Lifeloc Technologies, Inc - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Lifeloc Technologies, Inc	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Lifeloc Technologies, Inc	ex32x1.htm
EX-32.2 - EXHIBIT 32.2 - Lifeloc Technologies, Inc	ex32x2.htm
EX-10.1 - EXHIBIT 10.1 - Lifeloc Technologies, Inc	ex10x1.htm
EX-31.2 - EXHIBIT 31.2 - Lifeloc Technologies, Inc	ex31x2.htm
EX-31.1 - EXHIBIT 31.1 - Lifeloc Technologies, Inc	ex31x1.htm

UNITED STATE

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended March 31, 2013

o	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 o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 x No o

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

Large accelerated filer o	Accelerated filer o

Non-accelerated filer o	Smaller reporting company x
(Do not check if a smaller reporting company)

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

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	2,432,416 Shares
(Class)	(outstanding at May 7, 2013)

LIFELOC TECHNOLOGIES, INC.

FORM 10-Q

For the Three Months Ended March 31, 2013

INDEX

				Page
				Number

PART I. FINANCIAL INFORMATION				3

	ITEM 1		FINANCIAL STATEMENTS (UNAUDITED)

		-	Condensed Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012	3
		-	Condensed Statements of Income (Unaudited) for the three months ended March 31, 2013 and 2012	4
		-	Condensed Statements of Cash Flows (Unaudited) for the three months ended March 31, 2013 and 2012	5
		-	Notes to Condensed Financial Statements (Unaudited)	6

	ITEM 2		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	9

	ITEM 3		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	11

	ITEM 4		CONTROLS AND PROCEDURES	11

PART II. OTHER INFORMATION				12

	ITEM 1		LEGAL PROCEEDINGS	12

	ITEM 1A		RISK FACTORS	12

	ITEM 2		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	12

	ITEM 3		DEFAULTS UPON SENIOR SECURITIES	13

	ITEM 4		MINE SAFETY DISCLOSURES	13

	ITEM 5		OTHER INFORMATION	13

	ITEM 6		EXHIBITS	13

SIGNATURE				14

PART I FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

LIFELOC TECHNOLOGIES, INC.

Condensed Balance Sheets


ASSETS
	March 31,
	2013			December 31,
CURRENT ASSETS:	(Unaudited)			2012
Cash	$	2,126,187		$	2,338,012
Accounts receivable, net		642,107			405,321
Inventories, net		1,069,630			832,670
Income taxes receivable		78,796			174,129
Deferred taxes		154,961			130,172
Prepaid expenses and other		91,149			31,529
Total current assets		4,162,830			3,911,833

PROPERTY AND EQUIPMENT, at cost:
Production equipment		269,766			258,703
Office equipment		147,727			144,202
Sales and marketing equipment		177,701			175,344
Purchased software		46,203			46,203
Less accumulated depreciation		(398,032	)		(365,728	)
Total property and equipment, net		243,365			258,724

OTHER ASSETS:
Technology licenses, net		43,049			55,139
Patents, net		16,053			11,953
Deferred taxes, long term		5,710			2,112
Deposits and other		108,067			54,704
Total other assets		172,879			123,908

Total assets	$	4,579,074		$	4,294,465

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	260,180		$	82,796
Customer deposits		3,472			294
Accrued expenses		161,864			278,324
Deferred income, current portion		211,609			158,527
Reserve for warranty expense		23,850			23,100
Total current liabilities		660,975			543,041

DEFERRED INCOME, net of current portion		15,025			5,559

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Common stock, no par value; 50,000,000 shares
authorized, 2,432,416 shares outstanding (2,422,416
at December 31, 2012)		4,324,897			4,309,697
Accumulated (deficit)		(421,823	)		(563,832	)
Total stockholders' equity		3,903,074			3,745,865

Total liabilities and stockholders' equity	$	4,579,074		$	4,294,465

See accompanying notes.

LIFELOC TECHNOLOGIES, INC.

