Lifeloc Technologies, Inc - FORM 10-Q

Attached files

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

UNITED STATES

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 September 30, 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*

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

Indicate by check mark whether the registrant has submitted electronically 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 November 7, 2013)

LIFELOC TECHNOLOGIES, INC.

FORM 10-Q

For the Three Months Ended September 30, 2013

INDEX

				Page
				Number

PART I. FINANCIAL INFORMATION				3

	ITEM 1		FINANCIAL STATEMENTS (UNAUDITED)	3

		-	Condensed Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012	3
		-	Condensed Statements of Income (Unaudited) for the three months ended September 30, 2013 and 2012	4
		-	Condensed Statements of Income (Unaudited) for the nine months ended September 30, 2013 and 2012	5
		-	Condensed Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2013 and 2012	6
		-	Notes to Condensed Financial Statements (Unaudited)	7

	ITEM 2		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	10

	ITEM 4		CONTROLS AND PROCEDURES	13

PART II. OTHER INFORMATION				14

	ITEM 1		LEGAL INFORMATION	14

	ITEM 1A		RISK FACTORS	14

	ITEM 2		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	14

	ITEM 6		EXHIBITS	15

SIGNATURE				16

PART I FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

LIFELOC TECHNOLOGIES, INC.

Condensed Balance Sheets

ASSETS
	September 30,
	2013			December 31,
CURRENT ASSETS:	(Unaudited)			2012
Cash	$	2,835,657		$	2,338,012
Accounts receivable, net		745,967			405,321
Installment receivables		3,409			-
Inventories, net		886,959			832,670
Income taxes receivable		113,651			174,129
Deferred taxes		91,209			130,172
Prepaid expenses and other		78,895			31,529
Total current assets		4,755,747			3,911,833

PROPERTY AND EQUIPMENT, at cost:
Production equipment		278,119			258,703
Office equipment		153,494			144,202
Sales and marketing equipment		177,701			175,344
Purchased software		52,883			46,203
Less accumulated depreciation		(466,227	)		(365,728	)
Total property and equipment, net		195,970			258,724

OTHER ASSETS:
Technology licenses, net		13,332			55,139
Patents, net		34,942			11,953
Deferred taxes, long term		6,114			2,112
Deposits and other		54,788			54,704
Total other assets		109,176			123,908

Total assets	$	5,060,893		$	4,294,465

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	322,384		$	82,796
Customer deposits		5,882			294
Accrued expenses		311,280			278,324
Deferred income, current portion		63,412			158,527
Reserve for warranty expense		25,350			23,100
Total current liabilities		728,308			543,041

DEFERRED INCOME, net of current portion		16,091			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)		(8,403	)		(563,832	)
Total stockholders' equity		4,316,494			3,745,865

Total liabilities and stockholders' equity	$	5,060,893		$	4,294,465

See accompanying notes

LIFELOC TECHNOLOGIES, INC.

Condensed Statements of Income (Unaudited)


	Three Months Ended September 30,
	2013		2012
REVENUES:
Product sales	$	2,230,245	$	1,690,594
Royalties		46,100		67,874
Total		2,276,345		1,758,468

COST OF SALES		1,204,553		928,391

GROSS PROFIT		1,071,792		830,077

OPERATING EXPENSES:
Research and development		218,527		144,450
Sales and marketing		321,401		210,979
General and administrative		327,286		255,459
Total		867,214		610,888

OPERATING INCOME		204,578		219,189

OTHER INCOME (EXPENSE):
Interest income		5,375		4,319
Bad debt recovery		3,000		3,000
Total		8,375		7,319

NET INCOME BEFORE PROVISION FOR TAXES		212,953		226,508

PROVISION FOR FEDERAL AND STATE INCOME TAXES		26,962		(72,091	)

NET INCOME	$	239,915	$	154,417

NET INCOME PER SHARE, BASIC	$	0.10	$	0.06

NET INCOME PER SHARE, DILUTED	$	0.10	$	0.06

WEIGHTED AVERAGE SHARES, BASIC		2,432,416		2,422,416

WEIGHTED AVERAGE SHARES, DILUTED		2,432,416		2,445,416

See accompanying notes

LIFELOC TECHNOLOGIES, INC.

