Item 7. 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-K. 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 and 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-K are strongly encouraged to review the section titled
"Risk Factors."
Lifeloc Technologies, Inc., a Colorado corporation ("Lifeloc" or the "Company"), is a Colorado-based developer, manufacturer and marketer of portable hand-held and fixed station breathalyzers and related accessories, supplies and education. We design, produce and sell fuel-cell based breath alcohol testing equipment. We compete in all major segments of the portable breath alcohol testing instrument market, including law enforcement, workplace, corrections, original equipment manufacturing ("OEM") and consumer markets. In addition, we offer a line of supplies, accessories, services, and training to support customers' alcohol testing programs. We sell globally through distributors as well as directly to users.
We define our business as providing "near and remote sensing" products and solutions. Today, the majority of our revenues are derived from products and services for alcohol detection and measurement. We remain committed to growing our breath alcohol testing business. In the future, we anticipate the commercialization of new sensing and measurement products that may allow Lifeloc to successfully expand our business into new growth areas where we do not presently compete or where no satisfactory product solutions exist today.
In addition, with the October 2014 purchase of our corporate headquarters and certain adjacent property, we added a new reporting segment focused on the ownership and rental of real property through existing commercial leases.
Lifeloc incorporated in Colorado in December 1983. We filed a registration statement on Form 10 with the Securities and Exchange Commission, which became effective on May 31, 2011. Our fiscal year end is December 31. Our principal executive offices are located at 12441 West 49th Avenue, Unit 4, Wheat Ridge, Colorado 80033-3338. Our telephone number is (303) 431-9500. Our websites are www.lifeloc.com, www.lifeguardbreathtester.com and www.stsfirst.com. Information contained on our websites does not constitute part of this Form 10-K.
Results of Operations
For the year ended December 31, 2017 compared to the year ended December 31, 2016
.
Net sales.
Our product sales for the year ended December 31, 2017 were $7,629,474, a decrease of 3% from $7,888,786 for the same period a year ago. This decrease is primarily attributable to prevailing market conditions, including a decrease in sales in the oil and gas sector. When royalties of $289,588 and rental income of $71,676 are included, total revenues of $7,990,738 decreased by $390,397, or 5%, for the year ended December 31, 2017 when compared to the same 12 months a year ago. Rental income decreased due to the termination of a tenant lease that was not immediately replaced, and royalties decreased due to a decrease in sales by royalty-paying customers.
Gross profit.
Gross profit for the year ended December 31, 2017 of $3,712,864 represented a decrease of 11% from total gross profit of $4,178,406 for the year ended December 31, 2016, primarily as a result of decreased sales volume, decreased rental income in 2017, and lower royalties. Cost of product sales increased from $4,137,206 in the year ended December 31, 2016 to $4,178,268 in the same period in 2017, or 1%, primarily as a result of costs associated with the purchase in March 2017 of the RADAR mobile device product line, which was not yet accompanied by a proportionate increase in revenues. Gross profit margin on products decreased to 45% in the year ended December 31, 2017 from 48% in the year ended December 31, 2016 primarily for the same reason.
Research and development expenses.
Research and development expenses were $1,076,763 for the year ended December 31, 2017, representing an increase of 4% over the $1,037,035 in the same period a year ago. This increase resulted mostly from lower grant reimbursements this year vs. a year ago.
Sales and marketing expenses.
Sales and marketing expenses of $1,388,927 the year ended December 31, 2017 were higher than the $1,359,043 spent in the same period a year ago by 2%, or $29,884. This increase is attributable primarily to higher advertising costs in 2017.
General and administrative expenses.
General and administrative expenses were $1,114,534 for the year ended December 31, 2017 vs. $1,147,349 for the year ended December 31, 2016, a decrease of $32,815 or 3%.
Other income (expense).
Other income was affected by a decrease in interest income of $6,446 in the year ended December 31, 2017, mostly as the result of less cash available for investment because of the asset acquisition in Q1 of 2017. A business loan was paid in full in 2016, which resulted in the bad debt recovery of $4,500 in 2016 being absent in 2017. Interest expense of $60,705 in the year ended December 31, 2017 vs. $65,963 in the same period a year ago is the result of the balance of the term loan on our building declining.
Net income.
We realized net income of $14,603 for the year ended December 31, 2017 compared to net income of $433,151 for the year ended December 31, 2016. This decrease of $418,548, or 97%, was the result of the decrease in gross profit and of the changes in operating expenses discussed above, offset in part by a decrease in income taxes of $89,479.
Trends and Uncertainties That May Affect Future Results
Revenues in the year 2017 were lower compared to revenues in 2016. We believe increased sales efforts, along with the re-launch of the RADAR Mobile Devices, may result in improved revenues in 2018 and beyond. 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 2018 operating plan is focused on growing sales, increasing gross profits, and increasing research and development efforts on new products for long-term growth. We cannot predict with certainty the expected sales, gross profit, net income or loss, or usage of cash and cash equivalents for 2018. 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.
Interest expense
. In connection with the financing of our building purchase on October 31, 2014 we obtained a 10-year term loan from Bank of America in an initial principal amount of $1,581,106 bearing interest at 4.45% per annum (which was decreased to 4% in 2016) and secured by a first-priority mortgage in the acquired property, as well as a one-year $250,000 line of credit (which was increased to $750,000 in 2017) bearing interest at a rate equal to the LIBOR daily floating rate plus 2.5%, secured by all assets of the Company. As a result of payments made on the loan, as well as a reduction of the interest rate in July 2016, our interest expense decreased from $65,963 for FY 16 to $60,705 for FY 17. There were no borrowings under the line of credit as of December 31, 2017.
