UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from                      to

Commission file number     000-54319

LIFELOC TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Colorado
84-1053680
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 

12441 West 49th Ave., Unit 4
Wheat Ridge, Colorado  80033
(Address of principal executive offices)

(303) 431-9500
(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No  ☒  *

* The registrant is a voluntary filer of reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, and has filed all such reports during the preceding 12 months.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes        No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     
Accelerated filer     
   
Non-accelerated filer      
Smaller reporting company  
(Do not check if a smaller reporting company)
 
   
Emerging growth company 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No   

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
2,454,116 Shares
(Class)
(outstanding at November 7, 2018)
 


LIFELOC TECHNOLOGIES, INC.

FORM 10-Q

For the Three Months and Nine Months Ended September 30, 2018

INDEX
 
     
 
Page
Number
PART I.  FINANCIAL INFORMATION    
         
  ITEM 1  
FINANCIAL STATEMENTS (UNAUDITED)
 
     
Condensed Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017
3
     
Condensed Statements of Income (Unaudited) for the three months ended September 30, 2018 and 2017
 4
     
Condensed Statements of Income (Unaudited) for the nine months ended September 30, 2018 and 2017
 5
     
Condensed Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2018 and 2017
 6
     
Notes to Condensed Financial Statements (Unaudited)
 7
         
 
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
16
         
 
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
22
         
 
ITEM 4
CONTROLS AND PROCEDURES
22
         
PART II.     OTHER INFORMATION
23
         
 
ITEM 1
LEGAL PROCEEDINGS
23
         
 
ITEM 1A
RISK FACTORS
23
         
 
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
23
         
 
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
23
         
 
ITEM 4
MINE SAFETY DISCLOSURES
24
         
 
ITEM 5
OTHER INFORMATION
24
         
 
ITEM 6
EXHIBITS
24
         
 SIGNATURES
24
 
2


PART I      FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS

LIFELOC TECHNOLOGIES, INC.
 
Condensed Balance Sheets
 
   
ASSETS
 
   
September 30,
       
   
2018
   
December 31,
 
CURRENT ASSETS:
 
(Unaudited)
   
2017
 
 Cash
 
$
2,657,328
   
$
2,669,455
 
Accounts receivable, net
   
724,221
     
593,326
 
Inventories, net
   
1,354,768
     
1,175,103
 
Income taxes receivable
   
53,089
     
121,401
 
Prepaid expenses and other
   
85,486
     
21,804
 
      Total current assets
   
4,874,892
     
4,581,089
 
                 
PROPERTY AND EQUIPMENT, at cost:
               
 Land
   
317,932
     
317,932
 
Building
   
1,928,795
     
1,928,795
 
Real-time Alcohol Detection And Recognition equipment and software
   
569,448
     
569,448
 
Production equipment and software
   
783,490
     
556,025
 
Training courses
   
432,375
     
432,375
 
Office equipment and software
   
270,241
     
204,282
 
Sales and marketing equipment
   
273,433
     
216,330
 
Research and development equipment and software
   
159,810
     
131,770
 
Less accumulated depreciation
   
(1,658,104
)
   
(1,349,499
)
     Total property and equipment, net
   
3,077,420
     
3,007,458
 
                 
OTHER ASSETS:
               
Patents, net
   
174,045
     
177,244
 
Deposits and other
   
5,144
     
259,037
 
Deferred taxes
   
77,782
     
66,531
 
     Total other assets
   
256,971
     
502,812
 
     Total assets
 
$
8,209,283
   
$
8,091,359
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES:
               
Accounts payable
 
$
315,219
   
$
297,096
 
Term loan payable, current portion
   
42,757
     
42,101
 
Customer deposits
   
15,941
     
48,763
 
Accrued expenses
   
272,085
     
264,290
 
Deferred revenue, current portion
   
45,027
     
53,137
 
Reserve for warranty expense
   
41,000
     
40,000
 
      Total current liabilities
   
732,029
     
745,387
 
                 
TERM LOAN PAYABLE, net of current portion and
               
debt issuance costs
   
1,380,201
     
1,410,185
 
                 
DEFERRED REVENUE, net of current portion
   
10,354
     
9,683
 
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY:
               
Common stock, no par value; 50,000,000 shares
               
  authorized, 2,454,116 shares outstanding
   
4,593,279
     
4,580,177
 
Retained earnings
   
1,493,420
     
1,345,927
 
      Total stockholders' equity
   
6,086,699
     
5,926,104
 
      Total liabilities and stockholders' equity
 
$
8,209,283
   
$
8,091,359
 
                 
See accompanying notes.
 