Condensed Statements of Income (Unaudited)


	Three Months Ended March 31,
	2013			2012
REVENUES:
Product sales	$	1,777,924		$	1,803,689
Royalties		130,425			-
Total		1,908,349			1,803,689

COST OF SALES		959,179			1,000,291

GROSS PROFIT		949,170			803,398

OPERATING EXPENSES:
Research and development		160,569			119,331
Sales and marketing		248,327			200,018
General and administrative		337,981			306,584
Total		746,877			625,933

OPERATING INCOME		202,293			177,465

OTHER INCOME (EXPENSE):
Interest income		3,663			3,684
Bad debt recovery		3,000			-
Total		6,663			3,684

NET INCOME BEFORE PROVISION FOR TAXES		208,956			181,149

PROVISION FOR FEDERAL AND STATE INCOME TAXES		(66,947	)		(61,441	)

NET INCOME	$	142,009		$	119,708

NET INCOME PER SHARE, BASIC	$	0.06		$	0.05

NET INCOME PER SHARE, DILUTED	$	0.06		$	0.05

WEIGHTED AVERAGE SHARES, BASIC		2,426,542			2,422,416

WEIGHTED AVERAGE SHARES, DILUTED		2,426,542			2,445,416

See accompanying notes.

LIFELOC TECHNOLOGIES, INC.

Condensed Statements of Cash Flows (Unaudited)


	Three Months Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES:	2013			2012
Net income	$	142,009		$	119,708
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization		44,753			42,511
Deferred taxes		(28,387	)		(5,066	)
Reserve for warranty expense		750			400
Changes in operating assets and liabilities-
Accounts receivable		(236,786	)		(42,593	)
Inventories		(236,960	)		62,105
Income taxes receivable		95,333			-
Prepaid expenses and other		(59,620	)		858
Deposits and other		(53,363	)		14,294
Accounts payable		177,384			145,452
Customer deposits		3,178			(2,101	)
Accrued expenses		(116,460	)		(298,290	)
Deferred income		62,548			4,744
Income taxes payable		-			66,507
Net cash provided from (used in)
operating activities		(205,621	)		108,529

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(16,945	)		(41,886	)
Purchase of patent		(4,459	)		-

Net cash (used in) investing activities		(21,404	)		(41,886	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of 10,000 shares of common stock at $1.52 per share		15,200			-

NET INCREASE (DECREASE) IN CASH		(211,825	)		66,643

CASH, BEGINNING OF PERIOD		2,338,012			1,844,802

CASH, END OF PERIOD	$	2,126,187		$	1,911,445

See accompanying notes.

LIFELOC 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 breathalyzers and related 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 and sales agents, as well as directly to users.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These financial statements have been prepared by us, without audit, and reflect normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the results of the first quarter of 2013. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with footnotes contained in our financial statements for the year ended December 31, 2012 included in our Form 10-K.

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.

Note Receivable. We made a loan of $62,500 to Tipping Point, Inc. (“TPI”), an early stage company during the second quarter of 2011. Although the loan has been paid down by $25,000, including a repayment of $3,000 in the first quarter of 2013, we do not expect to realize any significant sales to TPI in the near term. We have provided a reserve against the loan for the full amount, leaving a net amount of $0, which is not included in our balance sheet at March 31, 2013. This note has a provision entitling us to convert any outstanding balance into stock of Tipping Point, Inc. TPI is considered a related party as certain of our board members were also TPI board members during a portion of 2011.

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 March 31, 2013 and December 31, 2012, inventory consisted of the following:

	2013			2012
Raw materials & deposits	$	405,827		$	271,865
Work-in-process		225,649			126,209
Finished goods		491,351			479,596
Total gross inventories		1,122,827			877,670
Less reserve for obsolescence		(53,197	)		(45,000	)
Total net inventories	$	1,069,630		$	832,670

Income Taxes. We account for income taxes under the provisions of Accounting Standards Codification 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. Revenue from product sales is 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.

Service and extended warranty contracts are booked as sales over their life on a straight-line basis. Supplies are recognized as sales when they are shipped. Training revenues are recognized at the time the training occurs. On occasion we arrange for customer financing and leasing through unrelated third parties. We recognize as revenue a fee from this arrangement at the time of the transaction. Occasionally, we rent used breathalyzers to customers, and in those cases, we recognize the revenues as they are earned over the life of the contract.

Royalty income is recognized in accordance with agreed upon terms, when performance obligations are satisfied, the amount is fixed or determinable and collectability is reasonably assured.

