGIES INC.

Condensed Consolidated Statements of Cash Flows

($ United States)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

ALR TECHNOLOGIES INC.

Notes to Condensed Consolidated Financial Statements

($ United States)

(Unaudited)

1.       Basis of Presentation, Nature of Operations and Going Concern

ALR Technologies Inc. (the “Company”) was incorporated under the laws of the state of Nevada on March 24, 1987. The Company has developed a compliance monitoring system that will allow for health care professionals to remotely monitor patient health conditions and provide patient health management. The Company has received Section 510(k) clearance from the United States Food and Drug Administration for its Diabetes Management System. The Company is seeking to commercialize its Diabetes Management System.

These consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) in U.S dollars and 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 losses over the nine month periods ended September 30, 2016 and 2015 of $9,428,782 and $5,584,786. In addition, losses incurred for the years ended December 31, 2015 and 2014 were $6,298,813 and $6,435,551. As of September 30, 2016, the Company is currently unable to self-finance its operations, has a working capital deficit of $22,604,551 (December 31, 2015 - $20,621,972), an accumulated deficit of $71,021,100 (December 31, 2015 - $61,592,317), limited resources, no source of operating cash flow, and no assurance that sufficient funding will be available to conduct continued product development activities. If the Company is able to finance its required product development activities, there is no assurance the Company’s current projects will be commercially viable or profitable. The Company has debts comprised of accounts payable, interest, lines of credit and promissory notes payable totaling $22,605,230 currently due, due on demand or considered delinquent. There is no assurance that the Company will not face additional legal action from creditors regarding delinquent accounts payable, payroll payable, promissory notes and interest payable. Any one or a combination of these above conditions could result in the failure of the business and cause the Company to cease 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 fund working capital and overhead requirements, fund the development of the Company’s product line and ultimately, the Company’s ability to achieve profitable operations and repay overdue obligations. Management has obtained short-term financing from related parties through lines of credit facilities with available borrowing in principal amount up to $10,500,000 (As of September 30, 2016 the total principal balance outstanding was $9,369,483). The resolution of whether the Company is able to continue as a going concern is dependent upon the realization of management’s plans. The Company plans to raise needed capital through the exercise of share options, increase to existing debt facilities or the acquisition of new debt facilities, and by future common share private placements. There can be no assurance that the Company will be able to raise any additional debt or equity capital from the sources described above, or that the lenders in the line of credit arrangements will maintain the availability of borrowing from the line. If management is unsuccessful in obtaining short-term financing or achieving long-term profitable operations, the Company will be required to cease operations.

ALR TECHNOLOGIES INC.

Notes to Condensed Consolidated Financial Statements

($ United States)

(Unaudited)

1.       Basis of Presentation, Nature of Operations and Going Concern (continued)

All of the Company’s debt is either due on demand or is in default, while continuing to accrue interest at its stated rate. The Company will seek to obtain creditors’ consents to delay repayment of the outstanding promissory notes payable and related interest thereto, until it is able to replace this financing with funds generated by operations, recapitalization with replacement debt or from equity financings through private placements. While some of 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. In the past, creditors have successfully commenced legal action against the Company to recover debts outstanding. In those instances, the Company was able to obtain financing from related parties to cover the verdict or settlement; however, there is no assurance that the Company would be able to obtain the same financing in the future. If the Company is unsuccessful in obtaining financing to cover any potential verdicts or settlements, the Company will be required to cease operations.

The Company’s activities will necessitate significant uses of working capital beyond 2016. Additionally, the Company’s capital requirements will depend on many factors, including the success of the Company’s continued product development and distribution efforts. The Company plans to continue financing its operations with the lines of credit it has available and future debt arrangements it obtains.

While the Company strongly believes that its capital resources will be sufficient in the near term, there is no assurance that the Company’s activities will generate sufficient revenues to sustain its operations without additional capital or if additional capital is needed, that such funds, if available, will be obtainable on terms satisfactory to the Company.

2.       Significant Accounting Policies

The unaudited condensed consolidated financial statements as of September 30, 2016 and for the period then ended have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, all adjustments necessary to present fairly the financial position as of September 30, 2016 and December 31, 2015 and the results of operations, and cash flows as of September 30, 2016 and 2015, and for the periods then ended, have been made. Those adjustments consist of normal and recurring adjustments.

These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

The results of operations for the nine month period ended September 30, 2016, are not necessarily indicative of the results to be expected for the full year.

ALR TECHNOLOGIES INC.

Notes to Condensed Consolidated Financial Statements

($ United States)

(Unaudited)

3.       Promissory notes and interest payable

a)       Promissory notes payable to related parties:

A summary of the promissory notes payable to related parties is as follows:

ALR TECHNOLOGIES INC.

