Notes to Financial Statements
December 31, 2021 and
2020
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 and monitoring" 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.stsfirst.com and www.lifeguardbreathtester.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, 2021 and 2020 was $813 and $1,085 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.
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.
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 one financial institution exceeded the $250,000 federally insured limit at December 31, 2021 by $993,331, by $214,830
at a second financial institution, and by $360,478 at a third financial institution. 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. 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:
Schedule of allowance for doubtful accounts | |
| |
|
Years Ended December
31 | |
2021 | |
2020 |
Balance, beginning of year | |
$ | 54,000 | | |
$ | 30,000 | |
Provision for estimated losses | |
| (48,712 | ) | |
| 25,042 | |
Recovery (write-off) of uncollectible accounts | |
| (288 | ) | |
| (1,042 | ) |
Balance, end of year | |
$ | 5,000 | | |
$ | 54,000 | |
The net accounts receivable
balance at December 31, 2021 of $562,092 included an account from one customer of $71,522 (13%), $57,500 from a second customer (10%),
and no more than 3% from any other single customer. The net accounts receivable balance at December 31, 2020 of $523,603 included
an account from one customer of $182,510 (35%), $67,183 from a second customer (13%), and no more than 10% from any other single customer.
Inventories.
Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. 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, 2021 and December 31, 2020, inventory consisted of the following:
Inventories | |
| |
|
| |
2021 | |
2020 |
Raw materials & deposits | |
$ | 2,179,332 | | |
$ | 2,116,389 | |
Work-in-process | |
| 84,963 | | |
| 16,862 | |
Finished goods | |
| 559,494 | | |
| 524,875 | |
Total gross inventories | |
| 2,823,789 | | |
| 2,658,126 | |
Less reserve for obsolescence | |
| (155,000 | ) | |
| (160,000 | ) |
Total net inventories | |
$ | 2,668,789 | | |
$ | 2,498,126 | |
A summary of the activity
in our inventory reserve for obsolescence is as follows:
Inventory reserve | |
| |
|
Years Ended December
31 | |
2021 | |
2020 |
Balance, beginning
of year | |
$ | 160,000 | | |
$ | 140,000 | |
Provision for estimated obsolescence | |
| 23,585 | | |
| 64,753 | |
Write-off
of obsolete inventory | |
| (28,585 | ) | |
| (44,753 | ) |
Balance,
end of year | |
$ | 155,000 | | |
$ | 160,000 | |
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 space modifications and for training courses; 39 years for the
cost of the building we purchased in October 2014. We utilize the declining method of depreciation for property, equipment
and space modifications, 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, 2021 and 2020 was $254,010 and $343,834 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, 2021 and 2020 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, 2021 and 2020 was $12,883 and $19,417 respectively. Amortization expense for each
of the next 5 years is estimated to be $12,932 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 $5,990 were included in amortization expense
for the years ended December 31, 2021 and 2020 respectively. A summary of our patents at December 31, 2021 and 2020 is as follows:
Patents | |
| |
|
| |
2021 | |
2020 |
Patents issued | |
$ | 190,508 | | |
$ | 190,508 | |
Patent applications | |
| 30,905 | | |
| 28,296 | |
Accumulated amortization | |
| (86,985 | ) | |
| (74,102 | ) |
Total net patents | |
$ | 134,428 | | |
$ | 144,702 | |
| |
| | | |
| | |
Deposits and Other
Assets. We include the long-term portion of installment receivables with deposits.
Accrued Expenses. We
have accrued various expenses in our December 31 balance sheets, as follows.
Accrued expenses | |
| |
|
| |
2021 | |
2020 |
Compensation | |
$ | 187,729 | | |
$ | 165,686 | |
Property and other taxes | |
| 68,514 | | |
| 69,109 | |
Rebates | |
| 42,287 | | |
| 31,471 | |
Total accrued expenses | |
$ | 298,530 | | |
$ | 266,266 | |
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:
Product warranty reserve | |
| |
|
Years Ended December
31 | |
2021 | |
2020 |
Balance, beginning
of year | |
$ | 46,500 | | |
$ | 45,000 | |
Provision for estimated
warranty claims | |
| 25,818 | | |
| 27,279 | |
Claims
made | |
| (25,818 | ) | |
| (25,779 | ) |
Balance,
end of year | |
$ | 46,500 | | |
$ | 46,500 | |
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, 2021 and 2020, we did not have any interest or penalties or any significant uncertain tax positions.
Revenue Recognition.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606). This ASU is a comprehensive new revenue recognition model that requires a company
to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects
to receive in exchange for those goods or services. We adopted this ASU on January 1, 2018 retrospectively, with the cumulative
effect of initial application (which was zero) recognized in retained earnings on that date.
