Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
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 Health-e-Connect 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 past
several fiscal years (2017 - $2,842,025; 2016 - $10,093,733), is currently unable to self-finance its operations, has a working
capital deficit of $25,976,379 (2016 - $23,230,725), accumulated deficit of $74,528,075 (2016 - $71,686,050), 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 $25,979,490 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 December 31, 2017 the total principal balance outstanding was $10,398,249. The resolution of whether
the Company is able to continue as a going concern is dependent upon the realization of management’s plans. If additional
financing is required, the Company plans to raise needed capital through the exercise of share options and by future common share
private placements. There can be no assurance that the Company will be able to raise any additional debt or equity capital from
the sources described above, or that the lenders in the line of credit arrangements will maintain the availability of borrowing
from the line. If management is unsuccessful in obtaining short-term financing or achieving long-term profitable operations, the
Company will be required to cease operations.
On
October 4, 2016, the Company’s wholly-owned inactive Canadian subsidiary, ALRTech Health Systems Inc. was dissolved and
appropriately deconsolidated from such date.
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
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.
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
|
a)
|
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 Option Pricing Model. The Black-Scholes Option
Pricing Model requires the input of highly subjective assumptions, including the option’s expected life and the price volatility
of the underlying stock.
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
2. Significant
accounting policies
(continued)
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, 2017, the Company has no uncertain tax positions that qualify for either recognition or disclosure
in the financial statements.
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, the measurement of stock-based compensation, the fair value of financial instruments and the reported amounts of revenues
and expenses during the reporting period. Management believes the estimates are reasonable; however, actual results could differ
from those estimates.
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 Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
2.
Significant
accounting policies
(continued)
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.
|
f)
|
Fair
value of financial instruments
|
The
Company’s financial instruments include cash, accounts payable, promissory notes payable and lines of credit. The fair values
of these financial instruments approximate their carrying values due to the relatively short periods to maturity of these instruments.
For fair value measurement, U.S. GAAP establishes a three-tier hierarchy which prioritizes the inputs used in the valuation methodologies
in measuring fair value:
Level
1 — observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level
2 — include other inputs that are directly or indirectly observable in the marketplace.
Level
3 — unobservable inputs which are supported by little or no market activity.
g)
Recently adopted and issued accounting pronouncements
i. Adopted
In
August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements
– Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”
(“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there is substantial doubt about an entity’s
ability to continue as a going concern for each annual and interim reporting period. If substantial doubt exists, additional disclosure
is required. This new standard was effective for the Company for annual and interim periods beginning after December 15, 2016.
Adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation — Stock Compensation: Improvements to Employee
Share-Based Payment Accounting
(“ASU 2016-09”). The new guidance will change how companies account for certain
aspects of share-based payments to employees. Under existing accounting guidance, tax benefits and certain tax deficiencies arising
from the vesting of share-based payments are recorded in additional paid-in-capital. The new guidance will require such benefits
or deficiencies to be recognized as income tax benefits or expenses in the statement of operations. Companies are required to
apply the new guidance prospectively. This new standard was effective for the Company for annual and interim periods beginning
after December 15, 2016. Adoption of this pronouncement did not have a material impact on the Company’s consolidated financial
statements.
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
2.
Significant
accounting policies
(continued)
h) Recently
adopted and issued accounting pronouncements
In
August 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-15, Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments. The new standard will make eight targeted changes to how cash receipts and cash payments
are presented and classified in the statement of cash flows. The standard will be effective for the Company beginning January
1, 2018, with early application permitted. The standard will require adoption on a retrospective basis unless it is impracticable
to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable.
In
May 2017, the FASB issued ASU 2017-09,
Stock Compensation: Scope of Modification Accounting
. The amendments in this update
provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting. ASU 2017-09 is effective for fiscal years and interim periods beginning after December 15, 2017, which will be effective
for the Company for the quarter ending December 31, 2018. Early adoption is permitted. The Company is assessing the impact, if
any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480),
and Derivative and Hedging (Topic 815)
. The amendments in Part I of this update change the classification analysis of certain
equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial
instruments should be classified as liabilities or equity instruments, a down-round feature no longer precludes equity classification
when assessing whether the instrument is indexed to an entity's own stock. The amendments also clarify existing disclosure requirements
for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down-round feature.