Deferred Revenue. Deferred revenues arise from service contracts and from extended warranty contracts. Those revenues are recognized on a straight-line basis over the life of the contract, which generally are written for one year. However, there are occasions when they are written for longer terms up to four years. In those cases, the revenues from that portion of the contract that extend beyond one year are shown in our balance sheet as long term. Deferred revenues also result from progress payments received on development contracts; those revenues are recognized when the contract is complete. All development contracts are for less than one year and all deferred revenues from this source are shown in our balance sheet as short term.

Fair Value of Financial Instruments. Our financial instruments consist of cash and cash equivalents, short-term trade receivables, note receivable and payables. The carrying values of cash and cash equivalents, short-term receivables and payables approximate their fair value due to their short term maturities.

Recent Accounting Pronouncements. We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.

3. BASIC AND DILUTED INCOME PER COMMON SHARE

We report both basic and diluted net income (loss) per share. Basic net income or loss per common share is computed by dividing net income or loss for the period by the weighted average number of common shares outstanding for the period. Diluted net income or loss per common share is computed by dividing the net income or loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. The shares used in the calculation of dilutive potential common shares exclude options to purchase shares where the exercise price was greater than the average market price of common shares for the period.

The following table presents the calculation of basic and diluted net income (loss) per share:

	Three Months Ended
	March 31, 2013		March 31, 2012
Net income	$	142,009	$	119,708
Weighted-average shares — basic		2,426,542		2,422,416
Effect of dilutive potential common shares		-		23,000
Weighted-average shares — diluted		2,426,542		2,445,416
Net income per share — basic	$	0.06	$	0.05
Net income per share — diluted	$	0.06	$	0.05
Antidilutive employee stock options		0		0

4. STOCKHOLDERS’ EQUITY

The following table summarizes information about employee stock options outstanding and exercisable at March 31, 2013:

	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
$3.69	23,000	4		$3.69	23,000		$3.69

Of the 23,000 options exercisable as of March 31, 2013, all are incentive stock options. The exercise price of all options granted through March 31, 2013 has been equal to or greater than the fair market value.

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

5. RELATED PARTY TRANSACTIONS

During the quarter ended March 31, 2013, we paid a consulting fee of $15,000 to a director.

6. LINE OF CREDIT

In May, 2012, we extended our line of credit for $150,000 with Citywide Bank. The credit facility will mature on June 1, 2013, and the interest rate is calculated at the prime rate plus 1%. There was no balance due on the line of credit as of March 31, 2013 and December 31, 2012.

7. COMMITMENTS

We entered into a development contract in March 2013, which calls for an initial deposit of $31,602, followed by seven monthly payments of $10,534.

8. 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, except that our shareholders approved a stock option plan providing for the grant of up to 150,000 shares at their annual meeting on April 1, 2013.

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, 2012 Form 10-K.

Overview

We have been a developer and manufacturer of advanced alcohol testing instruments since 1986. We design and produce high-quality, precise and rapid recovery alcohol testing instruments for use in workplace, clinics, schools, law enforcement, corrections, and other applications. We offer our customers accessories, service support, training and supplies. Our internet websites are www.lifeloc.com and www.lifeguardbreathtester.com.

The areas in which we do business are highly competitive and include both foreign and domestic competitors. Our major competitors are larger and have substantially greater resources than we do. Furthermore, other domestic or foreign companies, some with greater financial resources than we have, may seek to produce products or services that compete with ours.

We believe that competition for sales of alcohol testing products is based on product performance, service, delivery and price.

We believe that our future success depends to a large degree on our ability to develop new alcohol testing products and services to enhance the performance characteristics and methods of manufacture of existing products. Accordingly, we expect to continue to invest resources in research and development, to the extent funds are available.

Results of Operations

For the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

Net sales. Our product sales for the quarter ended March 31, 2013 were $1,777,924, a decrease of 1% from $1,803,689 for the quarter ended March 31, 2012. This decrease is attributable primarily to a decrease in orders from a large customer redesigning its ignition interlock product and therefore placing fewer orders, although it was offset in part by royalties on product sales by a former OEM customer that licensed our patented breath alcohol testing algorithms. When royalties of $130,425 are included, total revenues of $1,908,349 increased by $104,660, or 6%, for the quarter ended March 31, 2013 when compared to the same quarter a year ago.

