Notes
to Condensed Consolidated Financial Statements
($
United States)
(Unaudited)
1. Basis
of Presentation, Nature of Operations and Going Concern
ALR
Technologies Inc. (the “Company”) was incorporated under the laws of the state of Nevada on March 24, 1987. The Company
has developed a compliance monitoring system that will allow for health care professionals to remotely monitor patient health
conditions and provide patient health management. On October 17, 2011 the Company announced that it had received Section 510(k)
clearance from the United States Food and Drug Administration for its Diabetes Management System. The Company is currently seeking
pilot programs to deploy its product.
These
consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the United
States of America (“U.S. GAAP”) in U.S dollars and on a going-concern basis, which presumes the realization of assets
and the discharge of liabilities and commitments in the normal course of operations for the foreseeable future. Several adverse
conditions cast substantial doubt on the validity of this assumption. The Company has incurred significant losses over the six
month periods ended June 30, 2017 and 2016 of $1,331,048 and $1,425,984. In addition, losses incurred for the years ended December
31, 2016 and 2015 were $10,093,733 and $6,298,813. As of June 30, 2017, the Company is currently unable to self-finance its operations,
has a working capital deficit of $24,481,804 (December 31, 2016 - $23,230,726), accumulated deficit of $73,017,098 (December 31,
2016 - $71,686,051), limited resources, no source of operating cash flow, and no assurance that sufficient funding will be available
to conduct continued product development activities. If the Company is able to finance its required product development activities,
there is no assurance the Company’s current projects will be commercially viable or profitable. The Company has debts comprised
of accounts payable, interest, lines of credit and promissory notes payable totaling $24,482,039 currently due, due on demand
or considered delinquent. There is no assurance that the Company will not face additional legal action from creditors regarding
delinquent accounts payable, payroll payable, promissory notes and interest payable. Any one or a combination of these above conditions
could result in the failure of the business and cause the Company to cease operations.
The
Company’s ability to continue as a going-concern is dependent upon the continued financial support of its creditors and
its ability to obtain financing to fund working capital and overhead requirements, fund the development of the Company’s
product line and ultimately, the Company’s ability to achieve profitable operations and repay overdue obligations. Management
has obtained short-term financing from related parties through lines of credit facilities with available borrowing in principal
amount up to $10,500,000 (As of June 30, 2017 the total principal balance outstanding was $10,003,569). The resolution of whether
the Company is able to continue as a going concern is dependent upon the realization of management’s plans. The Company
plans to raise needed capital through the exercise of share options, increase to existing debt facilities or the acquisition of
new debt facilities, and by future common share private placements. There can be no assurance that the Company will be able to
raise any additional debt or equity capital from the sources described above, or that the lenders in the line of credit arrangements
will maintain the availability of borrowing from the line. If management is unsuccessful in obtaining short-term financing or
achieving long-term profitable operations, the Company will be required to cease operations.
ALR
TECHNOLOGIES INC.
Notes
to Condensed Consolidated Financial Statements
($
United States)
(Unaudited)
1. Basis
of Presentation, Nature of Operations and Going Concern (continued)
All
of the Company’s debt is either due on demand or is in default, while continuing to accrue interest at its stated rate.
The Company will seek to obtain creditors’ consents to delay repayment of the outstanding promissory notes payable and related
interest thereto, until it is able to replace this financing with funds generated by operations, recapitalization with replacement
debt or from equity financings through private placements. While some of the Company’s creditors have agreed to extend repayment
deadlines in the past, there is no assurance that they will continue to do so in the future. In the past, creditors have successfully
commenced legal action against the Company to recover debts outstanding. In those instances, the Company was able to obtain financing
from related parties to cover the verdict or settlement; however, there is no assurance that the Company would be able to obtain
the same financing in the future. If the Company is unsuccessful in obtaining financing to cover any potential verdicts or settlements,
the Company will be required to cease operations.