For freestanding equity classified financial instruments, the amendments require entities that present earnings per share ("EPS")
in accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That effect is treated as
a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion
options that have down-round features are now subject to the specialized guidance for contingent beneficial conversion features
(in Subtopic 470-20, Debt-Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments
in Part II of this update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as
pending content in the Accounting Standards Codification, to a scope exception. Those amendments do not have an accounting effect.
ASU 2017-11 is effective for fiscal years and interim periods beginning after December 15, 2018, which will be effective for the
Company for the quarter ending December 31, 2019. Early adoption is permitted. The Company is assessing the impact, if any, of
implementing this guidance on its consolidated financial position, results of operations and liquidity.
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
2.
Significant
accounting policies
(continued)
h) Recently
adopted and issued accounting pronouncements
The
Company has implemented all new accounting pronouncements that are in effect and may impact its financial statements. The Company
does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact
on its financial position or statement of operations.
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
|
|
December
31,
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
|
$
|
580,619
|
$
|
580,619
|
|
|
|
|
|
|
|
|
ii.
|
Interest at 1.25% per month
|
|
51,347
|
|
51,347
|
|
|
|
|
|
|
|
|
iii.
|
Interest at the U.S. bank prime rate plus 1%
|
|
100,000
|
|
100,000
|
|
|
|
|
|
|
|
|
iv.
|
Interest at 0.5% per month
|
|
695,000
|
|
695,00
|
|
|
|
|
|
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 Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
3.
Interest,
advances and promissory notes 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
|
|
December
31,
|
|
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.
|
Interest at 0.667% per month,
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
|
|
230,000
|
Total
Promissory Notes Payable to Unrelated Parties
|
$
|
2,394,353
|
$
|
2,394,353
|
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
3.
Interest,
advances and promissory notes payable
(continued)
c) Interest
payable
A
summary of the interest payable activity is as follows:
Balance,
December 31, 2015
|
$
|
3,135,742
|
Interest
incurred on promissory notes payable
|
|
494,171
|
|
|
|
Balance, December 31, 2016
|
|
3,629,913
|
Interest incurred
on promissory notes payable
|
|
504,873
|
Transfer from implicit
interest to interest payable on promissory note
|
|
172,470
|
|
|
|
Balance,
December 31, 2017
|
$
|
4,307,256
|
As
at December 31, 2017, the interest of $172,471 was transferred from imputed interest to interest payable as the Company determined
it was more appropriate to treat interest amounts recorded as a liability for one promissory note which had no stated interest
rate. The difference between the rate at which interest was imputed and the rate at which interest was deemed reasonable for accrual
purposes, totaling $86,236, has been recorded as a recovery of expense.
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Related parties (relatives of the Chairman)
|
|
$
|
2,255,529
|
|
|
$
|
1,956,403
|
|
Non-related parties
|
|
|
2,051,727
|
|
|
|
1,673,511
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,307,256
|
|
|
$
|
3,629,913
|
|
The
payment terms, security and any interest payable are based on the underlying promissory notes payable that the Company has outstanding.
e) Interest
expense
During
the year ended December 31, 2017, the Company incurred interest expense of $1,861,971 (2016: $9,064,906) substantially as follows:
|
-
|
$504,873
(2016: $494,170), including interest incurred on promissory notes (note 3(a)) and other
payables;
|
|
-
|
$1,202,250
(2016: $1,102,242) incurred on lines of credit payable as shown in note 4;
|
|
-
|
$154,848
(2016: $148,426) 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; and
|
|
-
|
$nil
(2016: $7,318,539) incurred on stock options granted to creditors (note 6(a)).
|
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
4.
Lines of credit
As
of December 31, 2017, the Company has two lines of credit as follows:
Creditor
|
Interest
Rate
|
Borrowing
Limit
|
Repayment
Terms
|
Principal
Borrowed
|
Accrued
Interest
|
Total
Outstanding
|
Security
|
Purpose
|
Chairman
and CEO
|
1%
per Month
|
$8,500,000
|
Due
on Demand
|
$ 8,398,249
|
$
3,453,208
|
$11,851,457
|
General
Security over Assets
|
General
Corporate Requirements
|
Wife
of Chairman
|
1%
per Month
|
$2,000,000
|
Due
on Demand
|
$ 2,000,000
|
$
1,496,385
|
$
3,496,385
|
General
Security over Assets
|
General
Corporate Requirements
|
Total
|
|
$10,500,000
|
|
$
10,398,249
|
$
4,949,593
|
$15,347,842
|
|
|
As
of December 31, 2016, the Company has two lines of credit as follows:
Creditor
|
Interest
Rate
|
Borrowing
Limit
|
Repayment
Terms
|
Principal
Borrowed
|
Accrued
Interest
|
Total
Outstanding
|
Security
|
Purpose
|
Chairman
and CEO
|
1%
per Month
|
$7,000,000
|
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
|
$
3,016,385
|
General
Security over Assets
|
General
Corporate Requirements
|
Total
|
|
$9,000,000
|
|
$
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 $8,500,000.
