LCTC 10-Q
Lifeloc Technologies, Inc (LCTC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended |
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| incorporation or organization) |
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Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
| Common Stock, no par value | Shares |
| (Class) | (outstanding at September 30, 2023) |
LIFELOC TECHNOLOGIES, INC.
FORM 10-Q
For the Three Months Ended September 30, 2023
INDEX
i
PART I FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
LIFELOC TECHNOLOGIES, INC.
Condensed Balance Sheets
| ASSETS | ||||||||
September 30, 2023 | December 31, 2022 | |||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Employee retention credit receivable | ||||||||
| Prepaid expenses and other | ||||||||
| Total current assets | ||||||||
| PROPERTY AND EQUIPMENT, at cost: | ||||||||
| Land | ||||||||
| Building | ||||||||
| Real-time Alcohol Detection And Recognition equipment and software | ||||||||
| Production equipment, software and space modifications | ||||||||
| Training courses | ||||||||
| Office equipment, software and space modifications | ||||||||
| Sales and marketing equipment and space modifications | ||||||||
| Research and development equipment, software and space modifications | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | ||||||||
| OTHER ASSETS: | ||||||||
| Patents, net | ||||||||
| Deposits and other | ||||||||
| Deferred taxes | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Term loan payable, current portion | ||||||||
| Income taxes payable | ||||||||
| Customer deposits | ||||||||
| Accrued expenses | ||||||||
| Deferred revenue, current portion | ||||||||
| Reserve for warranty expense | ||||||||
| Total current liabilities | ||||||||
| TERM LOAN PAYABLE, net of current portion and debt issuance costs | ||||||||
| DEFERRED REVENUE, net of current portion | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Common stock, par value; shares authorized, shares outstanding | ||||||||
| Retained earnings | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
See accompanying notes.
| 1 |
LIFELOC TECHNOLOGIES, INC.
Condensed Statements of Income (Unaudited)
| Three Months Ended September 30, | ||||||||
| REVENUES: | 2023 | 2022 | ||||||
| Product sales | $ | $ | ||||||
| Royalties | ||||||||
| Rental income | ||||||||
| Total | ||||||||
| COST OF SALES | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES: | ||||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Total | ||||||||
| OPERATING INCOME (LOSS) | ( | ) | ||||||
| OTHER INCOME (EXPENSE): | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Total | ( | ) | ||||||
| NET INCOME (LOSS) BEFORE PROVISION FOR TAXES | ( | ) | ||||||
| BENEFIT FROM FEDERAL AND STATE INCOME TAXES | ||||||||
| NET INCOME (LOSS) | $ | $ | ( | ) | ||||
| NET INCOME (LOSS) PER SHARE, BASIC | $ | $ | ( | ) | ||||
| NET INCOME (LOSS) PER SHARE, DILUTED | $ | $ | ( | ) | ||||
| WEIGHTED AVERAGE SHARES, BASIC | ||||||||
| WEIGHTED AVERAGE SHARES, DILUTED | ||||||||
See accompanying notes.
| 2 |
LIFELOC TECHNOLOGIES, INC.
Condensed Statements of Income (Unaudited)
| Nine Months Ended September 30, | ||||||||
| REVENUES: | 2023 | 2022 | ||||||
| Product sales | $ | $ | ||||||
| Royalties | ||||||||
| Rental income | ||||||||
| Total | ||||||||
| COST OF SALES | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES: | ||||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Total | ||||||||
| OPERATING INCOME (LOSS) | ( | ) | ||||||
| OTHER INCOME (EXPENSE): | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Total | ( | ) | ||||||
| NET INCOME (LOSS) BEFORE PROVISION FOR TAXES | ( | ) | ||||||
| BENEFIT FROM FEDERAL AND STATE INCOME TAXES | ||||||||
| NET INCOME (LOSS) | $ | $ | ( | ) | ||||
| NET INCOME (LOSS) PER SHARE, BASIC | $ | $ | ( | ) | ||||
| NET INCOME (LOSS) PER SHARE, DILUTED | $ | $ | ( | ) | ||||
| WEIGHTED AVERAGE SHARES, BASIC | ||||||||
| WEIGHTED AVERAGE SHARES, DILUTED | ||||||||
See accompanying notes
| 3 |
Lifeloc Technologies, Inc.
Condensed Statements of Stockholders' Equity (Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Total stockholders' equity, beginning balances | $ | $ | $ | $ | ||||||||||||
| Common stock (no shares issued during periods): | ||||||||||||||||
| Beginning balances | ||||||||||||||||
| Stock based compensation expense related to stock options | ||||||||||||||||
| Ending balances | ||||||||||||||||
| Retained earnings: | ||||||||||||||||
| Beginning balances | ||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||
| Ending balances | ||||||||||||||||
| Total stockholders' equity, ending balances | $ | $ | $ | $ | ||||||||||||
See accompanying notes
| 4 |
LIFELOC TECHNOLOGIES, INC
Condensed Statements of Cash Flows (Unaudited)
| Nine Months Ended September 30, | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | 2023 | 2022 | ||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income to net cash provided from (used in) operating activities- | ||||||||
| Depreciation and amortization | ||||||||
| Provision for inventory obsolescence, net change | ||||||||
| Deferred taxes, net change | ( | ) | ( | ) | ||||
| Stock based compensation expense related to stock options | ||||||||
| Changes in operating assets and liabilities- | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Employee retention credit and income taxes receivable | ||||||||
| Prepaid expenses and other | ( | ) | ( | ) | ||||
| Deposits and other | ||||||||
| Accounts payable | ( | ) | ||||||
| Income taxes payable | ||||||||
| Customer deposits | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Net cash provided from (used in) operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Patent filing expense | ( | ) | ( | ) | ||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: | ||||||||
| Principal payments made on term loan | ( | ) | ( | ) | ||||
| Net cash provided from (used in) financing activities | ( | ) | ( | ) | ||||
| NET (DECREASE) IN CASH | ( | ) | ( | ) | ||||
| CASH, BEGINNING OF PERIOD | ||||||||
| CASH, END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL INFORMATION: | ||||||||
| Cash paid for interest | $ | $ | ||||||
See accompanying notes
| 5 |
LIFEELOC TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
Lifeloc Technologies, Inc. ("Lifeloc" or the "Company") is a Colorado-based developer, manufacturer and marketer of portable hand-held and fixed station breathalyzers and related accessories, supplies and education. We design, produce and sell fuel-cell based breath alcohol testing equipment. We compete in all major segments of the breath alcohol testing instrument market, including law enforcement, workplace, corrections, original equipment manufacturing ("OEM") and consumer markets. In addition, we offer a line of supplies, accessories, services, and training to support customers' alcohol testing programs. We sell globally through distributors as well as directly to users.
