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ALR TECHNOLOGIES INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
The following information must be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this Quarterly Report and the audited Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis or Plan of Operations contained in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . Except for the description of historical facts contained herein, the Form 10-Q contains certain forward-looking statements concerning future applications of the Company's technologies and the Company's proposed services and future prospects, that involve risk and uncertainties, including the possibility that the Company will: (i) be unable to commercialize services based on its technology, (ii) ever achieve profitable operations, or (iii) not receive additional financing as required to support future operations, as detailed herein and from time to time in the Company's future filings with theSecurities and Exchange Commission ("SEC") and elsewhere. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws ofthe United States , we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our consolidated financial statements are stated in
are prepared in accordance with
principles.
In this quarterly report, unless otherwise specified, all references to "common
shares" refer to the common shares in our capital stock.
As used in this quarterly report, the terms "we", "us", "our", the "Company" and
"ALRT" mean
OverviewALR TECHNOLOGIES, INC. was incorporated under the laws of the state ofNevada onMarch 24, 1987 asMo Betta Corp. InApril 1998 , the Company changed its business purpose to marketing a pharmaceutical compliance device. InDecember 1998 , the common shares of the Company began trading on the Bulletin Board operated by theNational Association of Securities Dealers Inc. under the symbol "MBET." OnDecember 28, 1998 , the Company changed its name fromMo Betta Corp. toALR Technologies Inc. Subsequently, the symbol was changed to "ALRT". During 2011, the Company receivedFood and Drug Administration ("FDA") clearance and achieved Health Insurance Portability and Accountability Act of 1996 (HIPAA) compliance for its earlier version of the Diabetes Solution. With these key achievements and successful clinical trials completed, the Company undertook a pilot program in 2014. The Company obtained significant findings from this pilot program, which led to the development of its Insulin Dosage Adjustment ("IDA"). During 2017, the Company received FDA clearance for its IDA and submitted worldwide patent application under the patent cooperation treaty to theWorld Intellectual Property Organization for the Predictive A1C innovation it has licensed from its Chief Executive Officer. The Company is actively seeking to commence revenue-generating activities for its Diabetes Solution inSingapore and is conducting further pilot programs inthe United States andSingapore . 24 Recent Developments
OnJanuary 28, 2021 , the Company's Board of Directors approved the grant of options to six individuals to acquire an aggregate 32,000,000 shares of common stock at an exercise price of$0.05 per share with expiry dates betweenMay 17, 2024 andDecember 31, 2025 . All of the options granted have vesting conditions, of which 12,000,000 are time-based vesting conditions and 20,000,000 are performance-based vesting conditions. OnFebruary 22, 2021 , the Company granted three individuals the option to acquire an aggregate 5,000,000 shares of common stock at an exercise price of$0.05 per share untilMay 17, 2024 . All of the options granted will not vest until immediately before expiry. OnApril 14, 2021 , the Company's Board of Directors approved the grant of options to five individuals to acquire an aggregate 28,500,000 shares of common stock at a price of$0.05 per share untilDecember 31, 2025 . The options to acquire shares will vest according to performance or time-based conditions and none of these options granted had vested as of the date of this report. The Company entered into two Debt Settlement Agreements whereby the Company has agreed to issue an aggregate 4,400,000 shares of common stock to two creditors of the Company to extinguish$194,186 in accounts payable and$23,000 in promissory notes and interest. The shares were issued onMay 10, 2021 . The Company also issued commitment letters to two creditors offering them an aggregate of 20,000,000 shares of common stock in exchange for the extinguishment of$1,511,377 in promissory notes and interest payable prior
toDecember 31, 2021 . OnMay 12, 2021 , the Company's Board of Directors amended the option to acquire 2,000,000 shares, previously granted onJanuary 28, 2021 to a consultant, to 3,000,000 shares of common stock at a price of$0.05 per share untilDecember 31, 2025 . All other terms of theJanuary 28, 2021 grant remain the same and the options are subject to performance vesting conditions.
On
5,000,000 shares of common stock of the Company at a price of
until
OnJune 1, 2021 , the Company announced that it is taking steps to redomicile the Company toSingapore . As part of the process, the Company intends to effect a share exchange plan of merger under the laws ofNevada andSingapore in which shareholders will exchange their shares of the Company for shares in aSingapore entity, on a one-for-one basis, with theSingapore entity becoming the parent company. The transaction will be subject to shareholder approval and approval of the relevant corporate and securities regulatory authorities in both jurisdictions where required. OnJune 8, 2021 , the Company announced the establishment of the ALRT Animal Health Division, a new business division, which will introduce the world's first and only Continuing Glucose Monitoring System ("CGMS") for diabetic companion animals. OnJune 22, 2021 , the Company provided termination notices to four individuals which included that they would have 30 days to exercise their options, or those options would be cancelled. As a result, a total of 22,500,000 stock options granted in 2019 with an exercise price of$0.035 expired unexercised onJuly 22, 2021 . OnJune 27, 2021 , the Company's Board of Directors cancelled 7,400,000 stock options granted in previous years to three individuals with an average exercise price of$0.033 . These individuals have not provided services to the Company since mid-2020. All of the options had vested in previous years. 25 OnJune 27, 2021 , the Company's Board of Directors approved the grant of the option to acquire an aggregate 21,000,000 shares of common stock at a price of$0.05 per share untilJune 30, 2026 to four individuals. All of the options will vest according to performance or time-based conditions. None of these options have vested to date.
