ITEM 2 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our financial
condition and results of operations, and should be read in conjunction with our financial statements and the related notes included
elsewhere in this Form 10-Q. Certain statements contained in this section are not historical facts, including statements
about our strategies and expectations about new and existing products, market demand, acceptance of new and existing products,
technologies and opportunities, market and industry segment growth, and return on investments in products and markets. These
statements are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and we intend such
forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in these statutes. You
can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "intends," "plans" or "anticipates"
or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends
and that do not relate solely to historical matters. Such statements involve substantial risks and uncertainties that
may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking
statements in this section are based on information available to us on the date of this document, and we assume no obligation to
update such forward looking statements. Readers of this Form 10-Q are strongly encouraged to review the section entitled
"Risk Factors" in our December 31, 2018 Form 10-K.
Overview
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.stsfirst.com
and www.lifeguardbreathtester.com. Information contained on our websites does not constitute part of this Form 10-Q
unless expressly stated.
Principal Products and Services and Methods of Distribution
Alcohol Breath Testers
In 1989, we introduced our first breath
alcohol tester, the PBA3000. Our Phoenix® Classic was completed and released for sale in 1998, superseding the PBA3000. In
turn, the Phoenix® Classic has been superseded by our FC Series and Workplace Series of portable breath alcohol testers, which
are discussed below. Neither the PBA3000 nor the Phoenix® Classic is actively sold today.
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In 2001, we completed and released for
sale our new FC Series, designed specifically for domestic and international law enforcement and corrections markets. The portable
breath alcohol testers comprising our FC Series are currently being sold worldwide, having contributed to our growth since their
introduction. The FC Series is designed to meet the needs of domestic and international law enforcement for roadside drink/drive
testing and alcohol offender monitoring. The FC Series is approved by the U.S. Department of Transportation ("DOT") as
an evidential breath tester, making it suitable for sale to state law enforcement agencies for preliminary roadside breath alcohol
testing. The FC Series is routinely updated with firmware, software and component improvements as they become available. It
is readily adaptable to the specific requirements and regulations of domestic and international markets.
In 2005 and 2006, we introduced two new
models, the EV30 and Phoenix® 6.0 Evidential Breath Tester ("Phoenix® 6.0"), which constitute our Workplace Series
of testing devices. Like their predecessor, the Phoenix® Classic, and our FC Series, these instruments are DOT approved.
The DOT's specifications support the DOT's workplace alcohol testing programs, including those applicable to workplace alcohol
testing for the federally regulated transportation industry. We also sell component parts used in alcohol testing devices, such
as mouthpieces used by our breathalyzers, as well as forms and labels used for record keeping, and calibration products for user
re-calibration of our devices. We offer optional service agreements on our equipment, re-calibration services, and spare
parts, and we sell supporting instrument training and user certification training to our workplace customers.
In 2006, we commenced selling breath alcohol
equipment components that we manufacture to other OEMs for inclusion as subassemblies or components in their breath alcohol testing
devices.
In late 2009, Lifeloc released the LifeGuard®
Personal Breathalyzer ("LifeGuard®"), a personal alcohol breath tester that incorporates the same fuel-cell
technology used in our professional devices. Intended for the global consumer breathalyzer market, LifeGuard® is
marketed internationally through global distributors.
In 2011 and 2012, Lifeloc introduced Bluetooth
wireless keyboard and printer communication options for our Phoenix® 6.0 along with a series of web based workplace training
courses. We believe these two product innovations have been key to our success and leadership in workplace breath testing.
In 2013, Lifeloc expanded our FC Series
of professional breath alcohol testers targeted at domestic and international law enforcement and corrections markets with the
addition of the FC5 Hornet (the "FC5"). The FC5 is a passive (no mouthpieces required) portable handheld alcohol screening
device that competes directly with passive 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 use 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 DOT for our EASYCAL® automatic calibration station for use with our Phoenix ® 6.0 Evidential Breath Testers,
and we began shipments of the EASYCAL® to our law enforcement, corrections, workplace and international customers.
The EASYCAL® calibration station 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. In May of 2019, we received DOT approval on a second generation
EASYCAL® with broader capabilities called the EASYCAL® G2.
