ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our financial
condition and results of operations, and should be read in conjunction with our financial statements and the related notes included elsewhere
in this Form 10-Q. Certain statements contained in this section are not historical facts, including statements about our strategies
and expectations about new and existing products, market demand, acceptance of new and existing products, technologies and opportunities,
market and industry segment growth, and return on investments in products and markets. These statements are forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and we intend such forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in these statutes. You can identify forward-looking
statements by the use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "intends," "plans" or "anticipates" or the negative of these words
and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical
matters. Such statements involve substantial risks and uncertainties that may cause actual results to differ materially from
those indicated by the forward-looking statements. All forward-looking statements in this section are based on information
available to us on the date of this document, and we assume no obligation to update such forward looking statements. Readers
of this Form 10-Q are strongly encouraged to review the section titled "Risk Factors" in our December 31, 2022 Form 10-K.
Overview
Lifeloc Technologies, Inc., a Colorado corporation
("Lifeloc" or the "Company"), is a Colorado-based developer, manufacturer and marketer of portable hand-held
and fixed station breathalyzers and related accessories, supplies and education. We design, produce and sell fuel-cell based breath
alcohol testing equipment. We compete in all major segments of the portable breath alcohol testing instrument market, including
law enforcement, workplace, corrections, original equipment manufacturing ("OEM") and consumer markets. In addition, we offer
a line of supplies, accessories, services, and training to support customers' alcohol testing programs. We sell globally through distributors
as well as directly to users.
We define our business as providing "near
and remote sensing and monitoring" products and solutions. Today, the majority of our revenues are derived from products and services
for alcohol detection and measurement. We remain committed to growing our breath alcohol testing business. In the future, we anticipate
the commercialization of new sensing and measurement products that may allow Lifeloc to successfully expand our business into new growth
areas where we do not presently compete or where no satisfactory product solutions exist today.
In addition, with the October 2014 purchase
of our corporate headquarters and certain adjacent property, we added a new reporting segment focused on the ownership and rental of real
property through existing commercial leases.
Lifeloc incorporated in Colorado in December 1983. We
filed a registration statement on Form 10 with the Securities and Exchange Commission, which became effective on May 31, 2011. Our
fiscal year end is December 31. Our principal executive offices are located at 12441 West 49th Avenue, Unit 4, Wheat Ridge, Colorado
80033-3338. Our telephone number is (303) 431-9500. Our websites are www.lifeloc.com and www.stsfirst.com. Information
contained on our websites does not constitute part of this Form 10-Q.
Principal Products and Services and Methods
of Distribution
Alcohol Breath Testers
In 1989, we introduced our first breath
alcohol tester, the PBA3000. Our Phoenix® Classic was completed and released for sale in1998, superseding the PBA3000. In turn, the
Phoenix® Classic has been superseded by our FC Series and Workplace Series of portable breath alcohol testers, which are discussed
below. Neither the PBA3000 nor the Phoenix® Classic is actively sold today.
In 2001,
we completed and released for sale our new FC Series, designed specifically for domestic and international law enforcement and corrections
markets. The portable breath alcohol testers comprising our FC Series are currently being sold worldwide, having contributed to our growth
since their introduction. The FC Series is designed to meet the needs of domestic and international law enforcement for roadside drink/drive
testing and alcohol offender monitoring. The FC Series is approved by the U.S. Department of Transportation (“DOT”) as an
evidential breath tester, making it suitable for sale to state law enforcement agencies for preliminary roadside breath alcohol testing. The
FC Series is routinely updated with firmware, software and component improvements as they become available. It is readily adaptable
to the specific requirements and regulations of domestic and international markets.
In 2005 and 2006, we introduced two
new models, the EV30 and Phoenix® 6.0 Evidential Breath Tester (“Phoenix® 6.0”), which constitute our Workplace Series
of testing devices. Like their predecessor, the Phoenix® Classic, and our FC Series, these instruments are DOT approved.
The DOT’s specifications support the DOT’s workplace alcohol testing programs, including those applicable to workplace alcohol
testing for the federally regulated transportation industry. We also sell component parts used in alcohol testing devices, such as mouthpieces
used by our breathalyzers, as well as forms and labels used for record keeping, and calibration products for user re-calibration of our
devices. We offer optional service agreements on our equipment, re-calibration services, and spare parts, and we sell supporting
instrument training and user certification training to our workplace customers.
In 2006, we commenced selling breath
alcohol equipment components that we manufacture to other OEMs for inclusion as subassemblies or components in their breath alcohol testing
devices.