On
of common stock granted on
Effective
exercisable at
advisors.
OnJuly 19, 2021 , the Company elected to extend the outside date to place the remaining rights under the rights offering fromJuly 31, 2021 toOctober 29, 2021 . The Company plans to extend the rights offering further toMarch 31 ,
2022 (see below under Financing).
OnAugust 27, 2021 , the Company granted a member of our Board of Directors the option to acquire 5,000,000 shares of common stock at a price of$0.05 per share untilJune 30, 2026 . The options were fully vested at grant.
Recent Developments - Subsequent to
OnOctober 4, 2021 , the Company granted two individuals the option to acquire an aggregate 17,500,000 options at an exercise price of$0.05 per share untilSeptember 30, 2026 ; 15,000,000 of the options will vest according to time-based conditions and 2,500,000 will vest according to performance-based conditions. The Company plans to file a post effective amendment to extend the outside date to place the remaining rights under the rights offering fromOctober 29, 2021 toMarch 31, 2022 (see below under Financing). Financing Rights Offering
OnDecember 4, 2020 , the Company filed a Form S-1 Registration Statement to distribute subscription rights to purchase up to an aggregate 127,522,227 shares of our common stock at a price of$0.05 per share. As atSeptember 30, 2021 , the Company issued 26,496,635 unrestricted shares of common stock related to proceeds received of$1,324,832 . The Company had untilOctober 29, 2021 to sell the remaining 101,025,592 shares of common stock for total proceeds of$5,051,280 , if exercised. The Company plans to extend the rights offering untilMarch 31, 2022 . Exercise of Stock Options
On
proceeds of
Products
ALRT has developed its Diabetes Solution product by utilizing internet-based
technologies to facilitate the healthcare provider's ("HCPs") ability to monitor
their diabetes patients' health and ensure adherence to health maintenance
activities.
26
The ALRT Diabetes Solution is a remote monitoring and care facilitation platform
that allows patients to upload the blood glucose data from their blood glucose
meters on a weekly basis. The ALRT System processes and converts each data set
to a predictive A1C value and shares it with the patient's physician. The System
provides the physician with therapy advancement suggestions based on current
clinical practice guidelines. Patients receive therapy assessments and
adjustments in much shorter cycles, keeping A1Cs at target, mitigating diabetes
complications and lowering costs of care.
ALRT previously conducted a clinical trial utilizing manual blood glucose data
analysis and follow-up care. The trial demonstrated that remote diabetes care is
associated with significant lowering of A1C levels. The study concluded that
continuing intervention using an internet-based glucose monitoring system is an
effective way of improving glucose control compared to conventional care. A
second clinical trial demonstrated that this type of Internet-based Blood
Glucose Monitoring System ("IBGMS") was associated with comparable reductions in
A1C levels with that of more expensive CGMS. The Company is planning further
trials to demonstrate the added value of the predictive A1C and therapy
advancement features of the ALRT System.
In the future, the Company may seek to adapt its Diabetes Solution to be used in
the management of other chronic diseases. The Company may be required to obtain
additional clearance from the FDA prior to commencing selling activities in the
United States for other chronic health conditions.
Diabetes is a leading cause of death, serious illness and disability across
North America . By the year 2030, it is expected that 1 in 10 adults, globally,
will have diabetes (diagnosed and undiagnosed instances). We believe diabetes is
a global pandemic.
Data from the American Diabetes Association ("ADA") shows 30 million Americans
have diabetes and 84 million have prediabetes. That is 1 in 3 Americans coping
with the disease or serious threat of it. The total cost of diagnosed diabetes
is staggering at $327 billion annually ($237 billion in direct medical costs and
$90 billion in reduced productivity), putting serious drag on an already
strained healthcare system. Taking a broader view, the global cost of diabetes
was estimated at a whopping $825 billion annually in 2016.
