Lifeloc Technologies, Inc - Quarter Report: 2012 September (Form 10-Q)
UNITED STATE
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2012
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission file number 000-54319
LIFELOC TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Colorado
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84-1053680
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company x
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(Do not check if a smaller reporting company)
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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:
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Common Stock, no par value
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2,422,416 Shares
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(Class)
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(outstanding at November 2, 2012)
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LIFELOC TECHNOLOGIES, INC.
FORM 10-Q
For the Nine Months Ended September 30, 2012
INDEX
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Page
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Number
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PART I. FINANCIAL INFORMATION
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3
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ITEM 1
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FINANCIAL STATEMENTS
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-
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Condensed Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011
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3
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-
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Condensed Statements of Income (Unaudited) for the three months ended September 30, 2012 and 2011
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4
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Condensed Statement of Income (Unaudited) for the nine months ended September 30, 2012 and 2011
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5 | |||
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-
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Condensed Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2012 and 2011
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6
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-
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Notes to Condensed Financial Statements (Unaudited)
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7
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ITEM 2
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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10
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ITEM 3
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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14
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ITEM 4
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CONTROLS AND PROCEDURES
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14
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PART II. OTHER INFORMATION
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15
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ITEM 1
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LEGAL PROCEDINGS
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15
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ITEM 1A
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RISK FACTORS
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15
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ITEM 2
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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15
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ITEM 3
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DEFAULTS UPON SENIOR SECURITIES
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15
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ITEM 4
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MINE SAFETY DISCLOSURES
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15
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ITEM 5
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OTHER INFORMATION
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15
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ITEM 6
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EXHIBITS
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15
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SIGNATURE
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17
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2
PART I FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
LIFELOC TECHNOLOGIES, INC.
Condensed Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011
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ASSETS
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September 30,
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2012
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December 31,
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CURRENT ASSETS:
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(Unaudited)
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2011
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Cash
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$ | 2,340,567 | $ | 1,844,802 | ||||
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Accounts receivable, net
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605,863 | 449,836 | ||||||
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Inventories, net
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874,484 | 1,047,211 | ||||||
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Deferred taxes
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133,052 | 87,355 | ||||||
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Prepaid expenses and other
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74,533 | 51,270 | ||||||
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Total current assets
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4,028,499 | 3,480,474 | ||||||
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PROPERTY AND EQUIPMENT, at cost:
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Production equipment
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238,750 | 207,642 | ||||||
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Office equipment
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141,616 | 107,982 | ||||||
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Sales and marketing equipment
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159,513 | 150,513 | ||||||
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Purchased software
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39,557 | 38,157 | ||||||
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Leasehold improvements
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8,746 | - | ||||||
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Less accumulated depreciation
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(346,677 | ) | (256,364 | ) | ||||
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Total property and equipment, net
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241,505 | 247,930 | ||||||
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OTHER ASSETS:
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Technology licenses, net
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67,222 | 103,472 | ||||||
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Patents, net
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14,208 | 13,152 | ||||||
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Deferred taxes, long term
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3,186 | 2,382 | ||||||
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Deposits and other
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23,657 | 26,061 | ||||||
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Total other assets
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108,273 | 145,067 | ||||||
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Total assets
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$ | 4,378,277 | $ | 3,873,471 | ||||
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
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Accounts payable
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$ | 255,561 | $ | 57,775 | ||||
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Customer deposits
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219 | 2,347 | ||||||
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Accrued expenses
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250,525 | 452,566 | ||||||
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Deferred income, current portion
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165,799 | 68,384 | ||||||
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Reserve for warranty expense
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24,350 | 19,250 | ||||||
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Total current liabilities
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696,454 | 600,322 | ||||||
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DEFERRED INCOME, net of current portion
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8,383 | 6,269 | ||||||
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COMMITMENTS AND CONTINGENCIES
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STOCKHOLDERS' EQUITY:
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Common stock, no par value; 50,000,000 shares
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authorized, 2,422,416 shares outstanding
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4,309,697 | 4,309,697 | ||||||
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Accumulated (deficit)
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(636,257 | ) | (1,042,817 | ) | ||||
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Total stockholders' equity
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3,673,440 | 3,266,880 | ||||||
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Total liabilities and stockholders' equity
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$ | 4,378,277 | $ | 3,873,471 | ||||
See accompanying notes.
3
LIFELOC TECHNOLOGIES, INC.