Notes to Condensed Consolidated Financial Statements

($ United States)

(Unaudited)

3.       Promissory notes and interest payable (continued)

b)       Promissory notes payable to unrelated parties

A summary of the promissory notes payable to unrelated parties is as follows:

c)       Interest payable

A summary of the interest payable activity is as follows:

ALR TECHNOLOGIES INC.

Notes to Condensed Consolidated Financial Statements

($ United States)

(Unaudited)

3.       Promissory notes and interest payable (continued)

c)       Interest payable (continued)

Historically, all interest payable incurred is from interest incurred at the stated rate of promissory notes issued by the Company. The payment terms, security and any interest payable are based on the underlying promissory notes payable that the Company has outstanding.

d)       Interest expense

During the nine months ended September 30, 2016, the Company incurred interest expense of $8,614,457(2015: $4,375,722) substantially as follows:

ALR TECHNOLOGIES INC.

Notes to Condensed Consolidated Financial Statements

($ United States)

(Unaudited)

4.        Lines of Credit

As of September 30, 2016, the Company had two lines of credit as follows:

On July 1, 2016, the Company and the Chief Executive Officer of the Company agreed to amend the existing credit agreement to increase the borrowing limit on the line of credit provided to the Company from $7,000,000 to $8,500,000

As of December 31, 2015, the Company had two lines of credit as follows:

On May 29, 2015, the Company and the Chairman and Chief Executive Officer of the Company agreed to amend the existing credit agreement to increase the borrowing limit on the line of credit provided to the Company from $5,500,000 to $7,000,000.

5.       Capital Stock

On June 25, 2015, the Company’s articles of incorporation were amended to increase the authorized shares of common stock from 500,000,000 to 2,000,000,000 shares with a par value of $0.001 per share.

500,000,000 shares of preferred stock with a par value of $0.001 per share.

ALR TECHNOLOGIES INC.

Notes to Condensed Consolidated Financial Statements

($ United States)

(Unaudited)

5.       Capital Stock (continued)

b)       Issued Capital Stock

During the period ended September 30, 2016:

There were no capital stock issuances for the nine month period ended September 30, 2016.

During the year ended December 31, 2015:

There were no capital stock issuances for the year ended December 31, 2015.

6.        Additional paid-in capital

A summary of stock option activity is as follows:

During the nine month period ended September 30, 2016:

On July 1, 2016, the Company and the Chief Executive Officer of the Company agreed to amend the existing credit agreement to increase the borrowing limit on the line of credit provided to the Company from $7,000,000 to $8,500,000. In exchange for Mr. Chan making available the additional borrowing limit on the line of credit, the Company:

Ms. Kan is a creditor of the Company pursuant to a Line of Credit Agreement and certain promissory notes.

The interest expense recognized related to the option grant was $7,318,539.

ALR TECHNOLOGIES INC.

Notes to Condensed Consolidated Financial Statements

($ United States)

(Unaudited)

6.        Additional paid-in capital (continued)

a)       Stock options (continued)

During the nine month period ended September 30, 2016:

The Company recorded $16,345 in compensation expense related to vesting of stock options granted in previous years.

During the year ended December 31, 2015:

On January 30, 2015, the Company granted the option to acquire 4,500,000 shares of common stock at a price of $0.03 per share to 14 individuals. The fair value of the options granted was $42,858. During the year the Company recognized fair value of $10,964 and will recognize the balance over the vesting period for the unvested options.

On April 22, 2015, the Board of Directors approved the modification of the exercise price to acquire 12,400,000 shares of common stock of the Company from $0.03 per share to $0.015 per share held by 20 individuals. There was no increase in the fair value of the options from this modification. None of these option agreements have been executed.

On May 29, 2015, the Company and Sidney Chan, the Chairman and Chief Executive Officer of the Company agreed to amend the existing credit agreement to increase the borrowing limit on the line of credit provided to the Company from $5,500,000 to $7,000,000 (Note 4). In exchange for Mr. Chan making available the additional loan of $1,500,000 to the Company, the Company:

The interest expense recognized related to the option grant was $3,184,459.

The Company recorded a further $27,569 in compensation expense related to vesting of stock options granted in previous years.

ALR TECHNOLOGIES INC.

Notes to Condensed Consolidated Financial Statements

($ United States)

(Unaudited)

6.        Additional paid-in capital (continued)

a)       Stock options (continued)

The options outstanding at September 30, 2016 and December 31, 2015 were as follows:

The Company uses the fair value method for determining stock-based compensation for all options granted during the fiscal periods. The fair value was determined using the Black-Scholes Option Pricing Model based on the following weighted average assumptions:

The weighted average fair value for the options granted during the nine months ended September 30, 2016 was $0.002 (2015: $0.01).

ALR TECHNOLOGIES INC.