Condensed Statements of Income (Unaudited)


	Nine Months Ended September 30,
	2013			2012
REVENUES:
Sales	$	5,994,831		$	5,032,144
Royalties		298,912			184,450
Total		6,293,743			5,216,594

COST OF SALES		3,218,861			2,781,411

GROSS PROFIT		3,074,882			2,435,183

OPERATING EXPENSES:
Research and development		642,796			377,279
Sales and marketing		844,244			625,426
General and administrative		947,731			838,375
Total		2,434,771			1,841,080

OPERATING INCOME		640,111			594,103

OTHER INCOME (EXPENSE):
Interest income		12,997			12,006
Bad debt recovery		8,000			9,000
Total		20,997			21,006

NET INCOME BEFORE PROVISION FOR TAXES		661,108			615,109

PROVISION FOR FEDERAL AND STATE INCOME TAXES		(105,679	)		(208,549	)

NET INCOME	$	555,429		$	406,560

NET INCOME PER SHARE, BASIC	$	0.23		$	0.17

NET INCOME PER SHARE, DILUTED	$	0.23		$	0.17

WEIGHTED AVERAGE SHARES, BASIC		2,430,912			2,422,416

WEIGHTED AVERAGE SHARES, DILUTED		2,430,912			2,445,416

See accompanying notes

LIFELOC TECHNOLOGIES, INC.

Condensed Statements of Cash Flows (Unaudited)


	Nine Months Ended September 30,
CASH FLOWS FROM OPERATING ACTIVITIES:	2013			2012
Net income	$	555,429		$	406,560
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization		144,032			126,563
Deferred taxes		34,961			(46,501	)
Reserve for warranty expense		2,250			5,100
Changes in operating assets and liabilities-
Accounts receivable		(340,646	)		(156,027	)
Installment receivables		(3,409	)		-
Inventories		(54,289	)		172,727
Income taxes receivable		60,478			-
Prepaid expenses and other		(47,366	)		(23,263	)
Deposits and other		(84	)		2,404
Accounts payable		239,588			197,786
Customer deposits		5,588			(2,128	)
Accrued expenses		32,956			(202,041	)
Deferred income		(84,583	)		99,529
Net cash provided from
operating activities		544,905			580,709

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(37,745	)		(84,944	)
Purchase of patents		(24,715	)		-

Net cash (used in) investing activities		(62,460	)		(84,944	)

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

NET INCREASE IN CASH		497,645			495,765

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

CASH, END OF PERIOD	$	2,835,657		$	2,340,567

Supplemental cash flow disclosure:
Cash paid for income taxes	$	12,825		$	247,276

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 third 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 $30,000, including a repayment of $3,000 in the third 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 September 30, 2013. This note has a provision entitling us to convert any outstanding balance into stock of TPI. 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 September 30, 2013 and December 31, 2012, inventory consisted of the following:

	2013			2012
Raw materials & deposits	$	380,563		$	271,865
Work-in-process		122,237			126,209
Finished goods		444,099			479,596
Total gross inventories		946,899			877,670
Less reserve for obsolescence		(59,940	)		(45,000	)
Total net inventories	$	886,959		$	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.

In August, 2013 we discovered there were federal tax credits available to the Company. We filed amended federal and state tax income returns for 2010, 2011 and 2012 to take advantage of the Domestic Production Activities Deduction; thus we adjusted our income tax provision by $92,398 during the current quarter.

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.

Deferred revenues arising from installment receivables are recognized as sales when collected. Service contracts are booked as sales over their life on a straight-line basis; development contracts are considered as sales when they are complete. 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 installment receivables, from service contracts and from development contracts. Deferred revenues from installment receivables are recognized as sales when collected, generally over two years. Revenues from service contracts are recognized on a straight-line basis over the life of the contract, generally one year. However, there are occasions when they are written for longer terms up to four years. The revenues from that portion of the contract that extend beyond one year and from that portion of installment receivables 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, short-term installment 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 per share. Basic net income 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 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
	September 30, 2013		September 30, 2012
Net income	$	239,915	$	154,417
Weighted-average shares — basic		2,432,416		2,422,416
Effect of dilutive potential common shares		-		23,000
Weighted-average shares — diluted		2,432,416		2,445,416
Net income per share — basic	$	0.10	$	0.06
Net income per share — diluted	$	0.10	$	0.06
Antidilutive employee stock options		23,000		-