Condensed Statements of Income (Unaudited) for the three months ended September 30, 2012 and 2011
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Three Months Ended September 30,
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2012
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2011
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SALES
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$ | 1,758,468 | $ | 1,989,354 | ||||
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COST OF SALES
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928,391 | 1,071,323 | ||||||
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GROSS PROFIT
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830,077 | 918,031 | ||||||
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OPERATING EXPENSES:
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Research and development
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144,450 | 125,763 | ||||||
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Sales and marketing
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210,979 | 263,875 | ||||||
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General and administrative
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255,459 | 241,283 | ||||||
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Total
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610,888 | 630,921 | ||||||
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OPERATING INCOME
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219,189 | 287,110 | ||||||
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OTHER INCOME (EXPENSE):
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Interest income
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4,319 | 3,959 | ||||||
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Bad debt recovery
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3,000 | - | ||||||
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Total
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7,319 | 3,959 | ||||||
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NET INCOME BEFORE PROVISION FOR TAXES
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226,508 | 291,069 | ||||||
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PROVISION FOR FEDERAL AND STATE INCOME TAXES
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(72,091 | ) | (107,688 | ) | ||||
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NET INCOME
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$ | 154,417 | $ | 183,381 | ||||
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NET INCOME PER SHARE, BASIC
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$ | 0.06 | $ | 0.08 | ||||
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NET INCOME PER SHARE, DILUTED
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$ | 0.06 | $ | 0.08 | ||||
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WEIGHTED AVERAGE SHARES, BASIC
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2,422,416 | 2,422,416 | ||||||
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WEIGHTED AVERAGE SHARES, DILUTED
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2,445,416 | 2,422,416 | ||||||
See accompanying notes.
4
LIFELOC TECHNOLOGIES, INC.
Condensed Statements of Income (Unaudited) for the nine months ended September 30, 2012 and 2011
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Nine Months Ended September 30,
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2012
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2011
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SALES
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$ | 5,216,594 | $ | 6,324,042 | ||||
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COST OF SALES
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2,781,411 | 3,424,693 | ||||||
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GROSS PROFIT
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2,435,183 | 2,899,349 | ||||||
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OPERATING EXPENSES:
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Research and development
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377,279 | 343,515 | ||||||
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Sales and marketing
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625,426 | 772,753 | ||||||
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General and administrative
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838,375 | 782,645 | ||||||
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Total
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1,841,080 | 1,898,913 | ||||||
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OPERATING INCOME
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594,103 | 1,000,436 | ||||||
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OTHER INCOME (EXPENSE):
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Interest income
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12,006 | 9,480 | ||||||
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Bad debt recovery
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9,000 | - | ||||||
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Total
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21,006 | 9,480 | ||||||
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NET INCOME BEFORE PROVISION FOR TAXES
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615,109 | 1,009,916 | ||||||
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PROVISION FOR FEDERAL AND STATE INCOME TAXES
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(208,549 | ) | (337,299 | ) | ||||
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NET INCOME
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$ | 406,560 | $ | 672,617 | ||||
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NET INCOME PER SHARE, BASIC
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$ | 0.17 | $ | 0.28 | ||||
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NET INCOME PER SHARE, DILUTED
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$ | 0.17 | $ | 0.28 | ||||
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WEIGHTED AVERAGE SHARES, BASIC
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2,422,416 | 2,422,416 | ||||||
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WEIGHTED AVERAGE SHARES, DILUTED
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2,445,416 | 2,422,416 | ||||||
See accompanying notes.
5
LIFELOC TECHNOLOGIES, INC.
Condensed Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2012 and 2011
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Nine Months Ended September 30,
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CASH FLOWS FROM OPERATING ACTIVITIES:
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2012
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2011
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Net income
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$ | 406,560 | $ | 672,617 | ||||
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Adjustments to reconcile net income to net cash
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provided by (used in) operating activities-
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Depreciation and amortization
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126,563 | 104,964 | ||||||
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Provision for bad debt
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- | 50,000 | ||||||
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Deferred taxes
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(46,501 | ) | (30,425 | ) | ||||
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Changes in operating assets and liabilities-
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Accounts receivable
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(156,027 | ) | (548,018 | ) | ||||
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Inventories
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172,727 | (97,602 | ) | |||||
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Prepaid expenses and other
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(23,263 | ) | (25,875 | ) | ||||
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Deposits and other
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2,404 | (500 | ) | |||||
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Accounts payable
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197,786 | (40,121 | ) | |||||
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Customer deposits
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(2,128 | ) | (126,503 | ) | ||||
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Accrued expenses
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(202,041 | ) | 50,043 | |||||
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Deferred income
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99,529 | (16,669 | ) | |||||
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Reserve for warranty expense
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5,100 | 3,000 | ||||||
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Net cash provided from (used in)
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operating activities
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580,709 | (5,089 | ) | |||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchases of property and equipment, and patents
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(84,944 | ) | (127,112 | ) | ||||
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Purchase of technology license
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- | (25,000 | ) | |||||
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Note receivable, funds advanced
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- | (52,500 | ) | |||||
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Net cash (used in) investing activities
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(84,944 | ) | (204,612 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES
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- | - | ||||||
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NET INCREASE (DECREASE) IN CASH
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495,765 | (209,701 | ) | |||||
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CASH, BEGINNING OF PERIOD
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1,844,802 | 1,461,900 | ||||||
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CASH, END OF PERIOD
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$ | 2,340,567 | $ | 1,252,199 | ||||
See accompanying notes.
