ITEM 1. BUSINESS.
Background
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. On December 28, 1998, the Company changed its name from Mo Betta Corp. to ALR Technologies Inc. In April 1998, the Company changed its business purpose to marketing a pharmaceutical compliance device which was owned by A Little Reminder (ALR) Inc. (“ALR”).
On October 21, 1998, the Company entered into an agreement with ALR whereby the Company would have the non-exclusive right to distribute certain products of ALR described below.
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 continued its jurisdiction under the laws of Canada on September 23, 1996 and to the State of Wyoming on July 31, 1998.
ALR owned one subsidiary corporation, Timely Devices, Inc. (“TDI”). TDI was founded in Edmonton, Alberta, Canada on July 27, 1994. ALR owns 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. As a result of this sale, the Company is no longer using the technology that was used by its previously owned subsidiaries and does not have any assembly capability. The Company now does its own marketing and has designed products based on new technology. The manufacturing and assembling of these products has been contracted out.
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.” Subsequently the symbol was changed to “ALRT.”
On April 15, 2008, the Company incorporated a wholly-owned subsidiary in Canada under the name Canada Alrtech Health Systems Inc.
Products
The Company has developed a compliance and healthcare monitoring system and a line of medication compliance reminder devices that will assist people with taking their medications and treatments on time and allow for health care professionals to remotely monitor their compliance as well as diagnostic data from devices such as glucometers, nebulizer compressors, and intervene as necessary for non-compliant patients. The primary target market is to assist the healthcare professional in providing a comprehensive patient compliance system for their patients with chronic disease or at risk for developing chronic disease. Also targeted are hospitals to utilize the system to reduce hospital “re-admission” rates by keeping the discharged patient on their care plan. Secondary markets exist for vision care and contact lens replacement reminders, reminders for vitamins, nutrition and weight management programs and reminders for medications for companion animals.
The primary business development focus for the Company is its proprietary ALRT Health-e-Connect System™ (Health-e-Connect). It is a health management compliance monitoring system that contains several independent features that can be combined or used independently depending on the specific need for a disease population group.
The comprehensive system, the Health-e-Connect, allows health care professionals to program compliance reminders for patients with chronic conditions such as diabetes, COPD and other disease states. The compliance reminders can be in the form of text messages on the patient’s cell phone, text alerts on the Constant Health Companion™ (CHC) compliance reminder product or email alerts. The health professional can also monitor the patient’s compliance with medications, treatments or with the use of diagnostic readings from the glucometers, nebulizer compressors and other equipment. Health-e-Connect is a unique software system that provides communications links and remote monitoring for health professionals or caregivers to utilize, also allows for services from physicians that health insurance payers reimburse the physicians for.
Constant Health CompanionTM (CHC)
The Health-e-Connect can be utilized directly with patients without the need for the CHC but the company has developed the CHC for selected patient situations, where the cell phone text messaging will not be used, and for use with nebulizer compressor monitoring for patients with COPD or cystic fibrosis. The Company has developed the CHC with the intent of adding a feature for giving specific instructions. Thus, the actions/medications that need to be taken at a specific time will be displayed on the LCD screen. Although the Health-e-Connect system will be available much sooner that the CHC, the enhancements allowing for the remote monitoring of compliance data and diagnostic data now complete the full commercial introduction of the CHC will be third quarter of 2010. This model is PC programmable and contains a LCD display. Additional memory will allow the Reminder to store the list of medications used by the patient and an emergency contact list. The product users can also subscribe to the home monitoring system that allows registered recipients to monitor compliance. The product saves compliance profile of the patient for up to 12 months.
Other primary features include:
The monitoring capabilities with the Health-e-Connect and the CHC have been in pilot testing for more than two years and commercial introduction will commence in the third quarter to coincide with the introduction of the CHC. In addition to the reminder capability of the CHC, this system will provide the additional feature of allowing for the remote monitoring of reminder acknowledgments. This feature will enable a treatment center or other caregiver to intervene if it is deemed that the patient is not taking their medications as prescribed. The Health-e-Connect, which is a home monitoring system, will also allow a treatment center and other health care professionals to remotely change a patient’s reminder timing and/or the actions/doses/medications to take at the time of each reminder. This interactive system was designed and developed in response to the needs of patients with special and critical needs, such as heart disease patients, organ transplant recipients, cancer patients, severe diabetics, HIV patients and patients with other chronic diseases. Busy lifestyle and complex medications, or disease management regimen; contribute greatly to a person’s non-compliance. Benefits include the following:
ALRT Health-e-Connect System TM for Diabetes Monitoring
Health-e-Connect for diabetes monitoring is designed to complement the Company’s CHC patient compliance system. The System is a communications software platform that will enable health professionals to remotely monitor the health progress specifically relating to diabetic patients. This will facilitate more effective and timely communication of care to these patients.
Diabetes is a leading cause of death, serious illness and disability across North America. In the United States, it is estimated that 23.6 million people have diabetes. The Canadian Diabetes Association estimates that currently over 2 million Canadians have diabetes and this number is expected to rise to 3 million by the end of the decade. Medical costs due to diabetes and its complications are enormous. In the United States, such costs are estimated to be over $130 billion a year and in Canada, healthcare costs associated with diabetes is $13.2 billion annually.
Diabetes is a lifelong chronic disease with no cure. However, diabetics 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 person with diabetes mellitus to self-management 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.” The Company’s Health-e-Connect for diabetes monitoring provides an affordable and easy to use communication network as recommended by the Committee.
The Company’s Health-e-Connect adapted to the Canadian market will also be available. ERS Endocrine Research Inc. (“ERS”) Vancouver, Canada will be announcing the results of a clinical trial in the second quarter of 2010. The system allows upload of data directly from glucometers for review remotely by health professionals and caregivers.
ALRT Health-e-Connect System TM for Respiratory Health Management
The Company has the first and only nebulizer compressor monitoring system in the world. This system enables physicians and caregivers to monitor the use of the nebulizer; the time of day used and the duration of time used. This monitoring is especially important to the millions of people who suffer from COPD and have to take nebulized medications daily. The system consists of the CHC connected to nebulizer models that include the connectivity and a transmission modem. The Company received a patent from the US patent office for this system. Primary benefits and features of this system include:
The CHC connects to a custom port at the nebulizer compressor switch. The port is very small and this system can be adapted to all types of nebulizers at minimal cost.
The CHC system will also provide monitoring of peak flow meters and allow for remote monitoring of the peak flow scores from the meter by a healthcare professional.
Benefits of Healthcare Compliance Reminders
The problem of medication non-compliance is prevalent in the United States. In March of 2004, Medical Care estimated that $300 billion was spent annually as a direct or indirect result of medication non-compliance. Monitoring compliance of disease management activities, such as treatments, medications and diagnostic tests, allows for alerting designated parties when a patient is noncompliant. It also facilitates intervention if the patient is deemed at risk. Often, physicians and caregivers do not detect noncompliance until the next medical appointment. More timely intervention should result in substantial health benefits to the patient and significant cost savings. The ongoing monitoring of compliance data will also allow for evaluation of compliance behavior over time, resulting in behavior modification or education efforts when appropriate.
The Company believes that its products for setting timely healthcare compliance reminders/alerts will improve patient-compliance with doctor’s orders for taking medications and other treatments. Greater compliance with medication and treatment regimens is likely to enhance the patient’s ability to realize the full benefits. If people do not receive the intended benefit of their medications and health management regimens, their condition may fail to improve. Additional complications may develop and compromise the patient’s health further. This may lead to substantially increased costs of healthcare in general. Industry data indicate that 50% or more of people on medications do not take them as prescribed, and that this non-compliance contributes to 10% of hospitalizations and billions of dollars spent annually in excessive and preventable healthcare costs. Reminding a person to take an action is the first step in our system; monitoring their actions and their data is the second and intervention when needed is the important follow-up.
The Company’s comprehensive Health-e-Connect is the only device currently available that combines portability, compliance reminders, compliance monitoring and communications network for health professionals.
Reimbursement for Health Professionals
The Company is working on confirmation that Health-e-Connect will allow for services to be provided by physicians that will be reimbursed by health insurance companies. The reimbursement will be a breakthrough as physicians will be paid to provide these important new services to their patients with chronic conditions.
Business Development and Marketing Strategy
The Company is focusing the majority of its efforts in introducing and marketing our Health-e-Connect and CHC system for medical clinics and health professionals to provide direct care to patients and be reimbursed by the patients health benefit plan as well as to health plan payers due to the significant ROI they can achieve by keeping employees/plan members with conditions such as diabetes healthy. To reach these market targets the Company is utilizing independent sales consultants who have relationships with the target organizations as well as developing partnerships with health care service companies.
The Company is first targeting customers located in United States because of the large market potential but will also be establishing selling operations/agreements for sales and distribution in Canada, Europe, Australia and selected countries in Asia and South America.