We define our business as providing "near and remote sensing" products and solutions. Today, the majority of our revenues are derived from products and services for alcohol detection and measurement. We remain committed to growing our breath alcohol testing business. In the future, we anticipate the commercialization of new sensing and measurement products that may allow Lifeloc to successfully expand our business into new growth areas where we do not presently compete or where no satisfactory product solutions exist today.
Lifeloc incorporated in Colorado in December 1983. We filed a registration statement on Form 10 with the Securities and Exchange Commission, which became effective on May 31, 2011. Our fiscal year end is December 31. Our principal executive offices are located at 12441 West 49th Avenue, Unit 4, Wheat Ridge, Colorado 80033-3338. Our telephone number is (303) 431-9500. Our websites are www.lifeloc.com and www.stsfirst.com. Information contained on our websites does not constitute part of this Form 10-Q.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. These statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") and accounting principles generally accepted in the United States ("GAAP") for interim financial information. They do not include all information and notes required by GAAP for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to financial statements included in Lifeloc's Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, consisting of normal recurring accruals necessary for a fair presentation of the financial position as of September 30, 2023 and December 31, 2022, and the results of operations and cash flows for the quarters ended September 30, 2023 and September 30, 2022. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for a full year. The Company's 2022 Annual Report on Form 10-K includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q.
Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expense during the reporting period. Actual results could differ from those estimates.
Fair Value Measurement. Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements and Disclosures ("ASC 820"), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equity securities listed on the New York Stock Exchange.
Level 2 - Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.
| 6 |
Level 3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.
Inventories. Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. At September 30, 2023 and December 31, 2022, inventory consisted of the following:
| 2023 | 2022 | |||||||
| Raw materials & deposits | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total gross inventories | ||||||||
| Less reserve for obsolescence | ( | ) | ( | ) | ||||
| Total net inventories | $ | $ | ||||||
Income Taxes. We account for income taxes under the provisions of ASC Topic 740, Accounting for Income Taxes ("ASC 740"). We have determined an estimated annual effective tax rate. The rate will be revised, if necessary, as of the end of each successive interim period during our fiscal year to our best current estimate.
The estimated annual effective tax rate is applied to the year-to-date ordinary income (loss) at the end of the interim period.
ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Revenue Recognition. In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. We adopted this ASU on January 1, 2018 retrospectively, with the cumulative effect of initial application (which was zero) recognized in retained earnings on that date.
Revenue from product sales and supplies is generally recorded when we ship the product and title has passed to the customer, or when agreed milestones are met in the case of product developments, provided that we have evidence of a customer arrangement and can conclude that collection is probable. The prices at which we sell our products are fixed and determinable at the time we accept a customer's order. We recognize revenue from sales to stocking distributors when there is no right of return, other than for normal warranty claims, and generally have no ongoing obligations related to product sales, except for normal warranty.
The sales of licenses to our training courses are recognized as revenue at the time of sale. Training and certification revenues are recognized at the time the training and certification occurs. Data recording revenue is recognized based on each day’s usage of enrolled devices.
Revenues arising from extended warranty contracts are booked as sales over their life on a straight-line basis. We have discontinued arranging for customer financing and leasing through unrelated third parties and instead are providing for customer financing and leasing ourselves, which we recognize as revenue over the applicable lease term. Occasionally, we rent used equipment to customers, and in those cases, we recognize the revenues as they are earned over the life of the contract.
Royalty income is recognized in accordance with agreed upon terms, when performance obligations are satisfied, the amount is fixed or determinable and collectability is reasonably assured.
Rental income from space leased to our tenants is recognized in the month in which it is due, which approximates if it were recognized on a straight-line basis over the term of the related lease.
On occasion we receive customer deposits for future product orders and product developments. Customer deposits are initially recorded as a liability and recognized as revenue when the product is shipped and title has passed to the customer, or when agreed milestones are met in the case of product developments.
| 7 |
Topic 606 requires the disaggregation of revenue into broad categories, which we have defined as shown below for the three months and for the nine months ended September 30, 2023 and September 30, 2022.
| Three Months Ended September 30, | ||||||||
| Product sales: | 2023 | 2022 | ||||||
| Product sales and supplies | $ | $ | ||||||
| Training, certification and data recording | ||||||||
| Service plans and equipment rental | ||||||||
| Product sales subtotal | ||||||||
| Royalties | ||||||||
| Rental income | ||||||||
| Total revenues | $ | $ | ||||||
| Nine Months Ended September 30, | ||||||||
| Product sales: | 2023 | 2022 | ||||||
| Product sales and supplies | $ | $ | ||||||
| Training, certification and data recording | ||||||||
| Service plans and equipment rental | ||||||||
| Product sales subtotal | ||||||||
| Royalties | ||||||||
| Rental income | ||||||||
| Total revenues | $ | $ | ||||||
Deferred Revenue. Deferred revenues arise from service contracts and from development contracts. Revenues from service contracts are recognized on a straight-line basis over the life of the contract, generally one year, and are included in product revenue in our statements of income. However, there are occasions when they are written for longer terms up to four years. The revenues from that portion of the contract that extend beyond one year are shown in our balance sheets as long term. Deferred revenues also result from progress payments received on development contracts; those revenues are recognized when the contract is complete, and are included in product revenue in our statements of income. All development contracts are for less than one year and all deferred revenues from this source are shown in our balance sheets as short term.