6
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 2012. 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, 2011 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 $19,000, 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 of $43,500, leaving a net amount of $0 included in our balance sheet at September 30, 2012. This note has a provision entitling us to convert any outstanding balance into stock of TPI. TPI is considered a related party as certain of our board members were also TPI board members during a portion of 2011.
Inventories. Inventories are stated at the lower of cost (first-in, first-out basis) or market. We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. At September 30, 2012 and December 31, 2011, inventory consisted of the following:
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2012
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2011
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Raw materials & deposits
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$ | 387,000 | $ | 329,649 | ||||
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Work-in-process
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96,064 | 191,079 | ||||||
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Finished goods
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438,466 | 576,483 | ||||||
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Total gross inventories
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921,530 | 1,097,211 | ||||||
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Less reserve for obsolescence
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(47,046 | ) | (50,000 | ) | ||||
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Total net inventories
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$ | 874,484 | $ | 1,047,211 | ||||
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.
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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.
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.
Reclassification. Certain items reported in the three month and nine month periods ended September 30, 2011 have been reclassified to conform to the three month and nine month periods ended September 30, 2012 presentation. Such reclassifications had no effect on net income.
Change in Accounting Policy. During the quarter ended March 31, 2012, management changed its policy of accounting for shipping and handling costs. The Company now classifies freight billed to customers as sales revenue and the related freight cost as cost of sales. The change to the accounting policy was made in order to better manage this facet of operations as a profit center. As required, the 2011 presentation has been updated to reflect this change in accounting policy. As such, sales and cost of sales have been increased by $65,686 and $183,706 respectively for the three and nine months ended September 30, 2011.
Recent Accounting Pronouncements. We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.
3. BASIC AND DILUTED INCOME PER COMMON SHARE
We report both basic and diluted net income (loss) per share. Basic net income or loss per common share is computed by dividing net income or loss for the period by the weighted average number of common shares outstanding for the period. Diluted net income or loss per common share is computed by dividing the net income or loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. The shares used in the calculation of dilutive potential common shares exclude options to purchase shares where the exercise price was greater than the average market price of common shares for the period.
The following table presents the calculation of basic and diluted net income (loss) per share:
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Three Months Ended
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September 30, 2012
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September 30, 2011
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Net income
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$ | 154,417 | $ | 183,381 | ||||
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Weighted-average shares — basic
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2,422,416 | 2,422,416 | ||||||
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Effect of dilutive potential common shares
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23,000 | 0 | ||||||
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Weighted-average shares — diluted
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2,445,416 | 2,422,416 | ||||||
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Net income per share — basic
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$ | 0.06 | $ | 0.08 | ||||
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Net income per share — diluted
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$ | 0.06 | $ | 0.08 | ||||
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Antidilutive employee stock options
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0 | 0 | ||||||
4. STOCKHOLDERS’ EQUITY
The total number of authorized shares of common stock continues to be 50,000,000, with no change in the par value per share.
8
5. 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 December 31, 2011 and September 30, 2012.
6. 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.
9
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, 2011 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 September 30, 2012 compared to the three months ended September 30, 2011.
Net sales. Our sales for the quarter ended September 30, 2012 were $1,758,468, a decrease of 12% from $1,989,354 for the quarter ended September 30, 2011. This decrease is attributable primarily to OEM orders in 2011 that were not repeated in Q3 of 2012.
Gross profit. Gross profit for the quarter ended September 30, 2012 of $830,077 represented a decrease of 10% from gross profit of $918,031 for the quarter ended September 30, 2011. Gross profit as a percentage of sales (gross margins) increased from 46% to 47% for the quarter ended September 30, 2012 as compared to the quarter ended September 30, 2011, primarily as the result of a changed sales mix of products with a higher margin.