In October 2015, we expanded our Sentinel™
line with the Sentinel™ VA alcohol screening station, a fully automated station to control vehicular access to safety critical
facilities, such as mines, refineries, power stations and nuclear facilities. The Sentinel™ VA alcohol screening station
is intended to allow all drivers entering a secure area to be tested quickly and efficiently without leaving their vehicle.
In October, 2019 we received approval
from DOT for our LX9 and LT7 base unit alcohol breathalyzers, which will allow domestic sales of this product to commence in Q4
of 2019.
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Testers for Drugs of Abuse
In August 2016, we entered into an exclusive
patent license agreement with Sandia Corporation, Albuquerque, NM, pursuant to which we acquired the exclusive rights to develop,
manufacture and market Sandia's patented SpinDx™ technology for the detection of drugs of abuse. SpinDx™ uses a centrifugal
disk with micro fluidic flow paths allowing multiple tests to be carried out on a single small sample. Sandia Corporation
developed a prototype using the SpinDx™ technology under our Cooperative Research and Development Agreement which we received
in 2017 and are now commercializing. The SpinDx™ platform has the potential to improve real-time screening for a panel of
high-abuse drugs, with the ability to efficiently and quantitatively measure relatively low concentrations of drugs such as cocaine,
heroin, methamphetamine and other high-abuse drugs. We intend to use this technology, sometimes referred to as "Lab
on a Disk", to develop devices and tests that could be used at roadside, emergency rooms and in workplace testing to get a
rapid and quantitative measure for a panel of such drugs of abuse. We have detected delta-9-THC (the primary psychoactive
component of marijuana) down to concentrations of 5 nanograms per milliliter in our laboratory. This includes resolving the
psychoactive delta-9-THC from its inactive metabolites, an important step in establishing impairment. We completed the upgrade
of our base breathalyzer platform in 2019, and we remain committed to combining it with the SpinDx™ technology. Our goal
is to use this combination to develop a THC breathalyzer. There is no assurance that our efforts to develop a marijuana breathalyzer
will be successful or that significant sales will result from such development if successful.
In March 2017 we acquired substantially
all of the assets related to the Real-time Alcohol Detection and Reporting product ("R.A.D.A.R.®") from Track Group,
Inc. ("TRCK") for $860,000 in cash. The purchased assets included the R.A.D.A.R.® device with cellular reporting
for real-time alcohol monitoring, database infrastructure to tabulate and manage subscriber behavior, and biometric methodology
and intellectual property to fully automate identity verification. The R.A.D.A.R.® device was designed to be part of
an offender supervision program as an alternative to incarceration, and it is assigned to offenders as a condition of parole or
probation, with random testing throughout the day to demonstrate that they are meeting the conditions of their sentence.
We completed upgrading our base breathalyzer product line in Q4 of 2018 and have been submitting the models for local statutory
and regulatory approvals throughout 2019. We are nearing completion of work in improving the manufacturability of R.A.D.A.R.®
devices, which we expect to launch in Q1 of 2020.
Training
Drug and alcohol testing is highly regulated;
thus quality training is an important component of our business. Initially, our network of Master Trainers provided classroom
training which generated certification fees. This was expanded to include instructor materials, online training modules and
direct (live) training via webcam. In 2011, we launched Lifeloc University, a Learning Management System (LMS), defined as
"a software application for the administration, documentation, tracking, reporting and delivery of educational courses or
training programs." Lifeloc University is a critical component for online training courses since it provides student accountability.
In 2018, we updated and revised the Lifeloc University LMS utilizing responsive design so it could be viewed on mobile devices.
In December 2014, we acquired substantially
all of the assets of Superior Training Solutions, Inc. ("STS"), a company that develops and sells online drug and alcohol
training and refresher courses. We have augmented and updated the assets we acquired from STS to enable mobile device usage. These
assets complement our existing drug and alcohol training courses.
Real Property
On October 31, 2014, we purchased the commercial
property we use as our corporate headquarters and certain adjacent property in Wheat Ridge, Colorado. The building consists
of 22,325 square feet, of which 7,913 square feet are currently leased to two tenants under leases that expire at various times
in 2020. We intend to continue to lease the space we are not occupying, but in the future may elect to expand our own operations
into space currently leased to other tenants. Our purchase of the property was partially financed through a term loan in
an original principal amount of $1,581,106, secured by a first-priority mortgage on the property. The loan matures in October 2024.