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.
In October 2014 we were awarded a $250,000 grant from the Colorado Office of Economic Development to accelerate development of a breathalyzer that tests for Tetrahydrocannabinol ("THC"), the principal psychoactive constituent in cannabis. In 2016 the breathalyzer development effort was broadened to include the SpinDx technology as a potential detection method. SpinDx has demonstrated the ability to detect very low levels of THC under laboratory conditions. Terms of the grant require us to submit invoices as work is performed. We received $25,000, $42,396, $44,523, and $11,288 of grant reimbursements of allowed expenses in 2014, 2015, 2016 and 2017 respectively. The grant completion date was August 31, 2017, at which point $126,793 of grant funds remained unused and are no longer available. This development effort is continuing beyond the completion of the grant. There is no assurance that this effort to develop a THC breathalyzer will be successful or that significant sales will result from such development if successful.
On October 31, 2014, we purchased the commercial property we use as our corporate headquarters and certain adjacent property in Wheat Ridge, Colorado for a total purchase price of $1,949,139, of which we paid $368,033 in cash and financed the remaining $1,581,106 through a 10-year term loan from Bank of America bearing interest at 4.45% per annum (amended to 4% per annum in 2016), secured by a first-priority security interest in the property we acquired with the loan. In connection with the term loan, we arranged for a one-year $250,000 line of credit (raised to $750,000 in 2017) from Bank of America secured by all assets of the Company. The line of credit bears interest at a rate calculated at the LIBOR daily floating rate plus 2.5%. At December 31, 2017 this credit facility had not been used.
Except for normal operating contractual commitments and purchase orders, and aside from the commitments under our term loan and line of credit with Bank of America, we do not have any material contractual commitments requiring settlement in the future. See "Note 6 – Commitments and Contingencies" to our Financial Statements in Part II - Item 8.
We have traditionally funded working capital needs through product sales and close management of working capital components of our business. Historically, we have also received cash from private offerings of our common stock, warrants to purchase shares of our common stock, and notes. In our earlier years, we incurred quarter to quarter operating losses to develop current product applications, utilizing a number of proprietary and patent-pending technologies. Although we have been profitable in recent years, we can provide no assurances that operating losses will not occur in the future. Should that situation arise, we may not be able to obtain working capital funds necessary in the time frame needed and at satisfactory terms, if at all.
As of December 31, 2017, cash was $2,669,455, trade accounts receivable were $593,326 and current liabilities were $745,387 resulting in net liquid assets of $2,517,394. 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 may be required to seek additional sources of capital and/or to implement cost reduction measures, as necessary.
Property and equipment expenditures during FY 17 were $11,846 compared to $42,807 for FY 16. We filed patent applications at a cost to us of $17,217 in 2017 versus $8,954 in 2016. The acquisition of RADAR equipment and software in 2017 was $748,198, and the related patents were $100,000.
We generally provide a standard one-year limited warranty on materials and workmanship to our customers. In 2014 we began providing a lifetime warranty on fuel cells. 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 year ended December 31, 2017 and for the year ended December 31, 2016, warranty costs were not deemed significant.
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, sales returns, warranty, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.
We have concluded that we have two operating segments, including our primary business which is as a developer, manufacturer and marketer of portable hand-held breathalyzers and related accessories, supplies and education, and a second segment consisting of renting portions of our building to existing tenants.
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required, which would increase our expenses during the periods in which any such allowances were made. The amount recorded as a provision for bad debts in each period is based upon our assessment of the likelihood that we will be paid on our outstanding receivables, based on customer-specific as well as general considerations. To the extent that our estimates prove to be too high, and we ultimately collect a receivable previously determined to be impaired, we may record a reversal of the provision in the period of such determination.
We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Any write-downs of inventory would reduce our reported net income during the period in which such write-downs were applied.
Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally five years (three years for software and technology licenses). We use the double declining method of depreciation for property and equipment, and the straight line method for software and technology licenses. We purchased all of the assets of STS, an online education company, in 2014, which consisted of training courses that are amortized over 15 years using the straight line method. In October 2014, we purchased our building. A majority of the cost of the building is depreciated over 39 years using the straight line method. In addition, based on the results of a third party analysis, a portion of the cost was allocated to components integral to the building. Such components are depreciated over 5 and 15 years, using the double declining method and the straight line method respectively. The RADAR mobile devices, and the RADAR software and patents that were purchased in March 2017 are depreciated over 5 years using the double declining balance method, and amortized over 15 years, using the straight line method, respectively. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.
Revenue from product sales is generally 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.
Revenues arising from extended warranty contracts are booked as sales over their life on a straight-line basis. Supplies are recognized as sales when they are shipped. The sales of licenses to our training courses and the sale of training courses are recognized as revenue at the time of sale. 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 equipment 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.
The sales of licenses to our training courses are recognized as revenue at the time of sale.
Rental income from space leased to our tenants is recognized in the month in which it is due.
On occasion we receive customer deposits for future product orders. Customer deposits are initially recorded as a liability and recognized as revenue when the product is shipped and title has passed to the customer.