Diabetes is a lifelong chronic disease with no cure. However, people with
diabetes can take steps to control their disease and reduce the risk of
developing the associated serious complications, thereby controlling healthcare
costs. The Canadian Diabetes Association Clinical Practice Guidelines Expert
Committee reports that, "Successful diabetes care depends on the daily
commitment of persons with diabetes mellitus to self-manage through the balance
of lifestyle and medication. Diabetes care should be organized around a multi-
and interdisciplinary diabetes healthcare team that can establish and sustain a
communication network between the person with diabetes and the necessary
healthcare and community systems". Diabetes incidence rates, economic costs and
human costs are increasing even though we know how to control the disease. The
Diabetes Control and Complication Trial conducted from 1983 to 1993 outlined
management as follows:
· Testing blood glucose levels four or more times per day;
· Injecting insulin at least three times a day or using an insulin pump;
· Adjusting insulin dose according to food intake and exercise;
· Following a diet and exercise plan; and
· Monthly visits to healthcare team.
We believe there are five causes why diabetes is not controlled:
1. Patient non-adherence; 2. Unreliable data; 3. Data overload; 4. Clinical inertia; and
5. Insulin under-prescription.
27Patient Non -adherence As noted inPatrick Connole , "UnitedHealthcare, Other Large InsurersSeek Better Adherence to Diabetes Care", Health Plan Week,February 11, 2013 , Volume 23, Issue 5, 80% ofUnited States patients with diabetes do not follow their prescribed care plan. Central to conventional diabetes care is patient self-management. Unreliable Data As noted in Gonder-Frederick, L.A., et al, "Self Measurement of Blood Glucose: Accuracy of Self-Reporting Data and Adherence to Recommended Regimen" Diabetes Care, Volume 11, no. 7,July 1988 , 77% of patient data contain errors. Data Overload HCPs face a lack of timely and reliable blood glucose data, resulting in delays to advance therapy and sub-optimal insulin dosing. The amount of patient data for clinicians to analyze is too vast and significant during 15-minute clinical appointments, and the information they have is unreliable. Clinical Inertia As noted in Khunti, K., et al, "Clinical Inertia in People with Type 2 Diabetes: A Retrospective Cohort Study of More than 80,000 People." Diabetes Care, Volume 36, no. 11,July 2013 , across over 80,000 patients, when A1C goals were not met, therapy intensification was late across every measure. It took on average 19 months to escalate patients with an average A1C of 8.7% from single medication to dual therapy and 82 months to escalate patients with an average A1C of 8.8% from dual medication to triple therapy. Furthermore, they found that it took approximately 20 years to advance patients with an average A1C of over 9% to insulin. At the end of the study, less than 50% of the patients had their treatment intensified.
Furthermore, in Treatment intensification for patients with type 2 diabetes and
poor glycaemic control by Fu and Sheenan, it was noted that out of 11,525
patients investigated with an A1C greater than 8% patients received
intensification as follows:
· 37% within 6 months;
· 11% within 6-12 months; and
· 52% never.
Failure to respond to higher than targeted A1C with treatment intensification
puts patients with escalated A1C at risk for complications and
diabetes-associated co-morbidities.
Insulin Under-prescription
Insulin dosing is complex requiring review of large amounts of data, which takes significant amounts of time. We believe HCPs routinely under-prescribe insulin to ensure they avoid insulin dosage adjustments, which could result in hypoglycemia for their patients. Cleveland Clinic Study
A team at
more than 7,300 patients with type 2 diabetes and concluded that there is a
pervasiveness of clinical inertia for the management of type 2 diabetes in
real-world clinical practice settings.
The selected patients had an A1C value of ? 7% on a stable regimen of two oral anti-diabetic agents for at least 6 months (from 2005 to 2016). The median time to treatment intensification after A1C was above target was longer than one year. For patients with an A1C of ? 9%, therapy was not intensified in 44%
of patients. 28 According to lead study author Dr.Kevin Pantalone ofCleveland Clinic's Endocrinology & Metabolism Institute , "Short of a patient reporting non-adherence to their existing regimen of diabetes therapies, it is hard to imagine a reason why treatment intensification was not observed more frequently, when indicated, particularly in patients with an A1C ? 9%. In general, if intensification does not occur, the A1C can be expected to stay the same or get worse, it is not magically going to get better".(emphasis added) ALRT Diabetes SolutionALR Technologies Inc. has created the Diabetes Solution to address the diabetes marketplace globally. The Company's Diabetes Solution consists of hardware, software and diabetes test supplies. We designed the Diabetes Solution to be focused on the HCP and is agnostic and proactive. Our software operates on iOS, Android, Windows and MacOS systems. Enrollment into the ALRT Diabetes Solution will include a branded glucometer, diabetes test strips, lancets and a carrying case. Our technology collects all the blood glucose data from the glucometers, uploads it to a secure account and ships diabetes test strips as required. The patient data is aggregated to a predictive A1C value for a comprehensive view of the treatment plan and patient adherence to the plan, with the data available (and messaged) to authorized people.
The ALRT Diabetes Solution addresses the five causes for not controlling
diabetes with:
· Active patient monitoring;
· Direct meter uploads;
· Machine intelligent data processing;
· Predictive A1C; and
· Insulin dosage adjustment.
