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.
Results of Operations
For the three months ended June 30, 2018 compared to the three months ended June 30, 2017
.
Net sales.
Our product sales for the quarter ended June 30, 2018 were $2,013,790, an increase of 7% from $1,879,405 for the quarter ended June 30, 2017. This increase is primarily attributable to an increase in demand. When royalties of $96,358 and rental income of $19,101 are included, total revenues of $2,129,249 increased by $82,869, or 4%, for the quarter ended June 30, 2018 when compared to the same quarter a year ago.
Gross profit.
Total gross profit for the three months ended June 30, 2018 of $995,470 represented a decrease of 2% from total gross profit of $1,012,726 for the same period a year earlier primarily as a result of an increase to our reserve for inventory obsolescence as well as decreased rental income and lower royalties in 2018. Cost of product sales increased from $1,019,801 in Q2 of 2017 to $1,112,941 in Q2 of 2018, or 9%, primarily as a result of increased labor and materials required for the increased sales volume, as well as increased depreciation and an increase to our reserve for inventory obsolescence. Gross profit margin on products was 55% in Q2 of 2018, compared to 54% in Q2 of 2017.
Research and development expenses.
Research and development expenses were relatively unchanged at $253,229 for the quarter ended June 30, 2018 vs. $251,825 in the same quarter a year ago.
Sales and marketing expenses.
Sales and marketing expenses of $330,657 for the quarter ended June 30, 2018 decreased from the $367,474 for the quarter ended June 30, 2017, with the decrease of $36,817 attributable primarily to decreased compensation.
General and administrative expenses.
General and administrative expenses of $296,124 for the quarter ended June 30, 2018 were also relatively unchanged from the $286,726 spent in the same quarter a year ago.
Other income (expense).
Other income consisted of interest income of $4,253 in the quarter ended June 30, 2018 vs. $2,230 in the same quarter a year ago, primarily as the result of increased yields available on cash. Interest expense of $17,374 in the current quarter is relatively unchanged from $15,187 in the same period a year ago.
Net income.
We realized net income of $78,129 for the quarter ended June 30, 2018 compared to net income of $67,868 for the quarter ended June 30, 2017. This increase of $10,261 was primarily the result of the changes in gross profit discussed above, augmented by a decrease in income taxes of $1,666.
For the six months ended June 30, 2018 compared to the six months ended June 30, 2017
.
Net sales.
Our product sales for the six months ended June 30, 2018 were $4,136,033, an increase of 10% from $3,761,594 for the same period a year ago. This increase is primarily attributable to an increase in demand. When royalties of $161,423 and rental income of $33,702 are included, total revenues of $4,331,158 increased by $300,307, or 8%, for the six months ended June 30, 2018 when compared to the same six months a year ago.
Gross profit.
Total gross profit for the six months ended June 30, 2018 of $1,995,633 represented an increase of 1% from total gross profit of $1,977,605 for the six months a year earlier primarily as a result of increased sales volume, partially offset by decreased rental income and lower royalties in 2018. Cost of product sales increased from $2,025,612 in the six months ended June 30, 2017 to $2,292,442 in the same period in 2018, or 13%, primarily as a result of increased labor and materials required for the increased sales volume, together with increased depreciation resulting from the purchase of production equipment and software. Gross profit margin on products increased from 54% in the six months ended June 30, 2017 to 55% in the six months ended June 30, 2018.
Research and development expenses.
Research and development expenses were $591,555 for the six months ended June 30, 2018, representing an increase of 32% over the $448,193 in the same period a year ago. This increase resulted primarily from increased compensation and from higher 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 $666,058 for the six months ended June 30, 2018 decreased $41,060 from the $707,118 in the same six months ended June 30, 2017.
General and administrative expenses.
General and administrative expenses of $593,457 for the six months ended June 30, 2018 were relatively unchanged from the $590,320 spent in the same six months a year ago.
Other income (expense).
Other income consisted of interest income of $6,437 in the six months ended June 30, 2018 vs. $3,646 in the same period a year ago, primarily as the result of less cash available for investment in Q1 of 2017 because of the asset acquisition in Q1 of 2017. Interest expense of $32,088 in the current 6 months is relatively unchanged from $30,311 in the same period a year ago.
Net income.
We realized net income of $89,329 for the six months ended June 30, 2018 compared to net income of $145,861 for the same six months ended June 30, 2017. This decrease of $56,532 was the result of the changes in gross profit and research and development expenses discussed above, offset in part by a decrease in income taxes of $29,865.
Trends and Uncertainties That May Affect Future Results
Revenues in the second quarter of 2018 were modestly higher compared to revenues in 2017. 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.
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.
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) 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 June 30, 2018 this credit facility had not been used.
Equipment expenditures during the six months ended June 30, 2018 were $373,368, consisting primarily of an enterprise planning software package for materials management, customer relations management and e-commerce, compared to $139,736 in the same period a year ago. Expense related to patent applications was $0 in the first six months of 2018 versus $17,217 in the same period in 2017.
In March 2017 we acquired the R.A.D.A.R. assets from TRCK for $860,000 cash. The purchased assets included handheld hardware device technology (the “Device”) which is designed to measure breath alcohol content of the user and software technology designed to allow the Device to be configured and to capture and manage the data being returned from the Device. It also included patents and patent applications and production equipment. The R.A.D.A.R. device was designed to be part of an offender supervision program as an alternative to incarceration. R.A.D.A.R. devices are 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.
As of June 30, 2018, cash was $2,588,304, accounts receivable were $659,749 and current liabilities were $676,696 resulting in a net liquid asset amount of $2,571,357. 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 June 30, 2018 and for the quarter ended June 30, 2017, 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. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.
In March 2018 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 will be 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.
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.
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.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4 – CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2018.
(b) Changes in Internal Control over Financial Reporting
There were no significant changes in our internal controls over financial reporting during the period ended June 30, 2018 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.