Stock-based compensation is presented in accordance with the guidance of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718, Compensation — Stock Compensation ("ASC 718"). Under the provisions of ASC 718, companies are required to estimate the fair value of share-based payment awards made to employees and directors including employee stock options based on estimated fair values on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our statement of operations.
Off-Balance Sheet Arrangements
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
Item 8. Financial Statements and Supplementary Data
The following financial statements are included in this Report:
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Page
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Report of Independent Registered Public Accounting Firm for the Years Ended December 31, 2017 and 2016
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21
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Balance Sheets as of December 31, 2017 and 2016
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22
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|
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Statements of Income for the Years Ended December 31, 2017 and 2016
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23
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|
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Statements of Stockholders' Equity for the Years Ended December 31, 2017 and 2016
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24
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|
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Statements of Cash Flows for the Years Ended December 31, 2017 and 2016
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25
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|
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Notes to Financial Statements
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26
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Notes to Financial Statements
December 31, 2017 and 2016
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 and fixed station breathalyzers and related accessories, supplies and education. We design, produce and sell fuel-cell based breath alcohol testing equipment. We compete in all major segments of the breath alcohol testing instrument market, including law enforcement, workplace, corrections, original equipment manufacturing ("OEM") and consumer markets. In addition, we offer a line of supplies, accessories, services, and training to support customers' alcohol testing programs. We sell globally through distributors as well as directly to users.
We define our business as providing "near and remote sensing" products and solutions. Today, the majority of our revenues are derived from products and services for alcohol detection and measurement. We remain committed to growing our breath alcohol testing business. In the future, we anticipate the commercialization of new sensing and measurement products that may allow Lifeloc to successfully expand our business into new growth areas where we do not presently compete or where no satisfactory product solutions exist today.
Lifeloc incorporated in Colorado in December 1983. We filed a registration statement on Form 10 with the Securities and Exchange Commission, which became effective on May 31, 2011. Our fiscal year end is December 31. Our principal executive offices are located at 12441 West 49th Avenue, Unit 4, Wheat Ridge, Colorado 80033-3338. Our telephone number is (303) 431-9500. Our websites are www.lifeloc.com, www.lifeguardbreathtester.com, and www.stsfirst.com. Information contained on our websites does not constitute part of this Form 10-K.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Debt Issuance Costs
. In 2016, the Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs
("ASU 2015-03"). This standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. Deferred loan costs are amortized over the 20-year life of the term loan on a straight line basis, which approximates the effective interest method. Total amortization during the years ended December 31, 2017 and 2016 was $542 and $542, respectively, and is included within interest expense on the statements of income.
Deferred Taxes
. In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-17,
Balance Sheet Classification of
Deferred Taxes (
"ASU 2015-17"). This standard requires that deferred income tax assets and liabilities be presented as noncurrent assets or liabilities in the balance sheet. ASU 2015-17 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and may be applied either prospectively to all deferred tax assets or liabilities or retrospectively to all periods presented. Early adoption is permitted. We have adopted this new standard in 2017. As a result of adopting this standard, current deferred taxes of $109,727 have been reclassified in the accompanying balance sheet for December 31, 2016 as non-current.
Fair Value Measurement
. Accounting Standards Codification ("ASC") Topic 820,
Fair Value Measurements and Disclosures
("ASC 820"), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equity securities listed on the New York Stock Exchange.
Level 2 - Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.
Level 3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.
Cash and Cash Equivalents.
For purposes of reporting cash flows, we consider all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents. There were no cash equivalents as of December 31, 2017 and 2016.
Fair Value of Financial Instruments.
Our financial instruments consist of cash, short-term trade receivables, payables and a term loan secured by a first mortgage. The carrying values of cash, short-term receivables, and payables approximate their fair value due to their short term maturities. The carrying value of the term loan approximates its fair value based on interest rates currently obtainable.
Concentration of Credit Risk.
Financial instruments with significant credit risk include cash and accounts receivable. The amount of cash on deposit with two financial institutions exceeded the $250,000 federally insured limit at December 31, 2017 by $1,919,223. However, we believe that the financial institutions are financially sound and the risk of loss is minimal.
We have no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
Accounts Receivable
. Accounts receivable are typically unsecured and are derived from transactions with and from entities primarily located in the United States or from international distributors with a proven payment history; we require pre-payment for most international orders. Accordingly, we may be exposed to credit risks generally associated with the alcohol monitoring industry. Our credit policy calls for payment in accordance with prevailing industry standards, generally 30 days with occasional exceptions of up to 60 days for large established customers. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. A summary of the activity in our allowance for doubtful accounts is as follows:
Years Ended December 31
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|
2017
|
|
|
2016
|
|
Balance, beginning of year
|
|
$
|
35,000
|
|
|
$
|
35,000
|
|
Provision for estimated losses
|
|
|
10,669
|
|
|
|
5,301
|
|
Write-off of uncollectible accounts
|
|
|
(10,669
|
)
|
|
|
(5,301
|
)
|
Balance, end of year
|
|
$
|
35,000
|
|
|
$
|
35,000
|
|
The net accounts receivable balance at December 31, 2017 of $593,326 included an account from one customer of $156,960 (26%), and no more than 10% from any other single customer. The net accounts receivable balance at December 31, 2016 of $495,397 included an account from one customer of $113,948 (23%) and no more than 6% from any other single customer.