Notes to Condensed Consolidated Financial Statements

($ United States)

(Unaudited)

6.        Additional paid-in capital (continued)

a)       Stock options (continued)

The expense incurred related to stock options was allocated as follows:

7.       Related party transactions and balances

ALR TECHNOLOGIES INC.

Notes to Condensed Consolidated Financial Statements

($ United States)

(Unaudited)

7.       Related party transactions and balances (continued)

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.

8.       Commitments and contingencies

The Company has had three judgments against it relating to overdue promissory notes and accrued interest and a fourth creditor has demanded repayment of an overdue promissory note and accrued interest. To date, the Company has not repaid any of these promissory notes and related accrued interest and could be subject to further action. The legal liability, totaling $1,038,568, of these promissory notes and related accrued interest have been fully recognized and recorded by the Company.

The Company has a consulting arrangement with Mr. Sidney Chan, Chief Executive Officer and Chairman of the Board of Directors of the Company. Under the terms of the contract, Mr. Chan will be paid $180,000 per annum for services as Chief Executive Officer. The contract can be terminated at any time with thirty days’ notice and the payment of two years annual salary. Should the contract be terminated, all debts owed to Mr. Chan and his spouse must be immediately repaid. The initial term of the contract is for one year and automatically renews for continuous one year terms. Also under the terms of the contract are the following:

Mr. Chan will be entitled to a 1% net sales commission from the sales of any of the Company’s products at any time during his life, regardless if Mr. Chan is still under contract with the Company.

If more than 50% of the Company’s stock or assets are sold, Mr. Chan will be compensated for entering into non-compete agreements based on the selling price of the Company or its assets as follows:

ALR TECHNOLOGIES INC.

Notes to Condensed Consolidated Financial Statements

($ United States)

(Unaudited)

9.       Subsequent Events

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 Consolidated 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-K for the year ended December 31, 2015. Except for the description of historical facts contained herein, the Form 10-Q 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.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Our financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.

In this quarterly report, unless otherwise specified, all references to “common shares” refer to the common shares in our capital stock.

As used in this quarterly report, the terms “we”, “us”, “our”, the “Company” and “ALRT” mean ALR Technologies Inc, unless otherwise indicated.

Overview

ALR TECHNOLOGIES, INC. (the “Company” or “ALRT”) was incorporated under the laws of the State of Nevada on March 24, 1987 as Mo Betta Corp. In April 1998, the Company changed its business purpose to marketing a pharmaceutical compliance device.

On October 21, 1998, the Company entered into an agreement with A Little Reminder Inc. (“ALR”) whereby the Company would have the non-exclusive right to distribute certain products of ALR described below.

In December 1998, the common shares of the Company began trading on the Bulletin Board operated by the National Association of Securities Dealers Inc. under the symbol “MBET.” On December 28, 1998, the Company changed its name from Mo Betta Corp. to ALR Technologies Inc. Subsequently the symbol was changed to “ALRT.”

In April 1999, the Company acquired 99.9% (36,533,130) of the issued and outstanding Class A shares of common stock of ALR in exchange for 36,533,130 shares of the Company’s common stock thereby making ALR a subsidiary corporation of the Company. ALR also had outstanding 124,695 shares of Class B common stock, none of which was owned by the Company.

ALR was incorporated pursuant to the Company Act of British Columbia on May 24, 1996. ALR owned one subsidiary corporation, Timely Devices, Inc. (“TDI”). TDI was founded in Edmonton, Alberta, Canada on July 27, 1994. ALR owned all of the total outstanding shares of TDI. TDI had only one class of common stock outstanding.

On July 31, 2000, the Company sold all of its shares of ALR. From that point onward, the Company focused on developing its own technology, products and performed its own marketing.

On April 15, 2008, the Company incorporated a wholly-owned subsidiary in Canada under the name Canada ALRTech Health Systems Inc. This subsidiary was wound up during 2016.

In late 2011, the Company relocated its headquarters to 7400 Beaufont Springs Drive, Suite 300, Richmond, Virginia, 23225.

During 2011, the Company received FDA clearance and achieved HIPPA compliance for its Diabetes Management System. With these key achievements and successful clinical trials completed, the Company began implementing its commercialization strategy which included a pilot program with patients in Kansas in 2014. The Company obtained significant findings from this pilot program which led to the development of its Insulin Dosage Adjustment.

During 2017, the Company received FDA clearance for IDA and submitted worldwide patent application under the patent cooperation treaty to the World Intellectual Property Organization for its Predictive A1C innovation. The Company is actively seeking to commence revenue generating activities for its Diabetes Management System.

Recent Developments

On January 30, 2015, the Company granted the option to acquire 4,500,000 shares of common stock at a price of $0.03 per share for a term of five years as follows:

# the option granted to Ms. Payton is also subject to her accepting a full-time role with the Company prior to July 31, 2015.