Gross profit. Gross profit for the quarter ended March 31, 2013 of $949,170 represented an increase of 18% from gross profit of $803,398 for the quarter ended March 31, 2012 as a result of royalties resulting from a royalty agreement we entered into in 2012 with a former OEM customer, which provides for the monthly payment of royalties to us on all products containing certain of our software sold by our customer. Gross profit as a percentage of product sales decreased from 56% to 54% as a result the lower product sales for the quarter ended March 31, 2013 vs. the product sales for the quarter ended March 31, 2012, and as a result of increased compensation for the quarter ended March 31, 2013.

Research and development expenses. Research and development expenses were $160,569 for the quarter ended March 31, 2013, representing an increase of 35% over the $119,331 in the same quarter a year ago. This increase resulted from personnel and compensation increases, as well as payments to outside vendors, required to maintain our product development efforts.

Sales and marketing expenses. Sales and marketing expenses of $248,327 for the quarter ended March 31, 2013 represented an increase of 24% from sales and marketing expenses of $200,018 for the quarter ended March 31, 2012. This increase resulted primarily from increased advertising outlays.

General and administrative expenses. General and administrative expenses were $337,981 for the quarter ended March 31, 2013, which represented an increase of 10% over the $306,584 spent in the same quarter a year ago. This increase results from additional public company expense, and from consulting fees paid to a director.

Other income. The increase in other income resulted from a recovery of principal from the Tipping Point loan in the quarter ended March 31, 2013.

Net income. Net income was $142,009 for the quarter ended March 31, 2013 compared to net income of $119,708 for the quarter ended March 31, 2012. This increase of $22,301, or 19%, was the result of an increase in gross profit, offset in part by increased operating expenses as described above, as well as an increase in the provision for federal and state income taxes of $5,506.

Trends and Uncertainties That May Affect Future Results

Although revenues in 2013 are up slightly compared to revenues in 2012, we received several orders from international customers and from OEM customers in 2012 that are not expected to repeat in future periods. 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 2013 operating plan is focused on growing sales, increasing gross profits, increasing research and development costs as appropriate while increasing profits and positive cash flows. We cannot predict with certainty the expected sales, gross profit, net income or loss and usage of cash and cash equivalents for 2013. 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.

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 May 11, 2004, we entered into a credit facility agreement with Citywide Bank, which was renewed for one year in May 2012. The terms of the credit facility include a line of credit for $150,000, which matures on June 1, 2013 at an interest rate calculated at prime rate plus 1%, and all of which was available at March 31, 2013. Our borrowing under the credit facility is limited by our eligible receivables and inventory at the time of borrowing. At March 31, 2013 and December 31, 2012 we had not borrowed any amounts from the credit facility. The credit facility requires us to meet certain financial covenants. At March 31, 2013 and at March 31, 2012, we were in compliance with the financial covenants.

As of March 31, 2013, cash and cash equivalents were $2,126,187, trade accounts receivable were $642,107 and current liabilities were $660,975 resulting in a net liquid asset amount of $2,107,319. 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, which are required in order for us to maintain profitability. If these revenues are not achieved on a timely basis, we will be required to implement cost reduction measures, as necessary.

We made a loan of $62,500 to Tipping Point, Inc. (“TPI”), an early stage company, during Q2 of 2011. Although the loan has been paid down by $25,000, a repayment of $3,000 in the first quarter of 2013 we do not expect to realize any significant sales to TPI in the near term. We have provided a reserve against the full amount of the loan, leaving a net amount of $0, which is not included in our balance sheet at March 31, 2013. Two of our directors formerly served as directors of TPI.

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 operations. For the quarter ended March 31, 2013 and for the quarter ended March 31, 2012, warranty costs were not deemed significant.

Critical Accounting Policies and Estimates

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 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 provide for the estimated cost of product warranties at the time sales are recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, we have experienced some costs related to warranties. The warranty accrual is based on historical experience and is adjusted based on current experience. Should actual warranty experience differ from our estimates, revisions to the estimated warranty liability would be required.

We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based on 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. To the extent that our estimates prove to be too high, and we ultimately utilize or sell inventory previously determined to be impaired, we may record a reversal of the provision in the period of such determination.