In late 2009, Lifeloc released the LifeGuard
Personal Breathalyzer (“LifeGuard”), a personal alcohol breath tester that incorporates the same fuel-cell technology
used in our professional devices. Intended originally for the global consumer breathalyzer market, LifeGuard was phased out in 2018.
In 2011 and 2012, Lifeloc introduced
Bluetooth wireless keyboard and printer communication options for our Phoenix® 6.0 along with a series of web based workplace
training courses. We believe these two product innovations have been key to our success and leadership in workplace breath testing.
In 2013, Lifeloc expanded our FC Series
of professional breath alcohol testers targeted at domestic and international law enforcement and corrections markets with the addition
of the FC5 Hornet (the “FC5”). The FC5 is a passive (no mouthpieces required) portable handheld alcohol screening device that
competes directly with passive alcohol screeners from our competitors in the education, law enforcement, workplace and corrections markets.
In 2013, we also introduced the Sentinel™
zero tolerance alcohol screening station, a fully automated wall mounted screening station for use in safety sensitive industries such
as oil and gas and mining. Both devices expand Lifeloc’s products for passive alcohol screening.
In the third quarter of 2014, we received
approval from DOT for our EASYCAL® automatic calibration station for use with our Phoenix ® 6.0 Evidential Breath Testers, and
we began shipments of the EASYCAL® to our law enforcement, corrections, workplace and international customers. The EASYCAL®
calibration station is a first of its kind device that automatically performs breath tester instrument calibration, calibration verification
and gas management. As compared to manual instrument calibration, the EASYCAL® reduces the opportunity for human error, saves
time and reduces operating costs. In May 2019, we received DOT approval on a second generation EASYCAL® with broader capabilities
called the EASYCAL® G2.
In October 2015, we expanded our Sentinel™
line with the Sentinel™ VA alcohol screening station, a fully automated station to control vehicular access to safety critical facilities,
such as mines, refineries, power stations and nuclear facilities. The Sentinel™ VA alcohol screening station is intended to
allow all drivers entering a secure area to be tested quickly and efficiently without leaving their vehicle.
In November 2019, we received approval
from DOT for our LX9 and LT7 base unit alcohol breathalyzers. Both have been updated and both updated versions received DOT approval in
December 2021.
Testers for Drugs of Abuse
In August 2016, we entered into an exclusive
patent license agreement with Sandia Corporation, Albuquerque, NM, pursuant to which we acquired the exclusive rights to develop, manufacture
and market Sandia’s patented SpinDx™ technology for the detection of drugs of abuse. SpinDx™ uses a centrifugal disk
with micro fluidic flow paths allowing multiple tests to be carried out on a single small sample. The microfluidics disk with centrifugal
concentration achieves a strong signal from trace concentrations in small samples that under best conditions can be quantitative. Sandia
Corporation developed a prototype using the SpinDx™ technology under our Cooperative Research and Development Agreement. We received
the first prototype in 2018, advanced this device for robustness and manufacturability, and are now commercializing the device. In 2023
and 2022 we purchased SpinDx related test validation equipment as well as disk development fabrication equipment totaling $0 and $10,800
respectively. We are optimistic about the results of the work to date and expect market introduction later in 2023 with partners for field
demonstration. The SpinDx™ platform has the potential to improve real-time screening for a panel of high-abuse drugs, with the ability
to efficiently measure relatively low concentrations of drugs such as cocaine, heroin, methamphetamine, fentanyl and other high-abuse
drugs. 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. Testing has commenced to validate
the SpinDx technology against the definitive standard liquid chromatography-mass spectroscopy (LCMS) measurement utilizing human samples. The
SpinDx results are showing good correlation to the LCMS data. 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. Continued refinements are needed, which, when completed, we expect to result in R.A.D.A.R. 300
having the ability to confirm that the user blowing the alcohol test is the correct user, along with other features.
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 September 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.
Results of Operations
For the three months ended March 31,
2023 compared to the three months ended March 31, 2022.
Net sales. Our product sales for the
quarter ended March 31, 2023 were $2,133,359, an increase of 1% from $2,111,757 for the quarter ended March 31, 2022. This
increase is primarily attributable to selective price increases as well as an increase in demand in the current quarter. When royalties
of $8,206 and rental income of $22,989 are included, total revenues of $2,164,554 increased by $3,918 or 0%, for the quarter ended March
31, 2023 when compared to the same quarter a year ago.
Gross profit. Our total gross
profit for the three months ended March 31, 2023 of $935,427 represented an increase of 11% from total gross profit of $841,889 for the
same period a year earlier. This increase is primarily as a result of increased prices, offset in part by decreased royalties. Cost
of product sales decreased from $1,318,747 in Q1 of 2022 to $1,223,895 in Q1 of 2023, or 7%, partly as a result of lower depreciation
and amortization in 2023. Gross profit margin on products went from 38% in Q1 of 2022 to 43% in Q1 of 2023 as a result of the foregoing
factors.
