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, 2021 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" 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, www.stsfirst.com and lifeguardbreathtester.com. Information
contained on our websites does not constitute part of this Form 10-K.
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 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.
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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.
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® has been discontinued.
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.
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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. In 2021 we purchased
SpinDx related test validation equipment as well as disk development fabrication
equipment totaling $265,867. We are optimistic about the results of the work to
date and expect market introduction later in 2022 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. We intend to use this
technology platform, sometimes referred to as "Lab on a Disk", to develop a
series of devices and tests that could be used at roadside, emergency rooms and
in workplace testing to get a rapid and quantitative measure for a panel of such
drugs of abuse. First will be the SpinDx device with disks for delta-9 THC
detection from an oral fluid sample collected from a test subject. This will be
followed with a device based on our recently updated LX9 breathalyzer to collect
a sample for analysis from breath, which coupled with the SpinDx device will be
our marijuana breathalyzer system. We have detected delta-9-THC (the primary
psychoactive component of marijuana) down to concentrations of 5 nanograms per
milliliter in our laboratory. This includes resolving the psychoactive
delta-9-THC from its inactive metabolites, an important step in establishing
impairment. 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.
The R.A.D.A.R.® 200 Mobile Device has been updated and released for sale in
2022, with continued refinements ongoing based on customer feedback.
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 14,412 square feet are
occupied by us and 7,913 square feet are currently leased to two tenants whose
leases expire at various times until June 30, 2023. 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. 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.
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.
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Results of Operations
For the three months ended March 31, 2022 compared to the three months ended
March 31, 2021.
Net sales. Our product sales for the quarter ended March 31, 2022 were
$2,111,757, an increase of 19% from $1,775,447 for the quarter ended March 31,
2021. This increase is primarily attributable to an increase in demand in the
current quarter, which may represent partial recovery from the impact of
Covid-19 in the same quarter a year ago. When royalties of $26,640 and rental
income of $22,239 are included, total revenues of $2,160,636 increased by
$351,093, or 19%, for the quarter ended March 31, 2022 when compared to the same
quarter a year ago. With the diminishing effects of the pandemic, we expect
revenues to be somewhat higher in the remainder of 2022 when compared to 2021.
Gross profit. Our total gross profit for the three months ended March 31, 2022
of $841,889 represented an increase of 2% from total gross profit of $823,877
for the same period a year earlier. This increase is primarily as a result of
increased sales, offset by increased costs across the board, including labor and
components, and offset in part by increased royalties. Cost of product sales
increased from $979,023 in Q1 of 2021 to $1,318,747 in Q1 of 2022, or 35%, as a
result of increased sales volume and inflation. Gross profit margin on products
went from 45% in Q1 of 2021 to 38% in Q1 of 2022 as a result of the foregoing
factors.
Research and development expenses. Our research and development expenses were
$390,024 for the quarter ended March 31, 2022, representing an increase of 27%
over the $307,212 in the same quarter a year ago. This increase resulted mostly
from adding personnel and increased compensation, along with higher payments to
outside vendors in connection with the work pertaining to the SpinDx
development.
Sales and marketing expenses. Our sales and marketing expenses of $276,637 for
the quarter ended March 31, 2022 increased by $46,159 (20%) from the $230,478
for the quarter ended March 31, 2021, mostly as the result of resumption of
sales efforts formerly curtailed because of the pandemic.
General and administrative expenses. Our general and administrative expenses
of $352,833 for the quarter ended March 31, 2022 were relatively unchanged from
the $350,120 in the same period a year ago.
Other income (expense). Our other income decreased in Q1 of 2022 due to
forgiveness in Q1 of 2021 of the Paycheck Protection loan obtained in 2021,
versus none in the current period. Interest income of $432 in the quarter ended
March 31, 2022 was nominal and relatively unchanged from the $499 in the same
quarter a year ago. Our interest expense of $10,910 in the current quarter over
$13,517 in the same period a year ago is mostly the result of the lower interest
rate on our new term loan closed on September 30, 2021, as well as the result of
the balance of the term loan on our building declining.
Net income (loss). We realized a net loss of $144,508 for the quarter ended
March 31, 2022 compared to net income of $403,471 for the quarter ended March
31, 2021. This decrease of $547,979 was the result of the changes in gross
profit and operating expenses discussed above, offset in part by an increased
benefit from income tax of $28,250.
Trends and Uncertainties That May Affect Future Results
Revenues in the first quarter of 2022 were higher compared to revenues in 2021
as a result of the diminishing Covid-19 pandemic. We believe the effects of the
pandemic are declining, and we expect the remainder of 2022 to show modest
improvement over 2021. 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 2022 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 2022. 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.
17
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 maintained profitability during the several years
prior to 2020, we expect that operating losses could continue in the
future. Should that situation arise, we may not be able to obtain working
capital funds necessary in the time frame needed, 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 2017),
secured by a first-priority security interest in the property we acquired with
the loan. In connection with the term loan, 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 $750,000 and extend the maturity date to
September 28, 2021. The revolving line of credit facility expired in accordance
with its terms and has not been renewed. There was no balance due on the line of
credit as of March 31, 2021.
Equipment and software purchased during the quarter ended March 31, 2022 was
$10,800, compared to $0 in the same period a year ago. Building improvements
during the quarter ended March 31, 2022 were $0, compared to $0 in the quarter
ended March 31, 2021. We filed patent applications at a cost to us of $0 in the
first quarter of 2022 and $0 in the first quarter of 2021.
As of March 31, 2022, cash was $2,018,828, accounts receivable were $798,748 and
current liabilities were $786,769 resulting in a net liquid asset amount of
$2,030,807. 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 March
31, 2022 and for the quarter ended March 31, 2021, 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.
18
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.
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 2017, 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 are amortized over 15 years using the straight line method.
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.
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 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.
19
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.
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