Active Patient Monitoring Industry data indicates 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 ALRT System monitors patient uploads and the underlying data providing more timely access to patient blood glucose data. Our system initiates interventions by notifying the HCP of out-of-range results, or failure to upload data in accordance with the requirements of the care plan. The ALRT System does not rely upon the patient for uploading data. The ALRT Diabetes Solution provides the notifications and audit trail needed for achieving best practice results. Its performance tracking allows care teams to identify areas in treatment plans that require change of improvement. Direct Meter Uploads
Data is uploaded via Bluetooth directly from the glucometer into the ALRT
application. This ensures that the data is accurate and reliable based on the
results of testing.
Machine Intelligent Data Processing
Our machine intelligence processes large amounts of data, notifies relevant stakeholders and flags patients for review making collaboration real time. Across segments and populations, this also provides significant data points on use of diabetes test strips and insulin, which may be significant for businesses in those industries. 29 Predicative A1C Included in the Diabetes Solution is Predictive A1C. Predictive A1C is a patent-pending unique feature for monitoring the effectiveness of care plans. This technology utilizes data diagnostics to compare targeted A1C with indicated results. Weekly patient blood glucose data is evaluated, and HCPs are notified as needed for care plan review when blood glucose values exceed parameters set by the HCPs. Our platform provides HCPs with patient prioritization reports and alerts based on the Predictive A1C measures and other related diagnostics. Predictive A1C was designed to assist HCPs in addressing clinical inertia in diabetes care. Insulin Dose Adjustment Included in the Diabetes Solution is Insulin Dose Adjustment. IDA is an FDA-cleared feature that makes optimal insulin adjustment suggestions to HCPs based on dosing guidelines from organizations like theADA . This ensures that HCPs are making timely insulin dosage assessments based on the blood testing results uploaded. ALRT's next phase of technology advancement will produce an algorithm for advancing non-insulin diabetes therapies according to clinical practice guidelines.
Evolution of the Diabetes Solution
InAugust 2010 , the Company received the results of a clinical trial conducted by Dr.Hugh Tildesley using theALRT Health -e-Connect System, which was an earlier version of the Diabetes Solution. The trial showed A1C dropping from 8.8% to 7.6% for theIntervention Group usingALRT's Health -e-Connect System as part of a diabetes management program. The A1C test is important in diabetes treatment management as a long-term measure of control over blood glucose for diabetes patients. According to theCenter for Disease Control and Prevention , "In general, every percentage drop in A1C blood test results (e.g., from 8% to 7%), can reduce the risk of microvascular complications (eye, kidney and nerve diseases) by 40%". The trial served as the basis for an article titled Effect of Internet Therapeutic Intervention on A1C Levels in Patients with Type 2 Diabetes Treated with Insulin, which was published in theAugust 2010 Diabetes Care publication. InJuly 2011 , the follow-up results of the Dr. Tildesley clinical trial were published in theCanadian Journal of Diabetes .Dr. Tildesley conducted a 12-month study using the Health-e-Connect System as an IBGMS to provide intensive blood glucose control to determine the effects of internet-based blood glucose monitoring on A1C levels in patients with type 2 diabetes treated with insulin.Dr. Tildesley concluded that, "While IBGMS intervention was not a substitute for the patient-physician interaction in a clinical setting, it significantly improved A1C and, over time, we observed better glycemic control and patient satisfaction". InOctober 2011 , the Company received 510(k) clearance from the FDA for remote monitoring of patients in support of effective diabetes management programs. The 510(k) clearance enabled the Company to commence withthe United States marketing and sales launch of its Health-e-Connect System. The Health-e-Connect System has since evolved to be part of the ALRT Diabetes System. InSeptember 2014 , the Company initiated its pilot program with one of theKansas City Metropolitan Physician Association ("KCMPA") clinics to deploy its Diabetes Solution. Data from the KCMPA pilot program indicated that a number of patients had achieved reductions in their A1C levels. Furthermore, the data indicated that patients that left the pilot program had increases in A1C subsequent. OnFebruary 18, 2015 , the Company filed a 510(k) application with the FDA to add a remote insulin dosing recommendation feature to the Company's Diabetes Solution. The Company utilized the publicly available algorithm of theAmerican Association for Clinical Endocrinologists ("AACE") andADA . This feature allows the Company to regularly run a patient's blood glucose data (and other key data) through the AACE andADA algorithm. When the algorithm indicates that the patient's dose may not be optimal, the Diabetes Solution would provide the HCP that a dose change may be warranted and what the change would be based on AACE andADA guidelines. The decision about the dose change would rest entirely with the HCP. However, this new feature may make a significant contribution to improving the outcomes of diabetes patients if it allowed HCPs to keep their patients at the optimal dose for longer periods. OnSeptember 18, 2017 , the Company received clearance from the FDA for its IDA feature within the Company's Diabetes Solution. 30 OnJune 20, 2017 , the Company's Chief Executive Officer filed a worldwide patent application under the Patent Cooperation Treaty to theWorld Intellectual Property Organization for the Predictive A1C feature. The Company holds the rights to use the Predictive A1C feature. During 2019, the Company and the Chairman have entered into the National Phase for the applications by applying to target member countries.