The Company’s initial target market consists of patients with diabetes and also those with COPD (chronic obstructive pulmonary disease). People with conditions such as cystic fibrosis, transplant patients, congestive heart failure, coronary artery disease, and cancer can benefit from our system. The Health-e-Connect helps patients remember when and how to take their medication and execute therapy tasks. Another large market consists of healthcare provider employees such as case-managers, nurses, and other caregivers. The Health-e-Connect reports compliance data to caregivers, allowing them to assist their patients in following the proper medication and therapy schedules. Finally, a current market exists for the managers of caregivers. The Health-e-Connect helps the managers assess their caregivers’ effectiveness in overseeing their patients.
The Company is focusing its marketing efforts on the Health-e-Connect and CHC. Currently, the Company provides the only tool in the market that comprehensively addresses the problem of medication non-compliance from a multi-lateral front. The Health-e-Connect reminds patients of their medication regimens and therapies, provides caregivers the ability to track the patient compliance, thereby allowing timely intervention, and provides information to the managers to assess the caregiver’s effectiveness.
Aside from the Health-e-Connect and the CHC, the Company also offers a range of medication reminder products addressing the issue of medication non-compliance of various medication regimens. These medication reminder products are offered to individual patients through pharmacies and the Internet. Pharmaceutical companies have also purchased the devices to distribute to patients using their medications in an effort to improve their medication compliance.
The Health-e-Connect is low-cost, and the only comprehensive system on the market that addresses the growing issue of medication non-compliance with portability and low cost as well as the monitoring capability. Our System fills a critical gap in the healthcare system by providing ongoing oversight of patients. The Company believes that by addressing the issue of non-compliance, the Company will help patients live longer, healthier lives while also decreasing healthcare costs. The comprehensive compliance data provided to caregivers will assist them in improving their patient’s healthcare practices and enhance their own operating efficiency.
The Company has limited financial resources to mount an effective marketing program for all of our products, but the Company has developed relationships with health care service companies covering the diabetes and respiratory care market. The Company is actively seeking other marketing relationships.
Selling Activities
Medical services companies who have extensive sales networks in the primary targeted areas for diabetes and respiratory will be conducting the selling of the Health-e-Connect. They will be utilizing their presence in national, regional and state health care conferences as well as their sales networks to sell directly to medical clinics and hospitals.
Manufacturers
New Challenge Ltd. (NC) is ALRT’s main and only manufacturer for the CHC units. Hortek Technology Limited is ALRT’s main and only manufacturer of the CHC modem and CHC hub. New Challenge Ltd. and Hortek Technology Limited do not have exclusive manufacturing arrangements with the Company. The Company is free to increase the number of suppliers. The contract manufacturers do not have access to the proprietary firmware code embedded in the CHC unit and the CHC modem. The modem is FCC approved.
Patents and Trademarks
The Company received the following patent in 2009:
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US Patent 7,607,431 issued 10-27-2009 for patient compliance and remote monitoring of patient’s use of nebulizer compressors.
The Company has the following patent applications pending:
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Provisional Patent Application serial number 61/271,852 filed on July 27, 2009. Title is Patient Care Coordination System Including Home Use of Medical Apparatus.
The Company has received the following patents prior to 2009:
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US Patent 6,934,220 received on August 23, 2005 entitled Portable Programmable Medical Alert Device.
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US Patent D446, 740 received on August 21, 2001 for Ornamental design of a Medication Alert Device in the shape of a heart.
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US Patent D446, 739 received on August 21, 2001 for Ornamental Design of a Medication Alert Device in the shape of a dog bone.
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US Patent D4467, 074 received on August 28, 2001 for Ornamental Design of a Medication Alert Device in the shape of a stylized paw.
Competition
The Company competes with other corporations that produce medication compliance devices and monitoring systems, some of whom have greater financial, marketing and other resources than we do, but none currently offer a comprehensive compliance system that offers the full spectrum of benefits and features that our system does with cost efficiencies.
A few companies currently offer compliance monitoring systems but at much higher prices and with fewer benefits than our system. Patient compliance with medications is also being addressed with methods such as information pamphlets, compliance packaging, as well as other forms of devices. The devices include clocks, labels, organization systems, pagers as well as electronic remote diagnostic monitoring systems. None of these offer comprehensive compliance reminders, monitoring and messaging. The health care home monitoring opportunity has been recognized by other companies and several are now either currently selling or are developing systems that could be competitive with the ALRT systems. The Company does not see any competition though in the near future against the Company’s nebulizer monitoring system. The Company’s home monitoring systems will also be priced significantly below the competitive products now offered. The portability of the ALRT system will also set it apart from competition.
Employees
The Company presently contracted seven persons, two of whom are officers of the Company. The Company intends to hire additional employees and consultants on an as-needed basis.
ITEM 1A.
ITEM 1A.
RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
None.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Accounts payable and accrued liabilities as of December 31, 2009 includes $180,666 (December 31, 2008 -$180,666) of amounts owing to a supplier, which the Company is in the process of disputing. Management asserts that the Company has no obligation to the vendor as the vendor did not perform the work sought as expected and the Company never took possession of the end product. The amount payable stems from services provided during 2004. The vendor has not sought any actions to collect the amounts and management does not expect to ever pay this amount. The outcome of this matter cannot be determined at this time. Any additional liability realized, if any, will be recognized once the amount is determinable. Any gain on settlement of the account payable will be recorded in the period that an agreement with the supplier is reached and the amount becomes determinable.
During 2008, the Company was sued by Niblock Financial Systems and Gordon Niblock. During 2009 the following judgment was rendered: Niblock Financial Systems, Inc. et al v. ALR Technologies, Inc. Forsyth Count North Carolina File Number 0-9-CVS-2220. On July 21, 2009, a judgment was entered against the Company in the amount of $600,000 in favor of Niblock Financial Systems, Inc. and $550,000 in favor of Gordon Niblock, plus court costs and attorney’s fees. The judgment was rendered as a result of the Company’s failure to pay amounts due under several promissory notes. Subject to the entry of that judgment, the Company reached a Settlement Agreement with the two plaintiffs, resulting in a cash payment, a credit to the judgment (Exhibit B), and an assignment of the Judgment to Christine Kan. The two plaintiffs received promissory notes as a portion of the settlement, the results of which are reported in the following paragraph. It is not expected that any further litigation will ensue other than as described in the following paragraph. The judgment, now owned by Christine Kan, remains on the books as an active judgment against the Company.
Current Litigation: Niblock Financial Systems, Inc. et al v. ALR Technologies, Inc. Forsyth Count North Carolina File Number 10-CVS-685 This action seeks $300,000, plus costs and attorneys fees, and other relief arising out of the promissory note executed by the Company in the context of settlement of th prior lawsuit. The Company did not file an answer to the complaint, as the amount is admittedly owed. It is expected the Plaintiff will receive a judgment of in excess of $300,000 against the Company in the near future. It is expected that the judgment will also direct delivery of the shares of stock referenced in the settlement of the prior lawsuit to Plaintiffs. Those share certificates are in escrow with the undersigned firm at this time, until an order is entered.
Stan Link: Mr. Link holds a note from the Company, which is in arrears. The matter was reduced to a Consent Judgment in the amount of $43,608.25 on April 13, 2009 but the judgment may be in dispute.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders through the solicitation of proxies, or otherwise, during the quarter ended December 31, 2009.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s Common Stock is quoted on the Bulletin Board operated by the Federal Industry Regulatory Authority (“FINRA”) under the symbol “ALRT.” Summary trading by quarter for the 2009 and 2008 fiscal years are as follows:
[1] These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
At December 31, 2009, there were 211,527,909 common shares of the Company issued and outstanding.
At December 31, 2009, there were three holders of record holding 28,712,858 common shares, including common shares held by brokerage clearing houses, depositories or otherwise, in unregistered form. The beneficial owners of such shares are not known by the Company.
No cash dividends has been declared by the Company nor is any intended to be declared. The Company is not subject to any legal restrictions respecting the payment of dividends, except that they may not be paid to render the Company insolvent. Dividend policy will be based on the Company’s cash resources and needs and it is anticipated that all available cash will be needed for working capital.
There are no securities authorized for issuance under any equity compensation plans.
Securities Authorized From Issuance Under Equity Compensation Plans
The Company does not have any equity compensation plans and accordingly the Company does not have any securities authorized for issuance under an equity compensation plan.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company’s business is focused on enhancement of disease and healthcare management programs through improved medication adherence through our patient reminder products, monitoring of medication compliance, and intervention systems when lack of compliance puts the patient at risk. The Company’s primary business markets are the providers of health insurance and the providers of disease and case management services, including the home care industry.