10
Research and development expenses. Research and development expenses were $144,450 for the quarter ended September 30, 2012, representing an increase of $18,687 over the $125,763 in the same quarter a year ago. This increase resulted from our continuing efforts to upgrade our product lines.
Sales and marketing expenses. Sales and marketing expenses of $210,979 for the quarter ended September 30, 2012 represented a decrease of 20% from sales and marketing expenses of $263,875 for the quarter ended September 30, 2011. This decrease resulted from reduced lower commissions resulting from reduced commissionable sales, and from a staff reduction.
General and administrative expenses. General and administrative expenses were $255,459 for the quarter ended September 30, 2012, which represented an increase of 6% over the $241,283 spent in the same quarter a year earlier. This increase results from increased compensation resulting from additional personnel, offset in part by a decrease in bonus compensation due to decreased profitability.
Other income. Interest income stayed relatively consistent at $4,319 in the quarter ended September 30, 2012 compared to $3,959 in the quarter ended September 30, 2011. We recovered $3,000 on the Tipping Point, Inc. loan, which accounted for all of the bad debt recovery in the quarter ended September 30, 2012.
Net income. Net income was $154,417 for the quarter ended September 30, 2012 compared to net income of $183,381 for the quarter ended September 30, 2011. This decrease of 16% was the result of a decrease in sales and gross profit, offset in part by a reduction in the provision for federal and state income taxes of $35,597 as well as in changes in operating expenses as described above.
For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.
Net sales. Our sales for the nine months ended September 30, 2012 were $5,216,594, a decrease of 18% from $6,324,042 for the nine months ended September 30, 2011. This decrease is in large part attributable to a new order for $650,000 that was shipped to an international customer during 2011 and did not repeat in 2012, and also to a 2011 OEM order that did not repeat in 2012.
Gross profit. Gross profit for the nine months ended September 30, 2012 of $2,435,183 represented a decrease of 16% from gross profit of $2,899,349 for the nine months ended September 30, 2011, which is in line with the decrease in sales. Gross profit as a percentage of sales (gross margins) stayed relatively constant at 47%.
Research and development expenses. Research and development expenses were $377,279 for the nine months ended September 30, 2012, representing an increase of 10% over the $343,515 in the same nine month period a year ago. This increase resulted from increased staffing as a result of additional development work.
Sales and marketing expenses. Sales and marketing expenses of $625,426 for the nine months ended September 30, 2012 represented a decrease of 19% from sales and marketing expenses of $772,753 for the nine months ended September 30, 2011. This decrease resulted from lower commissions resulting from reduced commissionable sales as well as from a reduction of personnel.
General and administrative expenses. General and administrative expenses were $838,375 for the nine months ended September 30, 2012, which represented an increase of 7% over the $782,645 spent in the same nine month period a year earlier. This increase results from increased compensation as a result of additional personnel in the nine months ended September 30, 2012, and by increases in expenses related to becoming a publicly traded company.
11
Other income. Interest income increased from $9,480 in the nine months ended September 30, 2011 to $12,006 in the nine months ended September 30, 2012 primarily as the result of a larger amount of cash available for investment. We recovered $9,000 on the Tipping Point, Inc. loan, which accounted for all of the bad debt recovery in the nine months ended September 30, 2012 versus $0 in the nine months ended September 30, 2011.
Net income. Net income was $406,560 for the nine months ended September 30, 2012 compared to net income of $672,617 for the nine months ended September 30, 2011. This decrease of 40% was the result of lower sales, offset in part by a decreased provision for federal and state income taxes of $128,750.
Trends and Uncertainties That May Affect Future Results
Revenues in 2012 are down compared to revenues in 2011, as we received several orders from international customers and from OEM customers in 2011 that did not repeat and that are not expected to repeat in future periods. In addition, we experienced a slowing of orders as a result of the budgetary constraints faced by our customers. 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 2012 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 2012. 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, although we have not engaged in any such capital-raising transactions in the past five years. 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 on May 11, 2012 and which will mature on June 1, 2013. The terms of the credit facility include a line of credit for $150,000 at an interest rate calculated at prime rate plus 1%. Our borrowing under the credit facility is limited by our eligible receivables and inventory at the time of borrowing. At September 30, 2012 and 2011, we had not borrowed any amounts from the credit facility. The credit facility requires us to meet certain financial covenants. At September 30, 2012 and at September 30, 2011, we were in compliance with the financial covenants.