During 2019, the Company added automated patient management to the Diabetes
Solution. The Company is also seeking to have a private label glucometer,
diabetes test strips, lancets and carrying cases produced as part of the
Diabetes Solution. The Company is in talks with a manufacturer that has global
operations.
During 2019, the Company initiated support for CGMS with the ALRT Diabetes
Solution. CGM has become the standard of care for patients with type 1 diabetes
and is quickly gaining favor with type 2 diabetes patients who use insulin.
ALRT Pre-Diabetes System A prevention-based feature of the Diabetes Solution, the ALRT Prediabetes System, has been designed in direct response to discussions with government healthcare authorities for a scalable solution to the growing problem of prediabetes. The Prediabetes Solution provides patients with educational videos and supplemental content formatted for mobile devices and a private online community to discuss disease management (e.g., support, weight loss, diet, etc.). Most importantly, the System tracks patients and reminds them to test their A1C according to payer protocols. ALR GluCurve for PetsALR Technologies Inc. has developed the GluCurve Pet CGM to address an unmet need in diabetes care for felines and canines by combining the hardware of a CGMS with the software of an adapted version of its Diabetes Solution platform for use by veterinarians in animal health. The GluCurve Pet CGM platform allows the blood glucose readings from the medical device placed on the pet to be uploaded to the cloud where the data is processed and converted into daily glucose curve graphs and data sets that can be reviewed and compared by the veterinarian at any time. The system provides the doctor with insulin dose calculators and recommendations based on current clinical practice guidelines.
The current method to monitor glucose levels in diabetic felines and canines is
to prepare an in-clinic glucose curve that consists of the following steps:
1. The pet is dropped off at a veterinary clinic;
2. The pet is given an insulin shot;
3. The clinic staff will draw blood every 2 hours for 10-12 hours, performing the
following steps each time:
a. test the blood in a blood glucose meter;
b. record readings;
c. plot the data into a graph;
d. assess the effectiveness of the insulin dose and glycemic control; and
4. The pet is picked up by their owner.
The GluCurve Pet CGM solves the multiple issues that arise from doing an
in-clinic glucose curve:
· Inaccurate data;
· Manual process of data collection, review and analysis; and
· Burden on the clinic staff and the pet owner.
31 Inaccurate Data A CGM is placed on the pet by the veterinarian in minutes and the pet is sent home where the glucose readings will be automatically taken and uploaded for up to 14 days, which eliminates the stress on the animal from being housed in the clinic and from getting its blood drawn, which can elevate glucose levels. A CGM also provides readings every 5 minutes, which gives better insight to the veterinarian of the highs and lows of the pet's glucose levels throughout the day, which are often missed when only checking every 2 hours during an in-clinic glucose curve.
Manual Process of Data Collection, Review and Analysis
A CGM automatically uploads 288 glucose readings per day to the ALRT cloud where the data is analyzed, organized, then displayed on the platform for the veterinarian to view. The GluCurve Pet CGM platform provides patient management of diabetic pets so historical data can also be reviewed and compared.
Burden on Clinic Staff and Pet Owner
A CGM is placed on the pet in minutes, after which they are sent home, greatly reducing the time spent by the staff during an in-clinic glucose curve of caring for the pet and manually drawing blood and recording readings every 2 hours. The platform also greatly reduces the time needed by the doctor to review and make insulin dose adjustments by offering dosing calculators, guidelines and decision flowcharts based on current clinical practice guidelines.
Results of Operations - Nine Months Ended
Nine months endedSeptember 30, 2021 compared to Nine months endedSeptember 30, 2020 Nine Months Ended Nine Months Ended Amount ($) Percentage (%) September 30, September 30, Increase / Increase / 2021 2020 (Decrease) (Decrease) Revenue $ 2,000 - 2,000 100 Cost of revenue (1,000 ) - (1,000 ) 100 Gross margin 1,000 - 1,000 100 Operating Expenses Product development costs 369,000 1,447,000 (1,078,000 ) (74 ) Professional fees 574,000 508,000 66,000 13 Selling, general and administration 1,152,000 360,000 792,000 220 Operating Loss 2,095,000 2,315,000 (220,000 ) (10 ) Loss before other items 2,094,000 2,315,000 (221,000 ) (10 ) Other Items Interest expense 2,802,000 1,578,000 1,224,000 78 Loss on settlement of debt 34,000 - 34,000 100 Total Other Items 2,836,000 1,578,000 1,258,000 80 Net Loss$ 4,930,000 3,893,000 1,037,000 27 The net loss for the nine months endedSeptember 30, 2021 was 27% ($1,037,000 ) higher than the net loss atSeptember 30, 2020 . Loss before other items and stock-based compensation was$642,000 (84%) higher during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 . We highlight that loss before other items and stock-based compensation is a "non-GAAP financial measure". This measure is calculated by removing those items from the net loss presented on our unaudited condensed consolidated statements of operations. This measure does not have a standardized meaning underU.S. GAAP. Management uses this measure internally to evaluate its results of operations, as it removes the impact of stock-based compensation, non-operational losses and interest accretion. 32 Nine Months Ended Nine Months Ended Amount ($) Percentage (%) September 30, September 30, Increase / Increase / 2021 2020 (Decrease) (Decrease) Loss Before Other Items$ 2,094,000 2,315,000 (221,000 ) (10 ) Stock-based compensation included in selling, general and administration expense, professional fees and product development costs 685,000 1,548,000 (863,000 ) (56 ) Loss Before Other Items and Stock-based Compensation$ 1,409,000 767,000 642,000 84 The loss before interest and stock-based compensation for the Company's nine months endedSeptember 30, 2021 increased by$642,000 due primarily to increased professional fees of$388,000 and personnel costs of$253,000 .