	Nine months Ended
	September 30, 2013		September 30, 2012
Net income	$	555,429	$	406,560
Weighted-average shares — basic		2,430,912		2,422,416
Effect of dilutive potential common shares		-		23,000
Weighted-average shares — diluted		2,430,912		2,445,416
Net income per share — basic	$	0.23	$	0.17
Net income per share — diluted	$	0.23	$	0.17
Antidilutive employee stock options		23,000		-

4. STOCKHOLDERS’ EQUITY

The following table summarizes information about employee stock options outstanding and exercisable at September 30, 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 September 30, 2013, all are incentive stock options. The exercise price of all options granted through September 30, 2013 has been equal to or greater than the fair market value.

On April 1, 2013 our shareholders approved the adoption of a stock option plan providing for the grant of up to 150,000 shares. None of these options had been granted as of September 30, 2013.

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 nine months ended September 30, 2013, we paid a consulting fee of $15,000 to a director. No consulting fee was paid during the nine months ended September 30, 2012.

6. LINE OF CREDIT

Our line of credit for $150,000 with Citywide Bank matured on June 1, 2013, and was not renewed. There was no balance due on the line of credit as of September 30, 2012.

7. COMMITMENTS

We entered into a development contract in March 2013, which calls for an initial deposit of $31,602, followed by payments totaling $94,804 to be made as work is performed.

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 on October 1, 2013 our board of directors granted 69,000 key employee stock options, exercisable for 5 years at $2.32 per share.

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.

On July 24, 2013, we announced the launch of a new product, the Sentinel breath alcohol access control system, an automated monitoring system that performs high volume "zero tolerance" screening of employees, visitors or contractors in safety sensitive industries such as mining, construction, and oil and gas.

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 September 30, 2013 compared to the three months ended September 30, 3012.

Net sales. Our product sales for the quarter ended September 30, 2013 were $2,230,245, an increase of 32% from $1,690,594 for the quarter ended September 30, 3012. This increase is attributable to an increase in orders from all customers, as well as the completion of a development contract that accounted for $250,000 of the revenue increase. When royalties of $46,100 are included, total revenues of $2,276,345 increased by $517,877, or 29%, for the quarter ended September 30, 2013 when compared to the same quarter a year ago.

Gross profit. Gross profit for the quarter ended September 30, 2013 of $1,071,792 represented an increase of 29% from gross profit of $830,077 for the quarter ended September 30, 3012 as a result of the higher sales volume discussed above. Gross profit as a percentage of product sales decreased from 49% to 48% as a result of a different product mix for the quarter ended September 30, 2013 versus the product mix for the quarter ended September 30, 3012.

Research and development expenses. Research and development expenses were $218,527 for the quarter ended September 30, 2013, representing an increase of 51% over the $144,450 in the same quarter a year ago. This increase resulted from personnel and compensation increases, and from payments to outside vendors, required to maintain our product development efforts.

Sales and marketing expenses. Sales and marketing expenses of $321,401 for the quarter ended September 30, 2013 represented an increase of 52% from sales and marketing expenses of $210,979 for the quarter ended September 30, 3012. This increase resulted primarily from increased advertising outlays, from increased commissions as a result of increased sales volume, and from increased compensation.

General and administrative expenses. General and administrative expenses were $327,286 for the quarter ended September 30, 2013, which represented an increase of 28% over the $255,459 in the same quarter a year ago. This increase results mostly from additional compensation.

Other income. The increase in other income of $1,056 in the quarter ended September 30, 2013 resulted primarily from increased interest income.

Net income. Net income was $239,915 for the quarter ended September 30, 2013 compared to net income of $154,417 for the quarter ended September 30, 3012. This increase of $85,498, or 55%, was the result of an increase in gross profit, offset in part by increased operating expenses as described above, and from a decrease in the provision for federal and state income taxes of $99,053. The decrease in the provision for federal and state income taxes resulted primarily from filing amended income tax returns for 2010, 2011 and 2012.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 3012.