 
 
3


 
LIFELOC TECHNOLOGIES, INC.
 
Condensed Statements of Income (Unaudited)
 
       
    
Three Months Ended September 30,
 
REVENUES:
 
2018
   
2017
 
Product sales
 
$
1,985,520
   
$
1,944,734
 
Royalties
   
46,417
     
43,785
 
Rental income
   
23,822
     
12,160
 
Total
   
2,055,759
     
2,000,679
 
                 
COST OF SALES
   
1,111,067
     
1,118,203
 
                 
GROSS PROFIT
   
944,692
     
882,476
 
                 
OPERATING EXPENSES:
               
Research and development
   
249,092
     
242,005
 
Sales and marketing
   
331,505
     
367,101
 
General and administrative
   
271,172
     
268,667
 
Total
   
851,769
     
877,773
 
                 
OPERATING INCOME
   
92,923
     
4,703
 
                 
OTHER INCOME (EXPENSE):
               
Interest income
   
7,676
     
1,036
 
Interest expense
   
(14,957
)
   
(15,261
)
Total
   
(7,281
)
   
(14,225
)
                 
NET INCOME (LOSS) BEFORE PROVISION FOR TAXES
   
85,642
     
(9,522
)
                 
(PROVISION FOR) BENEFIT FROM FEDERAL AND STATE INCOME TAXES
   
(27,478
)
   
9,712
 
                 
NET INCOME
 
$
58,164
   
$
190
 
                 
NET INCOME PER SHARE, BASIC
 
$
0.02
   
$
-
 
                 
NET INCOME PER SHARE, DILUTED
 
$
0.02
   
$
-
 
                 
WEIGHTED AVERAGE SHARES, BASIC
   
2,454,116
     
2,454,116
 
                 
WEIGHTED AVERAGE SHARES, DILUTED
   
2,504,116
     
2,511,925
 
                 
 
See accompanying notes

4


LIFELOC TECHNOLOGIES, INC.
 
Condensed Statements of Income (Unaudited)
 
       
    
Nine Months Ended September 30,
 
REVENUES:
 
2018
   
2017
 
Product sales
 
$
6,121,553
   
$
5,706,328
 
Royalties
   
207,840
     
268,127
 
Rental income
   
57,524
     
57,075
 
Total
   
6,386,917
     
6,031,530
 
                 
COST OF SALES
   
3,446,592
     
3,171,449
 
                 
GROSS PROFIT
   
2,940,325
     
2,860,081
 
                 
OPERATING EXPENSES:
               
Research and development
   
840,647
     
690,198
 
Sales and marketing
   
997,563
     
1,074,219
 
General and administrative
   
864,629
     
858,987
 
Total
   
2,702,839
     
2,623,404
 
                 
OPERATING INCOME
   
237,486
     
236,677
 
                 
OTHER INCOME (EXPENSE):
               
Interest income
   
14,113
     
4,682
 
Interest expense
   
(47,045
)
   
(45,572
)
Total
   
(32,932
)
   
(40,890
)
                 
NET INCOME BEFORE PROVISION FOR TAXES
   
204,554
     
195,787
 
                 
PROVISION FOR FEDERAL AND STATE INCOME TAXES
   
(57,061
)
   
(49,736
)
                 
NET INCOME
 
$
147,493
   
$
146,051
 
                 
NET INCOME PER SHARE, BASIC
 
$
0.06
   
$
0.06
 
                 
NET INCOME PER SHARE, DILUTED
 
$
0.06
   
$
0.06
 
                 
WEIGHTED AVERAGE SHARES, BASIC
   
2,454,116
     
2,454,116
 
                 
WEIGHTED AVERAGE SHARES, DILUTED
   
2,504,116
     
2,520,414
 
                 
See accompanying notes

 
5


LIFELOC TECHNOLOGIES, INC.
 