* the option granted to Mr. Murphy is also subject to him accepting a full-time role with the Company

On January 30, 2015, Mr. Ronal Cheng was appointed to the Board of Directors of the Company. Mr. Cheng is a lawyer retired from Osler, Hoskin and Harcourt LLP, a major Canadian based international law firm, where he practiced as a partner from 1980 until his retirement in March 2014. He regularly appeared as counsel before the Canadian International Trade Tribunal, Canadian federal courts and on NAFTA and WTO matters and advised on NAFTA and other trade agreements. He represented and provided strategic advice to corporations including startups, trade associations and governments in anti-dumping, countervail and safeguard litigation, customs matters, commodity tax and government procurement disputes, as well import and export monitoring and controls. Mr. Cheng was listed in the Lexpert® Guides to Leading US/Canada Cross-border Litigation Lawyers and with highest listings in other leading legal directories such as Chambers, Martindale-Hubbell and Best Lawyers. Mr. Cheng received his Bachelor of Arts from Amherst College in 1972 and a Juris Doctor degree from the University of Toronto in 1974. Mr. Cheng is an active member of the Canadian Bar Association, American Bar Association, International Bar Association and Inter Pacific Bar Association.

On February 10, 2015, the Company entered into a revised services agreement with the Chief Executive Officer of the Company. In accordance with the terms of the agreement, short term compensation paid to the Chief Executive remains unchanged, however he will receive a 1% sales bonus on all sales of the Company. In addition, should his contract be terminated, all debts repayable to the Chief Executive Officer, his spouse and their family through existing debt facilities will be due within five days of his termination with the Company.

On April 22, 2015, our Board of Directors approved the modification of the exercise price to acquire 12,400,000 shares of common stock of the Company from $0.03 per share to $0.015 per share held by 20 individuals. None of the underlying option amendment agreements have been finalized between the Company and the 20 individuals.

On May 11, 2015, shareholders holding a majority of the outstanding shares of our common stock executed a written consent approving the amendment to the articles of incorporation to increase the authorized shares of common stock from 500,000,000 to 2,000,000,000 shares with a par value of $0.001. On June 25, 2015 the certificate of amendment to affect the change was issued by the Office of the Secretary of the State of Nevada.

On May 29, 2015, the Company and Sidney Chan, the Chairman and Chief Executive Officer of the Company, agreed to amend the existing credit agreement between the two parties to increase the borrowing limit on the line of credit provided to the Company from $5,500,000 to $7,000,000. All other terms and conditions remain unaltered. Mr. Chan and the Company had previously entered into a credit agreement on March 6, 2011, which was subsequently amended by amending agreements dated October 24, 2011, June 15, 2012, December 28, 2012 and April 1, 2014 whereby Mr. Chan agreed to make available to the Company a credit line equal to an aggregate of $5,500,000 for the Company’s corporate purposes. Under the terms of the arrangement, the amount borrowed by the Company bears simple interest at a rate of 1% per month. The amount borrowed is secured by a general security agreement over the assets of the Company and is due on demand.

In exchange for Mr. Chan making available the additional loan of $1,500,000 to the Company, the Company:

On December 28, 2015, the Company was notified by OTC Markets Group that it did not cure its bid price deficiency in the time provided.  The Company’s stock listing was moved from the OTCQB to OTC Pink Current Information on December 29, 2015. To meet the standards of the OTCQB, a Company must have a minimum closing bid price of $0.01 per share on at least one of the prior thirty consecutive calendar days.

On January 15, 2016, the Company announced that it has not been successful in finding follow on financing and accordingly reduced its operating budget by reducing its United States based sales and marketing program and diabetes care facilitation workforce. On January 31, 2016, the Company received the resignation of Mr. William Smith from the positions of President and member of the board of directors of the Company.

On June 21, 2016, the Company accepted a proposal from Sidney Chan, the Chairman and Chief Executive Officer of the Company, to amend the existing credit agreement between the two parties to increase the borrowing limit on the line of credit provided to the Company from $7,000,000 to $8,500,000. All other terms and conditions remain unaltered. Mr. Chan and the Company had previously entered into a credit agreement on March 6, 2011, which was subsequently amended by amending agreements dated October 24, 2011, June 15, 2012, December 28, 2012, April 1, 2014 and May 29, 2015 whereby Mr. Chan agreed to make available to the Company a credit line equal to an aggregate of $7,000,000 for the Company’s corporate purposes. Under the terms of the arrangement, the amount borrowed by the Company bears simple interest at a rate of 1% per month. The amount borrowed is secured by a general security agreement over the assets of the Company and is due on demand.