Additional Areas of Interest
Consistent with our business goal of providing
"near and remote sensing" products and solutions, our acquisition strategy involves purchasing companies, development
resources and assets that are aligned with our areas of interest and that can further aid in our entering additional markets.
We expect to actively research and engage in the acquisition of resources that can expedite our entrance into new markets or strengthen
our position in existing ones.
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Results of Operations
For the three months ended September 30, 2019 compared
to the three months ended September 30, 2018.
Net sales. Our product sales for
the quarter ended September 30, 2019 were $2,083,044, an increase of 5% from $1,985,520 for the quarter ended September 30, 2018. This
increase is primarily attributable to an increase in demand. When royalties of $153,922 and rental income of $21,189
are included, total revenues of $2,258,155 increased by $202,396, or 10%, for the quarter ended September 30, 2019 when compared
to the same quarter a year ago.
Gross profit. Our total gross
profit for the three months ended September 30, 2019 of $1,065,067 represented an increase of 13% from total gross profit of $944,692
for the same period a year earlier. This increase is primarily a result of increased sales volume and increased royalties. Cost
of product sales increased from $1,093,964 in Q3 of 2018 to $1,174,960 in Q3 of 2019, or 7%, primarily as a result of increased
labor and materials required for the increased sales volume, as well as increased tariffs. Gross profit margin on products
went from 45% in Q3 of 2018 to 44% in Q3 of 2019 mostly as a result of increased tariffs.
Research and development expenses.
Our research and development expenses were $253,716 for the quarter ended September 30, 2019 were relatively unchanged from the
$249,092 in the same quarter a year ago.
Sales and marketing expenses.
Our sales and marketing expenses of $329,824 for the quarter ended September 30, 2019 were relatively unchanged from the $331,505
for the quarter ended September 30, 2018.
General and administrative expenses.
Our general and administrative expenses of $287,814 for the quarter ended September 30, 2019 increased by 6% from $271,172
in the same period a year ago. This increase resulted mostly from increased compensation.
Other income (expense). Our
other income consisted of interest income of $10,454 in the quarter ended September 30, 2019 compared to $7,676 in the same quarter
a year ago, an increase of $2,778, mostly as the result of higher yields on increased cash available for investment in Q3 of 2019.
Our interest expense of $14,513 in the current quarter over $14,957 in the same period a year ago is the result of the balance
of the term loan on our building declining.
Net income. Our net income
was $151,525 for the quarter ended September 30, 2019 compared to net income of $58,164 for the quarter ended September 30, 2018. This
increase of $93,361 was the result of the changes in revenues, gross profit and operating expenses discussed above, offset in part
by an increase in income taxes of $10,651.
For the nine months ended September 30, 2019 compared to the
nine months ended September 30, 2018.
Net sales. Our product sales for the
nine months ended September 30, 2019 were $6,219,779, an increase of $98,226 or 2% from $6,121,553 for the same period a year ago. When
royalties of $376,906 and rental income of $67,953 are included, total revenues of $6,664,638 increased by $277,721, or 4%, for
the nine months ended September 30, 2019 when compared to the same nine months a year ago.
Gross profit. Total gross profit
for the nine months ended September 30, 2019 of $3,152,403 represented an increase of 7% from total gross profit of $2,940,325
for the nine months a year earlier primarily as a result of increased product sales and royalties. Cost of product sales
increased from $3,386,406 in the nine months ended September 30, 2018 to $3,460,986, or 2% in the current period. Gross profit
margin on products went from 45% in 2018 to 44% 2019, mostly as a result of increased tariffs.
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Research and development expenses.
Research and development expenses were $742,884 for the nine months ended September 30, 2019, representing a decrease of 12% from
the $840,647 in the same period a year ago. This decrease resulted primarily from lower payments to outside vendors
in connection with the work needed to upgrade and re-launch R.A.D.A.R®.
Sales and marketing expenses.
Sales and marketing expenses of $961,746 for the nine months ended September 30, 2019 decreased $35,817, or 4%, from the $997,563
in the same nine months ended September 30, 2018, mostly as a result of decreased compensation.
General and administrative expenses.
General and administrative expenses of $908,607 for the nine months ended September 30, 2019 were up by $43,978, or 5%,
from the $864,629 spent in the same nine months a year ago. This increase resulted primarily from increased compensation.