The largest potential for sustainable long term growth and value generation lies with the market segments that have the most influence on the end-user and the most to gain from improved healthcare results. These market segments are the health insurance providers the medical clinics and physicians who provide the care for people with chronic disease. Our focus is currently on medical clinics, hospitals and health plans with diabetics and respiratory disease being the initial patient targets.
Revenue
Revenues for the year ended December 31, 2009 decreased by $7,848 to $5,000 in 2009 from $12,848 for 2008. The Company has been devoting its efforts for the past three years to developing the Health-e-Connect patient monitoring and compliance system, a communications platform to allow health professionals and case managers to communicate as needed to the patient and/or to other health professionals. The Company needs to
obtain FDA 510(K) approval for glucose monitoring and nebulizer use monitoring and establish reimbursement for healthcare providers from insurers to realize sales. The Company is in the process of obtaining both of these and anticipates having them in place by the third quarter.
Product Development
With the completion of the diabetes and respiratory monitoring systems and commercial launch in plans in place, the Company expects to add additional home monitoring capabilities, including monitoring the essential diagnostic readings such as blood pressure, peak flow, weight, A1c and more are in development with completion expected later in 2010 or 2011.
The Company received US patent to cover its compliance monitoring system that works specifically with nebulizer compressors and patent application has been submitted to cover other elements of our comprehensive Health-e-Connect system. The Company has also been granted patents that cover the primary ease-of-use feature and one button programming. One-button programming is an important element in many of our Compliance Reminder products.
Product development and research costs were $414,546 in 2008 and $ 264,105 in 2009.
Operating Capital
The Company’s revenue from sales is not at a level to pay for operating costs and as such the management has volunteered to have their compensation deferred until cash flow allows for payment and creditors have agreed to additional stock option grants in return for deferred payment on interest in some cases and agreements of note extensions in other cases. All stock options granted as compensation for deferment of payment have been recorded at their value fair value using the Black-Scholes option pricing model and have been expensed over the agreed upon period of deferment where applicable.
Although cash flow from sales of products and services are expected to improve through 2010, there is no certainty of this, and if sales do increase there is no certainly that it will reach the level necessary to cover operating costs and debt load.
The Company has obtained a line of credit of US$1,000,000 from a relative of a director in March 2010 which is unsecured with interest payable on the amount borrowed at 1% per month. The line of credit has not yet been drawn down.
Management Compensation
Management has accepted deferred payment on compensation, deferred payment on interest on loans they have made to the Company and have paid Company bills and expenses without repayment; all to help ensure the Company’s survival. In return, the Company’s directors rewarded the participating personnel with stock options in 2008. During 2009, certain of these individuals accepted shares in exchange for the settlement of their debts with the Company. All shares issued and stock options granted were recorded at their fair values.
Operating Issues
The Company has expended significant efforts introducing its human medication and treatment reminder products to specified retail chains, pharmaceutical manufacturers, Contract Research Organizations, Health Management Organizations, Pharmacy Benefits Managers and certain clinics treating specific disease conditions. Sales to December 31, 2009 have not been sufficient for the Company to realize its investment in its inventories. Management plans to recover its investment through sales of Constant Health Companion and the ALRT Diabetes Health Management System.
If management is not successful in its plans, they may be required to raise additional funds from its existing and prospective shareholders.
Results of Operations
December 31, 2009 compared to December 31, 2008
Sales for the year ended December 31, 2009 were $5,000 and cost of goods sold was $nil as compared to $12,848 and $1,199 respectively for the year ended December 31, 2008. Sales were down in fiscal 2009 as a result of the decision to de-emphasize sales and marketing activities of focus the Company’s resources on development of the CHC and development of business network of pilot programs.
Product development costs were $264,105 for the year ended December 31, 2009 versus $414,546 for the year ended December 31, 2008. This decrease relates primarily to the development of the Health-e-Connect reaching the final stage.
Interest expense was $1,123,980 for the year ended December 31, 2009 as compared with $1,187,581 for the year ended December 31, 2008 as the Company continued to rely on loans for funding the Company’s operation. Included in the interest expense is $104,444 (2008 -$71,191) representing the fair value of stock options issued as a bonus for the deferment of repayment of promissory notes and $350,461 (2008: $414,219) representing the imputed interest on certain financial liabilities with no stated terms of interest.
The Company incurred professional fees of $146,719 for the year ended December 31, 2009 as compared with $101,138 for the year ended December 31, 2008 due to higher legal fees for the legal proceedings.
Rent decreased in fiscal 2009 to $35,203 from $49,202 for the year ended December 31, 2008 as the Company is making an effort to lower its overhead costs.
The selling, general and administrative expenses were $597,105 for the year ended December 31, 2009 as compared to $605,567 for the year ended December 31, 2008. The selling, general and administrative expenses were decreased by only $8,462.
Accounts receivable were $nil at December 31, 2009 as compared with $5,048 at December 31, 2008.
Accounts payable and accrued liabilities decreased to $797,493 at December 31, 2009 from $1,088,256 at December 31, 2008 while payroll payable were $18,050 at December 31, 2009 compared to $18,050 at December 31, 2008.
During the year ended December 31, 2009, the Company arranged $154,879 in debt financing in comparison with $519,328 during the year ended December 31, 2008.
December 31, 2008 compared to December 31, 2007
Sales for the year ended December 31, 2008 were $12,848 and cost of goods sold was $1,199 as compared to $194,796 and $25,558 respectively for the year ended December 31, 2007. Sales were down in fiscal 2008 as a result of the decision to de-emphasize sales and marketing activities of focus resources on development of the Constant Health Companion (CHC) and development of business network of pilot programs.
Product development costs were $414,546 for the year ended December 31, 2008 versus $270,966 for the year ended December 31, 2007. Product development costs include $228,001 (December 31, 2007 - $47,391) for a non-cash amount related to the value of stock options committed to be issued for services in the year. This increase relates primarily to the development of the ALRT Health-E-Connect SystemTM reaching the final stage.
Interest expense was $773,363 for the year ended December 31, 2008 as compared with $691,357 for the year ended December 31, 2007 as the Company continued to rely on loans for funding the Company’s operation. Included in the total reported interest is a non-cash amounts $71,190 (2007 -$12,458) related to stock options committed to be issued in consideration of promissory notes.
The Company incurred professional fees of $101,138 for the year ended December 31, 2008 as compared with $97,381 for the year ended December 31, 2007.
Rent increased slightly in fiscal 2008 to $49,202 from $42,485 for the year ended December 31, 2007.
The selling, general and administrative expenses were $605,567 for the year ended December 31, 2008 as compared to $643,909 for the year ended December 31, 2007. These totals include $Nil (December 31, 2007 - $39,838) for a non-cash amount related to the value of stock options committed to be issued for selling, general and administrative services in the year. The cash portion of the selling, general and administrative expenses were increased by only $1,497.
Accounts receivable were $5,048 at December 31, 2008 as compared with $4,221 at December 31, 2007.
Accounts payable and accrued liabilities decreased to $1,088,256 at December 31, 2008 from $1,119,545 at December 31, 2007 while payroll payable decreased to $18,050 at December 31, 2008 from $18,458 at December 31, 2007.
During the year ended December 31, 2008, the Company arranged $519,328 in debt financing in comparison with $75,000 during the year ended December 31, 2007.
Liquidity and Capital Resources
Cash Balances
At December 31, 2009, the Company’s cash balance was $658 compared to $7,901 at December 31, 2008.
Short and Long Term Liquidity
With respect to the Company’s short-term liquidity, the Company’s “current ratio” (current assets divided by current liabilities) as of December 31, 2009 was decreased by 0.01 from December 31, 2008. The greater the current ratio, the greater is the short-term liquidity of the Company.
The Company raised $154,879 of debt financing, was advanced $563,830 by related parties and raised $10,000 by issuing 200,000 common shares in 2009 for working capital. In additional, the Company issued a total of 135,249,463 common shares, at their fair value, in exchange for the extinguishment of debts totaling $6,762,473 as follows:
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interest payable of $2,319,108;
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promissory notes payable of $1,758,465;
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advances payable of $2,202,434, and
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accounts payable of $482,466
Subsequent to the year-end, the Company obtained a line of credit of US$1,000,000 from a relative of a director in March 2010 which is unsecured with interest payable on funds borrowed at 1% per month. These proceeds will be put toward working capital and the continued development of the Company’s product line. The line of credit has not yet been drawn down.
The Company has incurred significant operating losses over the past several fiscal years (2009 - $2,200,301; 2008 - $2,313,328), is currently unable to self-finance its operations, has a working capital deficit of $7,324,143 (2008 - $12,324,804), a deficit of $30,180,268 (2008 - $27,979,967), limited resources, no source of operating cash flow, no assurances that sufficient funding will be available to conduct further product development and operations and no assurance the Company’s current projects will be commercially viable or profitable.
All of the Company’s debt financing is due on demand. The Company will seek to obtain creditors’ consent to delay repayment of these loans 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 not to demand immediate payment or 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 cease operations.