We recognize deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, are not expected to be realized. Should we maintain sufficient, sustained income in the future, we may conclude that all or some of the valuation allowance should be reversed.

Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally three to five years. We use the double declining method of depreciation for property and equipment. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.

We amortize our patent costs over their estimated useful lives, which is typically the remaining statutory life. From time to time, we may be required to adjust these useful lives of our patents based on advances in technology, competitor actions, and the like. We review the recorded amounts of patents at each period end to determine if their carrying amount is still recoverable based on our expectations regarding sales of related products. Such an assessment, in the future, may result in a conclusion that the assets are impaired, with a corresponding charge against earnings.

We recognize revenue from product sales 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.

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.

Deferred revenues arise from service contracts and from extended warranty contracts. Those revenues are recognized on a straight-line basis over the life of the contract, which generally are written for one year. However, there are occasions when they are written for longer terms up to four years. In those cases, the revenues from that portion of the contract that extend beyond one year are shown in our balance sheet as long term. Deferred revenues also result from progress payments received on development contracts; those revenues are recognized when the contract is complete. All development contracts are for less than one year and all deferred revenues from this source are shown in our balance sheet as short term.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4 – CONTROLS AND PROCEDURES

Our Chief Executive Officer and Principal Accounting Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were not effective as of March 31, 2013 because of the material weaknesses in our internal control over financial reporting discussed below.

1.	Insufficient access to appropriate technical research materials and sufficient technical accounting knowledge within the accounting department related to accounting for complex transactions and to evolving generally accepted accounting principles.

2.	Insufficient technical accounting knowledge within the audit committee to adequately provide oversight of the Company’s accounting and reporting functions.

Because of the material weaknesses identified above, a reasonable possibility exists that a material misstatement in our financial statements will not be prevented or detected on a timely basis. However, our Chief Executive Officer and Principal Accounting Officer believe that the financial statements included in this quarterly report on Form 10-Q present, in all material respects, our financial position, results of operations and cash flows for the periods presented, in conformity with U.S. GAAP.

Plan for Remediation of Material Weaknesses

The remediation efforts outlined below are intended to address the identified material weaknesses in internal control over financial reporting.

1.	We have acquired access to additional technical research materials and have evaluated the need to retain additional personnel to enable our accounting department to adequately respond to changes in our operations and to changes within generally accepted accounting principles.

2.	We will attempt to recruit a new director to be appointed to our audit committee with the required credentials to serve as our audit committee financial expert.

On May 8, 2013, our Board appointed Dr. Wayne Willkomm to replace Dr. Robert Greenlee as chair of our audit committee. We will consider the results of our remediation efforts and related testing as part of our year-end 2013 assessment of the effectiveness of our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

Except as otherwise noted above, there were no significant changes in our internal control over financial reporting during the period ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Our management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that the Company’s disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of business. As of the date of this filing, there are no material pending or overtly threatened legal actions against us of which we are aware.

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, 2012, 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

On January 10, 2013 we sold 3,333 shares of our common stock and on February 15, 2013 we sold 6,667 shares of our common stock, in both cases to an officer and director at $1.52 per share pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. The full purchase price was paid in cash.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

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
3.1		Articles of Incorporation, dated as of December 29, 1983 (1)
3.2		Articles of Amendment to the Articles of Incorporation, dated as of July 10, 1986 (1)
3.3		Articles of Amendment to the Articles of Incorporation, dated as of August 18, 1986 (1)
3.4		Articles of Amendment to the Articles of Incorporation, dated as of April 18, 1988 (1)
3.5		Articles of Amendment to the Articles of Incorporation, dated as of April 1, 1991 (1)
3.6		Articles of Amendment to the Articles of Incorporation, dated as of May 10, 1993 (1)
3.7		Articles of Amendment to the Articles of Incorporation, dated as of May 11, 1992 (1)
3.8		Articles of Amendment to the Articles of Incorporation, dated as of November 17, 1997 (1)
3.9		Articles of Amendment to the Articles of Incorporation, dated as of July 15, 1998 (1)
3.10		Articles of Amendment to the Articles of Incorporation, dated as of April 1, 1994 (1)
3.11		Bylaws (1)
4.1		Form of Certificate representing Common Stock (1)
10.1		2013 Stock Option Plan
10.2		Lease by and between Lifeloc Technologies, Inc. and Ward West Properties LLC, dated December 12, 2006 (1)
10.3		First Lease Amendment and Extension, dated May 1, 2011, to the Lease by and between Lifeloc Technologies, Inc. and Ward West Properties LLC, dated December 12, 2006 (1)
10.4		Contract No. 071B0200005 between the State of Michigan and Lifeloc Technologies, Inc., dated October 5, 2009 (1)
10.5		Technology Transfer Agreement between Lifeloc Technologies, Inc. and Fuel Cell Sensors, dated June 1, 2011 (1)
10.6		Form of Standard Distribution Agreement (1)
10.7		Business Loan Agreement between Lifeloc Technologies, Inc. and Citywide Banks, dated May 11, 2011, as amended (1)
10.8		Representation Agreement between Crossco Manufacturers Representatives, Inc. and Lifeloc Technologies, Inc., dated February 2, 2009 (2)
31.1		Certification of Principal Executive Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002
31.2		Certification of Principal Financial Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		Interactive Date Files Pursuant to Rule 405 of Regulation S-T.