Condensed Statements of Cash Flows (Unaudited)
 
 
   
Nine Months Ended September 30,
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
2018
   
2017
 
Net income
 
$
147,493
   
$
146,051
 
Adjustments to reconcile net income to net cash
               
 provided from (used in) operating activities-
               
   Depreciation and amortization
   
320,983
     
225,310
 
   Provision for inventory obsolescence, net change
   
42,500
     
37,500
 
   Deferred taxes, net change
   
(11,251
)
   
12,836
 
   Reserve for warranty expense, net change
   
1,000
     
1,000
 
   Stock based compensation expense related to
               
     stock options
   
13,102
     
18,494
 
Changes in operating assets and liabilities-
               
   Accounts receivable
   
(130,895
)
   
(228,666
)
   Inventories
   
(222,165
)
   
(414,648
)
   Income taxes receivable
   
68,312
     
16,134
 
   Prepaid expenses and other
   
(63,682
)
   
(204
)
   Deposits and other
   
253,893
     
(145,010
)
   Accounts payable
   
18,123
     
96,348
 
   Customer deposits
   
(32,822
)
   
14,423
 
   Accrued expenses
   
7,795
     
20,889
 
   Deferred revenue
   
(7,439
)
   
(6,861
)
           Net cash provided from (used in) operating activities
   
404,947
     
(206,404
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES: 
               
Purchases of property and equipment
   
(378,567
)
   
(139,736
)
Cash paid for software acquired in asset acquisition
   
-
     
(396,948
)
Cash paid for equipment acquired in asset acquisition
   
-
     
(351,250
)
Reclassification of equipment and software acquired in
               
asset acquisition as inventory
   
-
     
178,750
 
Cash paid for patents and patent applications acquired
               
in asset acquisition
   
-
     
(100,000
)
Patent filing expense
   
(6,648
)
   
(17,217
)
           Net cash (used in) investing activities
   
(385,215
)
   
(826,401
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES: 
               
Principal payments made on term loan
   
(31,859
)
   
(30,335
)
           Net cash (used in) financing activities
   
(31,859
)
   
(30,335
)
                 
NET (DECREASE) IN CASH
  (12,127 )    
(1,063,140
)
                 
CASH, BEGINNING OF PERIOD
   
2,669,455
     
3,772,064
 
                 
CASH, END OF PERIOD
   
2,657,328
   
$
2,708,924
 
                 
SUPPLEMENTAL INFORMATION:
               
Cash paid for interest
 
$
44,270
   
$
30,040
 
                 
Cash paid for income tax
 
$
-
   
$
13,844
 
                 
See accompanying notes
 
6



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, www.lifeguardbreathtester.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, 2017 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, 2018 and December 31, 2017, and the results of operations and cash flows for the periods ended September 30, 2018 and 2017.  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 2017 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.
 
 
7


 
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.

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 market. 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, 2018 and December 31, 2017, inventory consisted of the following:

   
2018
   
2017
 
Raw materials & deposits
 
$
1,150,798
   
$
809,867
 
Work-in-process
   
68,369
     
181,976
 
Finished goods
   
238,101
     
243,260
 
Total gross inventories
   
1,457,268
     
1,235,103
 
Less reserve for obsolescence
   
(102,500
)
   
(60,000
)
Total net inventories
 
$
1,354,768
   
$
1,175,103
 

 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 (or 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, 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.

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. 
 
 
 
8


 
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.  Customer deposits are initially recorded as a liability and recognized as revenue when the product is shipped and title has passed to the customer.

Topic 606 requires the disaggregation of revenue into broad categories, which we have defined as shown below.

   
Three Months Ended September 30,
 
Product sales:
 
2018
   
2017
 
  Product sales and supplies
 
$
1,805,854
   
$
1,745,571
 
  Training, certification and data recording
   
158,116
     
170,614
 
  Service plans and equipment rental
   
21,550
     
28,549
 
  Product sales subtotal
   
1,985,520
     
1,944,734
 
Royalties
   
46,417
     
43,785
 
Rental income
   
23,822
     
12,160
 
Total revenues
 
$
2,055,759
   
$
2,000,679
 


   
Nine Months Ended September 30,
 
Product sales:
 
2018
   
2017
 
  Product sales and supplies
 
$
5,546,066
   
$
5,159,907
 
  Training, certification and data recording
   
498,742
     
456,843
 
  Service plans and equipment rental
   
76,745
     
89,578
 
  Product sales subtotal
   
6,121,553
     
5,706,328
 
Royalties
   
207,840
     
268,127
 
Rental income
   
57,524
     
57,075
 
Total revenues
 
$
6,386,917
   
$
6,031,530
 

Service plans and equipment rental, as well as Training, certification and data recording, include 9 months of revenue in the 9-month period ended September 30, 2018 attributable to the assets related to the Real-time Alcohol Detection and Recognition product (“R.A.D.A.R.”), which we acquired in March 2017, whereas only 7 months of revenue from the R.A.D.A.R. assets are included in the same period a year ago.