Research and development expenses.
Our research and development expenses were relatively unchanged at $396,766 for the quarter ended March 31, 2023, representing an increase
of 2% over the $390,024 in the same quarter a year ago.
Sales and marketing expenses.
Our sales and marketing expenses of $287,883 for the quarter ended March 31, 2023 were up by $11,246 (4%) over the $276,637 for the quarter
ended March 31, 2022. The increase resulted from various small increases offset in part by various small decreases.
General and administrative expenses.
Our general and administrative expenses of $319,015 for the quarter ended March 31, 2023 decreased by $33,818 (10%) from the $352,833
in the same period a year ago. This decrease is attributable to stock option expense in 2022 vs. none in 2023, as well as other decreases,
including amortization, offset by various increases.
Other income (expense). Our
interest income of $9,800 increased in Q1 of 2023 by $9,368 over $432 in Q1 of 2022 due to increased yield available on cash deposits.
Our interest expense of $10,535 in the current quarter over $10,910 in the same period a year ago is the result of the balance of the
term loan on our building declining.
Net income (loss). We realized
a net loss of $53,788 for the quarter ended March 31, 2023 compared to a net loss of $144,508 for the quarter ended March 31, 2022. This
decrease of $90,720 was the result of the changes in gross profit and operating expenses discussed above, offset in part by a decreased
benefit from income tax of $28,391.
Trends and Uncertainties That May Affect
Future Results
Revenues in the first quarter of 2023 were
slightly higher than revenues in 2022 as a result of selective price increases, as well as the continued diminishing effects of the Covid-19
pandemic. We experienced supply chain issues that hampered our ability to timely deliver all orders. We believe the supply chain
problems may be declining, and we expect the remainder of 2023 to show modest improvement over 2022. We expect our quarter-to-quarter
revenue fluctuations to continue, due to the unpredictable timing of large orders from customers and the size of those orders in relation
to total revenues. Going forward, we intend to focus our development efforts on products we believe offer the best prospects
to increase our intermediate and near-term revenues.
Our 2023 operating plan is focused on growing sales,
increasing gross profits, and increasing research and development efforts on new products for long term growth. We cannot predict
with certainty the expected sales, gross profit, net income or loss, or usage of cash and cash equivalents for 2023. However,
we believe that cash resources will be sufficient to fund our operations for the next twelve months under our current operating plan. If
we are unable to manage the business operations in line with our budget expectations, it could have a material adverse effect on business
viability, financial position, results of operations and cash flows. Further, if we are not successful in sustaining profitability and
remaining at least cash flow break-even, additional capital may be required to maintain ongoing operations.
Liquidity and Capital Resources
We compete in a highly technical, very competitive
and, in most cases, price driven alcohol testing marketplace, where products can take years to develop and introduce to distributors and
end users. Furthermore, manufacturing, marketing and distribution activities are regulated by the FDA, the DOT, and other regulatory
bodies that, while intended to enhance the ultimate quality and functionality of products produced, can contribute to the cost and time
needed to maintain existing products and develop and introduce new products.
We have traditionally funded working capital
needs through product sales and close management of working capital components of our business. Historically, we have also
received cash from private offerings of our common stock, warrants to purchase shares of our common stock, and notes. In our earlier years,
we incurred quarter to quarter operating losses to develop current product applications, utilizing a number of proprietary and patent-pending
technologies. Although we have been profitable in recent years except 2020 and 2022, we can provide no assurances that operating
losses will not occur in the future. Should that situation arise, we may not be able to obtain working capital funds necessary
in the time frame needed and at satisfactory terms, if at all.
On October 31, 2014, we purchased the commercial
property we use as our corporate headquarters and certain adjacent property in Wheat Ridge, Colorado for a total purchase price of $1,949,139,
of which we paid $368,033 in cash and financed the remaining $1,581,106 through a 10-year term loan from Bank of America bearing interest
at 4.45% per annum (amended to 4% per annum in 2017), secured by a first-priority security interest in the property we acquired with the
loan. 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.
Equipment and software purchased during the
quarter ended March 31, 2023 was $0, compared to $10,800 in the same period a year ago. We filed patent applications at a cost to
us of $1,404 in the first quarter of 2023 and $0 in the first quarter of 2022.