The
Company’s activities will necessitate significant uses of working capital beyond 2017. Additionally, the Company’s
capital requirements will depend on many factors, including the success of the Company’s continued product development and
distribution efforts. The Company plans to continue financing its operations with the lines of credit it has available and future
debt arrangements it obtains.
While
the Company strongly believes that its capital resources will be sufficient in the near term, there is no assurance
that the Company’s activities will generate sufficient revenues to sustain its operations without additional capital or
if additional capital is needed, that such funds, if available, will be obtainable on terms satisfactory to the Company.
2. Significant
Accounting Policies
The
unaudited condensed consolidated financial statements as of June 30, 2017 and for the period then ended have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures
normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures
made are adequate to make the information not misleading.
In
the opinion of management, all adjustments necessary to present fairly the financial position as of June 30, 2017 and December
31, 2016 and the results of operations, and cash flows as of June 30, 2017 and 2016, and for the periods then ended, have been
made. Those adjustments consist of normal and recurring adjustments.
These
unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto
included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
The
results of operations for the six month period ended June 30, 2017, are not necessarily indicative of the results to be expected
for the full year.
ALR
TECHNOLOGIES INC.
Notes
to Condensed Consolidated Financial Statements
($
United States)
(Unaudited)
3. Promissory
notes and interest payable
a) Promissory
notes payable to related parties:
A
summary of the promissory notes payable to related parties is as follows:
Promissory
Notes Payable to Related Parties
|
|
June
30,
2017
|
|
December
31,
2016
|
|
|
|
|
|
|
|
|
Promissory notes payable to relatives
of directors collateralized by a general security agreement on all the assets of the Company, due on demand:
|
|
|
|
|
|
|
|
|
|
|
|
|
i.
|
Interest at 1% per month
|
$
|
875,619
|
$
|
875,619
|
|
|
|
|
|
|
|
|
ii.
|
Interest at 1.25% per month
|
|
51,347
|
|
51,347
|
|
|
|
|
|
|
|
|
iii.
|
Interest at the U.S. bank prime rate plus 1%
|
|
500,000
|
|
500,000
|
|
|
|
|
|
Promissory
notes payable, unsecured, to relatives of a director, bearing interest at 1% per month, due on demand
|
|
1,465,000
|
|
1,465,000
|
Total
Promissory Notes Payable to Related Parties
|
$
|
2,891,966
|
$
|
2,891,966
|
ALR
TECHNOLOGIES INC.
Notes
to Condensed Consolidated Financial Statements
($
United States)
(Unaudited)
3. Promissory
notes and interest payable (continued)
b) Promissory
notes payable to unrelated parties
A
summary of the promissory notes payable to unrelated parties is as follows:
Promissory
Notes Payable to Unrelated Parties
|
|
June
30,
|
|
December
31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Unsecured promissory notes payable
to unrelated lenders:
|
|
|
|
|
|
|
|
|
|
|
|
|
i.
|
Interest at 1%
per month, repayable on March 31, 2009, due on demand
|
$
|
450,000
|
$
|
450,000
|
|
|
|
|
|
|
|
|
ii.
|
Interest at 1%
per month, with $50,000 repayable on December 31, 2004, $75,000 repayable on August 18, 2007, $75,000 repayable on November
19, 2007 and the balance due on demand. All are due on demand, accruing interest at the same rate.
|
|
887,455
|
|
887,455
|
|
|
|
|
|
|
|
|
iii.
|
Interest at 0.625%
per month, with $50,000 repayable on October 5, 2004, $40,000 repayable on December 31, 2004, and $60,000 repayable on July
28, 2006, all due on demand
|
|
150,000
|
|
150,000
|
|
|
|
|
|
|
|
|
iv.
|
Non-interest-bearing,
repayable on July 17, 2005, due on demand
|
|
270,912
|
|
270,912
|
|
|
|
|
|
|
|
|
v.
|
Non-interest-bearing
loan repayable at $25,000 per month beginning October 2009, none repaid to date
|
|
310,986
|
|
310,986
|
|
|
|
|
|
|
|
|
vi.