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.
 
9

 

Recent Accounting Pronouncements.  We have reviewed all recently issued, but not yet effective, accounting pronouncements. 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01").  This update substantially revises standards for the recognition, measurement and presentation of financial instruments.  This standard revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value.  It also amends certain disclosure requirements associated with the fair value of financial instruments.  ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements.  We adopted this new standard effective January 1, 2018.  This new standard did not have a material impact on our financial statements or related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for us beginning on January 1, 2019 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We have determined that we will adopt this new standard in 2019.  We do not expect this new standard to have a material impact on our financial statements or related disclosures.

Stock-Based Compensation.  Stock-based compensation is presented in accordance with the guidance of 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 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 income.

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 nine months ended September 30, 2018 and 2017 was $13,102 and $18,494 respectively, which consisted of stock-based compensation expense related to grants of employee stock options, and which is 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 and education.  As a result of purchasing our building on October 31, 2014, we have a second segment consisting of renting portions of our building to existing tenants, whose leases expire at various times until July 31, 2020.  
 
 
10


 
3.  ASSET ACQUISITION

In March 2017 we acquired all of the assets related to R.A.D.A.R. from Track Group, Inc. (“TRCK”) for $860,000 in cash.  Based on Level 3 inputs, which consisted of estimates of future cash flows, return on investment analyses, and replacement costs, the purchase price was allocated as follows:

 Asset
 
Allocation
   
Depreciable Life and Method
 
Estimated Future Annual Depreciation
 
Software
 
$
396,948
   
15 years; straight line
   
$
26,463
 
Rental equipment
   
172,500
   
5 years; double declining balance
 
Varies
 
Inventory
   
178,052
    N/A      
N/A
 
Patents and patent applications
   
100,000
   
15 years; straight line
   
$
6,667
 
Production equipment
   
12,500
   
5 years; double declining balance
 
Varies
 
Total
 
$
860,000
                 

The purpose of this acquisition was to expand our offering of substance abuse monitoring services.

4.  BASIC AND DILUTED INCOME AND LOSS PER COMMON SHARE

We report both basic and diluted net income per common share.  Basic net income per common share is computed by dividing net income for the period by the weighted average number of common shares outstanding for the period.  Diluted net income per common share is computed by dividing the net income 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 following table presents the calculation of basic and diluted net income per common share:

   
Three Months Ended
 
   
September 30, 2018
   
September 30, 2017
 
Net income
 
$
58,164
   
$
190
 
Weighted average shares-basic
   
2,454,116
     
2,454,116
 
Effect of dilutive potential common shares
   
50,000
     
57,809
 
Weighted average shares-diluted
   
2,504,116
     
2,511,925
 
Net income per share-basic
 
$
.02
     
-
 
Net income per share-diluted
 
$
.02
     
-
 
Antidilutive employee stock options
   
50,000
     
50,000
 

   
Nine Months Ended
 
   
September 30, 2018
   
September 30, 2017
 
Net income
 
$
147,493
   
$
146,051
 
Weighted average shares-basic
   
2,454,116
     
2,454,116
 
Effect of dilutive potential common shares
   
50,000
     
66,298
 
Weighted average shares-diluted
   
2,504,116
     
2,520,414
 
Net income per share-basic
 
$
.06
   
$
.06
 
Net income per share-diluted
 
$
.06
   
$
.06
 
Antidilutive employee stock options
   
50,000
     
50,000
 

 
11

 
5.  STOCKHOLDERS' EQUITY

The following table summarizes information about employee stock options outstanding and exercisable at September 30, 2018:

   
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
 
$2.32 - $6.00
 
60,000
 
3.13   
   
$5.39
 
10,000
   
$2.32
 

Of the 10,000 options exercisable as of September 30, 2018, all are incentive stock options. The exercise price of all options granted through September 30, 2018 has been equal to or greater than the fair market value of the Company’s common stock at the time the options were issued.

Options to purchase 50,000 shares of stock at $8.83 apiece were granted during the year ended December 31, 2016.  These options were forfeited and replaced with options to purchase 50,000 shares of stock at $6.00 apiece in 2017 in conjunction with the amendment of an employment agreement.  Vesting of these options is subject to performance achieved during the years ending December 31, 2019 and 2020.  No options were granted during the Nine Months Ended September 30, 2018.  No options were exercised during the Nine Months Ended September 30, 2018 or during the Nine Months Ended September 30, 2017.