Recent Accounting Pronouncements. We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not expect them to have a material effect on our financial statements.
ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the accompanying statement of income.
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. We used the Black-Scholes option-pricing model to determine fair value. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Although the fair value of employee stock options is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
Stock-based compensation expense recognized under ASC 718 for the three months ended September 30, 2023 and 2022 was $ and $ respectively, and for the nine months ended September 30, 2023 and 2022 it was $ and $ respectively. These amounts consist of stock-based compensation expenses from grants of employee stock options which are allocated to General and Administrative Expense when incurred.
Segment Reporting. We have concluded that we have two operating segments, including our primary business which is as a developer, manufacturer, lessor and marketer of portable hand-held breathalyzers and related accessories, supplies, education, training and royalties from development contracts. As a result of purchasing our building on October 31, 2014, we have a second business segment consisting of renting portions of our building to an existing tenant, whose lease expires at on June 30, 2025.
| 8 |
We report both basic and diluted net income (loss) per common share. Basic net income (loss) per common share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share is computed by dividing the net income (loss) for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. The shares used in the calculation of dilutive potential common shares exclude options to purchase shares where the exercise price was greater than the average market price of common shares for the period. The shares used in the calculation of dilutive potential common shares exclude options to purchase shares in loss periods since they are anti-dilutive.
The following table presents the calculation of basic and diluted net income (loss) per common share for three months ended September 30, 2023 and September 30, 2022, and for the nine months ended September 30, 2023 and 2022:
| Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Weighted average shares-basic | ||||||||
| Effect of dilutive potential common shares | ||||||||
| Weighted average shares-diluted | ||||||||
| Net income (loss) per share-basic | $ | $ | ( | ) | ||||
| Net income (loss) per share-diluted | $ | $ | ( | ) | ||||
| Antidilutive employee stock options | ||||||||
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Weighted average shares-basic | ||||||||
| Effect of dilutive potential common shares | ||||||||
| Weighted average shares-diluted | ||||||||
| Net income (loss) per share-basic | $ | $ | ( | ) | ||||
| Net income (loss) per share-diluted | $ | $ | ( | ) | ||||
| Antidilutive employee stock options | ||||||||
4. STOCKHOLDERS' EQUITY
The following table summarizes information about employee stock options outstanding and exercisable at September 30, 2023:
| STOCK OPTIONS OUTSTANDING | STOCK OPTIONS EXERCISABLE | |||||||||||||||||
| Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (in Years) | Weighted Average Exercise Price per Share | Number Exercisable | Weighted Average Exercise Price per Share | |||||||||||||
| $ | $ | $ | ||||||||||||||||
The exercise price of all options granted through September 30, 2023 has been equal to or greater than the fair market value of the Company's common stock at the time the options were issued. As of September 30, 2023, the 2013 Plan had expired and options for our common stock remain available for grant under the 2013 Plan.
options were granted during the three months or during the nine months ended September 30, 2023.
options were granted during the three months ended September 30, 2022. A total of options were granted to two employees during the nine months ended September 30, 2022.
options were exercised during the three months or during the nine months Ended September 30, 2023 and September 30, 2022.
The total number of authorized shares of common stock continues to be , with no change in the par value per share. All of our common stock is designated as no par value per share.
| 9 |
5. COMMITMENTS AND CONTINGENCIES
Mortgage Expense. We purchased our
facilities in Wheat Ridge, Colorado on October 31, 2014 for $
| 2023 | $ | |||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 – 2031 | ||||||
| Total | ||||||
| Less financing cost | ( | ) | ||||
| Net term loan payable | ||||||
| Less current portion | ( | ) | ||||
| Long term portion | $ |
Employee Severance Benefits. Our obligation with respect to employee severance benefits is minimized by the "at will" nature of the employee relationships. As of September 30, 2023, we had no obligation with respect to contingent severance benefit obligations other than the Company's obligations under the employment agreement with its chief executive officer, Dr. Wayne Willkomm. In the event that Dr. Willkomm's employment is terminated by the Company without Cause (including through a decision by the Company not to renew the employment agreement) or by Dr. Willkomm with Good Reason (as each are defined in the employment agreement), Dr. Willkomm will be eligible, upon satisfaction of certain conditions, for severance equal to two months of salary continuation plus 12 months of health insurance continuation.
Contractual Commitments and Purchase Orders.
Contractual commitments under development agreements and outstanding purchase orders issued to vendors in the ordinary course of business
totaled $
Regulatory Commitments. With respect to our LifeGuard® product, we are subject to regulation by the United States Food and Drug Administration ("FDA"). The FDA provides regulations governing the manufacture and sale of our LifeGuard® product, and we are subject to inspections by the FDA to determine our compliance with these regulations. FDA inspections are conducted periodically at the discretion of the FDA. On June 26, 2017, we were inspected by the FDA and no violations were issued. We are also subject to regulation by the DOT and by various state departments of transportation so far as our other products are concerned. We believe that we are in substantial compliance with all known applicable regulations
6. LINE OF CREDIT
As part of the long-term financing of our
property purchased on October 31, 2014, we obtained a one-year $250,000 revolving line of credit facility with Bank of America, which
matured on October 31, 2015 and was extended to June 30, 2018. The agreement was amended to increase the amount of the line to $
| 10 |
7. INCOME TAXES
The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for (benefit from) income taxes consists of the following.
| Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Federal statutory rate | $ | $ | ( | ) | ||||
| Effect of: | ||||||||
| State taxes, net of federal tax benefit | ||||||||
| Other | ( | ) | ( | ) | ||||
| Total | $ | ( | ) | $ | ( | ) | ||
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Federal statutory rate | $ | $ | ( | ) | ||||
| Effect of: | ||||||||
| State taxes, net of federal tax benefit | ||||||||
| Other | ( | ) | ( | ) | ||||
| Total | $ | ( | ) | $ | ( | ) | ||
8. BUSINESS SEGMENTS
We currently have two business segments: (i) the sale of physical products, including portable hand-held breathalyzers and related accessories, supplies, education, training ("Product Sales"), and royalties from development contracts with OEM manufacturers ("Royalties" and, together with Product Sales, the "Products" segment), and (ii) rental of a portion of our building (the "Rentals" segment). The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2.
Operating profits for these segments exclude unallocated corporate items. Administrative and staff costs were commonly used by all business segments and were indistinguishable.
The following sets forth information about the operations of the business segments for the three months ended September 30, 2023 and 2022.
| 2023 | 2022 | |||||||
| Product sales | $ | $ | ||||||
| Royalties | ||||||||
| Products subtotal | ||||||||
| Rentals | ||||||||
| Total | ||||||||
| Gross profit: | ||||||||
| Product sales | ||||||||
| Royalties | ||||||||
| Products subtotal | ||||||||
| Rentals | ( | ) | ( | ) | ||||
| Total | ||||||||
| Interest expense: | ||||||||
| Product sales | ||||||||
| Royalties | ||||||||
| Products subtotal | ||||||||
| Rentals | ||||||||
| Total | ||||||||
| Net income (loss) before taxes: | ||||||||
| Product sales | ( | ) | ||||||
| Royalties | ||||||||
| Products subtotal | ( | ) | ||||||
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The following sets forth information about the operations of the business segments for the nine months ended September 30, 2023 and 2022.
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There were no intersegment revenues.
At September 30, 2023, $
9. SUBSEQUENT EVENTS
We evaluated all of our activity and concluded that no subsequent events have occurred that would require recognition in our financial statements or disclosure in the notes to our financial statements.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our financial condition and results of operations, and should be read in conjunction with our financial statements and the related notes included elsewhere in this Form 10-Q. Certain statements contained in this section are not historical facts, including statements about our strategies and expectations about new and existing products, market demand, acceptance of new and existing products, technologies and opportunities, market and industry segment growth, and return on investments in products and markets. These statements are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and we intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in these statutes. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "intends," "plans" or "anticipates" or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. Such statements involve substantial risks and uncertainties that may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking statements in this section are based on information available to us on the date of this document, and we assume no obligation to update such forward looking statements. Readers of this Form 10-Q are strongly encouraged to review the section titled "Risk Factors" in our December 31, 2022 Form 10-K.
Overview
Lifeloc Technologies, Inc., a Colorado corporation ("Lifeloc" or the "Company"), is a Colorado-based developer, manufacturer and marketer of portable hand-held and fixed station breathalyzers and related accessories, supplies and education. We design, produce and sell fuel-cell based breath alcohol testing equipment. We compete in all major segments of the portable breath alcohol testing instrument market, including law enforcement, workplace, corrections, original equipment manufacturing ("OEM") and consumer markets. In addition, we offer a line of supplies, accessories, services, and training to support customers' alcohol testing programs. We sell globally through distributors as well as directly to users.
We define our business as providing "near and remote sensing and monitoring" products and solutions. Today, the majority of our revenues are derived from products and services for alcohol detection and measurement. We remain committed to growing our breath alcohol testing business. In the future, we anticipate the commercialization of new sensing and measurement products that may allow Lifeloc to successfully expand our business into new growth areas where we do not presently compete or where no satisfactory product solutions exist today.
In addition, with the October 2014 purchase of our corporate headquarters and certain adjacent property, we added a new reporting segment focused on the ownership and rental of real property through existing commercial leases.
Lifeloc incorporated in Colorado in December 1983. We filed a registration statement on Form 10 with the Securities and Exchange Commission, which became effective on May 31, 2011. Our fiscal year end is December 31. Our principal executive offices are located at 12441 West 49th Avenue, Unit 4, Wheat Ridge, Colorado 80033-3338. Our telephone number is (303) 431-9500. Our websites are www.lifeloc.com and www.stsfirst.com. Information contained on our websites does not constitute part of this Form 10-Q.
Principal Products and Services and Methods of Distribution
Alcohol Breath Testers
In 1989, we introduced our first breath alcohol tester, the PBA3000. Our Phoenix® Classic was completed and released for sale in1998, superseding the PBA3000. In turn, the Phoenix® Classic has been superseded by our FC Series and Workplace Series of portable breath alcohol testers, which are discussed below. Neither the PBA3000 nor the Phoenix® Classic is actively sold today.
In 2001, we completed and released for sale our new FC Series, designed specifically for domestic and international law enforcement and corrections markets. The portable breath alcohol testers comprising our FC Series are currently being sold worldwide, having contributed to our growth since their introduction. The FC Series is designed to meet the needs of domestic and international law enforcement for roadside drink/drive testing and alcohol offender monitoring. The FC Series is approved by the U.S. Department of Transportation (“DOT”) as an evidential breath tester, making it suitable for sale to state law enforcement agencies for preliminary roadside breath alcohol testing. The FC Series is routinely updated with firmware, software and component improvements as they become available. It is readily adaptable to the specific requirements and regulations of domestic and international markets.