5.
Capital
stock
|
a)
|
Authorized
share capital
|
During
the year ended December 31, 2017:
On
January 27, 2017, the Company’s Board of Directors approved a 100:1 reverse share split of the Company’s common stock.
Subsequently, on February 22, 2018, the Company’s Board of Directors approved a reversal of such share split. The initial
reverse share split and subsequent reversal are pending approval from the Securities and Exchange Commission (“SEC”)
and other regulatory bodies.
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
5.
Capital
stock (continued)
|
a)
|
Authorized
share capital (continued)
|
|
i.
|
Common
Stock (continued)
|
During
the year ended December 31, 2016:
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.
500,000,000
shares of preferred stock with a par value of $0.001 per share.
During
the years ended December 31, 2017 and December 31, 2016:
There
was no activity during the period.
6.
Additional paid-in capital
A
summary of stock option activity is as follows:
|
|
|
|
Year
Ended
|
Year
Ended
|
|
December
31, 2017
|
December
31, 2016
|
|
|
Weighted
Average
|
|
Weighted
Average
|
|
Number
of Options
|
Exercise
Price
|
Number
of
Options
|
Exercise
Price
|
Outstanding, beginning of
period
|
4,962,301,500
|
$
|
0.013
|
579,000,200
|
$
|
0.015
|
Granted
|
6,500,000
|
|
0.002
|
4,390,001,300
|
|
0.002
|
Cancelled
|
(4,950,000)
|
|
(0.061)
|
(6,700,000)
|
|
(0.030)
|
Outstanding,
end of period
|
4,963,851,500
|
$
|
0.002
|
4,962,301,500
|
$
|
0.004
|
|
|
|
|
|
|
|
Exercisable,
end of period
|
4,958,201,500
|
$
|
0.002
|
4,960,101,500
|
$
|
0.004
|
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
6. Additional
paid-in capital
(continued)
Stock options (continued)
During
the year ended December 31, 2017:
On
November 27, 2017, the Company’s Board of Directors approved
|
·
|
the
grant of the option to 10 individuals to acquire a total of 6,500,000 shares of common
stock of the Company at a price of $0.015 per share for a term of five years. 2,350,000
of the approved options were to a director of the Company and 4,150,000 were to consultants
of the Company.
|
|
·
|
the
life of the option held by 4 consultants to acquire an aggregate of 2,200,000 shares
of common stock was extended to November 27, 2022.
|
The
Company recorded compensation expense of $194,970 related to the grant of options.
The
Company recorded a further $5,259 in compensation expense related to vesting of stock options granted in previous years.
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.
The
Company recorded a further $18,014 in compensation expense related to vesting of stock options granted in previous years.