Revenue from product
sales and supplies is generally recorded when we ship the product and title has passed to the customer, or when agreed milestones are
met in the case of product developments, 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 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.
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 and product developments. Customer deposits are initially recorded as a liability
and recognized as revenue when the product is shipped and title has passed to the customer, or when agreed milestones are met in the
case of product developments.
Topic 606 requires
the disaggregation of revenue into broad categories, which we have defined as shown below.
Disaggregation of revenue | |
|
| |
Year
Ended December 31, |
Product sales: | |
2021 | |
2020 |
Product sales and supplies | |
$ | 5,992,880 | | |
$ | 5,509,424 | |
Training, certification and data recording | |
| 624,167 | | |
| 541,580 | |
Service plans and equipment rental | |
| 281,908 | | |
| 71,344 | |
Product sales subtotal | |
| 6,898,955 | | |
| 6,122,348 | |
Royalties | |
| 67,526 | | |
| 148,398 | |
Rental income | |
| 87,949 | | |
| 85,956 | |
Total revenues | |
$ | 7,054,430 | | |
$ | 6,356,702 | |
| |
| | | |
| | |
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.
Paycheck Protection Loans.
Loans. In 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allocated $350 billion to help small
businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program (“PPP”),
the initiative provided federally guaranteed loans to small businesses. A portion or all of these loans were to be forgiven if
borrowers complied with certain PPP guidelines including spending the funds on authorized expenses and maintaining their payrolls during
the crisis or restore their payrolls afterward. On May 4, 2020, the Company received proceeds of $465,097 from Bank of America under
the PPP (the “PPP Loan”). Proceeds of $471,347 were received from a second loan with similar terms in February, 2021. The
PPP provided that the PPP Loan could be partially or wholly forgiven if the funds were used for certain qualifying expenses as described
in the CARES Act. The Company used the entire PPP Loan amounts for qualifying expenses, and the loans were forgiven in their entirety
in February, 2021 and September, 2021 respectively. No interest on either loan has been recognized in our financial statements.
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 in good standing who meet the required sales threshold 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.
Recent Accounting
Pronouncements. We have reviewed all recently issued, but not yet effective, accounting pronouncements. None are
pending that will have a material impact on our financial statements or related disclosures.
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 2021 and 2020 was $17,157 and $30,351 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 June 30, 2022.
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, 2021 and 2020 was $0.01 and $0 per share, respectively.
3. BASIC AND DILUTED INCOME
AND LOSS PER COMMON SHARE
We report both basic
and diluted net income or loss per common share. Basic net income or loss per common share is computed by dividing net income
or loss for the period by the weighted average number of common shares outstanding for the period. Diluted net income or loss
per common share is computed by dividing the net income or loss for the period by the weighted average number of common and potential
common shares outstanding during the period if the effect of the potential common shares is dilutive. The shares used in the
calculation of dilutive potential common shares exclude options to purchase shares where the exercise price was greater than the average
market price of common shares for the period.
The following table presents the calculation
of basic and diluted net income per common share:
basic and diluted net income per common share | |
| | | |
| | |
| |
Years
Ended December 31, |
| |
2021 | |
2020 |
Net income (loss) | |
$ | 675,967 | | |
$ | (921,930 | ) |
Weighted average shares-basic | |
| 2,454,116 | | |
| 2,454,116 | |
Effect of dilutive potential common shares | |
| 64,779 | | |
| — | |
Weighted average shares-diluted | |
| 2,518,895 | | |
| 2,454,116 | |
Net income (loss) per share-basic | |
$ | 0.28 | | |
$ | (0.38 | ) |
Net income (loss) per share-diluted | |
$ | 0.27 | | |
$ | (0.38 | ) |
Antidilutive employee stock options | |
| — | | |
| — | |
4. 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 with vesting conditioned on meeting performance standards. An additional
total of 110,500 options were granted during the year ended December 31, 2020, 48,000 of which were granted to two officers and three
directors. Out of that 48,000, the officers were granted 37,500 and 7,500 and the directors were granted 1,000 each. These options vested
immediately upon granting. Upon separation of employment, the 7,500 granted to the officer expired without being exercised. No options
were exercised during the year ended December 31, 2021 or during the year ended December 31, 2020.