|
Interest at 0.667%
per month, with $125,000 due January 15, 2011
|
|
125,000
|
|
125,000
|
|
|
|
|
|
|
Promissory
notes payable, secured by a guarantee from the Chief Executive Officer, bearing interest at 1% per month
|
|
200,000
|
|
200,000
|
Total
Promissory Notes Payable to Unrelated Parties
|
$
|
2,394,353
|
$
|
2,394,353
|
c) Interest
payable
A
summary of the interest payable activity is as follows:
|
|
|
Interest
Payable
|
|
|
Balance, December 31, 2015
|
$
|
3,135,743
|
Interest
incurred on promissory notes payable
|
|
494,171
|
|
|
|
Balance, December 31, 2016
|
|
3,629,913
|
Interest
incurred on promissory notes payable
|
|
252,436
|
|
|
|
Balance,
June 30, 2017
|
$
|
3,882,349
|
ALR
TECHNOLOGIES INC.
Notes
to Condensed Consolidated Financial Statements
($
United States)
(Unaudited)
3. Promissory
notes and interest payable (continued)
c) Interest
payable (continued)
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Related parties (relatives of the Chairman)
|
|
|
2,105,966
|
|
|
$
|
1,956,403
|
|
Non-related parties
|
|
|
1,776,383
|
|
|
|
1,673,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,882,349
|
|
|
$
|
3,629,913
|
|
Historically,
all interest payable incurred is from interest incurred at the stated rate of promissory notes issued by the Company. The payment
terms, security and any interest payable are based on the underlying promissory notes payable that the Company has outstanding.
d) Interest
expense
During
the six months ended June 30, 2017, the Company incurred interest expense of $919,557 (2016: $853,148) substantially as follows:
-
|
$252,436
(2016: $241,736) incurred on promissory notes payables as shown in note 3(b);
|
-
|
$590,174 (2016:
$536,491) incurred on lines of credit payable, and
|
-
|
$76,947 (2016: $74,210)
incurred from the calculation of imputed interest on accounts payable outstanding for longer than one year, advances payable
and promissory notes payable, which had no stated interest rate;
|
ALR
TECHNOLOGIES INC.
Notes
to Condensed Consolidated Financial Statements
($
United States)
(Unaudited)
4.
Lines of Credit
As
of June 30, 2017, the Company had two lines of credit as follows:
Creditor
|
Interest
Rate
|
Borrowing
Limit
|
Repayment
Terms
|
Amount
Outstanding
|
Accrued
Interest
|
Total
|
Security
|
Purpose
|
Chairman
|
1%
per
Month
|
$ 8,500,000
|
Due
on
Demand
|
$ 8,003,569
|
$ 2,961,132
|
$
10,964,701
|
General
Security
over
Assets
|
General
Corporate
Requirements
|
Wife
of Chairman
|
1%
per
Month
|
$ 2,000,000
|
Due
on
Demand
|
2,000,000
|
1,376,385
|
3,376,385
|
General
Security
over
Assets
|
General
Corporate
Requirements
|
Total
|
|
$10,500,000
|
|
$
10,003,569
|
$ 4,337,517
|
$
14,341,086
|
|
|
As
of December 31, 2016, the Company had two lines of credit as follows:
Creditor
|
Interest
Rate
|
Borrowing
Limit
|
Repayment
Terms
|
Amount
Outstanding
|
Accrued
Interest
|
Total
|
Security
|
Purpose
|
Chairman
|
1%
per Month
|
$ 8,500,000
|
Due
on Demand
|
$
7,628,219
|
$
2,490,958
|
$
10,119,177
|
General
Security
over
Assets
|
General
Corporate Requirements
|
Wife
of Chairman
|
1%
per Month
|
$ 2,000,000
|
Due
on Demand
|
2,000,000
|
1,256,385
|
3,256,385
|
General
Security
over
Assets
|
General
Corporate Requirements
|
Total
|
|
$10,500,000
|
|
$
9,628,219
|
$ 3,747,343
|
$
13,375,562
|
|
|
|
|
|
|
|
|
|
|
|
|
On
July 1, 2016, the Company and the Chief Executive Officer of the Company agreed to amend the existing credit agreement to increase
the borrowing limit on the line of credit provided to the Company from $7,000,000 to $8,500,000.