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In 2005 and 2006, we introduced two new models, the EV30 and Phoenix® 6.0 Evidential Breath Tester (“Phoenix® 6.0”), which constitute our Workplace Series of testing devices. Like their predecessor, the Phoenix® Classic, and our FC Series, these instruments are DOT approved. The DOT’s specifications support the DOT’s workplace alcohol testing programs, including those applicable to workplace alcohol testing for the federally regulated transportation industry. We also sell component parts used in alcohol testing devices, such as mouthpieces used by our breathalyzers, as well as forms and labels used for record keeping, and calibration products for user re-calibration of our devices. We offer optional service agreements on our equipment, re-calibration services, and spare parts, and we sell supporting instrument training and user certification training to our workplace customers.
In 2006, we commenced selling breath alcohol equipment components that we manufacture to other OEMs for inclusion as subassemblies or components in their breath alcohol testing devices.
In late 2009, Lifeloc released the LifeGuard Personal Breathalyzer (“LifeGuard”), a personal alcohol breath tester that incorporates the same fuel-cell technology used in our professional devices. Intended originally for the global consumer breathalyzer market, LifeGuard was phased out in 2018.
In 2011 and 2012, Lifeloc introduced Bluetooth wireless keyboard and printer communication options for our Phoenix® 6.0 along with a series of web based workplace training courses. We believe these two product innovations have been key to our success and leadership in workplace breath testing.
In 2013, Lifeloc expanded our FC Series of professional breath alcohol testers targeted at domestic and international law enforcement and corrections markets with the addition of the FC5 Hornet (the “FC5”). The FC5 is a passive (no mouthpieces required) portable handheld alcohol screening device that competes directly with passive alcohol screeners from our competitors in the education, law enforcement, workplace and corrections markets.
In 2013, we also introduced the Sentinel™ zero tolerance alcohol screening station, a fully automated wall mounted screening station for use in safety sensitive industries such as oil and gas and mining. Both devices expand Lifeloc’s products for passive alcohol screening.
In the third quarter of 2014, we received approval from DOT for our EASYCAL® automatic calibration station for use with our Phoenix ® 6.0 Evidential Breath Testers, and we began shipments of the EASYCAL® to our law enforcement, corrections, workplace and international customers. The EASYCAL® calibration station is a first of its kind device that automatically performs breath tester instrument calibration, calibration verification and gas management. As compared to manual instrument calibration, the EASYCAL® reduces the opportunity for human error, saves time and reduces operating costs. In May 2019, we received DOT approval on a second generation EASYCAL® with broader capabilities called the EASYCAL® G2.
In October 2015, we expanded our Sentinel™ line with the Sentinel™ VA alcohol screening station, a fully automated station to control vehicular access to safety critical facilities, such as mines, refineries, power stations and nuclear facilities. The Sentinel™ VA alcohol screening station is intended to allow all drivers entering a secure area to be tested quickly and efficiently without leaving their vehicle.
In November 2019, we received approval from DOT for our LX9 and LT7 base unit alcohol breathalyzers. Both have been updated and both updated versions received DOT approval in December 2021.
Testers for Drugs of Abuse
In August 2016, we entered into an exclusive patent license agreement with Sandia Corporation, Albuquerque, NM, pursuant to which we acquired the exclusive rights to develop, manufacture and market Sandia’s patented SpinDx™ technology for the detection of drugs of abuse. SpinDx™ uses a centrifugal disk with micro fluidic flow paths allowing multiple tests to be carried out on a single small sample. The microfluidics disk with centrifugal concentration achieves a strong signal from trace concentrations in small samples that under best conditions can be quantitative. Sandia Corporation developed a prototype using the SpinDx™ technology under our Cooperative Research and Development Agreement. We received the first prototype in 2018, advanced this device for robustness and manufacturability, and are now commercializing the device. We are optimistic about the results of the work to date and expect market introduction later in 2023 with partners for field demonstration. The SpinDx™ platform has the potential to improve real-time screening for a panel of high-abuse drugs, with the ability to efficiently measure relatively low concentrations of drugs such as cocaine, heroin, methamphetamine, fentanyl and other high-abuse drugs.
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We intend to use the SpinDx™ technology platform, sometimes referred to as "Lab on a Disk", to develop a series of devices and tests that can be used at the roadside, in emergency rooms and in workplace testing to obtain a rapid and quantitative measure for a panel of drugs of abuse. The SpinDx reader is the base product capable of reading the current disks and with firmware updates will be able to read future disk offerings. Firmware updates will be distributed through a subscription model. The disks and sample collection kits are the consumables used by the product to produce a significant recurring revenue stream. Development of broader drug panels, improved accuracy, and sampling methods according to market demands is ongoing. The first test we intend to offer is the SpinDx device with disks for delta-9-THC detection from an oral fluid sample collected from a test subject. We anticipate that both quantitative and pass/fail disks will be made available, making this offering the only rapid quantitative test for delta-9-THC available on the market. Following this we expect to release a system based on our recently updated LX9 breathalyzer to collect a sample for analysis from breath, which, coupled with the SpinDx device, will complete our marijuana breathalyzer system. We have improved the detection sensitivity for delta-9-THC as well as the robustness of the device. We are continuing to work on developing this system into a device that can be used for roadside testing, as well as other venues requiring fast response. We have committed additional personnel and new equipment resources to this effort, with the goal of placing beta test units in early 2024 with validation partners who have already been identified. We anticipate full commercialization to begin in 2024. Human trials have begun validating SpinDx detection of delta-9-THC at the detection limits of 10 ng/ml in real-world human samples. We intend to prioritize the acceleration of SpinDx even at the expense of short-term profitability, with research and development investments, including substantial validation testing, to be ongoing in 2023 and 2024. There is no assurance that our efforts to develop a marijuana breathalyzer will be successful or that significant sales will result from such development if successful.