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, 2021 and 2020 is as follows:
Summary of our stock option activity | | |
| | |
| | |
| STOCK
OPTIONS
OUTSTANDING
| |
| | |
| Number Outstanding | | |
| Weighted
Average Exercise
Price Per Share | |
BALANCE
AT DECEMBER 31, 2019 | | |
| 28,000 | | |
$ | 5.95 | |
Granted | | |
| 110,500 | | |
| 3.80 | |
Exercised | | |
| — | | |
| — | |
Forfeited/expired | | |
| (39,750 | ) | |
| — | |
BALANCE
AT DECEMBER 31, 2020 | | |
| 98,750 | | |
$ | 4.09 | |
Granted | | |
| 20,500 | | |
| 3.80 | |
Exercised | | |
| — | | |
| — | |
Forfeited/expired | | |
| (6,250 | ) | |
| — | |
BALANCE
AT DECEMBER 31, 2021 | | |
| 113,000 | | |
$ | 3
.80 | |
The following table summarizes information
about employee stock options outstanding and exercisable at December 31, 2021:
Stock options outstanding and exercisable | | |
| |
|
| | |
STOCK
OPTIONS OUTSTANDING | |
STOCK
OPTIONS EXERCISABLE |
Range
of Exercise Prices | | |
Number Outstanding | |
| Weighted-Average Remaining
Contractual Life
(in Years) | | |
| Weighted-Average Exercise
Price per
Share | | |
Number Exercisable | |
| Weighted-Average Exercise
Price per
Share | |
3.80 | | |
113,000 | |
| 3.33 | | |
$ | 3.80 | | |
113,000 | |
$ | 3.80 | |
The exercise price
of all options granted through December 31, 2021 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, 2021, 30,300 options 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 2018 in conjunction with the amendment of an employment agreement.
In accordance with the terms of the grant, the number of options was reduced to 25,000 on December 31, 2019, and further reduced to 0
on December 31, 2020 as vesting of these options is subject to performance that was not achieved. 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 2020, the pricing model assumptions
were: risk-free interest rate .88%, expected life 5 years, expected volatility 23%, expected dividend rate 0%. For the options granted
in 2021, the pricing model assumptions were: risk-free interest rate .85%, expected life 5 years, expected volatility 24%, expected dividend
rate 0%. Applying these assumptions resulted in a fair value of $17,157 and $92,698 in 2021 and 2020 respectively, all of which was charged
against operations with a corresponding credit to capital. Unvested options were credited against operations, which resulted in total
share-based compensation cost of $17,157 and $30,351 for the years ended December 31, 2021 and 2020 respectively.
No options were exercised
during the years ended December 31, 2021 and 2020.
The total number of
authorized shares of common stock continues to be 50,000,000 with no change in the par value per share.
5. 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. This loan was paid on September 30, 2021 with proceeds
from a new term loan also secured by a first-priority mortgage on the property, in the principal amount of $1,350,000 which matures in
September, 2031.
The new note is payable
in 119 equal monthly installments of $7,453, including interest, plus a final payment of $786,607 (excluding interest) on September 30,
2031. Our minimum future principal payments on this term loan, by year, are as follows:
Minimum future lease payments | | |
| | |
2022 | | |
$ | 50,663 | |
2023 | | |
| 52,178 | |
2024 | | |
| 53,738 | |
2025 | | |
| 55,345 | |
2026 | | |
| 57,000 | |
2027
– 2031 | | |
| 1,068,642 | |
Total | | |
| 1,337,566 | |
Less
financing cost | | |
| (21,501 | ) |
Net term
loan payable | | |
| 1,316,065 | |
Less
current portion | | |
| (48,513 | ) |
Long
term portion | | |
$ | 1,267,552 | |
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, 2021 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 $811,534 at December 31, 2021.
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.
6. LINE
OF CREDIT AND PAYCHECK PROTECTION LOAN
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, 2018. The agreement was amended to increase
the amount of the line to $750,000 and extend the maturity date to September 28, 2021. The revolving line of credit facility expired
in accordance with its terms and has not been renewed. There was no balance due on the line of credit as of December 31, 2021 and
December 31, 2020.
The Coronavirus
Aid, Relief, and Economic Security (“CARES”) Act allocated $350 billion to help small businesses keep workers employed amid
the pandemic and economic downturn. Known as the Paycheck Protection Program (“PPP”), the initiative provides federally guaranteed
loans to small businesses. A portion or all of these loans may be forgiven if borrowers comply with certain PPP guidelines including
spending the funds on authorized expenses and maintaining their payrolls during the crisis or restore their payrolls afterward. On May
4, 2020, the Company received proceeds of $465,097 from Bank of America under the PPP (the “PPP Loan”). The funds were used
for certain qualifying expenses as described in the CARES Act, and the loan was forgiven in its entirety in February, 2021. Proceeds
of $471,347 were received from a second loan with similar terms in February, 2021 and the funds were used for certain qualifying expenses
as described in the CARES Act, and the loan was forgiven in September, 2021. No interest on either loan has been recognized in our financial
statements.