(1)	Incorporated by reference to our Registration Statement on Form 10-12G, filed on March 31, 2011.

(2)	Incorporated by reference to our Registration Statement on Form 10-12G (Amendment 1), filed on May 11, 2011.

SIGNATURE

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.

May 8, 2013	By:	/s/ Barry R. Knott
Date		Barry R. Knott
		President and Chief Executive Officer (Principal Executive Officer)

May 8, 2013	By:	/s/ Kristie L. LaRose
Date		Kristie L. LaRose
		Vice President of Finance and Administration (Principal Accounting Officer)

Exhibit Index

Exhibit No.		Description of Exhibit
3.1		Articles of Incorporation, dated as of December 29, 1983 (1)
3.2		Articles of Amendment to the Articles of Incorporation, dated as of July 10, 1986 (1)
3.3		Articles of Amendment to the Articles of Incorporation, dated as of August 18, 1986 (1)
3.4		Articles of Amendment to the Articles of Incorporation, dated as of April 18, 1988 (1)
3.5		Articles of Amendment to the Articles of Incorporation, dated as of April 1, 1991 (1)
3.6		Articles of Amendment to the Articles of Incorporation, dated as of May 10, 1993 (1)
3.7		Articles of Amendment to the Articles of Incorporation, dated as of May 11, 1992 (1)
3.8		Articles of Amendment to the Articles of Incorporation, dated as of November 17, 1997 (1)
3.9		Articles of Amendment to the Articles of Incorporation, dated as of July 15, 1998 (1)
3.10		Articles of Amendment to the Articles of Incorporation, dated as of April 1, 1994 (1)
3.11		Bylaws (1)
4.1		Form of Certificate representing Common Stock (1)
10.1		2013 Stock Option Plan
10.2		Lease by and between Lifeloc Technologies, Inc. and Ward West Properties LLC, dated December 12, 2006 (1)
10.3		First Lease Amendment and Extension, dated May 1, 2011, to the Lease by and between Lifeloc Technologies, Inc. and Ward West Properties LLC, dated December 12, 2006 (1)
10.4		Contract No. 071B0200005 between the State of Michigan and Lifeloc Technologies, Inc., dated October 5, 2009 (1)
10.5		Technology Transfer Agreement between Lifeloc Technologies, Inc. and Fuel Cell Sensors, dated June 1, 2011 (1)
10.6		Form of Standard Distribution Agreement (1)
10.7		Business Loan Agreement between Lifeloc Technologies, Inc. and Citywide Banks, dated May 11, 2011, as amended (1)
10.8		Representation Agreement between Crossco Manufacturers Representatives, Inc. and Lifeloc Technologies, Inc., dated February 2, 2009 (2)
31.1		Certification of Principal Executive Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002
31.2		Certification of Principal Financial Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		Interactive Date Files Pursuant to Rule 405 of Regulation S-T.

(1)	Incorporated by reference to our Registration Statement on Form 10-12G, filed on March 31, 2011.

(2)	Incorporated by reference to our Registration Statement on Form 10-12G (Amendment 1), filed on May 11, 2011.

Lifeloc Technologies, Inc - FORM 10-Q - May 8, 2013

Attached files

Lifeloc Technologies, Inc Reports