Net sales. Our product sales for the nine months ended September 30, 2013 were $5,994,831, an increase of 19% from $5,032,144 for the nine months ended September 30, 3012. This increase is attributable to an increase in orders from all customers, as well as the completion of a development contract that accounted for $250,000 of the revenue increase. When royalties of $298,912 are included, total revenues of $6,293,743 increased by $1,077,149, or 21%, for the nine months ended September 30, 2013 when compared to the same nine months a year ago.

Gross profit. Gross profit for the nine months ended September 30, 3013 of $3,074,882 represented an increase of 26% from gross profit of $2,435,183 for the nine months ended September 30, 3012. Gross profit as a percentage of sales (gross margins) increased from 48% to 51% as a result of a different product mix as well as economies of scale for the nine months ended September 30, 2013 vs. the nine months ended September 30, 3012.

Research and development expenses. Research and development expenses were $642,796 for the nine months ended September 30, 2013, representing an increase of 70% over the $377,279 in the same nine month period a year ago. This increase resulted from personnel and compensation increases, and from payments to outside vendors, required to maintain our product development efforts.

Sales and marketing expenses. Sales and marketing expenses of $844,244 for the nine months ended September 30, 2013 represented an increase of 35% from sales and marketing expenses of $625,426 for the nine months ended September 30, 3012. This increase resulted primarily from increased advertising outlays, from increased commissions as a result of increased sales volume, and from increased compensation.

General and administrative expenses. General and administrative expenses were $947,731 for the nine months ended September 30, 2013, which represented an increase of 13% over the $838,375 spent in the same nine month period a year earlier. This increase results mostly from additional compensation.

Net income. Net income was $555,429 for the nine months ended September 30, 2013 compared to net income of $406,560 for the nine months ended September 30, 3012. This increase of $148,869, or 37%, was the result of an increase in gross profit, offset in part by increased operating expenses as described above, and from a decreased provision for federal and state income taxes of $102,870. The decrease in the provision for federal and state income taxes resulted primarily from filing amended income tax returns for 2010, 2011 and 2012.

Trends and Uncertainties That May Affect Future Results

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 June 1, 2013, our credit facility agreement with Citywide Bank, matured and was not renewed. The terms of the credit facility included a line of credit for $150,000 at an interest rate calculated at prime rate plus 1%. At December 31, 2012, we had not borrowed any amounts from the credit facility. The credit facility required us to meet certain financial covenants. At December 31, 2012, we were in compliance with the financial covenants.

As of September 30, 2013, cash was $2,835,657, trade accounts receivable, including installment receivables, were $749,376 and current liabilities were $728,308 resulting in a net liquid asset amount of $2,856,725. 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 $30,000, including a repayment of $3,000 in the third 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 September 30, 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 income. For the quarter ended September 30, 2013 and for the quarter ended September 30, 3012, 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 an allowance 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 arising from installment receivables are recognized as sales when collected. Service contracts are booked as sales over their life on a straight-line basis, generally one to two years. 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. 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. During the quarter ended June 30, 2013, we adopted the policy of retaining such leases as opposed to leasing through unrelated third parties. 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. Supplies are recognized as sales when they are shipped. Training revenues are recognized at the time the training occurs.

ITEM 4 – CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2013.

(b) Changes in Internal Control over Financial Reporting

Prior to this quarter our management determined that our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting discussed below:

1.	Insufficient access to appropriate technical research materials and insufficient 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.

We have updated our internal controls to include acquiring access to additional technical research materials and we 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.

We have also appointed a new director to our audit committee with the required credentials to serve as our audit committee financial expert.

Management has evaluated the effectiveness of our internal controls over financial reporting and believes that the material weaknesses which previously existed at December 31st, 2012; March 31, 2013 and June 30, 2013 have been fully remediated as of September 30, 2013.

There have been no other changes in our internal controls over financial reporting during the most recent fiscal quarter that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting other than the control deficiency discussed above.

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

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
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.

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.

November 12, 2013	By:	/s/ Barry R. Knott
Date		Barry R. Knott
		President and Chief Executive Officer (Principal Executive Officer)

November 12, 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
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.

Lifeloc Technologies, Inc - FORM 10-Q - November 12, 2013

Attached files

Lifeloc Technologies, Inc Reports