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 December 31, 2017 and December 31, 2016, inventory consisted of the following:
|
|
2017
|
|
|
2016
|
|
Raw materials & deposits
|
|
$
|
809,867
|
|
|
$
|
592,771
|
|
Work-in-process
|
|
|
181,976
|
|
|
|
42,366
|
|
Finished goods
|
|
|
243,260
|
|
|
|
287,972
|
|
Total gross inventories
|
|
|
1,235,103
|
|
|
|
923,109
|
|
Less reserve for obsolescence
|
|
|
(60,000
|
)
|
|
|
(87,500
|
)
|
Total net inventories
|
|
$
|
1,175,103
|
|
|
$
|
835,609
|
|
A summary of the activity in our inventory reserve for obsolescence is as follows:
Years Ended December 31
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|
2017
|
|
|
2016
|
|
Balance, beginning of year
|
|
$
|
87,500
|
|
|
$
|
87,500
|
|
Provision for estimated obsolescence
|
|
|
21,965
|
|
|
|
30,134
|
|
Write-off of obsolete inventory
|
|
|
(49,465
|
)
|
|
|
(30,134
|
)
|
Balance, end of year
|
|
$
|
60,000
|
|
|
$
|
87,500
|
|
Property and Equipment.
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; 15 years for training courses; 39 years for the cost of the building we purchased in October 2014. We utilize the double-declining method of depreciation for property and equipment, and the straight-line method of depreciation for software, training courses, and the building, due to the expected usage of these assets over time. These methods are expected to continue throughout the life of the assets. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized. Depreciation expense for the years ended December 31, 2017 and 2016 was $275,592 and $243,326 respectively.
Long-Lived Assets.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A long-lived asset is considered impaired when estimated future cash flows related to the asset, undiscounted and without interest, are insufficient to recover the carrying amount of the asset. If deemed impaired, the long-lived asset is reduced to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell. No impairments were recorded for the years ended December 31, 2017 and 2016 respectively.
Patents.
The costs of applying for patents are capitalized and amortized on a straight-line basis over the lesser of the patent's economic or legal life (20 years for utility patents in the United States, and 14 years for design patents). Amortization expense, including impairments, for the years ended December 31, 2017 and 2016 was $11,882 and $39,297 respectively. Amortization expense for each of the next 5 years is estimated to be $13,227 per year. Capitalized costs are expensed if patents are not granted. We review the carrying value of our patents periodically to determine whether the patents have continuing value and such reviews could result in the conclusion that the recorded amounts have been impaired. Impairments of $0 and $29,386 were included in amortization expense for the years ended December 31, 2017 and 2016 respectively. A summary of our patents at December 31, 2017 and 2016 is as follows:
|
|
2017
|
|
|
2016
|
|
Patents issued
|
|
$
|
190,508
|
|
|
$
|
22,775
|
|
Patent applications
|
|
|
24,321
|
|
|
|
74,837
|
|
Accumulated amortization
|
|
|
(37,585
|
)
|
|
|
(25,703
|
)
|
Total net patents
|
|
$
|
177,244
|
|
|
$
|
71,909
|
|
Deposits and Other Assets
. We include the long-term portion of installment receivables and the long-term portion of prepaid consulting with deposits.
Accrued Expenses
. We have accrued various expenses in our December 31 balance sheets, as follows.
|
|
2017
|
|
|
2016
|
|
Compensation
|
|
$
|
139,841
|
|
|
$
|
135,585
|
|
Property and other taxes
|
|
|
96,097
|
|
|
|
49,092
|
|
Rebates
|
|
|
28,352
|
|
|
|
37,562
|
|
State income tax
|
|
|
-
|
|
|
|
12,408
|
|
Interest
|
|
|
-
|
|
|
|
5,186
|
|
|
|
$
|
264,290
|
|
|
$
|
239,833
|
|
Product Warranty Reserve
. We provide for the estimated cost of product warranties at the time sales are recognized. Our warranty obligation is based upon historical experience and will be affected by product failure rates and material usage incurred in correcting a product failure. Should actual product failure rates or material usage costs differ from our estimates, revisions to the estimated warranty liability would be required. A summary of the activity in our product warranty reserve is as follows:
Years Ended December 31
|
|
2017
|
|
|
2016
|
|
Balance, beginning of year
|
|
$
|
40,000
|
|
|
$
|
33,100
|
|
Provision for estimated warranty claims
|
|
|
38,153
|
|
|
|
46,980
|
|
Claims made
|
|
|
(38,153
|
)
|
|
|
(40,080
|
)
|
Balance, end of year
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
Income Taxes.
We account for income taxes under the provisions of ASC Topic 740,
Accounting for Income Taxes
("ASC 740"). ASC 740 requires recognition of 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. ASC 740 also requires recognition of deferred tax assets for the expected future tax effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. 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.
ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements, uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. For the years ended December 31, 2017 and 2016, we did not have any interest or penalties or any significant uncertain tax positions.
Revenue Recognition.
Revenue from product sales is generally 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.
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 equipment to customers, and in those cases, we recognize the revenues as they are earned over the life of the contract. Revenues from these activities are included in product revenue in our statements of income.
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.
The sales of licenses to our training courses and the sale of training courses are recognized as revenue at the time of sale.