Cash Used in Operating Activities
Cash used by the Company in operating activities during the year ended December 31, 2009 totaled $172,122 as compared to $511,407 for year ended December 31, 2008. The Company incurred a net loss of $2,200,301 for the year ended December 31, 2009 as compared to a loss of $2,313,328 for the year ended December 31, 2008.
Cash Proceeds from Financing Activities
During the year ended December 31, 2009, the Company arranged $154,879 in debt financing. In consideration for these loans, the Company has issued options to acquire a total of 620,000 shares of the Company at $0.25 per share exercisable for a period of five years. The fair value of these options has been estimated and recognized in the financial statements in interest expense. Also during 2009, the Company received $10,000 for issuing 200,000 common shares at the price of $0.05 per share.
During the year ended December 31, 2008, the Company arranged $519,328 in debt financing. In consideration for these loans, the Company has issued stock options to acquire a total of 2,278,000 shares of the Company at $0.25 per share exercisable for a period of ten years. The fair value of these options has been estimated and recognized in the financial statements in interest expense.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with US generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the accounting polices that are most critical to its 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 consolidated 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 consolidated financial statements. As described elsewhere in this annual report, at December 31, 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. 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 through future common share private placements. Management hopes to realize sufficient sales in future years to achieve profitable operations. Failure to achieve management’s plans may result in the Company curtailing operations or writing assets and liabilities down to liquidation values, or both.
Inventories. Inventories are recorded at the lower of cost, determined on a weighted average cost basis, and net realizable value.
Options and warrants issued in consideration for debt. The Company allocates the proceeds received from long-term debt between the liability and the options and warrants issued in consideration for the debt, based on their relative fair values, at the time of issuance. The amount allocated to the options or warrants is recorded as additional paid in capital and as a discount to the related debt. The discount is amortized to interest expense on a yield basis over the term of the related debt.
Revenue recognition. The Company recognizes sales revenue at the time of delivery when title has transferred to the customer, persuasive evidence of an arrangement exists, the fee is fixed and determinable and the sales proceeds are collectible. Provisions are recorded for product returns based on historical experience. Sales revenue, in transactions for which the Company does not have sufficient historical experience, are recognized when the return privilege period has expired.
Stock-based compensation. The Company follows Statement of Financial Accounting Standards No. 123R, “Share Based Payment” (“SFAS 123R”). SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the Company’s consolidated financial statements. Stock-based compensation recognized during the period is based on the value of the portion of the stock-based payment awards that are ultimately expected to vest during the period. The Company estimates the fair value of the stock options using the Black-Scholes valuation model, consistent with the provisions of SFAS 123R. The Black-Scholes valuation model requires the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The expected stock price volatility assumption was determined using historical volatility of the Company’s common stock.
Recent Accounting Pronouncements
In June 2009, the FASB issued new guidance which is now part of ASC 105-10 (formerly Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”, (“SFAS 168”)). SFAS 168 replaces FASB Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles", and establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued guidance which is now part of ASC 810-10, “Non-Controlling Interests in Consolidated Financial Statements, an Amendment of Accounting Research Bulletin No. 51” (formerly SFAS 160, “Non-Controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51”). This guidance establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, changes in a parent’s ownership of a non-controlling interest, calculation and disclosure of the consolidated net income attributable to the parent and the non-controlling interest, changes in a parent’s ownership interest while the parent retains its controlling financial interest and fair value measurement of any retained non-controlling equity investment. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this pronouncement had no impact on the Company’s consolidated financial statements.
In April 2008, the FASB issued revised guidance on determining the useful life of intangible assets. The revised guidance, which is now part of ASC 350-30, “General Intangibles Other than Goodwill” (previously Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets”), amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The guidance is effective for fiscal years beginning after December 15, 2008 and will only apply prospectively to intangible assets acquired after the effective date. Early adoption is not permitted. The adoption of this pronouncement had no impact on the Company consolidated financial statements.
In December 2007, the FASB issued amendments to ASC 805, “Business Combinations” (“ASC 805”) (formerly SFAS 141R), which established principles and requirements for the acquirer of a business to recognize and measure in its financial statements the identifiable assets (including in-process research and development and defensive assets) acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The amendments to ASC 805 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Prior to the adoption of ASC 805, in-process research and development costs were immediately expensed and acquisition costs were capitalized. Under ASC 805 all acquisition costs are expensed as incurred. The standard also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. In April 2009, the FASB updated ASC 805 to amend the provisions for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. This update also eliminates the distinction between contractual and non-contractual contingencies. The adoption of this pronouncement had no impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued guidance which is now part of ASC 825-10, “Financial Instruments” (formerly Financial Staff Position SFAS 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (SFAS 107-1 and APB 28-1). This statement amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments”, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. The statement also amends APB Opinion No. 28, “Interim Financial Reporting”, to require those disclosures in all interim financial statements. This statement is effective for interim periods ending after June 15, 2009. The adoption of this pronouncement had no impact on the Company’s consolidated financial statements.
In May 2009, the FASB issued new guidance for accounting for subsequent events. The new guidance, which is now part of ASC 855-10, “Subsequent Events” (formerly, SFAS No. 165, “Subsequent Events”) is consistent with existing auditing standards in defining subsequent events as events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued, but it also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The new guidance defines two types of subsequent events: “recognized subsequent events” and “non-recognized subsequent events.” Recognized subsequent events provide additional evidence about conditions that existed at the balance sheet date and must be reflected in the company’s financial statements. Non-recognized subsequent events provide evidence about conditions that arose after the balance sheet date and are not reflected in the financial statements of a company. Certain non-recognized subsequent events may require disclosure to prevent the financial statements from being misleading. The new guidance was effective on a prospective basis for interim or annual periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU 2009-05”). This update provides amendments to Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosure”, for the fair value measurement of liabilities when a quoted price in an active market is not available. ASU 2009-05 is effective for reporting periods beginning after August 28, 2009. The Company is currently assessing the future impact of this pronouncement on their future consolidated financial statements.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALR TECHNOLOGIES INC.
Consolidated Financial Statements
December 31, 2009
(restated)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of ALR Technologies Inc.
We have audited the accompanying consolidated balance sheets of ALR Technologies Inc. as of December 31, 2009 and 2008 and the related consolidated statements of loss and comprehensive loss, stockholders’ deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the consolidated financial statements, the Company has suffered recurring losses, negative cash flows from operations, a working capital deficiency, been dependent on advances from related parties, has promissory notes payable and their related interest payable past due and has yet to establish commercial viability of their products, all of which are factors that raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in note 1. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We also audited the adjustments described in note 15 that were applied to restate the December 31, 2008 consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied.
“Smythe Ratcliffe LLP” (signed)
Chartered Accountants
Vancouver, Canada
March 29,
ALR TECHNOLOGIES INC.
Consolidated Balance Sheets
($ United States)
December 31, 2009 and 2008
Basis of Presentation, Nature of Operations and Going Concern (note 1)
Contingencies and Commitments (notes 8 and 10)
See accompanying notes to consolidated financial statements
ALR TECHNOLOGIES INC.
Consolidated Statements of Loss and Comprehensive Loss
($ United States)
Years Ended December 31, 2009 and 2008
(Restated - note 15)
See accompanying notes to consolidated financial statements
ALR TECHNOLOGIES INC.
Consolidated Statements of Stockholders’ Deficiency
($ United States)
Years Ended December 31, 2009 and 2008
See accompanying notes to consolidated financial statements
ALR TECHNOLOGIES INC.
Consolidated Statements of Cash Flows
($ United States)
Years Ended December 31, 2009 and 2008
See accompanying notes to consolidated financial statements
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
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 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 health care professionals to remotely monitor and intervene as necessary if a person is non-compliant.
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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 past several fiscal years (2009 - $2,200,301; 2008 - $2,313,328), is currently unable to self-finance its operations, has a working capital deficit of $7,324,143 (2008 - $12,324,804), a deficit of $30,180,268 (2008 - $27,979,967), limited resources, no source of operating cash flow, no assurance that sufficient funding will be available to conduct further product development and operations, debts comprised of accounts payable, payroll payable, interest and promissory notes payable totaling $7,058,797 currently due or considered delinquent, no assurance that the Company will not face additional legal action from creditors regarding delinquent accounts payable, payroll payable, promissory notes and interest payable, and there is no assurance the Company’s current projects will be commercially viable or profitable. Any one or a combination of these above conditions could result in the failure of the business and require 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 repay its current obligations, fund working capital, and overhead requirements, fund the development of the Company’s product line and the Company’s ability to achieve profitable operations. Management plans to obtain financing through the issuance of shares on the exercise of options, through future common share private placements and/or through obtaining a line of credit. While the Company is currently negotiating a line of credit and has received an advance of $90,000 (note 14), the terms have yet to be finalized and the outcome cannot be predicted at this time. Obtaining short-term financing is critical to the Company’s completion of product development activities and ultimately, the distribution of their product line and the execution of their business plan. The resolution of the going concern issue is dependent upon the realization of management's plans. There can be no assurance provided 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 short-term financing or in achieving long-term profitable operations, the Company will be required to cease operations.