5. Capital
Stock
|
a)
|
Authorized
Capital Stock
|
On January
27, 2017, the Company’s Board of Directors approved a 100:1 reverse share split of the Company’s common stock. Subsequently,
on February 22, 2018, the Company’s Board of Directors proposed a reversal of such share split. The initial reverse share
split and subsequent reversal are pending approval from the Securities and Exchange Commission (“SEC”) and other regulatory
bodies.
On
December 21, 2016, the Company’s shareholders holding a majority of the issued capital stock consented in writing to increase
the authorized shares of common stock of the Company from two billion shares (2,000,000,000) to ten billion shares (10,000,000,000)
shares. The increase in the authorized shares of common stock of the Company is pending approval from the SEC.
ALR
TECHNOLOGIES INC.
Notes
to Condensed Consolidated Financial Statements
($
United States)
(Unaudited)
5.
Capital
Stock
(continued)
|
a)
|
Authorized
Capital Stock (continued)
|
500,000,000 shares of preferred
stock with a par value of $0.001 per share.
b) Issued
Capital Stock
During
the period ended June 30, 2017:
There
were no capital stock issuances for the six month period ended June 30, 2017.
During
the year ended December 31, 2016:
There
were no capital stock issuances for the year ended December 31, 2016.
6.
Additional paid-in capital
A
summary of stock option activity is as follows:
|
Six
Months Ended
|
Year
Ended
|
|
June
30, 2017
|
December
31, 2016
|
|
Number
of
|
|
Weighted
Average
|
Number
of
|
|
Weighted
Average
|
|
Options
|
|
Exercise
Price
|
Options
|
|
Exercise
Price
|
Outstanding, beginning of period
|
4,962,301,500
|
$
|
0.003
|
579,000,200
|
$
|
0.015
|
Granted
|
-
|
|
-
|
4,390,001,300
|
|
0.002
|
Cancelled
|
(900,000)
|
|
-
|
(6,700,000)
|
|
(0.030)
|
|
|
|
|
-
|
|
-
|
Outstanding,
end of period
|
4,961,401,500
|
$
|
0.003
|
4,962,301,500
|
$
|
0.003
|
|
|
|
|
|
|
|
Exercisable,
end of period
|
4,956,451,500
|
$
|
0.003
|
4,960,101,500
|
$
|
0.003
|
During
the period ended June 30, 2017:
The
Company recorded $3,022 in compensation expense related to vesting of stock options granted in previous years.
ALR
TECHNOLOGIES INC.
Notes
to Condensed Consolidated Financial Statements
($
United States)
(Unaudited)
6.
Additional paid-in capital (continued)
a)
Stock
options (continued)
During
the year ended December 31, 2016:
On
July 1, 2016, the Company and the Chief Executive Officer of the Company agreed to amend the existing credit agreement to increase
the borrowing limit on the line of credit provided to the Company from $7,000,000 to $8,500,000 (Note 4). In exchange for Mr.
Chan making available the additional loan of $1,500,000 to the Company, the Company:
|
·
|
reduced
the exercise price of the 560,000,200 shares of common stock under option to Mr. Chan
and his spouse from $0.015 to $0.002;
|
|
·
|
granted
Mr. Chan and his spouse the right and option to purchase, an additional 4,390,001,300
shares of common stock at a price of $0.002 per share for a term of five years
|
The interest expense
recognized related to the option grant was $7,318,539.