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
6. Additional
paid-in capital
(continued)
Stock options
(continued)
Outstanding
The
options outstanding at December 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
December
31, 2017
|
|
December
31, 2016
|
Expiry
Date
|
|
Options
|
|
Exercise
Price
|
|
Intrinsic
Value
|
|
Options
|
|
Exercise
Price
|
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
May
27, 2017
|
|
-
|
$
|
0.030
|
|
-
|
|
400,000
|
$
|
0.030
|
-
|
|
May 31, 2017
|
|
-
|
$
|
0.050
|
|
-
|
|
500,000
|
$
|
0.050
|
-
|
|
August
16, 2017
|
|
-
|
$
|
0.030
|
|
-
|
|
250,000
|
$
|
0.030
|
-
|
|
December 28,
2017
|
|
-
|
$
|
0.030
|
|
-
|
|
1,000,000
|
$
|
0.030
|
-
|
|
January
28, 2018 *
|
|
1,200,000
|
$
|
0.030
|
|
-
|
|
1,500,000
|
$
|
0.030
|
-
|
|
March 26, 2018
|
|
500,000
|
$
|
0.030
|
|
-
|
|
500,000
|
$
|
0.030
|
-
|
|
April
9, 2018
|
|
500,000
|
$
|
0.030
|
|
-
|
|
1,000,000
|
$
|
0.030
|
-
|
|
May 21, 2019
|
|
500,000
|
$
|
0.030
|
|
-
|
|
500,000
|
$
|
0.030
|
-
|
|
July
25, 2019
|
|
1,000,000
|
$
|
0.030
|
|
-
|
|
1,000,000
|
$
|
0.030
|
-
|
|
August 1, 2019
|
|
1,250,000
|
$
|
0.030
|
|
-
|
|
1,250,000
|
$
|
0.030
|
-
|
|
August
26, 2019
|
|
-
|
$
|
0.030
|
|
-
|
|
1,500,000
|
$
|
0.030
|
-
|
|
January 30, 2020
|
|
2,400,000
|
$
|
0.030
|
|
-
|
|
2,900,000
|
$
|
0.030
|
-
|
|
May
29, 2020
|
|
560,000,200
|
$
|
0.002
|
|
-
|
|
560,000,200
|
$
|
0.002
|
-
|
|
July 21, 2021
|
|
4,390,001,300
|
$
|
0.002
|
|
-
|
|
4,390,001,300
|
$
|
0.002
|
-
|
|
November
27, 2022
|
|
6,500,000
|
$
|
0.020
|
|
-
|
|
|
$
|
0.020
|
-
|
|
Total
|
|
4,963,851,500
|
$
|
0.002
|
|
-
|
|
4,962,301,500
|
$
|
0.002
|
-
|
|
Weighted
Average Remaining
Contractual
Life
|
|
3.35
|
|
|
|
|
|
4.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Subsequently expired, unexercised.
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:
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
6.
Additional paid-in capital
(continued)
|
|
Stock
options (continued)
|
|
|
|
|
|
December
31,
2017
|
|
December
31,
2016
|
|
|
|
|
Risk-free interest rate
|
2.34%
|
|
1.68%
|
Expected life
|
5 years
|
|
5 years
|
Expected dividends
|
0%
|
|
0%
|
Expected volatility
|
330%
|
|
210%
|
Forfeiture
rate
|
0%
|
|
0%
|
The
weighted average fair value for the options granted during 2017 was $0.03 (2016: $0.002).
The
fair value of the stock options granted and vested was allocated as follows:
|
|
|
|
|
|
|
December
31, 2017
|
|
December
31,
2016
|
|
|
|
|
|
|
Interest expense
|
$
|
-
|
$
|
7,318,539
|
Product development expense
|
|
66,800
|
|
14,267
|
Professional expense
|
|
52,492
|
|
577
|
Selling,
general and administration expenses:
|
|
80,937
|
|
3,170
|
|
|
|
|
|
|
|
$
|
200,229
|
$
|
7,336,553
|
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
7.
Related
party transactions and balances
|
|
|
|
|
|
|
|
|
Year
End December 31, 2017
|
|
Year
End December 31, 2016
|
|
|
|
|
|
|
Related party transaction included within
interest expense:
|
|
|
|
|
|
Interest
expenses on promissory notes issued to relatives of the Chairman & Chief Executive Officer of the Company
|
|
$
|
299,125
|
$
|
288,426
|
Interest
expense on lines of credit payable to the Chairman & Chief Executive Officer of the Company and his spouse
|
|
$
|
1,202,250
|
$
|
1,102,242
|
Stock
based compensation related to stock options granted to the Chairman & Chief Executive Officer for increasing the borrowing
limit on the line of credit available to the Company
|
|
$
|
-
|
$
|
7,318,539
|
|
|
|
|
|
|
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
|
|
$
|
189,600
|
$
|
189,600
|
Stock-based
compensation related to stock options granted a Director of the Company
|
|
$
|
70,489
|
$
|
-
|
Consulting
fees paid to the 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 $1,113,768, of these
promissory notes and related accrued interest have been fully recognized and recorded by the Company. The Company has accrued
additional interest of $172,471 related to one of these promissory notes.
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
8.
Commitments
and contingencies (continued)
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:
|
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 $200,000,000
|
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
9.
Financial
instruments
The
Company’s financial instruments consist of cash, accounts payable, interest payable, promissory notes payable to unrelated
parties and promissory notes payable to related parties.