· The Company incurred increased professional costs related to assessing business
structure alternatives;
· The Company has retained additional personnel to support commercialization
strategies in
· The Company has incurred professional costs related to its proposed migration
to
· The Company has retained additional personnel related to evaluating and forming
its pet division.
Selling, General and Administration
Selling, general and administration costs incurred consist of salaries and consulting fees of management personnel, stock-based compensation for options granted to management personnel, travel and trade show costs, rent of the Company's corporate office, website development costs and general costs incurred through day-to-day operations. During the period, the Company had an increase in selling, general and administration expenses, primarily driven by an increase in salaries and consulting fees paid to personnel and to a market research firm related to commercialization plans for the Company's Diabetes Solution. The components of selling, general and administration expenses and the changes therein can be
seen
as follows:
Nine Months Ended Nine Months Ended Amount ($)
September 30, September 30, Increase /
Selling, General and Administration: 2021 2020 (Decrease)
Salaries and consulting fees $ 524,000 271,000 253,000
Travel and trade shows 12,000 20,000 (8,000 )
Website and information technology 17,000 12,000 5,000 Transfer agent, filing fees and quotation costs 16,000 38,000 (22,000 ) Market research consulting fees 44,000 - 44,000 License and permits 19,000 8,000 11,000 Other general and administration costs 66,000 11,000 55,000 Stock-based compensation 454,000 - 454,000 Total$ 1,152,000 360,000 792,000 33 During Q3 2021, the Company had increased selling, general and administration operating expenses, as compared to the same period in 2020. The cash-based selling, general and administration expenses increased by$338,000 during Q3 2021, as compared to Q3 2020, which was primarily related to increased personnel costs and market research consulting fees.
Product development costs
Substantially all of the product development costs incurred related to a) services provided by contractors of the Company, and b) expenses incurred for product development. The change in balance from the previous year relates primarily to changes in composition of our technical team in the current year, as compared to the previous year. The Company incurred stock-based compensation expense of$160,000 during Q3 2021 related to the grant and vesting of options to its product development team compared to$1,156,000 during Q3 2020. The reduction in product development costs related to stock-based compensation expenses of$996,000 for the nine months endedSeptember 30, 2021 accounted for 92% of the reduction in total product development costs from the nine months endedSeptember 30, 2020 . Professional fees Professional costs incurred consist of consulting and advisory fees of certain professionals retained, audit fees, tax consultant fees, recruiter fees, legal fees and stock-based compensation for options granted to professionals. During the period, there was a significant increase in professional fees related to:
· The recruitment of certain personnel;
· The engagement of additional accounting personnel; and
· Legal and tax advice obtained related to corporate structure analysis.
By type of professional cost, the variance can be seen as follows:
Nine Months Ended Nine Months Ended Amount ($)
September 30, September 30, Increase /
Professional fees: 2021 2020 (Decrease)
Corporate auditor $ 18,000 22,000 (4,000 )
Accounting fees 113,000 47,000 66,000
Tax consultant fees 43,000 - 43,000
Legal fees 202,000 33,000 169,000
Recruiter fees 48,000 - 48,000
Market consultants and outreach 34,000 -
34,000 Professionals retained 45,000 14,000 31,000 Stock-based compensation 71,000 392,000 (321,000 ) Total $ 574,000 508,000 66,000 Excluding the difference in net loss attributed to the grant of stock options in the prior year, professional fees increased by$387,000 from the comparative period of the prior year, as indicated above.