In March 2017 we acquired substantially all of the assets related to the Real-time Alcohol Detection and Reporting product (“R.A.D.A.R.®”) from Track Group, Inc. (“TRCK”) for $860,000 in cash. The purchased assets included the R.A.D.A.R.® device with cellular reporting for real-time alcohol monitoring, database infrastructure to tabulate and manage subscriber behavior, and biometric methodology and intellectual property to fully automate identity verification. The R.A.D.A.R.® device was designed to be part of an offender supervision program as an alternative to incarceration, and it is assigned to offenders as a condition of parole or probation with random testing throughout the day to demonstrate that they are meeting the conditions of their sentence. We purchased the assets of R.A.D.A.R. 100 in 2017, knowing the product needed significant upgrading, which was essentially completed and released for sale several years later as R.A.D.A.R. 200. This product met with little market acceptance as a result of the underperformance of one feature, namely, the biometric identification confirmation. In order to meet certain SpinDx milepost commitments, and to optimally allocate resources, we withdrew R.A.D.A.R. 200 from the market and made the decision to write off all related assets in 2022. We have outsourced the development of R.A.D.A.R. 300 to a third party, which, if successful, will result in proof of concept showing that the above problem has been resolved.
Training
Drug and alcohol testing is highly regulated; thus quality training is an important component of our business. Initially, our network of Master Trainers provided classroom training which generated certification fees. This was expanded to include instructor materials, online training modules and direct (live) training via webcam. In 2011, we launched Lifeloc University, a Learning Management System (LMS), defined as "a software application for the administration, documentation, tracking, reporting and delivery of educational courses or training programs." Lifeloc University is a critical component for online training courses since it provides student accountability. The Lifeloc University LMS was updated in 2018 to provide responsive design so it could be viewed on mobile devices and was updated in 2021 to reflect DOT rule and other changes.
In December 2014, we acquired substantially all of the assets of Superior Training Solutions, Inc. (“STS”), a company that develops and sells online drug and alcohol training and refresher courses. We have augmented and updated the assets we acquired from STS to enable mobile device usage. These assets complement our existing drug and alcohol training courses.
Real Property
On October 31, 2014, we purchased the commercial property we use as our corporate headquarters and certain adjacent property in Wheat Ridge, Colorado. The building consists of 22,325 square feet, of which 19,551 square feet are occupied by us and 2,774 square feet is currently leased to one tenant whose lease expires June 30, 2025. We intend to continue to lease the space we are not occupying, but in the future may elect to expand our own operations into space currently leased to the other tenant. Our purchase of the property was partially financed through a term loan in an original principal amount of $1,581,106, secured by a first-priority mortgage on the property. This loan was paid on September 30, 2021 with proceeds from a new term loan, also secured by a first-priority mortgage on the property, in the principal amount of $1,350,000 which matures in September 2031.
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Additional Areas of Interest
Consistent with our business goal of providing “near and remote sensing and monitoring” products and solutions, our acquisition strategy involves purchasing companies, development resources and assets that are aligned with our areas of interest and that can further aid in our entering additional markets. We expect to actively research and engage in the acquisition of resources that can expedite our entrance into new markets or strengthen our position in existing ones.
Results of Operations
For the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
Net sales. Our product sales for the quarter ended September 30, 2023 were $2,676,872, an increase of 33% from $2,007,652 for the quarter ended September 30, 2022. This increase is primarily attributable to selective price increases as well as an increase in demand in the current quarter. When royalties of $5,063 and rental income of $13,573 are included, total revenues of $2,695,508 increased by $663,642 or 33%, for the quarter ended September 30, 2023 when compared to the same quarter a year ago. Rental income decreased in the current quarter vs. the same quarter a year ago by $9,416 due to the expiration and non-renewal of the lease on 5,139 square feet on July 31, 2023, which we expect to utilize for internal purposes.
Gross profit. Our total gross profit for the three months ended September 30, 2023 of $1,119,391 represented an increase of 46% from total gross profit of $767,915 for the same period a year earlier. This increase is primarily as a result of increased prices and higher volume. Cost of product sales increased from $1,232,530 in Q3 of 2022 to $1,552,930 in Q3 of 2023, or 26% as a result of increased volume in 2023. Gross profit margin on products went from 39% in Q3 of 2022 to 42% in Q3 of 2023 as a result of the foregoing factors.
Research and development expenses. Our research and development expenses were $516,174 for the quarter ended September 30, 2023, representing an increase of 65% over the $313,092 in the same quarter a year ago. This increase is due in large part to our continuing emphasis on SpinDx and increased costs associated with its development.
Sales and marketing expenses. Our sales and marketing expenses of $309,898 for the quarter ended September 30, 2023 were up by $41,383 (15%) over the $268,515 for the quarter ended September 30, 2022. The increase resulted from increased spending on trade shows and other costs associated with increased volume.
General and administrative expenses. Our general and administrative expenses of $269,593 for the quarter ended September 30, 2023 decreased by $27,213 (9%) over the $296,806 in the same period a year ago, mostly due to the outsourcing of development of R.A.D.A.R. 300 to a third party in 2023.
Other income (expense). Our interest income of $17,678 increased in Q3 of 2023 by $13,170 over $4,508 in Q3 of 2022 due to increased yield available on cash deposits. Our interest expense of $10,494 in the current quarter over $10,724 in the same period a year ago is the result of the balance of the term loan on our building declining.
Net income (loss). We realized net income of $109,603 for the quarter ended September 30, 2023 compared to a net loss of $86,972 for the quarter ended September 30, 2022. This increase of $196,575 was the result of the changes in gross profit and operating expenses discussed above, augmented in part by an increased benefit from income tax of $48,951. The benefit from income tax resulted from a revision of deferred income tax and the use of tax loss carryovers in filing amended Federal and State income tax returns for 2022, which was required as a result of the change in rules relating to research and development expense amortization.
For the nine months Ended September 30, 2023 compared to the nine months ended September 30, 2022.