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As of September 30, 2012, cash and cash equivalents were $2,340,567, trade accounts receivable were $605,863 and current liabilities were $696,454, resulting in a net liquid asset amount of $2,249,976. 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 $19,000, 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 $43,500, leaving a net amount of $0 included in our balance sheet at September 30, 2012. 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 September 30, 2012 and for the quarter ended September 30, 2011, 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.
13
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 when title has passed to the customer, provided that we have evidence of a customer arrangement and can conclude that collection is probable. We recognize revenue from sales to stocking distributors when there is no right of return, other than for normal warranty claims.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4 – CONTROLS AND PROCEDURES
(a) Our principal executive officer and principal financial 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 effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure
(b) During the quarter ended September 30, 2012, there were no changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
None.
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, 2011, 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 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:
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Exhibit No.
|
Description of Exhibit
|
|
|
3.1
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Articles of Incorporation, dated as of December 29, 1983 (1)
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|
|
3.2
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Articles of Amendment to the Articles of Incorporation, dated as of July 10, 1986 (1)
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|
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3.3
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Articles of Amendment to the Articles of Incorporation, dated as of August 18, 1986 (1)
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|
|
3.4
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Articles of Amendment to the Articles of Incorporation, dated as of April 18, 1988 (1)
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|
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3.5
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Articles of Amendment to the Articles of Incorporation, dated as of April 1, 1991 (1)
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|
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3.6
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Articles of Amendment to the Articles of Incorporation, dated as of May 10, 1993 (1)
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3.7
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Articles of Amendment to the Articles of Incorporation, dated as of May 11, 1992 (1)
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|
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3.8
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Articles of Amendment to the Articles of Incorporation, dated as of November 17, 1997 (1)
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|
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3.9
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Articles of Amendment to the Articles of Incorporation, dated as of July 15, 1998 (1)
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|
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3.10
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Articles of Amendment to the Articles of Incorporation, dated as of April 1, 1994 (1)
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|
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3.11
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Bylaws (1)
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|
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4.1
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Form of Certificate representing Common Stock (1)
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10.1
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2002 Stock Option Plan (1)
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10.2
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Lease by and between Lifeloc Technologies, Inc. and Ward West Properties LLC, dated December 12, 2006 (1)
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10.3
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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)
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10.4
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Contract No. 071B0200005 between the State of Michigan and Lifeloc Technologies, Inc., dated October 5, 2009 (1)
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15
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10.5
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Technology Transfer Agreement between Lifeloc Technologies, Inc. and Fuel Cell Sensors, dated June 1, 2011 (1)
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|
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10.6
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Form of Standard Distribution Agreement (1)
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10.7
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Business Loan Agreement between Lifeloc Technologies, Inc. and Citywide Banks, dated May 11, 2011, as amended (1)
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10.8
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Representation Agreement between Crossco Manufacturers Representatives, Inc. and Lifeloc Technologies, Inc., dated February 2, 2009 (2)
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31.1
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Certification of Principal Executive Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002
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31.2
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Certification of Principal Financial Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002
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32.1
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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
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32.2
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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
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|
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101
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Interactive Data Files Pursuant to Rule 405 of Regulation S-T.
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(1)
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Incorporated by reference to our Registration Statement on Form 10-12G, filed on September 30, 2011.
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(2)
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Incorporated by reference to our Registration Statement on Form 10-12G (Amendment 1), filed on May 11, 2011.
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16
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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LIFELOC TECHNOLOGIES, INC.
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By:
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/s/ Barry R. Knott
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Date: November 5, 2012
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Barry R. Knott
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President and Chief Executive Officer
(Principal Executive Officer)
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By:
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/s/ Kristie L. LaRose
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Date: November 5, 2012
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Kristie L. LaRose
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Vice President of Finance and Administration
(Principal Accounting Officer)
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17
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
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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
|
2002 Stock Option Plan (1)
|
|
|
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
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Business Loan Agreement between Lifeloc Technologies, Inc. and Citywide Banks, dated May 11, 2011, as amended (1)
|
|
|
10.8
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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 Data Files Pursuant to Rule 405 of Regulation S-T.
|
|
(1)
|
Incorporated by reference to our Registration Statement on Form 10-12G, filed on May 11, 2011.
|
|
(2)
|
Incorporated by reference to our Registration Statement on Form 10-12G (Amendment 1), filed on May 11, 2011.
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18