Lifeloc Technologies, Inc - Quarter Report: 2014 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

Form 10-Q

 

OR

 

Commission file number:  000-54319

 

LIFELOC TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

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.

 

 

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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LIFELOC TECHNOLOGIES, INC.

 

FORM 10-Q

 

For the Three Months Ended September 30, 2014

 

INDEX

 

 

			Page Number
PART I.      FINANCIAL INFORMATION				2
ITEM 1	FINANCIAL STATEMENTS (UNAUDITED)			2
	Condensed Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013			2
	Condensed Statements of Income (Unaudited) for the three months ended September 30, 2014 and 2013			3
	Condensed Statements of Income (Unaudited) for the nine months ended September 30, 2014 and 2013			4
	Condensed Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2014 and 2013			5
	Notes to Condensed Financial Statements (Unaudited)			6
ITEM 2	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			10
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			14
ITEM 4	CONTROLS AND PROCEDURES			14
PART II.     OTHER INFORMATION				14
ITEM 1	LEGAL PROCEEDINGS			14
ITEM 1A	RISK FACTORS			15
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			15
ITEM 3	DEFAULTS UPON SENIOR SECURITIES			15
ITEM 4	MINE SAFETY DISCLOSURES			15
I TEM 5	OTHER INFORMATION			15
ITEM 6	EXHIBITS			15
SIGNATURE				16

 

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PART I      FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

 

See accompanying notes.

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See accompanying notes.

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See accompanying notes.

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See accompanying notes.

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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 accessories, supplies and education.  We design, produce and sell fuel-cell based breath alcohol testing equipment.  We compete in all major segments of the portable breath alcohol testing instrument market, including law enforcement, workplace, corrections, original equipment manufacturing ("OEM") and consumer markets. In addition, we offer a line of supplies, accessories, services, and training to support customers' alcohol testing programs. We sell globally through distributors 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 2014.  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, 2013 included in our Annual Report on Form 10-K (our "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 $43,000, including a repayment of $3,000 in the third quarter of 2014, 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, 2014.  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, 2014 and December 31, 2013, inventory consisted of the following:

 

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.

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ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Revenue Recognition.   Revenue from product sales is recorded when we ship the product and title has passed to the customer, provided that we have evidence of a customer arrangement and can conclude that collection is probable.  The prices at which we sell our products are fixed and determinable at the time we accept a customer's order. We recognize revenue from sales to stocking distributors when there is no right of return, other than for normal warranty claims, and generally have no ongoing obligations related to product sales, except for normal warranty.

Service, development and extended warranty contracts are booked as sales over their life on a straight-line basis. Supplies are recognized as sales when they are shipped.  Training revenues are recognized at the time the training occurs.  We have discontinued arranging for customer financing and leasing through unrelated third parties and instead are providing for customer financing and leasing ourselves which we recognize as revenue over the applicable lease term.  Occasionally, we rent used breathalyzers to customers, and in those cases, we recognize the revenues as they are earned over the life of the contract.

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

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

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

Recent Accounting Pronouncements.  We have reviewed all recently issued, but not yet effective, accounting pronouncements.  The Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 (Revenue from Contracts with Customers), which is effective for annual reporting periods beginning after December 15, 2016.  We have not yet assessed the impact, if any, of adopting this standard.

3.  BASIC AND DILUTED INCOME PER COMMON SHARE

We report both basic and diluted net income 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 per share:

 

 

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4.  STOCKHOLDERS' EQUITY

The following table summarizes information about employee stock options outstanding and exercisable at September 30, 2014:

 

Of the 92,000 options exercisable as of September 30, 2014, all are incentive stock options. The exercise price of all options granted through September 30, 2014 has been equal to or greater than the fair market value.

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

5.  RELATED PARTY TRANSACTIONS

During the 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, 2014, nor did we engage in any other related party transaction during that period.

 

6.  INCOME TAXES

The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes consists of the following:

 

 

 

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7.  COMMITMENTS

On August 25, 2014, the Company entered into a Contract to Buy and Sell Real Estate (the "Contract") with Ward West Properties LLC, a non-affiliated third party, related to property located at 12441 West 49th Avenue, Wheat Ridge, CO 80033 (the "Property"), which includes the property the Company uses as its corporate headquarters and certain adjacent property, for an aggregate purchase price of approximately $1.9 million (the "Purchase Price"). The purchase closed on October 31, 2014. The Company obtained financing for a portion of the Purchase Price through a loan from Bank of America secured by a first-lien mortgage on the Property.

Outstanding purchase orders issued to vendors in the ordinary course of business totaled $1,316,051 at September 30, 2014.

 

8.  SUBSEQUENT EVENTS

In September 2014, we were notified that we have been awarded a $250,000 grant from the Colorado Office of Economic Development to accelerate development of a marijuana Breathalyzer that is currently under development. We have not yet received any official documentation regarding this grant. We evaluated all of our other activity and concluded that no other subsequent events have occurred that would require recognition in our financial statements or disclosure in the notes to our financial statements.