Rental income from space leased to our tenants is recognized in the month in which it is due, which approximates if it were recognized on a straight-line basis over the term of the related lease.
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.
Deferred Revenue.
Deferred revenues arise from service contracts and from development contracts. Revenues from service contracts are recognized on a straight-line basis over the life of the contract, generally one year, and are included in product revenue in our statements of income. However, there are occasions when they are written for longer terms up to four years. The revenues from that portion of the contract that extend beyond one year are shown in our balance sheets as long term. Deferred revenues also result from progress payments received on development contracts; those revenues are recognized when the contract is complete, and are included in product revenue in our statements of income. All development contracts are for less than one year and all deferred revenues from this source are shown in our balance sheets as short term.
Grants
. We apply for and receive job training and other grants. In September 2014 we were notified that we had 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. Grants are recognized as reductions of expense when received. In 2017 and 2016, we received expense reimbursement grants of $11,288 and $44,523 respectively.
Rebates.
Our rebate program is available to certain of our North American workplace distributors in good standing who are responsible for sales equaling at least $25,000 in one calendar year. Distributors who meet the required sales threshold automatically earn a rebate equal to between 1 and 10 percent of that distributor's total sales of the Company's products. We accrue for these rebates monthly; they are shown in our balance sheets as accrued expenses and are included in sales and marketing expense in our statements of income.
Research and Development Expenses
. We expense research and development costs for products and processes as incurred.
Stock-Based Compensation
. Stock-based compensation is presented in accordance with the guidance of 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 on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our statement of income.
ASC 718 requires companies to estimate the fair value of share-based payment awards 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 the accompanying statement of income.
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. We used the Black-Scholes option-pricing model ("Black-Scholes model") to determine fair value. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Although the fair value of employee stock options is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
Stock-based compensation expense recognized under ASC 718 for years 2017 and 2016 was $22,857 and $24,308 respectively. Stock-based compensation expense related to employee stock options under ASC 718 is allocated to General and Administrative Expense when incurred.
Segment Reporting.
We have concluded that we have two operating segments, including our primary business which is as a developer, manufacturer and marketer of portable hand-held breathalyzers and related accessories, supplies and education. As a result of purchasing our building on October 31, 2014, we have a second segment consisting of renting portions of our building to existing tenants, whose leases expire at various times until July 31, 2020.
Basic and Diluted Income and Loss per Common Share.
Net income or loss per share is calculated in accordance with ASC Topic 260,
Earnings Per Share
("ASC 260"). Under the provisions of ASC 260, 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 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. Dilution from potential common shares outstanding at December 31, 2017 and 2016 was $0.00 and $0.01 per share, respectively.
Recent Accounting Pronouncements
. We have reviewed all recently issued, but not yet effective, accounting pronouncements.
The FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
("ASU 2014-09"). It outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." In August 2015, the FASB issued ASU No. 2015-14, which deferred by one year the mandatory effective date of ASU 2014-09. As a result, public entities are required to adopt the new revenue standard in annual periods beginning after December 15, 2017 and in interim periods within those annual periods. The standard may be applied either retrospectively to prior periods or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted, but not before annual periods beginning after December 15, 2016. We have determined that we will adopt the new revenue standard in 2018 retrospectively, with the cumulative effect of initial application recognized in retained earnings. We do not expect this new standard to have a material impact on our financial statements or related disclosures.
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
("ASU 2016-01"). This update substantially revises standards for the recognition, measurement and presentation of financial instruments. This standard revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements. We have determined that we will adopt this new standard in 2018. We do not expect this new standard to have a material impact on our financial statements or related disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for us beginning on January 1, 2019 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We have determined that we will adopt this new standard in 2019. We do not expect this new standard to have a material impact on our financial statements or related disclosures.
3.
ASSET ACQUISITION
In March 2017 we acquired all of the assets related to R.A.D.A.R. from Track Group, Inc. ("TRCK") for $860,000 in cash. Based on Level 3 inputs, which consisted of estimates of future cash flows, return on investment analyses, and replacement costs, the purchase price was allocated as follows:
Asset
|
|
Allocation
|
|
Depreciable Life and Method
|
Estimated Future Annual Depreciation
|
|
Software
|
|
$
|
396,948
|
|
15 years; straight line
|
|
$
|
26,463
|
|
Rental equipment
|
|
|
172,500
|
|
5 years; double declining balance
|
Varies
|
|
Rental equipment not yet in service
|
|
|
178,052
|
|
5 years; double declining balance
|
Varies
|
|
Patents and patent applications
|
|
|
100,000
|
|
15 years; straight line
|
|
$
|
6,667
|
|
Production equipment
|
|
|
12,500
|
|
5 years; double declining balance
|
Varies
|
|
Total
|
|
$
|
860,000
|
|
|
|
|
|
|
The original rental equipment not yet in service of $178,052 was transferred to inventory.
The purpose of this acquisition was to expand our offering of substance abuse monitoring services.
4.
BASIC AND DILUTED INCOME AND LOSS PER COMMON SHARE
We report both basic and diluted net income per common share. Basic net income per common share is computed by dividing net income for the period by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. The shares used in the calculation of dilutive potential common shares exclude options to purchase shares where the exercise price was greater than the average market price of common shares for the period.