Under the terms of agreement, in exchange for Mr. Chan making available the additional loan of $1,500,000 to the Company, the Company would be required to:

On December 20, 2016, certain stockholders who beneficially owned 122,998,482, or approximately 50.66%, of the combined voting power of the common stock consented in writing to increase the number of authorized shares of common stock from two billion shares (2,000,000,000) to ten billion shares (10,000,000,000) shares, par value $0.001 per share. The Company filed a preliminary information statement with the SEC but has not filed its definitive statement due to its deficient reporting status.

On January 27, 2017, the Company’s Board of Directors approved a 100:1 reverse share split of the Company’s common stock. The Company has filed the amendment to its articles to effect the reverse split with the State of Nevada. The Company cannot complete its stock split due to its deficient reporting status with the SEC. The reverse share split is pending approval from the SEC and other regulatory bodies.

On November 27, 2017, the Company’s Board of Directors approved the grant of the option to 8,700,000 shares of common stock of the Company at a price of $0.015 per share for a term of five years. 2,200,000 of the approved options were to a director of the Company and 6,500,000 were to consultants of the Company.

Products

ALR Technologies products utilize internet-based technologies to facilitate healthcare provider’s ability to monitor their patient’s health and ensure adherence to health maintenance activities.

Products (continued)

The ALRT Diabetes Management System is a remote monitoring and care facilitation program that allows patients to upload the blood glucose data from their glucometers. ALRT Health Data Monitors monitor that data and, based on clinician approved protocols, provide advice, support and interventions when patients show blood glucose readings that are out of an acceptable range or if they are failing to test their blood glucose as prescribed. The ALRT System has been successfully proven in a clinical trial that demonstrated this type of remote care is associated with significant lowering of A1c levels. The study concluded that continuing intervention using an internet based glucose monitoring system is an effective way of improving glucose control compared to conventional care. A second clinical trial demonstrated that this type of Internet-based Blood Glucose Monitoring System (IBGMS) was associated with comparable reductions in A1c levels with that of more expensive Continuing Glucose Monitoring Systems (CGMS).

In the future, the Company may seek to adapt its System to be used in the management of other chronic diseases. The Company may be required to obtain additional clearance from the FDA prior to commencing selling activities in the United States for other disease states.

ALRT Diabetes Management System

Diabetes is a leading cause of death, serious illness and disability across North America. In the United States, it is estimated that 26 million people have diabetes, with 4.5 million people being classified as insulin dependent. By the year 2030, it is expected that 1 in 10 adults, globally, will have diabetes (diagnosed and undiagnosed instances). By the year 2050, it is expected that 1 in 3 United States adults will have diabetes (diagnosed and undiagnosed instances). We believe diabetes is a global pandemic.

As a result, medical costs due to diabetes and its complications are enormous. In the United States, such costs are estimated to be over $245 billion a year. In Canada, where it is estimated there are 2 million people with diabetes, healthcare costs associated with diabetes is estimated to be more than $13 billion annually.

Diabetes is a lifelong chronic disease with no cure. However, people with diabetes can take steps to control their disease and reduce the risk of developing the associated serious complications, thereby controlling healthcare costs. The Canadian Diabetes Association Clinical Practice Guidelines Expert Committee reports that “Successful diabetes care depends on the daily commitment of persons with diabetes mellitus to self-manage through the balance of lifestyle and medication. Diabetes care should be organized around a multi- and interdisciplinary diabetes healthcare team that can establish and sustain a communication network between the person with diabetes and the necessary healthcare and community systems.”

However, as noted in Patrick Connole, “UnitedHealthcare, Other Large Insurers Seek Better Adherence to Diabetes Care”, Health Plan Week, February 11, 2013 Volume 23 Issue 5, 80% of United States patients with diabetes do not follow their prescribed care plan.

Furthermore, in Treatment intensification for patients with type 2 diabetes and poor glycaemic control by Fu and Sheenan, it was noted that out 11,525 patients investigated with an A1c greater than 8% patients received intensification as follows:

• 37% within 6 months;
• 11% within 6-12 months, and
• 52% never

ALRT Diabetes Management System (continued)

A study in 2013 by Khunti, Wolden, Thorstead, Anderson and Davies entitled Clinical inertia in people with type 2 diabetes: a retrospective cohort study of more than 80,000 people found that patients it took on average 19 months to escalate patients with an average A1c of 8.7% from single medication to dual therapy and 82 months to escalate patients with an average A1c of 8.8% from dual medication to triple therapy. Furthermore, they found that it took approximately 20 years to advance patients with an average A1c of over 9% to insulin. At the end of the study, less than 50% of the patients had their treatment intensified.

The Company’s Diabetes Management System provides an affordable and easy to use tool to provide the communication network as recommended by the Committee. Our Diabetes Management System includes a communications software platform that also enables health professionals to remotely monitor the health progress to patients with diabetes. This facilitates more timely and effective communication and coordination of care to these patients. This also results in positive behavior patterning, or re-patterning, of the patients.