All of the Company's debt is either due on demand or is overdue and is now due on demand, 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, replacement debt or from equity financings through private placements. 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. 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.
If the going concern assumption were not appropriate for these consolidated financial statements then adjustments may be necessary to the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used. Such adjustments could be material.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
2. Significant accounting policies:
a) Principles of consolidation
These consolidated financial statements include the accounts of the Company and its integrated wholly-owned subsidiary, ALRTech Health Systems Inc. (incorporated in British Columbia, Canada, April 15, 2008). All significant inter-company balances and transactions have been eliminated.
b) Foreign currency transactions
The Company's functional and reporting currency is the United States dollar. Transactions in foreign currencies are translated into United States dollars at the rates in effect on the transaction dates. Monetary assets and liabilities are translated at the year-end exchange rate. Non-monetary assets and liabilities are translated using historical rates of exchange. Revenue and expenses are translated at the rates of exchange prevailing on the dates such items are recognized in operations. Exchange gains or losses arising on translation or settlement of foreign currency monetary items are included in the consolidated statements of loss.
c) Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of its customers to make required payments. When the Company becomes aware that a specific customer is unable or unwilling to meet its financial obligations, the Company records a specific allowance to reflect the level of credit risk in the customer’s outstanding receivable balance.
d) Inventories
Inventories are recorded at the lower of cost, determined on a weighted average cost basis, and net realizable value.
e) Equipment
Equipment is recorded at cost less accumulated depreciation. Depreciation is provided using the following methods and annual rates:
f) Options issued in conjunction with debt
The Company allocates the proceeds received from long-term debt between the liability and the attached options issued in conjunction with debt, based on their relative fair values, at the time of issuance. The amount allocated to the options or warrants is recorded as additional paid-in capital and as a discount to the related debt. The discount is amortized to its face value as interest expense using the effective interest rate over the term of the related debt.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
2. Significant accounting policies: (continued)
g) Revenue recognition
The Company recognizes sales revenue at the time of delivery of products when title has transferred to the customer, persuasive evidence of an arrangement exists, the fee is fixed and determinable, and the sales proceeds are collectible. Provisions are recorded for product returns based on historical experience. Sales revenue, in transactions for which the Company does not have sufficient historical experience, are recognized when the return privilege period expires.
h) Stock-based compensation
The Company follows the fair value method of accounting for stock-based compensation. The Company estimates the fair value of share-based payment awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the Company’s consolidated financial statements. The Company estimates the fair value of the stock options using the Black-Scholes valuation model. The Black-Scholes valuation model requires the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock.
i) Income taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and operating loss carry-forwards that are available to be carried forward to future years for tax purposes.
Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. When it is not considered to be more likely than not that a deferred income tax asset will be realized, a valuation allowance is provided for the excess.
The Company follows the accounting requirements associated with uncertainty in income taxes using the provisions of Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more-likely-than-not the positions will be sustained upon examination by the tax authorities. It also provides guidance for derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2009, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
j) Loss per share
Basic loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the year. Diluted 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 loss per common shares when the effect would be anti-dilutive.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
2. Significant accounting policies: (continued)
k) Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring management estimates include the recoverable amount of the Company's inventories; the fair value of common shares issued as settlement of promissory notes payable, and accounts payable and accrued liabilities; the fair value of promissory notes payable and interest payable, compensation costs of stock options issued to employees and non-employees for services or modification of previous stock option commitments; and financing costs of stock options issued in consideration of promissory notes payable, the extension of their due dates and the modification of previous stock option. Management believes the estimates are reasonable; however, actual results could differ from those estimates.
l) Commitments and contingencies
Liabilities for loss contingencies, arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Recoveries from third parties that are probable of realization are separately recorded, and are not offset against the related liability.
m) Segmented information
The Company primarily operates in one reportable segment, the medical devices segment, in the United States. The majority of the Company’s assets are located in Canada.
n) Comprehensive income
Comprehensive income is the overall change in the net assets of the Company for a period, other than changes attributable to transactions with stockholders. It is made up of net income and other comprehensive income. Other comprehensive income consists of net income and other gains and losses affecting stockholders' equity that under generally accepted accounting principles are excluded from net income. The Company has no items of other comprehensive income (loss) in any period presented. Therefore, as presented in the Company's consolidated statements of loss, net loss equals comprehensive loss.
o) Recently issued and adopted accounting pronouncements
i. Adopted
In June 2009, the FASB issued new guidance that is now part of ASC 105-10 (formerly SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”, (“SFAS 168”)). SFAS 168 replaces FASB Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles", and establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
2. Significant accounting policies: (continued)
o) Recently issued and adopted accounting pronouncements (continued)
i. Adopted (continued)
In December 2007, the FASB issued amendments to Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”) (formerly SFAS 141R), which established principles and requirements for the acquirer of a business to recognize and measure in its financial statements the identifiable assets (including in-process research and development and defensive assets) acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The amendments to ASC 805 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Prior to the adoption of ASC 805, in-process research and development costs were immediately expensed and acquisition costs were capitalized. Under ASC 805 all acquisition costs are expensed as incurred. The standard also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. In April 2009, the FASB updated ASC 805 to amend the provisions for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. This update also eliminates the distinction between contractual and non-contractual contingencies. The adoption of this pronouncement had no impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued guidance that is now part of ASC 825-10, “Financial Instruments” (formerly Financial Staff Position SFAS 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (SFAS 107-1 and APB 28-1)). This statement amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments”, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. The statement also amends APB Opinion No. 28, “Interim Financial Reporting”, to require those disclosures in all interim financial statements. This statement is effective for interim periods ending after June 15, 2009. The adoption of this pronouncement had no impact on the Company’s consolidated financial statements.
In May 2009, the FASB issued new guidance for accounting for subsequent events. The new guidance, which is now part of ASC 855-10, “Subsequent Events” (formerly SFAS No. 165, “Subsequent Events”) is consistent with existing auditing standards in defining subsequent events as events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued, but it also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The new guidance defines two types of subsequent events: “recognized subsequent events” and “non-recognized subsequent events”. Recognized subsequent events provide additional evidence about conditions that existed at the balance sheet date and must be reflected in the company’s financial statements. Non-recognized subsequent events provide evidence about conditions that arose after the balance sheet date and are not reflected in the financial statements of a company. Certain non-recognized subsequent events may require disclosure to prevent the financial statements from being misleading. The new guidance was effective on a prospective basis for interim or annual periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
2. Significant accounting policies: (continued)
o) Recently issued and adopted accounting pronouncements (continued)
ii. Issued
In August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU 2009-05”). This update provides amendments to ASC Topic 820, “Fair Value Measurements and Disclosure”, for the fair value measurement of liabilities when a quoted price in an active market is not available. ASU 2009-05 is effective for reporting periods beginning after August 28, 2009. The Company is currently determining the effect of the adoption of this pronouncement on its consolidated financial statements.
3. Inventories:
The Company's inventories consists of product parts and finished goods inventories consisting of medical compliance reminder devices. As of December 31, 2009, management recorded a provision of $263,520 (2008 - $263,520) in respect of its Med Reminder inventory.
4. Prepaid expenses and others:
The Company's prepaid expenses includes $nil (2008 - $32,500) in prepaid sales commission and $42 (2008 - $25,036) in prepaid expenses and advances from a non-related party.
5. Equipment:
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
6. Interest, advances and promissory notes payable:
During the year ended December 31, 2009, the Company received proceeds of $154,879 from a director and a relative of a director in exchange for the issuance of promissory notes payable. The promissory notes issued are due on demand with interest at 1.0% per month and are collateralized by a floating charge against assets of the Company. As further consideration, 620,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share for a period of five years were granted to the lenders and were recorded as interest expense totaling $54,044. These options were fully vested once granted. As of December 31, 2009, these 620,000 stock options were cancelled as part of the agreement for subscribing for shares at the price of $0.05 per share completed in December 2009. There was no accounting impact on the cancellation of these options.
During the year ended December 31, 2009, the Company accrued advances payable totaling $563,830 as follows:
· $166,345 from a director
· $337,485 from a Company controlled by a director and a relative of a director
· $60,000 from an officer.