The
fair values of cash 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 to related parties and promissory notes payable to unrelated parties
can be separated into two classes of financial liabilities.
i. Interest-bearing
promissory notes, lines of credit and related interest payable
ii. Non-interest-bearing
promissory notes past due
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 for these debts. As there is no observable
market for interest rates on similar promissory notes, the fair value was estimated using level 2 inputs in the fair value hierarchy.
The
Company has one non-interest-bearing promissory notes payable past due. 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 2 input in the fair value hierarchy.
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
9.
Financial
instruments (continued)
Financial
instruments that potentially subject the Company to credit risk consist of cash. The Company only has an immaterial cash balance
and is not exposed to significant credit 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)
Cash flow risk
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 incur 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) Price
risk
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 price risk.
The
Company’s promissory notes payable consist of $500,000 of variable interest rate notes and $4,786,319 of fixed interest
rate notes. All of these notes are past due and are currently due on demand while interest continues to accrue. Due to the delinquency
of the fixed interest rate promissory notes payable, there is no active market for these instruments and fluctuations in market
interest rates do not have a significant impact on their estimated fair values as of December 31, 2017.
At
December 31, 2017, the effect on the net loss and comprehensive loss of a hypothetical change of 1% in market interest rate cannot
be reasonably determined.
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
9.
Financial
instruments
(continued)
c)
Foreign currency risk
The
Company incurs certain accounts 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, 2017, 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 risk.
10.
Income
taxes
The
provision for income taxes differs from the result that would be obtained by applying the statutory tax rate of 34% (2016 - 34%)
to income before income taxes. The difference results from the following items:
|
|
|
|
|
|
|
December
31,
2017
|
|
December
31,
2016
|
|
|
|
|
|
Computed expected benefit of income taxes
|
$
|
(966,289)
|
$
|
(3,431,869)
|
Stock-based compensation
|
|
68,036
|
|
2,494,428
|
Non-deductible
interest expense
|
|
52,648
|
|
50,465
|
Increase
in valuation allowance
|
|
845,604
|
|
886,976
|
|
|
|
|
|
Income
tax provision
|
$
|
-
|
$
|
-
|
The
components of the net deferred income tax asset, the statutory tax rate and the amount of the valuation allowance are as follows:
|
|
|
|
|
|
|
December
31,
2017
|
|
December
31,
2016
|
|
|
|
|
|
Net
operating loss carried forward
|
$
|
39,717,436
|
$
|
34,924,072
|
Tax rate
|
|
34%
|
|
34%
|
Deferred income
tax assets
|
|
13,503,928
|
|
11,874,184
|
Valuation
allowance
|
|
(13,503,928)
|
|
(11,874,184)
|
|
|
|
|
|
Net
deferred income tax asset
|
$
|
-
|
$
|
-
|
ALR
TECHNOLOGIES INC.
Notes
to Financial Statements
For
the Years Ended December 31, 2017 and 2016
($
United States)
10.
Income
taxes
(continued)
The
potential benefit of the deferred income tax asset has not been recognized in these financial statements since it cannot be assured
that it is more likely than not that such benefit will be utilized in future years. The Company believes that 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 $39,717,436 for utilization in the United States of America, the jurisdiction where they were incurred,
will expire between 2019 and 2037 if they are not used. The following table lists the fiscal year in which the loss was incurred
and the expiration date of the operating loss carry-forwards:
Fiscal
Year
|
|
Amount
|
Expiry
Date
|
1999
|
$
|
88,022
|
2019
|
2000
|
|
4,425,866
|
2020
|
2001
|
|
3,681,189
|
2021
|
2002
|
|
2,503,951
|
2022
|
2003
|
|
2,775,900
|
2023
|
2004
|
|
1,250,783
|
2024
|
2005
|
|
1,304,283
|
2025
|
2006
|
|
1,532,322
|
2026
|
2007
|
|
1,479,818
|
2027
|
2008
|
|
1,599,919
|
2028
|
2009
|
|
1,723,146
|
2029
|
2010
|
|
822,678
|
2030
|
2011
|
|
1,746,615
|
2031
|
2012
|
|
1,638,421
|
2032
|
2013
|
|
2,568,328
|
2033
|
2014
|
|
2,855,631
|
2034
|
2015
|
|
2,927,200
|
2035
|
2016
|
|
2,471,978
|
2036
|
2017
|
|
2,487,072
|
2037
|
Total
|
$
|
39,717,436
|
|
11.
Subsequent
events
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.