The total number of authorized shares of common stock continues to be 50,000,000, with no change in the par value per share.

6.  COMMITMENTS AND CONTINGENCIES

Mortgage Expense. We purchased our facilities in Wheat Ridge, Colorado on October 31, 2014 for $1,949,139 and took out a term loan secured by a first mortgage on the property in the amount of $1,581,106 with Bank of America for a portion of the purchase price.  Effective June 30, 2016 the note was amended to revise the interest rate from 4.45% to 4.00% per annum.  The revised note is payable in 99 equal monthly installments of $8,417, including interest, plus a final payment of $1,138,104 (excluding interest) on October 31, 2024.  Our minimum future principal payments on this term loan, by year, are as follows:

Year
   
Amount
 
         
2018
   
$
10,675
 
2019
     
44,292
 
2020
     
45,964
 
2021
     
48,021
 
2022
     
50,005
 
2023– 2024
     
1,230,600
 
Total
     
1,429,557
 
Less financing cost
     
(6,599
)
Net term loan payable
     
1,422,958
 
Less current portion
     
(42,757
)
Long term portion
   
$
1,380,201
 

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, 2018 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 $1,811,554 at September 30, 2018.

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.
 
 
12


 
7.  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 that bears interest at a rate equal to the LIBOR daily floating rate (which was 2.17388% and 1.18111% on September 30, 2018 and 2017, respectively), plus 2.5%.  The agreement was amended May 15, 2017 to increase the amount of the line to $750,000 and extend the maturity date to June 30, 2018, which has been subsequently extended to June 30, 2020.  The revolving line of credit facility is secured by all personal property and assets, whether now owned or hereafter acquired, wherever located.  There was no balance due on the line of credit as of September 30, 2018 and December 31, 2017.

8.  INCOME TAXES

The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes consists of the following:

   
Nine Months Ended
 
   
September 30, 2018
   
September 30, 2017
 
Federal statutory rate
 
$
54,089
   
$
68,621
 
Effect of:
               
  State taxes, net of federal tax benefit
   
(10,669
)
   
(9,959
)
  Estimated research and development credits
   
(11,909
)
   
(44,863
)
  Other
   
25,550
     
35,937
 
Total
 
$
57,061
   
$
49,736
 

9. 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.
 
 
13


 
The following sets forth information about the operations of the business segments for the three months ended September 30, 2018 and 2017.

   
2018
   
2017
 
Product sales
 
$
1,985,520
   
$
1,944,734
 
Royalties
   
46,417
     
43,785
 
Products subtotal
   
2,031,937
     
1,988,519
 
Rentals
   
23,822
     
12,160
 
Total
 
$
2,055,759
   
$
2,000,679
 
                 
Gross profit (loss):
               
Product sales
 
$
891,556
   
$
868,506
 
Royalties
   
46,417
     
43,785
 
Products subtotal
   
937,973
     
912,291
 
Rentals
   
6,719
     
(29,815
)
Total
 
$
944,692
   
$
882,476
 
                 
Interest expense:
               
Product sales
 
$
7,908
   
$
4,096
 
Royalties
   
-
     
-
 
Products subtotal
   
7,908
     
4,096
 
Rentals
   
7,049
     
11,165
 
Total
 
$
14,957
   
$
15,261
 
                 
Net income (loss) before taxes:
               
Product sales
 
$
39,555
   
$
(12,327
)
Royalties
   
46,417
     
43,785
 
Products subtotal
   
85,972
     
31,458
 
Rentals
   
(330
)
   
(40,980
)
Total
 
$
85,642
   
$
(9,522
)
 
 

 
14

The following sets forth information about the operations of the business segments for the nine months ended September 30, 2018 and 2017.