On September 4, 2009, the Company received a Notice of Credit to Judgment from the Superior Court of the State of North Carolina, whereby the Company was ordered to pay two creditors holding promissory notes payable (the “plaintiffs”) an aggregate payment of $1,988,000 for principal, interest and legal fees incurred. Subsequent to the verdict, the Company, two directors, a relative of a director (the “Purchaser”) and the plaintiffs entered into a settlement agreement (the “Settlement Agreement”) whereby a relative of a director acquired $1,313,000 of debts from the plaintiffs in a private transaction. The remaining $675,000 due to the plaintiffs was converted into common shares of the Company as part of a separate debt for shares settlement (note 6(d)). As part of the Settlement Agreement, a second director, not related to the Purchaser, assigned unsecured advances payable of the Company with no stated terms of interest, totaling $425,000, to the plaintiffs. As part of the Settlement Agreement, the Company agreed to the following repayment terms:
· $300,000 repayable at a rate of $25,000 per month (note 8); and
· $125,000 repayable in whole by January 15, 2011.
During the year ended December 31, 2008, the Company entered into an agreement with a non-related party whereby the Company received a total of $450,000 over a four-month period starting from March 2008 in exchange for promissory notes payable. The promissory notes were due for repayment on September 30, 2009 with interest at 1% per month and 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 of $104,534 arising from these stock options was amortized as interest expense over the promissory note period to September 30, 2009. As of December 31, 2009, there was $nil (2008 - $50,400) for deferred interest expense recognized.
During the year ended December 31, 2008, a relative of a director repaid $50,000 to a loan holder and assumed the loan repayable at demand with the interest rate of 1% per month. As further consideration, 200,000 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. This same relative provided additional loans payable on demand totaling $69,328 to the Company at an interest rate of 1% per month. As further consideration, 278,000 options exercisable into common shares of the Company at an exercise price of $0.25 per share for a period of five years were issued. All of these loans are collateralized by a floating charge against total assets of the Company. Compensation costs related to these options, being the fair value of the options, have been charged to interest expense in the statement of operations.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
6. Interest, advances and promissory notes payable: (continued)
The interest payable is related to promissory notes payable that are past due. The interest payable is due on demand and has no stated terms of interest.
The advances payable are without stated terms of interest and repayment. The Company has recorded imputed interest rate of 1% per month over the life of the loan with a corresponding amount recognized in accumulated paid in capital representing the implicit compensation for the use of funds.
c) Promissory notes payable
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
6. Interest, advances and promissory notes payable: (continued)
c) Promissory notes payable (continued)
d) Shares for debt settlement
In September 2009, the Company offered their creditors the chance to collect their debts outstanding through the issuance of shares. The creditors, comprising both arm’s-length and non-arm’s-length individuals, that accepted the offer agreed with the Company on a price of $0.05 per share. The agreements were completed on September 30, 2009 and the common shares were issued in December 2009. In total, the Company issued 135,249,463 common shares at $0.05 per share for a total amount of $6,762,473. As part of the terms of the subscription agreement, subscribers agreed to cancel 41,948,000 stock options previously granted to them by the Company at the exercise price of $0.25 per share. The stock options cancelled had previously vested and there was no accounting impact on the cancellation. The following table describes the details of payments of the entire subscription:
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
6. Interest, advances and promissory notes payable: (continued)
e) Interest expense
During the year ended December 31, 2009, the Company incurred interest expense of $1,123,980 (2008: $1,187,581) as follows:
·
$669,075 (2008: $702,171) incurred on promissory notes payables outstanding as shown in note 6(c);
·
$350,461 (2008: $414,219) incurred from the calculation of imputed interest on accounts payable outstanding for longer than one year, advances payable and promissory notes payable, which had no stated interest rate.;
·
$54,044 (2008: $nil) incurred from stock options granted to a relative of a director as a bonus for not demanding promissory notes payable over due; and
·
$50,400 (2008: $71,191) incurred from stock options granted for the extension of the maturity date of a promissory note payable. The calculated fair value of the stock options was amortized over the period of the extension.
7. Capital Stock
Common shares:
On December 17, 2009, the Company issued 200,000 common shares at $0.05 per share for total proceeds of $10,000.
Stock options:
A summary of the status of the stock options as of December 31, 2009 and 2008, and changes during the years ended on those dates are presented below:
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
7. Capital Stock (continued)
During the year ended December 31, 2009:
· The Company granted 620,000 stock options to relative of a director as follows:
- 275,000 stock options exercisable at $0.25 per share for a term of five years expiring March 20, 2014
- 208,000 stock options exercisable at $0.25 per share for a term of five years expiring March 31, 2014
- 137,000 stock options exercisable at $0.25 per share for a term of five years expiring October 31, 2014
· On September 30, 2009, the Company cancelled 41,948,000 stock options as a condition of the debt retirement. The options cancelled consisted of 19,778,000 stock options from directors and 22,170,000 stock options from non-employees, all were fully vested and recognized as stock-based compensation expense prior to cancellation.
All of the options granted vested immediately. The 620,000 stock options were granted as a bonus for not demanding repayment and the fair value totaling $54,044 was allocated to interest expense.
During the year ended December 31, 2008:
· The Company granted 3,850,000 stock options, exercisable at $0.25 per share for a term of five years to consultants of the Company
· The Company granted 2,278,000 stock options, exercisable at $0.25 per share for a term of five years to creditors of the Company
Of the total granted, 3,128,000 vested immediately, while 3,000,000 were granted with vesting conditions based on certain performance targets.
The Company calculated the fair value of the options granted in 2009 to be $76,294 (2008: $349,632). The fair value of options granted in previous years but expensed during 2009 was $50,400 (2008: $nil).
The fair value of the 3,000,000 options granted with vesting provisions in 2008 was $84,210, even though a final measure of the value of compensation cost does not occur until performance is complete. The amount was charged to product development costs and is based on the expected performance period. An additional 850,000 stock options, which vested immediately, were granted for product development services. Compensation costs related to these options, being the fair value of the options, was $143,791 and have been charged to product development costs.
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, was $121,591 of which $71,191 was charged to interest expense and $50,400 was classified as deferred interest expense.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2008 and 2008
7. Capital stock: (continued)
Stock options outstanding are as follows:
The options outstanding at December 31, 2009 and 2008 were as follows:
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options, based on the $0.06 closing stock price of the Company’s common stock on the NASDAQ over-the-counter market on December 31, 2009. As of December 31, 2009, none of the stock options outstanding were in-the-money.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
7. Capital stock: (continued)
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 grant date fair value for the options granted during 2009 was $0.09 (2008: $0.13).
The fair value of the stock options granted was allocated as follows:
8. Contingencies
The Company is currently being sued by a creditor for $300,000 of promissory notes payable plus the associated costs and legal fees of the lawsuit. The Company was supposed to make principal payments of $25,000 per month commencing in October 2009. To date, the Company has not repaid any of the loan and the loan is considered to be in default. The Company has previously recognized the debt as they recognize the amount is owed. No further amounts have been recorded at year-end as the additional amounts are not determinable at this time.
Accounts payable and accrued liabilities as of December 31, 2009 include $180,666 (2008 - $180,666) of amounts owing to a supplier, which the Company is in the process of disputing. The outcome of this matter cannot be determined at this time. Any adjustment will be recorded in the period that an agreement with the supplier is reached and the amount becomes determinable.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
9. Related party transactions:
All transactions with related parties, except as described below, were incurred in the normal course of operations and measured at the exchange amount, which is the amount of consideration established and agreed upon by the transacting parties.
Options granted to related parties have been recorded at their estimated fair value as disclosed in note 7.
The Company has advances payable, interest payable and promissory notes payable due to related parties, as disclosed in note 6.
10. Commitments:
During 2000, the Company entered into three-year contracts with certain executive officers and directors providing the following annual compensation.
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 provide for a commission of 1% of net sales during the term of the agreement. 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:
· 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 $200,000,000.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
10. Commitments: (continued)
In addition, if more than 50% of the Company's stock or assets are sold, key employees as determined by the Board of Directors 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 amount distributed to each key employee is also to be determined by the Board of Directors.
11. Financial instruments:
Fair value
The fair values of cash, accounts receivable, and certain accounts payable and accrued liabilities approximate their carrying values due to the relatively short periods to maturity of these instruments.
Certain accounts payable have been outstanding longer than one year. The Company has recorded imputed interest at a rate of 1% per month over the period the payables have been outstanding for longer than one year, with a corresponding amount recognized in additional paid-in capital. The calculated amount represents the implicit compensation for the use of funds beyond a reasonable term for regular trade payables.
For the purposes of fair value analysis, promissory notes payable can be separated into three classes of financial liabilities.
i. Interest-bearing promissory notes and related interest payable
ii. Non-interest-bearing promissory note past due
iii. Non-interest-bearing promissory notes due in the future.
The interest-bearing promissory notes payable are all delinquent and have continued to accrue interest at their stated rates. The Company currently does not have the funds to extinguish these debts and will continue to incur interest until such time as the liabilities are extinguished. There is not an active market for delinquent loans for a Company with a similar financial position. Management asserts the carrying values of the promissory notes and related interest payable are a reasonable estimate of fair value as they represent the Company’s best estimate of their legal obligation on these debts. As there is no observable market for interest rates on similar promissory notes, the fair value was estimated using level 3 inputs in the fair value hierarchy.