7. INCOME
TAXES
We account for
income taxes under ASC 740, which requires the use of the liability method. ASC 740 provides that deferred taxassets 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. The CARES Act provided for carrying back our 2020 net operating loss, which resulted in previous Federal
General Business Credits being eliminated, and a carryover available for 2021 of $179.426. After various adjustments, including the exclusion
from taxable income of forgiveness of the Paycheck Protection loans, we reported a loss for tax purposes of $259,180 in 2021. Thus the
Federal General Business Credit carryover is increased by unused 2021 credits of $71,341, making $250,767 available for 2022. The net
operating loss carryback has been eliminated and our 2021 loss may be carried forward indefinitely.
Our income tax (benefit)
provision is summarized below:
Schedule of income tax provision | |
| |
|
Years Ended | |
December
31, 2021 | |
December
31, 2020 |
Current: | |
| | | |
| | |
Federal | |
$ | — | | |
$ | (213,924 | ) |
State | |
| — | | |
| — | |
Total current | |
| — | | |
| (213,924 | ) |
Deferred: | |
| | | |
| | |
Federal | |
| (47,940 | ) | |
| (9,227 | ) |
State | |
| (8,367 | ) | |
| (52,257 | ) |
Total deferred | |
| (56,307 | ) | |
| (61,484 | ) |
Total | |
$ | (56,307 | ) | |
$ | (275,408 | ) |
| |
| | | |
| | |
The items accounting for the difference
between income taxes computed at the federal statutory rate and the (benefit) provision for income taxes consists of the following:
Schedule of income tax reconciliation | |
| |
|
Years Ended | |
December
31, 2021 | |
December
31, 2020 |
Federal statutory rate | |
$ | 130,129 | | |
$ | (194,152 | ) |
Effect of: | |
| | | |
| | |
State taxes, net of federal tax benefit | |
| (2,335 | ) | |
| (52,258 | ) |
Research & development credit | |
| — | | |
| — | |
Paycheck Protection loan forgiveness
and other | |
| (184,101 | ) | |
| (28,998 | ) |
Total | |
$ | (56,307 | ) | |
$ | (275,408 | ) |
| |
| | | |
| | |
The components of the
deferred tax asset are as follows:
Schedule of components of the deferred tax asset | |
| |
|
Current Deferred
Tax Assets: | |
December
31, 2021 | |
December
31, 2020 |
Bad debt reserve | |
$ | 1,275 | | |
$ | 13,840 | |
Inventory reserve | |
| 39,525 | | |
| 41,008 | |
Accrued vacation | |
| 16,988 | | |
| 19,816 | |
Deferred income | |
| 19,899 | | |
| 11,336 | |
Warranty reserve | |
| 11,858 | | |
| 11,918 | |
Federal and State net operating loss
carry forward | |
| 114,904 | | |
| 50,224 | |
Total | |
$ | 204,449 | | |
$ | 148,142 | |
Our income tax returns
are no longer subject to Federal or state tax examinations by tax authorities for years before 2016.
8. LEGAL PROCEEDINGS
We were not involved
or party to any legal proceedings at December 31, 2021 or December 31, 2020, and therefore made no accruals for legal proceedings in
either 2021 or 2020.
9. MAJOR
CUSTOMERS/SUPPLIERS
We depend on sales
that are generated from our customers' ongoing usage of alcohol testing instruments.
One customer
contributed 4%
($300,103)
to our product sales in 2021, a second customer contributed 3%
($228,162),
a third customer contributed 3%
($204,512),
and no other customer contributed more than 3%. One customer contributed 6%
($380,990)
to our total sales in 2020, a second customer contributed 4% ($236,735), a third customer contributed 4% ($222,656), 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 2021, we depended
upon three vendors for approximately 21% of our purchases (three vendors and 21% respectively in 2020).
10. 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 2021 and 2020 we contributed $8,731 and $31,853 respectively. The participants
vest in Company contributions based on years of service, with a participant fully vested after six years of credited service.
11. 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, 2021 and 2020.