   
2018
   
2017
 
Product sales
 
$
6,121,553
   
$
5,706,328
 
Royalties
   
207,840
     
268,127
 
Products subtotal
   
6,329,393
     
5,974,455
 
Rentals
   
57,524
     
57,075
 
Total
 
$
6,386,917
   
$
6,031,530
 
                 
Gross profit (loss):
               
Product sales
 
$
2,735,147
   
$
2,604,488
 
Royalties
   
207,840
     
268,127
 
Products subtotal
   
2,942,987
     
2,872,615
 
Rentals
   
(2,662
)
   
(12,534
)
Total
 
$
2,940,325
   
$
2,860,081
 
                 
Interest expense:
               
Product sales
 
$
25,974
   
$
23,893
 
Royalties
   
-
     
-
 
Products subtotal
   
25,974
     
23,893
 
Rentals
   
21,071
     
21,679
 
Total
 
$
47,045
   
$
45,572
 
                 
Net income (loss) before taxes:
               
Product sales
 
$
20,447
   
$
(38,127
)
Royalties
   
207,840
     
268,127
 
Products subtotal
   
228,287
     
230,000
 
Rentals
   
(23,733
)
   
(34,213
)
Total
 
$
204,554
   
$
195,787
 

There were no intersegment revenues.

At September 30, 2018, $878,575 of our assets were used in the Rentals segment, with the remainder, $7,330,708, used in the Products and unallocated segments.

10.  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.

15


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, 2017 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, monitoring and reporting 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" 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.lifelocbreathtester.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

In 1989, we introduced our first breath alcohol tester, the PBA3000. Our Phoenix® Classic was completed and released for sale in 1998, 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 an additional product line, 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.
 
 
16


 
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, these instruments are also 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 original equipment manufacturers ("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 for the global consumer breathalyzer market, LifeGuard® is marketed internationally through global distributors and, until March 2017, was sold directly to consumers in the U.S.  

In 2011 and 2012 Lifeloc introduced Bluetooth wireless keyboard and printer communication options for our popular 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 Lifeloc Evidential Breath Testers, and we began shipments of the EASYCAL® to our law enforcement, corrections, workplace and international customers.   The EASYCAL® 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 October 2014 we were awarded a $250,000 grant from the Colorado Office of Economic Development to accelerate development of a breathalyzer that tests for Tetrahydrocannabinol (THC), the principal psychoactive constituent in cannabis.  In 2016 the breathalyzer development effort was broadened to include the SpinDx technology as a potential detection method. Terms of the grant required us to submit invoices as work was performed. We received $25,000, $42,396, and $44,523 of grant reimbursements in 2014, 2015 and 2016 respectively. None have been received in 2018 or 2017.  The grant completion date was August 31, 2017, at which point $126,793 of grant funds remained unused and are no longer available.  Reimbursements received under the grant are included in our Statements of Income as reductions in Research and Development cost.  No revenue has been recognized from these grant reimbursements.  The SpinDx platform has the potential to revolutionize real-time screening for a panel of high abuse drugs, with the ability to quickly and quantitatively measure very low concentrations of such drugs, including cocaine, methamphetamine and others.  We have detected delta-9-THC (the primary psychoactive component of marijuana) down to concentrations of 5 nanograms per milliliter in our laboratory.  We remain committed to completing development of a marijuana breathalyzer, utilizing the SpinDx technology developed through our cooperative research and development agreement with Sandia National Laboratory.  There is no assurance that this effort to develop a THC breathalyzer will be successful or that significant sales will result from such development if successful.
 
 
17


 
On October 31, 2014, we purchased the commercial property the Company uses as its corporate headquarters and certain adjacent property in Wheat Ridge, Colorado.  The building consists of 22,325 square feet, of which 10,670 are currently leased to three tenants under leases that expire at various times ranging from April 30, 2020 to July 31, 2020.  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 other tenants.  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. The loan matures in October 2024.

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. The assets we acquired from STS complement our existing drug and alcohol training courses.

In October 2016 we expanded our Sentinel™ line with the Sentinel™ VA alcohol screening station, a full automated station to control vehicular access to safety critical facilities, such as mines, refineries, power stations and nuclear facilities.

In March 2017 we acquired all of the assets related to the Real-time Alcohol Detection and Recognition 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 are currently working on improving the manufacturability of R.A.D.A.R. devices and upgrading our base breathalyzer product, both of which we expect to launch before year end.

Additional Areas of Interest

Consistent with our business goal of providing "near and remote sensing" 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, 2018 compared to the three months ended September 30, 2017.

Net sales. Our product sales for the quarter ended September 30, 2018 were $1,985,520, an increase of 2% from $1,944,734 for the quarter ended September 30, 2017.  This increase is primarily attributable to an increase in demand.  When royalties of $46,417 and rental income of $23,822 are included, total revenues of $2,055,759 increased by $55,080, or 3%, for the quarter ended September 30, 2018 when compared to the same quarter a year ago.