Options
Outstanding:
The
options outstanding at June 30, 2017 and December 31, 2016 were as follows:
|
|
June
30, 2017
|
|
December
31, 2016
|
|
Expiry
Date
|
|
Options
|
|
Exercise
Price
|
|
Intrinsic
Value
|
|
Options
|
|
Exercise
Price
|
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
May 27, 2017
|
|
-
|
$
|
-
|
|
-
|
|
400,000
|
$
|
0.050
|
-
|
May 31, 2017
|
|
-
|
$
|
-
|
|
-
|
|
500,000
|
$
|
0.250
|
|
August 16, 2017
|
|
250,000
|
$
|
0.050
|
|
-
|
|
250,000
|
$
|
0.050
|
-
|
December 28,
2017
|
|
1,000,000
|
$
|
0.030
|
|
-
|
|
1,000,000
|
$
|
0.030
|
-
|
January 28, 2018
|
|
1,500,000
|
$
|
0.015
|
|
-
|
|
1,500,000
|
$
|
0.015
|
-
|
March 26, 2018
|
|
500,000
|
$
|
0.015
|
|
-
|
|
500,000
|
$
|
0.015
|
-
|
April 9, 2018
|
|
1,000,000
|
$
|
0.015
|
|
-
|
|
1,000,000
|
$
|
0.015
|
-
|
May 21, 2019
|
|
500,000
|
$
|
0.015
|
|
-
|
|
500,000
|
$
|
0.015
|
-
|
July 25, 2019
|
|
1,000,000
|
$
|
0.015
|
|
-
|
|
1,000,000
|
$
|
0.015
|
-
|
August 1, 2019
|
|
1,250,000
|
$
|
0.015
|
|
-
|
|
1,250,000
|
$
|
0.015
|
-
|
August 26, 2019
|
|
1,500,000
|
$
|
0.015
|
|
-
|
|
1,500,000
|
$
|
0.015
|
-
|
January 30, 2020
|
|
2,900,000
|
$
|
0.015
|
|
-
|
|
2,900,000
|
$
|
0.015
|
-
|
May 29, 2020
|
|
450,000,100
|
$
|
0.002
|
|
|
|
560,000,200
|
$
|
0.002
|
|
July
1, 2021
|
|
4,390,001,300
|
$
|
0.002
|
|
|
|
4,390,001,300
|
$
|
0.002
|
|
Total
|
|
4,961,401,500
|
$
|
0.003
|
|
-
|
|
4,962,301,500
|
$
|
0.003
|
-
|
Weighted
Average Remaining
Contractual
Life
|
|
3.88
|
|
|
|
|
|
4.81
|
|
|
|
ALR
TECHNOLOGIES INC.
Notes
to Condensed Consolidated Financial Statements
($
United States)
(Unaudited)
6.
Additional paid-in capital (continued)
a)
Stock
options (continued)
The
expense incurred related to stock options was allocated as follows:
|
|
Three
Months Ended
June
30, 2017
(unaudited)
|
|
Three
Months Ended
June
30, 2016
(unaudited)
|
|
Six
Months
Ended
June
30, 2017
(unaudited)
|
|
Six
Months
Ended
June
30, 2016
(unaudited)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Product development
|
|
933
|
|
1,663
|
|
1,945
|
|
11,559
|
Professional
|
|
-
|
|
-
|
|
-
|
|
1,325
|
General,
selling and administration
|
|
353
|
|
747
|
|
1,077
|
|
1,426
|
|
|
|
|
|
|
|
|
|
|
$
|
1,286
|
$
|
2,410
|
$
|
3,022
|
$
|
14,310
|
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:
|
|
June 30,
2017
|
|
December 31,
2016
|
|
|
|
|
|
Risk-free interest rate
|
|
|
n/a
|
|
|
|
1.68
|
%
|
Expected life
|
|
|
n/a
|
|
|
|
5 years
|
|
Expected dividends
|
|
|
n/a
|
|
|
|
0
|
%
|
Expected volatility
|
|
|
n/a
|
|
|
|
194
|
%
|
Forfeiture rate
|
|
|
n/a
|
|
|
|
0
|
%
|
The
weighted average fair value for the options granted during the six months ended June 30, 2017 was $nil (2016: $nil).
ALR
TECHNOLOGIES INC.