As of March 31, 2023, cash was $2,052,444,
accounts receivable were $543,830 and current liabilities were $1,051,389 resulting in a net liquid asset amount of $1,544,885. We
believe that the diminishing of the Covid-19 pandemic and the introduction of several new products during the last several years, along
with new and on-going customer relationships will allow Lifeloc to operate profitably. If the revenue levels during the last several
years prior to 2020 are not achieved on a timely basis, we may be required to seek additional sources of capital and/or to implement further
cost reduction measures, as necessary.
We generally provide a standard one-year
limited warranty on materials and workmanship to our customers. We provide for estimated warranty costs at the time product
revenue is recognized. Warranty costs are included as a component of cost of goods sold in the accompanying statements of operations. For
the quarter ended March 31, 2023 and for the quarter ended March 31, 2022, warranty costs were not deemed significant.
Critical Accounting Policies and Estimates
Our financial statements and accompanying
notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The
preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies
and estimates that we use to prepare our financial statements. In general, management's estimates are based on historical experience,
on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and
circumstances. Actual results could differ from those estimates made by management.
Our discussion and analysis of our financial condition
and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, sales returns, warranty, contingencies
and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used
in the preparation of our financial statements.
We have concluded that we have two operating
segments, including our primary business which is as a developer, manufacturer, lessor and marketer of portable hand-held breathalyzers
and related accessories, supplies, education, training and royalties from development contracts and a second segment consisting of renting
portions of our building to existing tenants.
We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required,
which would increase our expenses during the periods in which any such allowances were made. The amount recorded as a provision
for bad debts in each period is based upon our assessment of the likelihood that we will be paid on our outstanding receivables, based
on customer-specific as well as general considerations. To the extent that our estimates prove to be too high, and we ultimately
collect a receivable previously determined to be impaired, we may record a reversal of the provision in the period of such determination.
We reduce inventory for estimated obsolete
or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required. Any write-downs of inventory would reduce our reported net income during
the period in which such write-downs were applied.
Property and equipment are stated at cost,
with depreciation computed over the estimated useful lives of the assets, generally five years (three years for software and technology
licenses). We use the double declining method of depreciation for property, including space modifications, and the straight line
method for software and technology licenses. We purchased all of the assets of STS, an online education company, in 2014, which consisted
of training courses that are amortized over 15 years using the straight line method. In October 2014, we purchased our building.
A majority of the cost of the building is depreciated over 39 years using the straight line method. In addition, based on the results
of a third party analysis, a portion of the cost was allocated to components integral to the building. Such components are depreciated
over 5 and 15 years, using the declining method. The R.A.D.A.R.® software and patents that were purchased in March 2017 were originally
set to amortize over 15 years using the straight line method, but in 2022 we accelerated the amortization of the remaining cost to fully
amortize the assets by December 31, 2022. Maintenance and repairs are expensed as incurred and major additions, replacements and
improvements are capitalized.
Revenue from product sales and supplies is
generally recorded when we ship the product and title has passed to the customer, or when agreed milestones are met in the case of product
developments, provided that we have evidence of a customer arrangement and can conclude that collection is probable. The prices
at which we sell our products are fixed and determinable at the time we accept a customer's order. We recognize revenue from sales to
stocking distributors when there is no right of return, other than for normal warranty claims, and generally have no ongoing obligations
related to product sales, except for normal warranty.
The sales of licenses to our training courses
are recognized as revenue at the time of sale. Direct training performed by us is recognized when training is completed by the trainer,
with the unearned portion classified as deferred revenue. Training and certification revenues are recognized at the time the training
and certification occurs. Data recording revenue is recognized based on each day's usage of enrolled devices.
Revenues arising from
extended warranty contracts are booked as sales over their life on a straight-line basis. We are providing for customer financing
and leasing, which we recognize as revenue over the applicable lease term. Occasionally, we rent used equipment to customers,
and in those cases, we recognize the revenues as they are earned over the life of the contract. Revenues from rental of equipment
and extended service plans are recognized over the life of the contracts.
Royalty income is recognized in accordance
with agreed upon terms, when performance obligations are satisfied, the amount is fixed or determinable and collectability is reasonably
assured.
Rental income from space leased to our tenants
is recognized in the month in which it is due.
On occasion we receive customer deposits
for future product orders and for product development. Customer deposits are initially recorded as a liability and recognized
as revenue when the product is shipped and title has passed to the customer, or in the case of product development, when agreed milestones
are met.
Stock-based compensation is presented in
accordance with the guidance of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")
Topic 718, Compensation — Stock Compensation ("ASC 718"). Under the provisions of ASC 718, companies are required
to estimate the fair value of share-based payment awards made to employees and directors including employee stock options based on estimated
fair values on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected
to vest is recognized as expense over the requisite service periods in our statement of operations.