 

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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 Quarterly Report on 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 Annual Report on Form 10-K for the year ended December 31, 2013.

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, www.lifeguardbreathtester.com, alcohol-analyzers.com and www.lifeloc.fr.

In 2013 we expanded our FC Series of professional breath alcohol testers sold to law enforcement, corrections and international markets with the addition of the FC5 Hornet. The FC5 is a portable handheld alcohol screening device that competes directly against passive (no mouthpieces required) alcohol screeners from our competitors in the education, law enforcement, workplace and corrections markets. In 2013 we also introduced the Sentinel zero tolerance alcohol screening station, a fully automated wall mounted screening station for employees in safety sensitive industries such as oil and gas and mining. Both devices expand Lifeloc's products for passive alcohol screening.

In the third quarter of 2014 we received approval from the U.S. Department of Transportation for our EASYCAL automatic calibration station for use with Lifeloc Evidential Breath Testers, and we began shipments of the EASYCAL to our law enforcement, corrections, workplace and international customers.   The EASYCAL is a first of its kind device that automatically performs breath tester instrument calibration, calibration verification and gas management.  As compared to manual instrument calibration, the EASYCAL reduces the opportunity for human error, saves time and reduces operating costs.

Although no official documents have been received, we were notified in Q3 that we were awarded a $250,000 grant from the Colorado Office of Economic Development to accelerate development of a marijuana breathalyzer.  There is no assurance that this effort to develop a marijuana breathalyzer will be successful or that significant sales will result from such development if successful.

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 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.

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Results of Operations

For the three months ended September 30, 2014 compared to the three months ended September 30, 2013.

Net sales. Our sales for the quarter ended September 30, 2014 were $2,452,129, an increase of 10% from $2,230,245 for the quarter ended September 30, 2013.  This increase is attributable primarily to strong performance from our international and law enforcement markets, as well as the introduction of new products.  When royalties of $54,403 are included, total revenues of $2,506,532 increased by $230,187, or 10%, for the quarter ended September 30, 2014 when compared to the same quarter a year ago.

Gross profit.  Gross profit for the quarter ended September 30, 2014 of $1,176,906 represented an increase of 10% from gross profit of $1,071,792 for the quarter ended September 30, 2013 as a result of increased sales of products, with similar gross margins in both periods.

Research and development expenses.  Research and development expenses were $221,749 for the quarter ended September 30, 2014, representing an increase of 1% over the $218,527 in the same quarter a year ago.  This increase resulted mostly from increased headcount.

Sales and marketing expenses.   Sales and marketing expenses of $357,456 for the quarter ended September 30, 2014 represented an increase of 11% from sales and marketing expenses of $321,401 for the quarter ended September 30, 2013.  This increase resulted primarily from increased advertising outlays and from additional headcount.

General and administrative expenses.  General and administrative expenses were $274,778 for the quarter ended September 30, 2014, which represented a decrease of 16% over the $327,286 spent in the same quarter a year ago.  This decrease resulted primarily from lower compensation.

Other income.  Other income of $8,591 for the quarter ended September 30, 2014 consisted of interest income of $5,591 and bad debt recovery of $3,000, compared to interest income of $5,375 and bad debt recovery of $3,000 in the same quarter a year ago.

Net income.   Net income was $214,555 for the quarter ended September 30, 2014 compared to net income of $239,915 for the quarter ended September 30, 2013.  This decrease of $25,360, or 11%, was the result of changes in gross profit and changes in operating expenses as described above, and an increase in the provision for income taxes which resulted from amended returns filed in Q3 of 2013, as well as timing differences, offset by the absence of the research and development credit in this period.

For the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.

Net sales. Our sales for the nine months ended September 30, 2014 were $6,545,128, an increase of 9% from $5,994,831 for the nine months ended September 30, 2013.  This increase is attributable primarily to sales growth from our law enforcement, corrections and international customers.  When royalties of $261,583 are included, total revenues of $6,806,711 increased by $512,968, or 8%, for the nine months ended September 30, 2014 when compared to the same nine month period a year ago.

Gross profit.  Gross profit for the nine months ended September 30, 2014 of $3,301,239 represented an increase of 7% over gross profit of $3,074,882 for the nine months ended September 30, 2013 as a result of increased sales of products, with similar gross margins in both periods, offset by a $37,329 reduction in royalties.

Research and development expenses.  Research and development expenses were $739,995 for the nine months ended September 30, 2014, representing an increase of 15% over the $642,796 in the same nine month period a year ago.  This increase resulted mostly from increased headcount.

Sales and marketing expenses.   Sales and marketing expenses of $1,019,750 for the nine months ended September 30, 2014 represented an increase of 21% from sales and marketing expenses of $844,244 for the nine months ended September 30, 2013.  This increase resulted primarily from increased advertising outlays and from additional headcount.

General and administrative expenses.   General and administrative expenses were $858,449 for the nine months ended September 30, 2014, which represented a decrease of 9% over the $947,731 spent in the same nine months a year ago.  This decrease resulted primarily from lower compensation expenses.