The Diabetes Management System and the Company’s universal upload cable, are compatible with the majority of the major brands of glucose meters available for sale in the United States.

In August 2010, the Company received the results of a clinical trial conducted by Dr. Hugh Tildesley using the ALRT Health-e-Connect System. The trial showed A1c dropping from 8.8% to 7.6% for the Intervention Group using ALRT’s Health-e-Connect System as part of a diabetes management program. The A1c test is important in diabetes treatment management as a long-term measure of control over blood glucose for diabetes patients. According to Center for Disease Control and Prevention, “In general, every percentage drop in A1c blood test results (e.g. from 8% to 7%), can reduce the risk of microvascular complications (eye, kidney and nerve diseases) by 40%.”The trial served as the basis for an article titled “Effect of Internet Therapeutic Intervention on A1c Levels in Patients with Type 2 Diabetes Treated with Insulin” was published in the August 2010 Diabetes Care publication.

In July 2011, the follow-up results of the Dr. Tildesley clinical trial were published in the Canadian Journal of Diabetes. Dr. Tildesley conducted a 12 month study using Health-e-Connect System as an Internet Based Blood Glucose Monitoring System (IBGMS) to provide intensive blood glucose control to determine the effects of internet based blood glucose monitoring on A1c levels in patients with type 2 diabetes treated with insulin. Dr Tildesley concluded that, “While IBGMS intervention was not a substitute for the patient–physician interaction in a clinical setting, it significantly improved A1c and, over time, we observed better glycemic control and patient satisfaction.”

In October 2011, the Company received 510(k) clearance from the U.S. Food and Drug Administration (FDA) for its Diabetes Management System (then known as the Health-e-Connect System) for remote monitoring of patients in support of effective diabetes management programs. The 510(k) clearance enables the Company to commence with the United States marketing and sales launch of its Health-e-Connect System.

On July 28, 2014, the Company entered into a pilot service agreement with Kansas City Metropolitan Physician Association (KCMPA), one of the nation's premier Accountable Care Organizations (ACO). Under the agreement, KCMPA, which made diabetes management a key focus of its Quality Improvement Plan, enrolled up to 200 of its patients with Type 2 diabetes into ALRT's Diabetes Management System. The pilot service agreement was effective nine months from the beginning date of patient enrollment and the intent was to allow 6 months of use for each patient enrolled in the system. The pilot program between ALRT and KCMPA represented the first commercial deployment of ALRT's Diabetes Management System. On September 9, 2014, the Company began enrolling patients with Type 2 diabetes and A1c levels above 8 percent into the pilot program trialing the Diabetes Management System.

ALRT Diabetes Management System (continued)

In September 2014, the Company initiated its pilot program with one of the Kansas City Metropolitan Physician Association clinics to deploy its Diabetes Management System for up to 200 patients that fit certain criteria. As a result of the pilot program findings and general industry trends, the Company proceeded with developing three new innovations:

On January 1, 2015, the Center for Medicaid and Medicare Services began reimbursing physicians for the non-face-to-face management of Medicare patients with two or more serious chronic diseases. Physicians would be paid a per-patient-per-month fee for “Chronic Care Management” and the examination of data from a remote monitoring platform is considered a reimbursable activity by CMS. Therefore, the company modified its System to conform to the requirements of the CMS reimbursement. These modifications permit the company to market to medical groups throughout the United States with a product that will help physicians to draw down this new reimbursement as well as to potentially improve the outcomes of their patients.

On February 18, 2015, the Company filed a 510(k) application with the FDA to add a remote insulin dosing recommendation feature to the Company’s Diabetes Management System. The company utilized the publicly available algorithm of the AACE & ADA. This feature allows the company to regularly run a patient’s blood glucose data (and other key data) through the AACE and ADA algorithm. When the algorithm indicated that the patient’s dose may not be optimal, the Diabetes Management System would provide the heathcare provider that a dose change may be warranted and what the change would be based on AACE and ADA guidelines. The decision about the dose change would rest entirely with the healthcare provider. However, this new feature may make a significant contribution to improving the outcomes of diabetes patients if it allowed healthcare provider to keep their patients at the optimal dose for longer periods.

Preliminary data from the KCMPA pilot program indicated that a number of patients had achieved reductions in their A1c levels. On April 17, 2015, the company signed a commercial contract with one of the KCMPA clinics, the Clay-Platte Family Medicine Clinic, to provide remote monitoring services. The Company has provided these services to date to Clay-Platte at no charge as it has provided the Company with continuous users as a sample population for its own strategic planning and business plan. The Company continues to actively provide services to Clay-Platte for certain of its patients.

On June 20, 2017, the Company filed a worldwide patent application under the PCT for its Predictive A1c feature to the World Intellectual Property Office.