The following table presents the calculation of basic and diluted net income per common share:
|
|
Years Ended
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Net income
|
|
$
|
14,603
|
|
|
$
|
433,151
|
|
Weighted average shares-basic
|
|
|
2,454,116
|
|
|
|
2,454,116
|
|
Effect of dilutive potential common shares
|
|
|
64,072
|
|
|
|
93,314
|
|
Weighted average shares-diluted
|
|
|
2,518,188
|
|
|
|
2,547,430
|
|
Net income per share-basic
|
|
$
|
.01
|
|
|
$
|
.18
|
|
Net income per share-diluted
|
|
$
|
.01
|
|
|
$
|
.17
|
|
Antidilutive employee stock options
|
|
|
-
|
|
|
|
-
|
|
5.
STOCKHOLDERS' EQUITY
Stock Option Plan.
In January 2013, we adopted our 2013 Stock Option Plan (the "2013 Plan") to promote the Company's and its stockholders' interests by helping us to attract, retain and motivate our key employees and associates. Under the terms of the 2013 Plan, our Board of Directors (the "Board") can grant either "nonqualified" or "incentive" stock options, as defined by the Internal Revenue Code and related regulations. The purchase price of the shares subject to a stock option is the fair market value of our common stock on the date the stock option is granted. Generally, all stock options must be exercised within five years from the date granted. The number of common shares reserved for issuance under the 2013 Plan is 150,000 shares of common stock, subject to adjustment for dividend, stock split or other relevant changes in our capitalization. The 2013 Plan was approved by our shareholders at their regular annual meeting on April 1, 2013.
Under ASC 718, the value of each employee stock option was estimated on the date of grant using the Black-Scholes model for the purpose of financial information in accordance with ASC 718. The use of a Black-Scholes model requires the use of actual employee exercise behavior data and the use of a number of assumptions including expected volatility, risk-free interest rate and expected dividends. Options to purchase 50,000 shares of stock at $6.00 apiece were granted in 2017 and remain outstanding. Options to purchase 50,000 shares of stock at $8.83 apiece were granted in 2016, all of which were cancelled in 2017.
Cumulative compensation cost recognized in net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of compensation expense in the period of forfeiture. The volatility of the stock is based on a comparable public company's historical volatility since our stock is rarely traded. Fair value computations are highly sensitive to the volatility factor; the greater the volatility, the higher the computed fair value of options granted.
The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the use of assumptions, including the expected stock price volatility. Because our employee stock options have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. A summary of our stock option activity and related information for equity compensation plans approved by security holders for each of the fiscal years ended December 31, 2017 and 2016 is as follows:
|
|
STOCK OPTIONS
OUTSTANDING
|
|
|
|
Number
Outstanding
|
|
|
Weighted Average
Exercise Price Per Share
|
|
BALANCE AT DECEMBER 31, 2015
|
|
|
79,000
|
|
|
$
|
2.66
|
|
Granted
|
|
|
50,000
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(43,500
|
)
|
|
|
-
|
|
BALANCE AT DECEMBER 31, 2016
|
|
|
85,500
|
|
|
$
|
6.13
|
|
Granted
|
|
|
50,000
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(75,500
|
)
|
|
|
-
|
|
BALANCE AT DECEMBER 31, 2017
|
|
|
60,000
|
|
|
$
|
5.39
|
|
The following table summarizes information about employee stock options outstanding and exercisable at December 31, 2017:
|
|
|
STOCK OPTIONS OUTSTANDING
|
|
|
STOCK OPTIONS EXERCISABLE
|
|
Range of Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Weighted-Average
Remaining Contractual
Life (in Years)
|
|
Weighted-Average
Exercise Price
per Share
|
|
|
Number
Exercisable
|
|
|
Weighted-Average
Exercise Price
per Share
|
|
|
$2.32
|
|
|
|
10,000
|
|
|
|
.75
|
|
|
$2.32
|
|
|
|
10,000
|
|
|
|
$2.32
|
|
|
$6.00
|
|
|
|
50,000
|
|
|
|
4.50
|
|
|
$6.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
Of the 10,000 options exercisable as of December 31, 2017, all are incentive stock options. The exercise price of all options granted through December 31, 2017 has been equal to or greater than the fair market value as of the date of grant, as determined by the Board. As of December 31, 2017, 83,300 options exercisable for our common stock remain available for grant under the 2013 Plan.
Options to purchase 50,000 shares of stock at $8.83 apiece were granted during the year ended December 31, 2016. These options were forfeited and replaced with options to purchase 50,000 shares of stock at $6.00 apiece in 2017 in conjunction with the amendment of an employment agreement. Vesting of these options is subject to performance achieved during the years ending December 31, 2019 and 2020. The provisions of ASC 718-10-55 require the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options, based on estimated fair values. Share-based compensation cost for stock options is measured at the grant date, based on the fair value as calculated by the Black-Scholes-Merton ("BSM") option-pricing model. The BSM option pricing model requires the use of actual employee exercise behavior data and the application of a number of assumptions, including expected volatility, risk free interest rate and expected dividends. For the options granted in 2017, the pricing model assumptions were: risk-free interest rate 1.94%, expected life 5 years, expected volatility 29%, expected dividend rate 0%. Applying these assumptions resulted in a fair value of $87,341, which will result in stock option expense of approximately $1,456 per month through September 30, 2022 being charged against operations with a corresponding credit to capital. Share-based compensation cost for the year ended December 31, 2017 was $22,857 and $24,308 for the year ended December 31, 2016.