The non-interest-bearing promissory note payable past due is several years delinquent and there have been no renegotiated repayment terms. There is not an active market for default loans not bearing interest nor is there an observable market for lending to companies with a financial position similar to the Company. The Company has recorded imputed interest at a rate of 1% per month over the life of the promissory notes, with a corresponding amount recognized in additional paid-in capital representing the implicit compensation for the use of funds. Management asserts the payment date for these amounts cannot be reasonably determined. Management further asserts there is not a determinable interest rate for arm’s-length borrowings based on the current financial position of the Company and asserts the carrying value is the best estimate of the Company’s legal liability and represents the fair value for the promissory note. This would be considered a level 3 input in the fair value hierarchy.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
11. Financial instruments (continued)
The non-interest-bearing promissory notes payable due in the future are the result of the Settlement Agreement whereby certain advances payable were assigned to the plaintiffs. As part of the Settlement Agreement, the Company agreed to repayment terms for these non-interest-bearing amounts. Since these amounts now have fixed repayment terms, the Company considers amounts as promissory notes as opposed to advances. Since the settlement, the Company has not made the required payments on one promissory note where repayments were required prior to year-end (note 8). Based on the Company’s current financial position and the maturities of these promissory notes, it is likely the Company will default on the other promissory notes payable in this class. These loans were originally based on the advances received by the Company. The Company has recorded imputed interest at a rate of 1% per month over the life of the promissory note, with a corresponding amount recognized in additional paid-in capital representing the implicit compensation for the use of funds. Management’s assertion is the carrying value is the best estimate of the Company’s liability and represents the fair value for the promissory note. This would be considered a level 3 input in the fair value hierarchy.
The fair value of advances payable cannot be determined as there are no stated terms of repayment. The Company has recorded imputed interest at a rate of 1% per month over the life of the advances payable, with a corresponding amount recognized in additional paid-in capital representing the implicit compensation for the use of funds.
Credit risk
Financial instruments that potentially subject the Company to credit risk consist of cash and accounts receivable. As the Company only has minimal cash and has recognized an allowance to reduce accounts receivable to $nil, the Company is not exposed to significant credit risk.
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises two types of risk: interest rate risk and foreign currency risk.
i. Interest rate risk
Interest rate risk consists of two components:
a) To the extent that payments made or received on the Company’s monetary assets and liabilities are affected by changes in the prevailing market interest rates, the Company is exposed to interest rate cash flow risk.
The Company is exposed to interest rate cash flow risk on promissory notes payable of $500,000, which incurs a variable interest rate of prime plus 1%. A hypothetical change of 1% on interest rates would increase or decrease net loss and comprehensive loss by $5,000.
b) To the extent that changes in prevailing market interest rates differ from the interest rate on the Company’s monetary assets and liabilities, the Company is exposed to interest rate price risk.
The Company’s promissory notes payable consist of $500,000 of variable interest rate notes and $4,775,333 of fixed interest rate notes. All of these notes are past due and are currently due on demand while interest continues to accrue. Due to the delinquency of the fixed interest rate promissory notes payable, fluctuations in market interest rates do not have a significant impact on their estimated fair values as of December 31, 2009.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
11. Financial instruments (continued)
At December 31, 2009, the effect on the net loss and comprehensive loss of a hypothetical change of 1% in market interest rate cannot be reasonably determined.
ii. Foreign currency risk
The Company incurs certain accounts payable, advances payable and expenses in Canadian dollars and is exposed to fluctuations in changes in exchange rates between the US and Canadian dollars. As at December 31, 2009, the effect on net loss and comprehensive loss of a hypothetical change of 10% between the US and Canadian dollar would not be material. The Company has not entered into any foreign currency contracts to mitigate this risk.
12. Reconciliation of net loss to net cash used in operating activities:
13. Income taxes:
The provision for income taxes differs from the result that would be obtained by applying the statutory tax rate of 34% (2008 - 34%) to income before income taxes. The difference results from the following items:
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
13. Income taxes: (continued)
The components of the net deferred income tax asset, the statutory tax rate and the amount of the valuation allowance are as follows:
The potential benefit of the deferred income tax asset has not been recognized in these financial statements since the Company cannot be assured that it is more likely than not that such benefit will be utilized in future years.
The Company believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred income tax assets such that a full valuation allowance has been recorded.
The operating losses amounting to $22,365,154 will expire between 2019 and 2029 if they are not utilized. The following table lists the fiscal year in which the loss was incurred and the expiration date of the operating loss carry-forwards:
14. Subsequent events:
a) The Company received an advance of $90,000 on the line of credit for which the terms are currently under negotiation with a relative of a director. The amount borrowed to date is unsecured with interest payable at 1% per month.
b) 200,000 stock options exercisable at the price of $0.25 per share expired unexercised.
ALR TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
($ United States)
Years Ended December 31, 2009 and 2008
15. Restatement
The Company has recognized the imputed interest on certain liabilities that have no stated interest rate. Imputed interest was calculated on accounts payable owing for longer than one year, and advances and promissory notes payable with stated rate of interest. The restatement results in an increase to interest expense of $350,462 for the year ended December 31, 2009 (2008: $414,218) with a corresponding increase to additional paid-in capital. Also as part of the restatement, the Company increased additional paid-in capital and deficit at December 31, 2007 by $1,870,149. Previously recorded amounts along with restated figures are presented below:
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in and disagreements with accountants on accounting and financial disclosure for the years ended December 31, 2009 and 2008.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, as of the end of the period covered by this report, the Company conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be included in the Company’s reports to Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to ALR Technologies Inc., including the Company’s consolidated subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the period covered by this report, the Company’s disclosure controls and procedures are effective at these reasonable assurance levels.
Limitations on the Effectiveness of Controls
The Company’s management, including the CEO and CFO, does not expect that the Company’s Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
CEO and CFO Certifications
Appearing immediately following the Signatures section of this report there are Certifications of the CEO and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of this report, which you are currently reading is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, the management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on the management’s assessment, as of December 31, 2009, the Company’s internal control over financial reporting was effective based on those criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Controls over Financial Reporting
In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. We have evaluated our internal control over financial reporting and there have been no changes in our internal controls or in other factors that could affect those controls.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The names, ages and positions held by each of the officers and directors of the Company are as follows:
All directors have a term of office expiring at the next annual general meeting of the Company, unless re-elected or earlier vacated in accordance with the By-laws of the Company. All officers have a term of office lasting until their removal or replacement by the board of directors.
Sidney Chan - President, Chief Executive, Chief Financial Officer and a member of the Board of Directors of the Company.
Mr. Chan has made a significant contribution to the Company since first becoming involved in August 1997. He has assisted the Company’s financing and its evolution into a public company. Most importantly, he has also directed the Company’s product development. Mr. Chan has extensive relationships with Hong Kong area based technology and electronic manufacturers, helping assure the availability of low cost manufacturing and materials procurement. Mr. Chan is an engineer and obtained his Bachelor of Engineering (Mining) degree with distinction in Mineral Economics from McGill University in 1973.
Stanley Cruitt - Chairman and a member of the Board of Directors of the Company.
Stan Cruitt joined the Company as President in 2000, bringing with him more than 20 years of experience in the pharmaceutical industry. He became President at a key point in the Company’s history, when ALRT was evaluating its products and considering innovative uses for medication and health management compliance throughout the healthcare community. Mr. Cruitt has extensive experience in the pharmaceutical industry, where he has held numerous positions ranging from serving as a marketing research analyst with Merck to top marketing and management positions with Ciba and Novartis. In 1996, Newsweek and Advertising Age recognized him as one of the top marketers in the United States. Mr. Cruitt’s experience at building brands, markets and business is a needed fit for the Company. Mr. Cruitt received his undergraduate degree from Southern Illinois University and received academic honors during graduate study.
Dr. Jaroslav V. Tichy - Vice President, Technology and a member of the Board of Directors of the Company
Since December, 2000, Dr. Tichy has been Vice President of Technology for the Company. From 1984 through 2000, Dr. Tichy was a Systems Design Specialist with Weir-Jones Engineering Consultants Ltd. Dr. Tichy has conducted research and lectured in a wide range of areas including asynchronous switching theory, signal theory and pattern recognition. In addition, he has been involved in a number of development projects including analog, digital and mixed circuit design, digital signal processing and microprocessor and microcontroller based systems. Dr. Tichy received both his PhD and MSc. degrees in computer technology from the Technical University in Brno Czech Republic.