On September 18, 2017, the Company received clearance from the FDA for its Insulin Dosage Adjustment feature within the Company’s Diabetes Management System.

Critical Accounting Policies and Going Concern

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our unaudited condensed consolidated financial statements for the nine months ended September 30, 2016 and 2015, which have been prepared in accordance with GAAP.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical and anticipated results, trends, and various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may materially differ from our estimates.

The Company’s condensed consolidated financial statements have been prepared 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. See note 1 of the condensed consolidated financial statements.

Due to our being a development stage company and not having generated significant revenues, in the Notes to our financial statements, we have included disclosure regarding concerns about our ability to continue as a going concern.

Consolidated Results of Operations

Nine Months Ended September 30, 2016

The net loss for the Company’s nine months ended September 30, 2016 and September 30, 2015 was significantly impacted by the grant of options to obtain additional debt financing:

Consolidated Results of Operations (continued)

The net loss for the nine months ended September 30, 2016 increased by 69% ($3,843,996) from the same period in the prior year as a result of the grant of options with a fair value of $7,318,539 as consideration for receiving an increase in the borrowing limit of the primary line of credit facility the Company has available. During the same period in the previous year, the Company incurred expense of $3,184,459 with respect to options granted for increasing the borrowing limit on the line of credit facility the Company had available. The fair value of the options granted accounted for 110% of the total increase in net loss from the same period in the prior year. At the operating expenses level, the Company had a reduction in net loss attributed to a reduction in the sales, marketing and diabetes care facilitators in the United States effective January 31, 2016.

General, selling and administrative expenses. General, selling and administrative costs consist of salaries and consulting fees of management personnel, stock-based compensation for options granted to management personnel, travel and trade show costs, rent of the Company’s corporate office, website costs, information technology costs and general costs incurred through day-to-day operations. From the nine month period ended September 30, 2016 as compared to the nine month period ended September 30, 2015, there was significant variance in the total expense incurred. By type of general and administrative cost, the variance can be seen as follows:

All of categories of general, selling and administrative costs were reduced as compared to the same period in the prior year. During 2016, the Company reduced its general and administrative operating expenditures as compared to the same period in 2015 as it reduced its sales and marketing team in the United States. The cash-based general & administrative expenditure decreased by approximately $343,000 during the nine month period ended September 30, 2016 as compared to the prior year period.

Product development costs. Substantially all of the product development costs incurred related to a) services provided by contractors of the Company b) expenses incurred for product development and c) stock-based compensation for options granted to members of the product development team. The change in balance from the previous year relates primarily to an increase in external consulting services related to the Insulin Dosage Adjustment 510K application and the Company quality system and an increase in development personnel.

Consolidated Results of Operations (continued)

Professional fees. Professional costs incurred consist of consulting and advisory fees of certain professionals retained, audit fees, legal fees, diabetes care facilitators and stock-based compensation for options granted to professionals. During the period, there was a significant decrease in professional fees. By type of general and administrative cost, the variance can be seen as follows:

The decrease in professional fees can be attributed to the Company not filing its 2016 Form 10Qs and its 2015 10K for 2015 during the 2016 fiscal year and terminating its United States Diabetes Care Facilitators.

Interest expense. Interest expense was from the following sources for the nine months ended September 30, 2016 and 2015:

Interest on Promissory Notes

There were not substantial changes in the amount of promissory notes outstanding from September 30, 2015 to September 30, 2016. Related to its promissory notes outstanding, the Company incurred interest expense of $371,000 for the nine months ended September 30, 2016 and $387,000 for the nine months ended September 30, 2015. The difference of interest expense relates to certain related party creditors reducing the interest rate charged on their promissory notes owed by the Company.

Interest on Lines of Credit

The Company has two line of credit facilities that had balances as follows:

Consolidated Results of Operations (continued)

Interest on Lines of Credit (continued)

The Company incurred interest on the lines of credit as follows:

Imputed Interest

During the 2016 and 2015 periods, the Company had certain zero interest promissory notes and accounts payable in excess of one year. Pursuant to the company’s accounting policy, these zero interest amounts are considered to be financing items in nature and are assigned a deemed interest rate (1% per month). The interest incurred on these is expensed as imputed interest and the instead of increasing the liabilities of the Company, it is allocated to equity under the financial statement line item “additional paid-in capital”.

Interest Expense Related to Stock Options Granted

On July 1, 2016, the Company and the Chief Executive Officer of the Company agreed to amend the existing credit agreement to increase the borrowing limit on the line of credit provided to the Company from $7,000,000 to $8,500,000. In exchange for Mr. Chan making available the additional borrowing limit on the line of credit, the Company granted Mr. Chan and his spouse the option to acquire 4,390,001,300 shares of common stock of the Company. The Company utilized the Black Scholes option pricing model to calculate the fair value of these options. The interest expense recognized related to the option grant was $7,318,539, which was all recognized during 2015 since the line of credit is due on demand and has no other terms of repayment.