Net sales. Our product sales for the nine months ended September 30, 2023 were $7,056,638, an increase of 13% from $6,264,222 for the same period ended September 30, 2022. This increase is primarily attributable to selective price increases as well as an increase in demand. When royalties of $23,419 and rental income of $60,351 are included, total revenues of $7,140,408 increased by $767,882 or 12%, for the nine months ended September 30, 2023 when compared to the same nine months a year ago. Rental income decreased in the current nine month period vs. the nine months a year ago by $7,516 due to the expiration and non-renewal of the lease on 5,139 square feet on July 31, 2023, which we expect to utilize for internal purposes.
Gross profit. Our total gross profit for the nine months ended September 30, 2023 of $3,097,262 represented an increase of $823,823 (36%) from total gross profit of $2,273,439 for the same period a year earlier. This increase is primarily as a result of increased prices and higher volume, offset in part by decreased royalties of $17,018. Cost of product sales increased from $4,058,846 in 2022 to $4,009,495 in 2023, or 1%, partly as a result of lower depreciation and amortization in 2023. Gross profit margin on products went from 36% in 2022 to 44% in 2023 as a result of the foregoing factors.
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Research and development expenses. Our research and development expenses were $1,308,721 for the nine months ended September 30, 2023, representing an increase of 24% over the $1,056,026 in the same nine months a year ago. This increase is due in large part to our continuing emphasis on SpinDx and increased costs associated with its development.
Sales and marketing expenses. Our sales and marketing expenses of $897,856 for the nine months ended September 30, 2023 were up by $76,035 (9%) over the $821,821 for the nine months ended September 30, 2022. The increase resulted from various increased spending on trade shows and other costs associated with increased volume.
General and administrative expenses. Our general and administrative expenses of $872,724 for the nine months ended September 30, 2023 were down by $70,336 (8%) from the $943,060 in the same period a year ago, mostly due to stock option expense in 2022 vs. none in 2023 and to the outsourcing of development of R.A.D.A.R. 300 to a third party in 2023.
Other income (expense). Our interest income of $46,678 increased in 2023 by $40,548 over $6,130 in 2022 due to increased yield available on cash deposits. Our interest expense of $31,319 in the current nine months over $32,451 in the same period a year ago is the result of the balance of the term loan on our building declining.
Net income (loss). We realized net income of $110,960 for the nine months ended September 30, 2023 compared to a net loss of $433,010 for the nine months ended September 30, 2022. This increase of $543,970 was the result of the changes in gross profit and operating expenses discussed above, offset in part by a decreased benefit from income tax of $63,139. The change in the benefit from income tax resulted from a revision of deferred income tax and the use of tax loss carryovers in filing amended Federal and State income tax returns for 2022, which was required as a result of the change in rules relating to research and development expense amortization.
Trends and Uncertainties That May Affect Future Results
Revenues in the third quarter of 2023 were somewhat higher than revenues in 2022 as a result of selective price increases, as well as the continued diminishing effects of the Covid-19 pandemic. We believe the supply chain problems may be declining, and we expect the remainder of 2023 to show modest improvement over 2022. We expect our quarter-to-quarter revenue fluctuations to continue, due to the unpredictable timing of large orders from customers and the size of those orders in relation to total revenues. Going forward, we intend to focus our development efforts on products we believe offer the best prospects to increase our intermediate and near-term revenues.
Our 2023 operating plan is focused on growing sales, increasing gross profits, and increasing research and development efforts on new products for long term growth. We cannot predict with certainty the expected sales, gross profit, net income or loss, or usage of cash and cash equivalents for the remainder of 2023 and beyond. However, we believe that cash resources will be sufficient to fund our operations for the next twelve months under our current operating plan. If we are unable to manage the business operations in line with our budget expectations, it could have a material adverse effect on business viability, financial position, results of operations and cash flows. Further, if we are not successful in sustaining profitability and remaining at least cash flow break-even, additional capital may be required to maintain ongoing operations.
Liquidity and Capital Resources
We compete in a highly technical, very competitive and, in most cases, price driven alcohol testing marketplace, where products can take years to develop and introduce to distributors and end users. Furthermore, manufacturing, marketing and distribution activities are regulated by the FDA, the DOT, and other regulatory bodies that, while intended to enhance the ultimate quality and functionality of products produced, can contribute to the cost and time needed to maintain existing products and develop and introduce new products.
We have traditionally funded working capital needs through product sales and close management of working capital components of our business. Historically, we have also received cash from private offerings of our common stock, warrants to purchase shares of our common stock, and notes. In our earlier years, we incurred quarter to quarter operating losses to develop current product applications, utilizing a number of proprietary and patent-pending technologies. Although we have been profitable in recent years except 2020 and 2022, we can provide no assurances that operating losses will not occur in the future. Should that situation arise, we may not be able to obtain working capital funds necessary in the time frame needed and at satisfactory terms, if at all.
On October 31, 2014, we purchased the commercial property we use as our corporate headquarters and certain adjacent property in Wheat Ridge, Colorado for a total purchase price of $1,949,139, of which we paid $368,033 in cash and financed the remaining $1,581,106 through a 10-year term loan from Bank of America bearing interest at 4.45% per annum (amended to 4% per annum in 2017), secured by a first-priority security interest in the property we acquired with the loan. The loan was paid on September 30, 2021 with proceeds from a new term loan, also secured by a first-priority mortgage on the property, in the principal amount of $1,350,000 which matures in September 2031. In connection with the original term loan, we obtained a one-year $250,000 revolving line of credit facility with Bank of America, which matured on October 31, 2015, was extended to June 30, 2018, then amended to increase the amount of the line to $750,000 and extend the maturity date to September 28, 2021, and has now expired and not been renewed.