Gross profit.   Total gross profit for the three months ended September 30, 2018 of $944,692 represented an increase of $62,216, or 7%, from total gross profit of $882,476 for the same period a year earlier, primarily as a result of a difference in mix of products sold.  Cost of product sales increased to $1,093,964 in Q3 of 2018 from $1,076,228 in Q3 of 2017, or 2%, primarily as a result of increased labor and materials required for the increased sales volume.  Gross profit margin on products was 45% in Q3 of 2018, compared to 45% in Q3 of 2017.  

Research and development expenses.  Research and development expenses were relatively unchanged at $249,092 for the quarter ended September 30, 2018 vs. $242,005 in the same quarter a year ago.

Sales and marketing expenses.   Sales and marketing expenses of $331,505 for the quarter ended September 30, 2018 decreased from the $367,101 for the quarter ended September 30, 2017, with the decrease of $35,596 attributable primarily to decreased compensation expense.
 
 
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General and administrative expenses.   General and administrative expenses of $271,172 for the quarter ended September 30, 2018 were relatively unchanged from the $268,667 spent in the same quarter a year ago.

Other income (expense).  Other income consisted of interest income of $7,676 in the quarter ended September 30, 2018 vs. $1,036 in the same quarter a year ago, primarily as the result of increased yields available on cash.  Interest expense of $14,957 in the current quarter was relatively unchanged from $15,261 in the same period a year ago.

Net income.   We realized net income of $58,164 for the quarter ended September 30, 2018 compared to net income of $190 for the quarter ended September 30, 2017.  This increase of $57,974 was primarily the result of the changes in gross profit discussed above, offset in part by an increase in income taxes of $37,190.

For the Nine Months Ended September 30, 2018 compared to the Nine Months Ended September 30, 2017.

Net sales. Our product sales for the nine months ended September 30, 2018 were $6,121,553, an increase of 7% from $5,706,328 for the same period a year ago.  This increase is primarily attributable to an increase in demand.  When royalties of $207,840 and rental income of $57,524 are included, total revenues of $6,386,917 reflect an increase of $355,387, or 6%, for the nine months ended September 30, 2018 when compared to the same nine months a year ago.

Gross profit.   Total gross profit for the nine months ended September 30, 2018 of $2,940,325 represented an increase of 3% from total gross profit of $2,860,081 for the nine months a year earlier, primarily as a result of increased sales volume, partially offset by lower royalties in 2018.  Cost of product sales increased from $3,101,840 in the nine months ended September 30, 2017 to $3,386,406 in the same period in 2018, or 9%, primarily as a result of increased labor and materials required for the increased sales volume, together with increased depreciation resulting from the purchase of production equipment and software.  Gross profit margin on products decreased from 46% in the nine months ended September 30, 2017 to 45% in the nine months ended September 30, 2018.  

Research and development expenses.  Research and development expenses were $840,647 for the nine months ended September 30, 2018, representing an increase of 22% over the $690,198 in the same period a year ago.  This increase resulted primarily from increased compensation expense and from higher payments to outside vendors in connection with the work needed to upgrade and re-launch R.A.D.A.R.

Sales and marketing expenses.   Sales and marketing expenses of $997,563 for the nine months ended September 30, 2018 decreased $76,656 from the $1,074,219 in the same nine months ended September 30, 2017, or 7%, mostly as the result of decreased compensation.

General and administrative expenses.   General and administrative expenses of $864,629 for the nine months ended September 30, 2018 were relatively unchanged from the $858,987 spent in the same nine months a year ago.

Other income (expense).  Other income consisted of interest income of $14,113 in the nine months ended September 30, 2018 vs. $4,682 in the same period a year ago, primarily as the result of increased yields available on cash.  Interest expense of $47,045 in the current 9 months was relatively unchanged from $45,572 in the same period a year ago.

Net income.   We realized net income of $147,493 for the nine months ended September 30, 2018 which was relatively unchanged when compared to net income of $146,051 for the same nine months ended September 30, 2017.

Trends and Uncertainties That May Affect Future Results

Revenues in the third quarter of 2018 were modestly higher compared to revenues in 2017. 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 2018 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 2018.  However, we believe that cash resources and borrowing capacity 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.
 