On May 29, 2015, the Company and Sidney Chan, the Chairman and Chief Executive Officer of the Company agreed to amend the existing credit agreement to increase the borrowing limit on the line of credit provided to the Company from $5,500,000 to $7,000,000 (Note 4). In exchange for Mr. Chan making available the additional borrowing room, the Company granted Mr. Chan and his spouse the option to purchase 330,000,100 shares of common stock of the Company. The Company utilized the Black Scholes option pricing model to calculate the fair value of these options. The interest expense recognized related to the option grant was $3,184,459, which was all recognized during 2015 since the line of credit is due on demand and has no other terms of repayment.

Consolidated Results of Operations (continued)

Three Months Ended September 30, 2016

The net loss for the three months ended September 30, 2016 increased by 938% ($7,231,986) as compared to the same period in the prior year as a result of the Q3 2016 grant of option to acquire shares of common stock of the Company with a fair value of $7,318,539 as consideration for receiving an increase in the borrowing limit of the primary line of credit facility the Company has available. There was not similar transaction during the comparable period in the prior year ended. The fair value of the options granted accounted for 101% of the increase in net loss from the prior year. The balance of the reduction in net loss can be attributed to a reduction in the sales, marketing and diabetes care facilitators in the United States effective January 31, 2016.

Liquidity and Capital Resources

The Company has a severe working capital deficiency. It does not have ability to service is current liabilities for the next twelve months and is reliant on its line of credit facilities to meet its on-going operations. Until the Company has revenue producing activities that exceed its operating requirements, it will be unable to service its current liabilities and the working capital deficit will continue to increase. As of the date of this management discussion and analysis, the Company has not commenced revenue generating activities, nor does it know when they will commence. There is substantial doubt about the Company’s ability to repay its current liabilities in the near term or anytime in the future which could ultimately lead to business failure.

Current Assets

The Company’s current assets as at September 30, 2016 and December 31, 2015 consist substantially of cash.

Current Liabilities

The Company has current liabilities of $ as at September 30, 2016 as compared to $20,676,225 as at December 31, 2015. Current liabilities were as follows:

The increase in interest payable of $367,953 relates to accrued interest incurred on promissory notes at their stated rates of interest. All of the promissory notes and related interest payable are overdue.

The fluctuations in accounts payables occurred as part of operations.

The increase in the lines of credit payable of $1,558,244 is attributable to borrowings as follows:

Cash Balances and Working Capital

As of September 30, 2016, the Company’s cash balance was $679 compared to $52,688 as of December 31, 2015.

Cash Provided by (Used in) Operating Activities

Cash used by the Company in operating activities during the nine months ended September 30, 2016 was $791,175 as compared to $1,165,335 used during the same period last year. The Company’s expenditures from operations were used as follows (approximate amounts):

The majority of the expenditures were to pay product development costs, professional fees and selling and administration costs associated with operating the business.

Cash Proceeds from Financing Activities

Cash sourced by the Company from financing activities during the nine month period ended September 30, 2016 was $742,000 as compared to $1,137,000 sourced during the same period in the prior year. The funds were sourced from lines of credit provided by Chairman of the Board and a relative of the Chairman of the Board. The loans received in 2016 and 2015 covered the operating, product development and market development requirements for the Company repaid certain advances and accounts payable.

Short and Long Term Liquidity

As of September 30, 2016, the Company does not have the current financial resources and committed financing to enable it to meet its administrative overhead, product development budgeted costs and debt obligations over the next 12 months.

All of the Company’s debt financing are due on demand or overdue. 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. The Company has faced litigation from creditors in the past and is currently being sued by one creditor. There is no assurance that additional creditors will not make claims against the Company 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.

Tabular Disclosure of Contractual Obligations:

The Company will continue to use the funds available from the line of credit to cover administrative overhead and product development requirements until such time it can establish cash flows from operations. In the next six months, the Company anticipates the amount borrowed from the line of credit to increase as compared to the past six months as it expects to commercially launch its Diabetes Management System during this period.

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. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT 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.

Under the supervision and with the participation of our management, including the Principal Executive Officer and Principal Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report.

Based on this assessment, we found our internal and disclosure controls over financial reporting to be not effective for the following reasons:

While the Company is working to remedy these deficiencies as its business activities evolve, there were no changes in our internal or disclosure controls over financial reporting during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

There were no other changes from the period beginning July 1, 2016 to the date of this 10Q.

ITEM 1A. RISK FACTORS.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

As at September 30, 2016, the Company had promissory notes payable and related interest payable, totalling $8,790,015 in default.

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 29th day of December, 2017.