Other income (expense). Other
income consisted of interest income of $27,726 in the nine months ended September 30, 2019 vs. $14,113 in the same period
a year ago, primarily as the result of improved yields available on cash invested during the current period. Interest expense
of $43,404 in the current 9 months is down from $47,045 in the same period a year ago as the result of the balance of the term
loan on our building declining.
Net income. We realized net income
of $401,209 for the nine months ended September 30, 2019 compared to net income of $147,493 for the same nine months ended September
30, 2018. This increase of $253,716 was the result of the changes in gross profit and operating expenses discussed above,
offset in part by an increase in income taxes of $65,218.
Trends and Uncertainties That May Affect Future Results
Revenues in the third quarter of 2019 were
higher compared to revenues in 2018. We believe changing market conditions together with the domestic launch of our base
breathalyzer product line in Q4 may result in further increases in revenues for the remainder of 2019, and with the re-launch of
R.A.D.A.R.® in Q1 of 2020, further increases in revenues in 2020. 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 2019 operating plan and our 2020 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 2019 or 2020. However, we believe that cash resources and borrowing capacity will be sufficient
to fund our operations for the next twelve months under our current operating plan. If we are unable to manage the business
operations in line with our budget expectations, it could have a material adverse effect on business viability, financial position,
results of operations and cash flows. Further, if we are not successful in sustaining profitability and remaining at least cash
flow break-even, additional capital may be required to maintain ongoing operations.
Liquidity and Capital Resources
We compete in a highly technical, very
competitive and, in most cases, price driven alcohol testing marketplace, where products can take years to develop and introduce
to distributors and end users. Furthermore, manufacturing, marketing and distribution activities are regulated by the
FDA, the DOT, and other regulatory bodies that, while intended to enhance the ultimate quality and functionality of products produced,
can contribute to the cost and time needed to maintain existing products and develop and introduce new products.
We have traditionally funded working capital
needs through product sales and close management of working capital components of our business. Historically, we have
also received cash from private offerings of our common stock, warrants to purchase shares of our common stock, and notes. In our
earlier years, we incurred quarter to quarter operating losses to develop current product applications, utilizing a number of proprietary
and patent-pending technologies. Although we have been profitable during the last several years, we expect that operating
losses could well occur in the future. Should that situation arise, we may not be able to obtain working capital funds
necessary in the time frame needed and at satisfactory terms or at all.
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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 2017), 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 (increased
to $500,000 in 2016, and again to $750,000 in 2017), which matures June 30, 2020, 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%. As of September
30, 2019, this credit facility had not been used.
Building improvements during the nine
months ended September 30, 2019 were $23,552, compared to none in the same period a year ago. Equipment expenditures
during the 9 months ended September 30, 2019 were $142,936 (consisting primarily of molds for our new base unit and the
upgraded version of R.A.D.A.R.®, as well as office equipment), compared to $378,567 in the same period a year ago.
We filed no patent applications at a cost to us of $0 in the first 9 months of 2019 and $6,648 in the same period in
2018.
As of September 30, 2019, cash was $2,922,176,
accounts receivable were $754,680 and current liabilities were $1,112,044 resulting in a net liquid asset amount of $2,564,812. 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 may be required to implement cost reduction measures, as necessary.
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, 2019 and for the quarter ended September 30, 2018, 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.
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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. Maintenance
and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.
In March 2017, we acquired the R.A.D.A.R.®
assets from TRCK, which consisted of production equipment and of hardware device technology (the "Devices") that are
depreciated over 5 years using the double declining balance method when placed in service. With the R.A.D.A.R.® assets, we
also purchased software designed to measure breath alcohol content of the user and software technology designed to allow the Devices
to be configured and to capture and manage the data being returned from the Device, as well as 6 issued U.S. patents and 16 domestic
and international patent applications. This software and the patents and patent applications are being amortized over 15
years using the straight line method.
Revenue from product sales and supplies
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.
The sales of licenses to our training courses
are recognized as revenue at the time of sale. Training and certification revenues are recognized at the time the training
and certification occurs. Data recording revenue is recognized based on each day's usage of enrolled devices.
Revenues arising from extended warranty
contracts are booked as sales over their life on a straight-line basis. We are providing for customer financing and leasing,
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 rental of equipment
and extended service plans are recognized over the life of the contracts.
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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.
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.