Interest expense
Interest expense was from the following sources for the nine months ended
Nine Months Ended Nine Months Ended Amount ($)
September 30, September 30, Increase /
Interest expense: 2021 2020 (Decrease) Interest expense incurred on promissory notes $ 396,000 397,000 (1,000 ) Interest expense incurred on lines of credit 1,031,000 1,089,000 (58,000 ) Interest expense incurred on stock options modified 1,288,000 - 1,288,000 Imputed interest on zero interest loans 86,000 92,000 (6,000 ) Other interest 1,000 - 1,000 Total$ 2,802,000 1,578,000 1,224,000 34 Interest expense incurred on stock options modified of$1,288,000 related to the modification of stock options held by the Chairman and Chief Executive Officer of the Company and his spouse related to financing provided.
Interest on Promissory Notes
OnMay 10, 2021 , the Company issued 2,000,000 shares of common stock with a fair market price of$0.057 to a creditor to extinguish$20,000 in promissory notes and$3,000 in accrued interest on promissory notes. There were no other significant changes in the amount of promissory notes outstanding as atSeptember 30, 2021 and 2020. The interest incurred on promissory notes was consistent during the nine months endedSeptember 30, 2021 and 2020.
Interest on Lines of Credit
The Company has two line of credit facilities with balances as follows:
Nine Months Ended Nine Months Ended Amount ($)
September 30, September 30, Increase /
Lines of credit: 2021 2020 (Decrease)
Line of credit provided by Sidney Chan$ 10,093,000 9,366,000 727,000 Line of credit provided by Christine Kan 2,000,000
2,000,000 - Total$ 12,093,000 11,366,000 727,000 The principal balance of the line of credit due to Mr.Sidney Chan decreased, as principal of$1,038,967 was retired through the issuance of shares onSeptember 21, 2020 . This decrease was offset by advances toMr. Chan under the line of credit to finance the operations of the Company.
The Company incurred interest on the lines of credit as follows:
Nine Months Ended Nine Months Ended Amount ($)
September 30, September 30, Increase /
Interest expense on lines of credit: 2021 2020 (Decrease)
Interest expense incurred on the
line of credit from Sidney Chan
during the period $ 851,000 909,000 (58,000 )
Interest expense incurred on the
line of credit from Christine Kan
during the period 180,000 180,000 -
Total $ 1,031,000 1,089,000 (58,000 )
Imputed Interest
During the 2021 and 2020 periods, the Company had certain zero interest
promissory notes and accounts payable in excess of one year. Pursuant to the
Company's accounting policy, these zero interest amounts are considered to be
financing items in nature and are assigned a deemed interest rate (1% per
month). The interest incurred on these is expensed as imputed interest and,
instead of increasing the liabilities of the Company, it is allocated to equity
under the financial statement line item additional paid-in capital. The change
from the prior period is related to the discussion included under Interest
on Promissory Notes above. 35
Liquidity and Capital Resources
As At Amount ($) Percentage (%)
September 30, As At Increase / Increase /
Working Capital 2021 December 31, 2020 (Decrease) (Decrease)
Current Assets $ 106,000 129,000 (23,000 ) (18 )
Current Liabilities 23,350,000 21,889,000 1,461,000 7
Working Capital Deficiency $ (23,244,000 ) (21,760,000 ) (1,484,000 ) 7
The Company has a severe working capital deficiency. It does not have the
ability to service its current liabilities for the next twelve months and is
reliant on its line of credit facilities to meet its ongoing operations. Until
the Company has revenue-producing activities that exceed its operating
requirements, it will be unable to service its current liabilities and the
working capital deficit will continue to increase. As of the date of this
report, the Company has commenced minimal revenue-generating activities. The
Company is expecting to continue generating revenues in Singapore during the
2021 and 2022 fiscal years; however, the amount and timing are uncertain. The
revenues generated in 2021 and 2022 from its operations in Singapore are not
expected to be sufficient to finance the ongoing operations of the business and
repay the current liabilities. The Company is also evaluating opportunities for
its Pet GluCurve product, the timing and amount of revenues from which are
uncertain. The Company is seeking to complete its Rights Offering that would
provide additional financing of $5,051,000 , which is significantly less than the
current liabilities outstanding. There is substantial doubt about the Company's
ability to repay its current liabilities in the near term or any time in the
future, which could ultimately lead to business failure.
Current Assets
The Company's nominal current assets as at
2020
Current Liabilities The Company has current liabilities of$23,350,000 atSeptember 30, 2021 , as compared to$21,889,000 atDecember 31, 2020 . Current liabilities are as follows: September 30, Change Change 2021 December 31, 2020 ($) (%) Accounts payable and accrued liabilities$ 1,056,000 1,114,000 (58,000 ) (5 ) Promissory notes to related parties 3,042,000 3,032,000 10,000 0 Promissory notes to arm's length parties 2,213,000 2,254,000 (41,000 ) (2 ) Interest payable 3,979,000 3,575,000 404,000 11 Lines of credit from related parties 13,060,000 11,914,000 1,146,000 10 Total current liabilities$ 23,350,000 21,889,000 1,461,000 7 The fluctuations in accounts payable occurred in the regular course of business. Accounts payable of$194,000 was extinguished from the issuance of shares of common stock.