No options were exercised during the years ended December 31, 2017 and 2016.
The total number of authorized shares of common stock continues to be 50,000,000, with no change in the par value per share.
6.
COMMITMENTS AND CONTINGENCIES
Mortgage Expense
. We purchased our facilities in Wheat Ridge, Colorado on October 31, 2014 for $1,949,139 and took out a term loan secured by a first mortgage on the property in the amount of $1,581,106 with Bank of America for a portion of the purchase price. Effective June 30, 2016 the note was amended to revise the interest rate from 4.45% to 4.00% per annum. The revised note is payable in 99 equal monthly installments of $8,417, including interest, plus a final payment of $1,138,104 (excluding interest) on October 31, 2024. Our minimum future principal payments on this term loan, by year, are as follows:
Year
|
|
|
Amount
|
|
|
|
|
|
|
2018
|
|
|
$
|
42,535
|
|
2019
|
|
|
|
44,292
|
|
2020
|
|
|
|
45,964
|
|
2021
|
|
|
|
48,021
|
|
2022
|
|
|
|
50,005
|
|
2023– 2024
|
|
|
|
1,230,599
|
|
Total
|
|
|
|
1,461,416
|
|
Less financing cost
|
|
|
|
(9,130
|
)
|
Net term loan payable
|
|
|
|
1,452,286
|
|
Less current portion
|
|
|
|
(42,101
|
)
|
Long term portion
|
|
|
$
|
1,410,185
|
|
Employee Severance Benefits
. Our obligation with respect to employee severance benefits is minimized by the "at will" nature of the employee relationships. As of December 31, 2017 we had no obligation with respect to contingent severance benefit obligations other than the Company's obligations under the employment agreement with its chief executive officer, Dr. Wayne Willkomm. In the event that Dr. Willkomm's employment is terminated by the Company without Cause (including through a decision by the Company not to renew the employment agreement) or by Dr. Willkomm with Good Reason (as each are defined in the employment agreement), Dr. Willkomm will be eligible, upon satisfaction of certain conditions, for severance equal to two months of salary continuation plus 12 months of health insurance continuation.
Contractual Commitments and Purchase Orders
. Contractual commitments under development agreements and outstanding purchase orders issued to vendors in the ordinary course of business totaled $1,770,157 at December 31, 2017.
Regulatory Commitments
. With respect to our LifeGuard® product, we are subject to regulation by the United States Food and Drug Administration ("FDA"). The FDA provides regulations governing the manufacture and sale of our LifeGuard® product, and we are subject to inspections by the FDA to determine our compliance with these regulations. FDA inspections are conducted periodically at the discretion of the FDA. On June 26, 2017, we were inspected by the FDA and no violations were issued. We are also subject to regulation by the DOT and by various state departments of transportation so far as our other products are concerned. We believe that we are in substantial compliance with all known applicable regulations.
7.
LINE OF CREDIT
As part of the long-term financing of our property purchased on October 31, 2014, we obtained a one-year $250,000 revolving line of credit facility with Bank of America, which matured on October 31, 2015 and was extended to June 30, 2017, and bears interest at a rate equal to the LIBOR daily floating rate of 1.4375% and .6882% on December 31, 2017 and 2016, respectively, plus 2.5%. The agreement was amended May 15, 2017 to increase the amount of the line to $750,000 and extend the maturity date to June 30, 2018. The revolving line of credit facility is secured by all personal property and assets, whether now owned or hereafter acquired, wherever located. There was no balance due on the line of credit as of December 31, 2017 and December 31, 2016.
8.
INCOME TAXES
We account for income taxes under ASC 740, which requires the use of the liability method. ASC 740 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized. We have a Federal General Business Credit carryover available for 2018 of $63,881.
Our income tax provision is summarized below:
Years Ended
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
15,177
|
|
|
$
|
114,335
|
|
State
|
|
|
5,783
|
|
|
|
27,686
|
|
Total current
|
|
|
20,960
|
|
|
|
142,021
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
41,845
|
|
|
|
10,199
|
|
State
|
|
|
1,351
|
|
|
|
1,415
|
|
Total deferred
|
|
|
43,196
|
|
|
|
11,614
|
|
Total
|
|
$
|
64,156
|
|
|
$
|
153,635
|
|
|
|
|
|
|
|
|
|
|
On December 22, 2017, the new Federal tax law was signed, lowering the corporate tax rate to 21%. The resulting change in deferred taxes is noted in the table below. 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:
Years Ended
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Federal statutory rate
|
|
$
|
29,706
|
|
|
$
|
193,896
|
|
Effect of:
|
|
|
|
|
|
|
|
|
State taxes, net of federal tax benefit
|
|
|
7,134
|
|
|
|
29,101
|
|
Research & development credit
|
|
|
(14,529
|
)
|
|
|
(67,330
|
)
|
Federal tax rate change
|
|
|
32,110
|
|
|
|
-
|
|
Other
|
|
|
9,735
|
|
|
|
(2,032
|
)
|
Total
|
|
$
|
64,156
|
|
|
$
|
153,635
|
|
The components of the deferred tax asset are as follows:
|
|
Years Ended December 31,
|
|
Current Deferred Tax Assets:
|
|
2017
|
|
|
2016
|
|
Bad debt reserve
|
|
$
|
8,971
|
|
|
$
|
13,300
|
|
Inventory reserve
|
|
|
15,378
|
|
|
|
33,250
|
|
Accrued vacation
|
|
|
15,830
|
|
|
|
20,256
|
|
Deferred income
|
|
|
16,100
|
|
|
|
27,721
|
|
Warranty reserve
|
|
|
10,252
|
|
|
|
15,200
|
|
Total deferred tax assets
|
|
$
|
66,531
|
|
|
$
|
109,727
|
|
Our income tax returns are no longer subject to Federal tax examinations by tax authorities for years before 2014 or state examinations for years before 2013.