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Equipment and software purchased during the nine months ended September 30, 2023 was $21,611, compared to $201,870 in the same period a year ago. We filed patent applications at a cost to us of $1,404 in the nine months of 2023 and $1,687 in the nine months of 2022.
As of September 30, 2023, cash was $2,136,873, accounts receivable were $709,307 and current liabilities were $1,143,284 resulting in a net liquid asset amount of $1,702,896. We believe that the diminishing effect of the Covid-19 pandemic and the introduction of several new products during the last several years, along with new and on-going customer relationships will allow Lifeloc to operate profitably. If the requisite revenue levels are not achieved on a timely basis, we may be required to seek additional sources of capital and/or to implement further cost reduction measures, as necessary.
We generally provide a standard one-year limited warranty on materials and workmanship to our customers. We provide for estimated warranty costs at the time product revenue is recognized. Warranty costs are included as a component of cost of goods sold in the accompanying statements of operations. For the quarter ended September 30, 2023 and for the quarter ended September 30, 2022, warranty costs were not deemed significant.
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, sales returns, warranty, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.
We have concluded that we have two operating segments, including our primary business which is as a developer, manufacturer, lessor and marketer of portable hand-held breathalyzers and related accessories, supplies, education, training and royalties from development contracts and a second segment consisting of renting portions of our building to existing tenants.
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required, which would increase our expenses during the periods in which any such allowances were made. The amount recorded as a provision for bad debts in each period is based upon our assessment of the likelihood that we will be paid on our outstanding receivables, based on customer-specific as well as general considerations. To the extent that our estimates prove to be too high, and we ultimately collect a receivable previously determined to be impaired, we may record a reversal of the provision in the period of such determination.
We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Any write-downs of inventory would reduce our reported net income during the period in which such write-downs were applied.
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Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally five years (three years for software and technology licenses). We use the double declining method of depreciation for property, including space modifications, and the straight line method for software and technology licenses. We purchased all of the assets of STS, an online education company, in 2014, which consisted of training courses that are amortized over 15 years using the straight line method. In October 2014, we purchased our building. A majority of the cost of the building is depreciated over 39 years using the straight line method. In addition, based on the results of a third party analysis, a portion of the cost was allocated to components integral to the building. Such components are depreciated over 5 and 15 years, using the declining method. The R.A.D.A.R.® software and patents that were purchased in March 2017 were originally set to amortize over 15 years using the straight line method, but in 2022 we accelerated the amortization of the remaining cost to fully amortize the assets by December 31, 2022. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.
Revenue from product sales and supplies is generally recorded when we ship the product and title has passed to the customer, or when agreed milestones are met in the case of product developments, provided that we have evidence of a customer arrangement and can conclude that collection is probable. The prices at which we sell our products are fixed and determinable at the time we accept a customer's order. We recognize revenue from sales to stocking distributors when there is no right of return, other than for normal warranty claims, and generally have no ongoing obligations related to product sales, except for normal warranty.
The sales of licenses to our training courses are recognized as revenue at the time of sale. Direct training performed by us is recognized when training is completed by the trainer, with the unearned portion classified as deferred revenue. Training and certification revenues are recognized at the time the training and certification occurs. Data recording revenue is recognized based on each day's usage of enrolled devices.
Revenues arising from extended warranty contracts are booked as sales over their life on a straight-line basis. We are providing for customer financing and leasing, which we recognize as revenue over the applicable lease term. Occasionally, we rent used equipment to customers, and in those cases, we recognize the revenues as they are earned over the life of the contract. Revenues from rental of equipment and extended service plans are recognized over the life of the contracts.
Royalty income is recognized in accordance with agreed upon terms, when performance obligations are satisfied, the amount is fixed or determinable and collectability is reasonably assured.
Rental income from space leased to our tenants is recognized in the month in which it is due.
On occasion we receive customer deposits for future product orders and for product development. Customer deposits are initially recorded as a liability and recognized as revenue when the product is shipped and title has passed to the customer, or in the case of product development, when agreed milestones are met.
Stock-based compensation is presented in accordance with the guidance of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718, Compensation — Stock Compensation ("ASC 718"). Under the provisions of ASC 718, companies are required to estimate the fair value of share-based payment awards made to employees and directors including employee stock options based on estimated fair values 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 expense over the requisite service periods in our statement of operations.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4 – CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023.
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(b) Changes in Internal Control over Financial Reporting
There were no significant changes in our internal controls over financial reporting during the period ended September 30, 2023 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Our management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that the Company's disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
We may be involved from time to time in litigation, negotiation and settlement matters that may have a material effect on our operations or finances. We are not aware of any pending or threatened litigation against us or our officers or directors in their capacity as such that could have a material impact on our operations or finances.
ITEM 1A – RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in ''Risk Factors'' in our Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition and/or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
No options were exercised during the three months ended September 30, 2023 or during the three months ended September 30, 2022. There were no sales of equity securities during the three months ended September 30, 2023 or during the three months ended September 30, 2022.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
None.
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ITEM 6 – EXHIBITS
The following exhibits are filed with this report on Form 10-Q or are incorporated by reference:
| Exhibit No. | Description of Exhibit | |
| 31.1 | Certification of Principal Executive Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002 | |
| 31.2 | Certification of Principal Financial Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002 | |
| 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LIFELOC TECHNOLOGIES, INC. | |||
| November 8, 2023 | By: | /s/ Wayne R. Willkomm | |
| Date | Wayne R. Willkomm, Ph.D. | ||
|
President and Chief Executive Officer (Principal Executive Officer) |
|||
| November 8, 2023 | By: | /s/ Michelle Heim | |
| Date | Michelle Heim | ||
|
Controller (Principal Accounting Officer) |
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Exhibit Index
| Exhibit No. | Description of Exhibit | ||
| 31.1 | Certification of Principal Executive Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002 | ||
| 31.2 | Certification of Principal Financial Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002 | ||
| 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
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