Involvement in Certain Legal Proceedings
To the Company’s knowledge, during the past ten years, its officers and directors: has not filed a petition under the federal bankruptcy laws or any state insolvency law, nor had a receiver, fiscal agent or similar officer appointed by a court for the business or present of such a person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer within two years before the time of such filing; were not convicted in a criminal proceeding or named subject of a pending criminal proceeding (excluding traffic violations and other minor offences); were not the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting the following activities: (i) acting as a futures commission merchant, introducing broker, commodity
trading advisor, commodity pool operator, floor broker, leverage transaction merchant, associated person of any of the foregoing, or as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director of any investment company, or engaging in or continuing any conduct or practice in connection with such activity; (ii) engaging in any type of business practice; (iii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodity laws; were not the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described above under this Item, or to be associated with persons engaged in any such activity; were not found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any federal or state securities law and the judgment in subsequently reversed, suspended or vacate; and were not found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated.
Compliance with Section 16(a) of the Exchange Act.
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company during the fiscal years 2009 and 2008, all directors have filed their Form 4 and 5, on a timely basis.
Audit Committee and Charter
The Company has an audit committee and audit committee charter. The Company’s audit committee is comprised of all three directors. None of directors are deemed independent. Two directors also hold positions as officers of the Company. A The Company’s audit committee is responsible for: (1) selection and oversight of its independent accountant; (2) establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls and auditing matters; (3) establishing procedures for the confidential, anonymous submission by company employees of concerns regarding accounting and auditing matters; (4) engaging outside advisors; and, (5) funding for the outside auditory and any outside advisors engagement by the audit committee.
Audit Committee Financial Expert
The Company has no financial expert. It believes the cost related to retaining a financial expert at this time is prohibitive. Further, because of the Company’s limited operations, management believes the services of a financial expert are not warranted.
Code of Ethics
The Company has adopted a corporate code of ethics. The Company believes its code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code.
Disclosure Committee and Charter
The Company has a disclosure committee and disclosure committee charter. The Company’s disclosure committee is comprised of all of its officers and directors. The purpose of the committee is to provide assistance to the Principal Executive Officer and the Principal Financial Officer in fulfilling their responsibilities regarding the identification and disclosure of material information about the Company and the accuracy, completeness and timeliness of the Company’s financial reports.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation paid by the Company to officers and directors during the three most recent fiscal years.
Summary Compensation Table
[1]
All Other Compensation includes automobile allowance.
[2]
At December 31, 2009, salaries and other annual compensation for fiscal 2009, 2008 and 2007 totaling $460,800 remain unpaid and are included in advances payable.
[3]
At December 31, 2009, salaries and other annual compensation for fiscal 2009, 2008 and 2007 totaling $498,600 remain unpaid and are included in advances payable. Stan Cruitt resigned as President on June 16, 2008.
[4]
At December 31, 2009, salaries and other annual compensation for fiscal 2009, 2008 and 2007 totaling $180,000 remain unpaid and are included in advances payable.
The Company has granted a total of 13,845,000 stock options to Sidney Chan, President, Chief Executive Officer, Chief Financial Officer and Director of the issuer of which 2,060,000 expired and 11,785,000 were cancelled during the year ended December 31, 2009. 8,860,976 stock options to Stanley Cruitt, Chairman and Director of the issuer of which 6,073,976 expired and 2,787,000 were cancelled during the year ended December 31, 2009. 5,702,249 options to Dr. Jaroslav Tichy, Vice President Technology of the issuer of which 496,249 expired and 5,206,000 were cancelled during the year ended December 31, 2009.
The Company does not have any long-term incentive plans.
During 2000, the Company entered into three-year contracts with certain executive officers and directors providing the following annual compensation.
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 provide for a commission of 1% of net sales during the term of the agreement. 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:
·
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
In addition, if more than 50% of the Company's stock or assets are sold, key employees as determined by the Board of Directors 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 amount distributed to each key employee is also to be determined by the Board of Directors.
Compensation of Directors
There are no standard or other arrangements pursuant to which the Company’s directors were compensated in their capacity as such during the 2009 fiscal year.
The Company’s Board of Directors unanimously resolved that members receive no compensation for their services, however, they are reimbursed for travel expenses incurred in serving on the Board of Directors.
No additional amounts are payable to the members of the Company’s Board of Directors for committee participation or special assignments.
Effective August 25, 2006, the Board of Directors consist three members, Mr. Sidney Chan, President, Chief Executive Officer, Chief Financial Officer of the Company, Mr. Stanley Cruitt, Chairman of the Company, and Dr. Jaroslav Tichy. There are no independent directors.
Directors’ Compensation
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The following table sets forth, as of December 31, 2009, the beneficial shareholdings of persons or entities holding five percent or more of the Company’s common stock, each director individually, each named executive officer and all directors and officers of the Company as a group. Each person has sole voting and investment power with respect to the shares of Common Stock shown, and all ownership is of record and beneficial.
[1] 14,845,000 shares are held in the name of Sidney Chan, 500,000 shares are held in the name of KRS Retraction Limited, 83,153,482 shares are owned by Christine Kan, Mr. Chan’s wife., and 300,000 shares are owned equally by Mr. Alexander Chan, Mr. Daniel Chan, and Kathleen Chan, all children of Mr. Chan.
[2] 13,493,976 shares are held in the name of Stan Cruitt and 9,000,000 shares are owned by Annie Cruitt,
Mr. Cruitt’s wife.
Changes in Control
To the knowledge of management, there are no present arrangements or pledges of securities of the Company which may result in a change in control of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Year Ended December 31, 2009
All transactions with related parties were incurred in the normal course of operations and measured at the exchange amount, which is the amount of consideration and agreed upon by the transaction parties.
During the year ended December 31, 2009, Christine Kan, wife of Sidney Chan, President, Chief Executive Officer, Chief Financial Officer and Director of the Company loaned the Company a total of $154,879. The loan bears interest at 1% percent per month and is secured by a floating charge against the assets of the Company.
During the year ended December 31, 2009, the promissory note denominated in Canadian dollars plus interest totaling $692,250 payable to Sidney Chan, President, Chief Executive Officer, Chief Financial Officer and Director of the Company were converted into 13,845,000 common shares of the Company at the price of $0.05 per share. In addition, promissory notes, advances, plus interest totaling $4,197,674 payable to Sidney Chan’s family were converted into 98,798,482 common shares of the Company at the price of $0.05 per share.
During the year ended December 31, 2009, advances totaling $529,699 payable to his wife and a private company controlled by Stan Cruitt, Chairman and Director of the Company were converted into 10,593,976 common shares of the Company at the price of $0.05 per share.
During the year ended December 31, 2009, advances totaling $285,112 payable to a private company controlled by Dr. Tichy, Vice-President Technologies and Director of the Company were converted into 5,702,249 common shares of the Company at the price of $0.05 per share.
During the year ended December 31, 2009, the Company issued the following stock options to common shares of the Company:
·
620,000 stock options to Christine Kan, a relative of Sidney Chan, in consideration of providing loans totaling $154,879 to the Company. All the options are vested at the time of commitment and the fair value of these options estimated to be $54,044 was charged to interest expense. The options are exercisable into the Company’s shares for the period of five years from commitment date. The options were cancelled in December 2009.
Year Ended December 31, 2008
During the year ended December 31, 2008, the promissory note denominated in Canadian dollars payable to Sidney Chan, President, Chief Executive Officer, Chief Financial Officer and Director of the Company was increased by $23,239 due to unfavourable exchange rates.
During the year ended December 31, 2008, the Company issued the following stock options to purchase common shares of the Company:
a.
250,000 stock options to Kathleen Chan, a relative of Sidney Chan, in consideration of services. These options are subject to certain vesting conditions and are exercisable into the Company’s common shares for a period of ten years from the commitment date.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
(1) Audit Fees
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the Company’s audit of annual consolidated financial statements and review of consolidated financial statements included in the Company’s Form 10-Qs or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years was:
$45,000
Smythe Ratcliffe LLP
$50,000
Smythe Ratcliffe LLP
(2) Audit-Related Fees
The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported in the preceding paragraph:
$ 0.00
Smythe Ratcliffe LLP
$ 0.00
Smythe Ratcliffe LLP
(3) Tax Fees
The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning was:
$ 0.00
Smythe Ratcliffe LLP
$ 0.00
Smythe Ratcliffe LLP
(4) All Other Fees
The aggregate fees billed in each of the last two fiscal years for the products and services provided by the principal accountant, other than the services reported in paragraphs (1), (2), and (3) was:
$0
Smythe Ratcliffe LLP
$3,160
Smythe Ratcliffe LLP
(5) The Company’s audit committee’s pre-approval policies and procedures described in paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X were that the audit committee pre-approve all accounting related activities prior to the performance of any services by any accountant or auditor.
(6) The percentage of hours expended on the principal accountant’s engagement to audit the Company’s consolidated financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full time, permanent employees was 0%.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL SCHEDULES
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 report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 15th day of April, 2010.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities.
EXHIBIT INDEX