Notes
to Condensed Consolidated Financial Statements
($
United States)
(Unaudited)
7.
Related
party transactions and balances
|
|
Three
months ended
June
30, 2017
(unaudited)
|
|
Three
months ended
June
30, 2016
(unaudited)
|
|
Six
months
ended
June
30, 2017
(unaudited)
|
|
Six
months
ended
June
30, 2016
(unaudited)
|
|
|
|
|
|
|
|
|
|
Related party
transaction included within interest expense:
|
|
|
|
|
|
|
|
|
Interest
expenses on promissory notes issued to relatives of the Chairman & Chief Executive Officer of the Company
|
|
$ 74,782
|
|
$ 73,882
|
|
$ 146,850
|
|
$ 138,863
|
Interest
expense on lines of credit payable to the Chairman & Chief Executive Officer of the Company and his spouse
|
|
298,168
|
|
272,777
|
|
598,454
|
|
536,491
|
Related
party transactions including within selling, general and administration expenses
:
|
|
|
|
|
|
|
|
|
Consulting
fees to the Chairman & Chief Executive Officer of the Company accrued on the line of credit available to the Company
|
|
47,400
|
|
47,400
|
|
94,800
|
|
94,800
|
Consulting
fees paid to the former President of the Company
|
|
-
|
|
-
|
|
-
|
|
15,500
|
Interest
on promissory notes payable to related parties, management compensation and compensation paid to a relative of a director have
been recorded at the exchange amount, which is the amount agreed to by the parties. Options granted to related parties have been
recorded at their estimated fair value.
8.
Commitments
and contingencies
The
Company has had three judgments against it relating to overdue promissory notes and accrued interest and a fourth creditor has
demanded repayment of an overdue promissory note and accrued interest. To date, the Company has not repaid any of these promissory
notes and related accrued interest and could be subject to further action. The legal liability, totaling $1,094,968 (2016 - $1,076,168),
of these promissory notes and related accrued interest have been fully recognized and recorded by the Company.
The
Company has a consulting arrangement with Mr. Sidney Chan, Chief Executive Officer and Chairman of the Board of Directors of the
Company. Under the terms of the contract, Mr. Chan will be paid $180,000 per annum for services as Chief Executive Officer. The
contract can be terminated at any time with thirty days’ notice and the payment of two years annual salary. Should the contract
be terminated, all debts owed to Mr. Chan and his spouse must be immediately repaid. The initial term of the contract is for one
year and automatically renews for continuous one year terms. Also under the terms of the contract are the following:
ALR
TECHNOLOGIES INC.
Notes
to Condensed Consolidated Financial Statements
($
United States)
(Unaudited)
8.
Commitments
and contingencies (continued)
|
b)
|
Commitments
(continued)
|
|
i.
|
Incentive
Revenue Bonus
|
Mr.
Chan will be entitled to a 1% net sales commission from the sales of any of the Company’s products at any time during his
life, regardless if Mr. Chan is still under contract with the Company.
If
more than 50% of the Company’s stock or assets are sold, Mr. Chan will be compensated for entering into non-compete agreements
based on the selling price of the Company or its assets as follows:
|
-
|
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
|
9. Subsequent
Events
|
a)
|
On
November 27, 2017, the Company’s Board of Directors approved the grant of the option
to acquire 8,700,000 shares of common stock of the Company at a price of $0.015 per share
for a term of five years. 2,200,000 of the approved options were to a director of the
Company and 6,500,000 were to consultants of the Company.
|
|
b)
|
On
January 31, 2018, the Company’s Board of Directors approved the following grants:
|
|
·
|
the
option to acquire 47,000,000 shares of common stock of the Company at a price of $0.015
per share for a term of five years to 9 consultants of the Company, and
|
|
·
|
the
option to acquire 200,000 shares of common stock of the Company at a price of $0.015
per share until April 19, 2019 to 1 consultant of the Company.
|
Of
the options granted with a term of five years, options to acquire a total of 11,000,000 shares of common stock were granted to
three relatives of the Chairman of the Board.