The increase in interest payable relates to:
·
of interest;
·
to interest payable; and
·
All of the promissory notes and related interest payable is overdue.
36
The increase in the lines of credit payable of
borrowings of:
·
sales and marketing program;
·
·
amounts.
Cash Flows
Nine Months Ended Nine Months Ended
Cash Flows September 30, 2021 September 30, 2020
Cash flows used in Operating Activities$ (1,302,000 ) $ (661,000 ) Cash flows provided by Financing Activities 1,251,000 660,000 Net Decrease in Cash During Period $ (51,000 )
$ (1,000 ) Cash Balances
As of
Cash Used in Operating Activities
Cash used by the Company in operating activities during the nine months endedSeptember 30, 2021 was$1,302,000 in comparison with$661,000 used during the same period last year. The Company's expenditures from operations were used as follows (approximate amounts): Cash Used in Operating Activities Nine Months Ended
Nine Months Ended Reconciliation September 30, 2021 September 30, 2020 Net loss$ (4,930,000 ) $ (3,893,000 ) Stock-based compensation incurred for product development, selling, general and administration, professional fees and interest expense 1,973,000 1,548,000 Non-cash imputed interest expense 86,000 92,000 Loss on debt settlement 34,000 - Net purchases with balances owing in accounts payable and accrued liabilities 137,000 106,000 Retainers and prepaid services (29,000 ) - Accrued interest on lines of credit 1,031,000 1,089,000 Accrued interest from promissory notes 396,000 397,000 Cash used in operating activities$ (1,302,000 )
$ (661,000 )
The expenditures incurred were to fund the operating activities of the business.
37
Cash Proceeds from Financing Activities
Cash sourced by the Company from financing activities during the nine months
ended
during the same period last year. The funds were sourced as follows:
Cash from Financing Activities Nine Months Ended Nine Months Ended Reconciliation September 30, 2021 September 30, 2020 Proceeds from Rights Offering$ 1,125,000 $ - Proceeds from exercise of options 12,000 - Net proceeds from line of credit from Mr. Sidney Chan 114,000 660,000 Cash provided by financing activities$ 1,251,000
$ 660,000
Short- and Long-Term Liquidity
As of
resources and committed financing to enable it to meet its administrative
overhead, product development budgeted costs and debt obligations over the next
12 months.
All of the Company's debt financing is due on demand or overdue. The Company will seek to obtain creditors' consents to delay repayment of these loans until it is able to replace these financings with funds generated by operations, replacement debt, or from equity financings through private placements or the exercise of options and warrants. While the Company is seeking to complete its Rights Offering, there is no certainty that it will be able to do so. If the Company is not able to complete the Rights Offering, it will not have sufficient funds to repay the debt financing past maturity and it will be due on demand. While the Company's creditors have agreed to extend repayment deadlines in the past, there is no assurance that they will continue to do so in the future. The Company has faced litigation from creditors in the past and is currently being sued by one creditor. There is no assurance that additional creditors will not make claims against the Company in the future. Failure to obtain either replacement financing or creditor consent to delay the repayment of existing financing could result in the Company having to cease operations.
Tabular Disclosure of Contractual Obligations:
Payments Due by Period
Less More
Than 1 1-3 3-5 Than 5
Total Year Years Years Years
Accounts payable and accrued
liabilities $ 1,056,000 $ 1,056,000 $ - $ - $ -
Promissory notes to related
parties 3,042,000 3,042,000 - - -
Promissory notes to arm's
length parties 2,213,000 2,213,000 - - -
Interest payable 3,979,000 3,979,000 - - -
Lines of credit 13,060,000 13,060,000 - - -
$ 23,350,000 $ 23,350,000 $ - $ - $ -
38
The Company will continue to use the funds available from the lines of credit to
cover administrative overhead and product development requirements until such
time it can establish cash flows from operations. In the next nine months, the
Company anticipates the amount borrowed from the lines of credit to increase
compared to the past nine months, as it expects to commercially launch its
Diabetes Management System before December 31, 2021 .
Critical Accounting Policies and Going Concern
Our discussion and analysis of our results of operations and liquidity and capital resources are based on our unaudited condensed consolidated financial statements for the nine months endedSeptember 30, 2021 and 2020, which have been prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical and anticipated results, trends and various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ materially from our estimates. The Company's condensed consolidated financial statements have been prepared on a going concern basis, which presumes the realization of assets and the discharge of liabilities and commitments in the normal course of operations for the foreseeable future. See note 1 of the unaudited condensed consolidated financial statements.
Due to our being a development stage company and not having generated
significant revenues, in the notes to our condensed consolidated financial
statements, we have included disclosure regarding concerns about our ability to
continue as a going concern.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet financing arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that is material to investors.
39
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