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Other income.  Other income of $25,610 for the nine months ended September 30, 2014 consisted of interest income of $16,610 and bad debt recovery of $9,000, compared to interest income of $12,997 and bad debt recovery of $8,000 for the nine months ended September 30, 2013.

Net income.   Net income was $476,452 for the nine months ended September 30, 2014 compared to net income of $555,429 for the nine months ended September 30, 2013.  This decrease of $78,977, or 14%, was the result of the changes in gross profit and operating expenses as described above, offset by increased income taxes as a result of amended returns filed in 2013.

Trends and Uncertainties That May Affect Future Results

Although revenues in 2014 are up modestly compared to revenues in 2013, there is no assurance this will continue in future periods.  We expect our quarter-to-quarter revenue fluctuations to continue, due to the unpredictable timing of large orders from customers and the size of those orders in relation to total revenues.  Going forward, we intend to focus our development efforts on products we believe offer the best prospects to increase our intermediate and near-term revenues.

 

Our 2014 operating plan is focused on growing sales, increasing gross profits, and increasing research and development efforts on new products for long-term growth.  We cannot predict with certainty the expected sales, gross profit, net income or loss and usage of cash and cash equivalents for 2014.  However, we believe that cash resources will be sufficient to fund our operations for the next twelve months under our current operating plan.  If we are unable to manage the business operations in line with our budget expectations, it could have a material adverse effect on business viability, financial position, results of operations and cash flows. Further, if we are not successful in sustaining profitability and remaining at least cash flow break-even, additional capital may be required to maintain ongoing operations.

Liquidity and Capital Resources

We compete in a highly technical, very competitive and, in most cases, price driven alcohol testing marketplace, where products can take years to develop and introduce to distributors and end users.  Furthermore, manufacturing, marketing and distribution activities are regulated by the FDA, the DOT, and other regulatory bodies that, while intended to enhance the ultimate quality and functionality of products produced, can contribute to the cost and time needed to maintain existing products and develop and introduce new products. 

We have traditionally funded working capital needs through product sales and close management of working capital components of our business.  Historically, we have also received cash from private offerings of our common stock, warrants to purchase shares of our common stock, and notes. In our earlier years, we incurred quarter-to-quarter operating losses to develop current product applications, utilizing a number of proprietary and patent-pending technologies.  Although we have been profitable 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.

As of September 30, 2014, cash was $3,155,380, accounts receivable were $787,015 and current liabilities were $827,860 resulting in a net liquid asset amount of $3,114,535.  We believe that the introduction of several new products during the last several years, along with new and on-going customer relationships, will continue to generate sufficient revenues to maintain profitability.  If these revenues are not achieved on a timely basis, we 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 $43,000, including a repayment of $3,000 in the third quarter of 2014, 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, 2014.

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, 2014 and for the quarter ended September 30, 2013, warranty costs were not deemed significant.

 

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Critical Accounting Policies and Estimates

 

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements.  In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.  Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, sales returns, warranty, contingencies and litigation.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.

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 service, development and extended warranty contracts are booked as sales over their life on a straight-line basis. Supplies are recognized as sales when they are shipped. Training revenues are recognized at the time the training occurs. We have discontinued arranging for customer financing and leasing through unrelated third parties and instead are providing customer financing and leasing ourselves which we recognize as revenue over the applicable lease term.  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. On occasion we receive customer deposits for future product orders. Customer deposits are initially recorded as a liability and recognized as revenue when the product is shipped and title has passed to the customer.

 

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required, which would increase our expenses during the periods in which any such allowances were made.  The amount recorded as a provision for bad debts in each period is based upon our assessment of the likelihood that we will be paid on our outstanding receivables, based on customer-specific as well as general considerations.  To the extent that our estimates prove to be too high, and we ultimately collect a receivable previously determined to be impaired, we may record a reversal of the provision in the period of such determination.

We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.  If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.  Any write-downs of inventory would reduce our reported net income during the period in which such write-downs were applied.

Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally five years (three years for software and technology licenses).  We use the double declining method of depreciation for property and equipment, and the straight line method for software and technology licenses.  Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.

Stock-based compensation is presented in accordance with the guidance of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718, Compensation — Stock Compensation ("ASC 718").  Under the provisions of ASC 718, companies are required to estimate the fair value of share-based payment awards made to employees and directors including employee stock options based on estimated fair values on the date of grant using an option-pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our statements of income.

Off-Balance Sheet Transactions

 

We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

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ITEM 3   –   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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, 2014.

 

(b)	Changes in Internal Control over Financial Reporting

There were no significant changes in our internal controls over financial reporting during the period ended September 30, 2014 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

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

PART II. OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

We may be involved from time to time in litigation, negotiation and settlement matters that may have a material effect on our operations or finances. We are not aware of any pending or threatened litigation against us or our officers or directors in their capacity as such that could have a material impact on our operations or finances.

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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, 2013, 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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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.

 

 

 

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Exhibit Index

 

 

 

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