 
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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 during the last several years, we expect that operating losses could well 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 or 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 2016), secured by a first-priority security interest in the property we acquired with the loan. In connection with the term loan, we arranged for a one-year $250,000 line of credit (increased to $500,000 in 2016, and again to $750,000 in 2017) from Bank of America secured by all assets of the Company.  The line of credit bears interest at a rate calculated at the LIBOR daily floating rate plus 2.5%. At September 30, 2018 this credit facility had not been used.

Equipment expenditures during the nine months ended September 30, 2018 were $378,567, consisting primarily of an enterprise planning software package for materials management, customer relations management and e-commerce, compared to $139,736 in the same period a year ago.  Expense related to patent applications was $6,648 in the first nine months of 2018 versus $17,217 in the same period in 2017.

In March 2017 we acquired the R.A.D.A.R. assets from TRCK for $860,000 cash.  The purchased assets included handheld hardware device technology (the “Device”) which is designed to measure breath alcohol content of the user and software technology designed to allow the Device to be configured and to capture and manage the data being returned from the Device.  It also included patents and patent applications and production equipment.  The R.A.D.A.R. device was designed to be part of an offender supervision program as an alternative to incarceration.  R.A.D.A.R. devices are 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 are currently working on improving the manufacturability of R.A.D.A.R. devices and upgrading our base breathalyzer product, both of which we expect to launch before year end.

As of September 30, 2018, cash was $2,657,328, accounts receivable were $724,221 and current liabilities were $732,029 resulting in a net liquid asset amount of $2,649,520.  We believe that the introduction of several new products during the last several years, along with new and on-going customer relationships, will continue to generate sufficient revenues to maintain profitability.  If these revenues are not achieved on a timely basis, we may be required to implement cost reduction measures, as necessary.

We generally provide a standard one-year 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 income.  For the quarter ended September 30, 2018 and for the quarter ended September 30, 2017, warranty costs were not deemed significant.
 
 
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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 and marketer of portable hand-held breathalyzers and related accessories, supplies and education, 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.

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 and equipment, 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 double declining method and the straight line method respectively.  Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.

In March 2018 we acquired the R.A.D.A.R. assets from TRCK, which consisted of production equipment and of hardware device technology (the “Devices”) that are depreciated over 5 years using the double declining balance method when placed in service. With the R.A.D.A.R. assets, we also purchased software designed to measure breath alcohol content of the user and software technology designed to allow the Devices to be configured and to capture and manage the data being returned from the Device, as well as 6 issued U.S. patents and 16 domestic and international patent applications.  This software and the patents and patent applications will be amortized over 15 years using the straight line method.
 
 
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Revenue from product sales and supplies is generally recorded when we ship the product and title has passed to the customer, 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.

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.  Customer deposits are initially recorded as a liability and recognized as revenue when the product is shipped and title has passed to the customer.

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.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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, 2018.

(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, 2018 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
 
 
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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, 2017, 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 nine months ended September 30, 2018 or during the nine months ended September 30, 2017.  Options entitling their holder to purchase 23,500 shares of stock at $2.32 apiece lapsed during the nine months ended September 30, 2017.  There were no sales of equity securities during the nine months ended September 30, 2018 or during the nine months ended September 30, 2017.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.
 
 
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ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

None.

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
 
 
 
 
101.INS
 
XBRL Instance Document
 
101.SCH
 
XBRL Schema Document
 
101.CAL
 
XBRL Calculation Linkbase Document
 
101.LAB
 
XBRL Label Linkbase Document
 
101.PRE
 
XBRL Presentation Linkbase Document
 
101.DEF
 
XBRL Definition Linkbase Document
 

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, 2018          
  By:  
/s/ Wayne R. Willkomm            
 
Date
 
Wayne R. Willkomm, Ph.D.
 
   
President and Chief Executive Officer
(Principal Executive Officer)
 
       
November 8, 2018          
  By:  
/s/ Kristie L. LaRose            
 
Date
 
Kristie L. LaRose
 
   
Vice President of Finance and Administration
(Principal Accounting Officer)
 

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Exhibit Index
Exhibit No.
 
Description of Exhibit
 
 
 
 
101.INS
 
XBRL Instance Document
 
101.SCH
 
XBRL Schema Document
 
101.CAL
 
XBRL Calculation Linkbase Document
 
101.LAB
 
XBRL Label Linkbase Document
 
101.PRE
 
XBRL Presentation Linkbase Document
 
101.DEF
 
XBRL Definition Linkbase Document
 

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