9.
LEGAL PROCEEDINGS
We were not involved or party to any legal proceedings at December 31, 2017 or December 31, 2016, and therefore made no accruals for legal proceedings in either 2017 or 2016.
10.
MAJOR CUSTOMERS/SUPPLIERS
We depend on sales that are generated from our customers' ongoing usage of alcohol testing instruments.
One customer contributed 8% ($623,506) to our total sales in 2017, a second customer contributed 5% ($418,819), a third customer contributed 4% ($290,098), and no other customer contributed more than 3%. One customer contributed 7% ($625,874) to our total sales in 2016, a second customer contributed 5% ($385,840), a third customer contributed 4% ($369,815), and no other customer contributed more than 3%. In making this determination, we considered the federal government, state governments, local governments, and foreign governments each as a single customer.
In 2017, we depended upon three vendors for approximately 35% of our purchases (three vendors and 24% respectively in 2016).
11.
DEFINED CONTRIBUTION EMPLOYEE BENEFIT PLAN
We have adopted a 401(k) Profit Sharing Plan ("401(k) Plan") which covers all full-time employees who have completed 3 months of full-time continuous service and are age eighteen or older. Participants may defer up to 100% of their gross pay up to 401(k) Plan limits. Participants are immediately vested in their contributions. We make monthly discretionary matching contributions of 3% of the total payroll of the participating employees. In 2017 and 2016 we contributed $51,456 and $45,142 respectively. The participants vest in Company contributions based on years of service, with a participant fully vested after six years of credited service.
12.
LICENSE OF SOFTWARE
In 2012 we granted a non-exclusive license to two customers for the use of our patented breath alcohol testing algorithms. The agreement provides for termination pursuant to notice requirements, and further provides for royalties based on the number of units sold which incorporate our software. The transaction is being accounted for under the guidance of ASC 605-10,
Revenue Recognition
, which states, in part, revenue can be recognized when collection of the fee agreement can be reasonably assured.
13.
BUSINESS SEGMENTS
We currently have two business segments: (i) the sale of physical products, including portable hand-held breathalyzers and related accessories, supplies, education, training ("Product Sales"), and royalties from development contracts with OEM manufacturers ("Royalties" and, together with Product Sales, the "Products" segment), and (ii) rental of a portion of our building (the "Rentals" segment). The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2.
Operating profits for these segments exclude unallocated corporate items. Administrative and staff costs were commonly used by all business segments and were indistinguishable.
The following sets forth information about the operations of the business segments for the years ended December 31, 2017 and 2016.
|
|
2017
|
|
|
2016
|
|
Product sales
|
|
$
|
7,629,474
|
|
|
$
|
7,888,786
|
|
Royalties
|
|
|
289,588
|
|
|
|
392,603
|
|
Products subtotal
|
|
|
7,919,062
|
|
|
|
8,281,389
|
|
Rentals
|
|
|
71,676
|
|
|
|
99,746
|
|
Total
|
|
$
|
7,990,738
|
|
|
$
|
8,381,135
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss):
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
3,451,206
|
|
|
$
|
3,751,580
|
|
Royalties
|
|
|
289,588
|
|
|
|
392,603
|
|
Products subtotal
|
|
|
3,740,794
|
|
|
|
4,144,183
|
|
Rentals
|
|
|
(27,930
|
)
|
|
|
34,223
|
|
Total
|
|
$
|
3,712,864
|
|
|
$
|
4,178,406
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
31,827
|
|
|
$
|
38,582
|
|
Royalties
|
|
|
-
|
|
|
|
-
|
|
Products subtotal
|
|
|
31,827
|
|
|
|
38,582
|
|
Rentals
|
|
|
28,878
|
|
|
|
27,381
|
|
Total
|
|
$
|
60,705
|
|
|
$
|
65,963
|
|
|
|
|
|
|
|
|
|
|
Net income before taxes:
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
(154,021
|
)
|
|
$
|
187,341
|
|
Royalties
|
|
|
289,588
|
|
|
|
392,603
|
|
Products subtotal
|
|
|
135,567
|
|
|
|
579,944
|
|
Rentals
|
|
|
(56,808
|
)
|
|
|
6,842
|
|
Total
|
|
$
|
78,759
|
|
|
$
|
586,786
|
|
There were no intersegment revenues.
At December 31, 2017, $904,768 of our assets were used in the Rentals segment, with the remainder, $7,186,591, used in the Products and unallocated segments.
Future rental income and related expenses will depend on whether existing leases are renewed. Minimum base rents for leases in place at December 31, 2017 are scheduled to be $58,886 in 2018, $59,892 in 2019, and $32,768 in 2020.
14.
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.