Operations of business segments | |
| |
|
| |
2021 | |
2020 |
Product sales | |
$ | 6,898,955 | | |
$ | 6,122,348 | |
Royalties | |
| 67,526 | | |
| 148,398 | |
Products subtotal | |
| 6,966,481 | | |
| 6,270,746 | |
Rentals | |
| 87,949 | | |
| 85,956 | |
Total | |
$ | 7,054,430 | | |
$ | 6,356,702 | |
| |
| | | |
| | |
Gross profit: | |
| | | |
| | |
Product sales | |
$ | 2,952,410 | | |
$ | 2,002,161 | |
Royalties | |
| 67,526 | | |
| 148,398 | |
Products subtotal | |
| 3,019,936 | | |
| 2,150,559 | |
Rentals | |
| 40,160 | | |
| 29,987 | |
Total | |
$ | 3,060,096 | | |
$ | 2,180,546 | |
| |
| | | |
| | |
Interest expense: | |
| | | |
| | |
Product sales | |
$ | 33,612 | | |
$ | 36,863 | |
Royalties | |
| — | | |
| — | |
Products subtotal | |
| 33,612 | | |
| 36,863 | |
Rentals | |
| 17,660 | | |
| 19,266 | |
Total | |
$ | 51,272 | | |
$ | 56,129 | |
| |
| | | |
| | |
Net income (loss) before taxes: | |
| | | |
| | |
Product sales | |
$ | 529,634 | | |
$ | (1,356,457 | ) |
Royalties | |
| 67,526 | | |
| 148,398 | |
Products subtotal | |
| 597,160 | | |
| (1,208,059 | ) |
Rentals | |
| 22,500 | | |
| 10,721 | |
Total | |
$ | 619,660 | | |
$ | (1,197,338 | ) |
There were no intersegment
revenues.
At December 31, 2021, $575,671 of our assets were used in the Rentals segment, with the remainder, $,$8,374,160, 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, 2021
are scheduled to be $54,956 in 2022 and $15,378 in 2023.
12. SUBSEQUENT
EVENTS
We evaluated all of
our activity and concluded that no subsequent events have occurred that would require recognition in our financial statements or disclosure
in the notes to our financial statements, except as follows.
On February 3, 2022
we granted 15,000 options to key employees, which have a term of 5 years, and which are immediately and fully vested. Under ASC 718,
the value of each 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. 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.
The factors used
to estimate the value of the revised option grant on February 3, 2022 and the resulting fair market value, are as follows.
Assumptions used for stock option grants | |
| | |
Stock price | |
| $3.80 | |
Exercise price per share | |
| $3.80 | |
Original term (years) | |
| 5 | |
Volatility | |
| 31.00% | |
Annual rate of quarterly dividends | |
| None | |
Risk free interest rate | |
| 1.66% | |
Fair market value of options | |
| $17,202 | |
The above fair
market value of these options will be a charge to our statement of income, with an offsetting credit to capital, for the quarter ending
March 31, 2022.
13. QUARTERLY
RESULTS (UNAUDITED)
Schedule of quarterly results | |
| |
| |
| |
|
2021 | |
Q1 | |
Q2 | |
Q3 | |
Q4 |
Revenues | |
$ | 1,809,543 | | |
$ | 1,729,636 | | |
$ | 1,887,488 | | |
$ | 1,627,763 | |
Gross profit | |
| 823,877 | | |
| 605,418 | | |
| 934,051 | | |
| 696,750 | |
Net income (loss)(1) | |
| 403,471 | | |
| (109,712 | ) | |
| 522,660 | | |
| (140,452 | ) |
Basic earnings (loss) per
share | |
| 0.16 | | |
| (0.04 | ) | |
| 0.21 | | |
| (0.05 | ) |
Diluted earnings (loss) per
share | |
$ | 0.16 | | |
$ | (0.04 | ) | |
$ | 0.21 | | |
$ | (0.05 | ) |
| |
| | | |
| | | |
| | | |
| | |
2020 | |
Q1 | |
Q2 | |
Q3 | |
Q4 |
Revenues | |
$ | 2,018,336 | | |
$ | 1,320,038 | | |
$ | 1,555,068 | | |
$ | 1,463,260 | |
Gross profit | |
| 778,076 | | |
| 328,069 | | |
| 597,104 | | |
| 477,297 | |
Net income (loss) | |
| (165,306 | ) | |
| (349,592 | ) | |
| (212,766 | ) | |
| (194,266 | ) |
Basic earnings (loss) per
share | |
| (0.07 | ) | |
| (0.14 | ) | |
| (0.09 | ) | |
| (0.08 | ) |
Diluted earnings (loss) per
share | |
$ | (0.07 | ) | |
$ | (0.14 | ) | |
$ | (0.09 | ) | |
$ | (0.08 | ) |
| (1) | Includes
PPP loan forgiveness of $465,097 in Q1. Includes PPP loan forgiveness of $471,347 in Q3. |