The following is a discussion of our financial condition and results of operations, and should be read in conjunction with our financial statements and the related notes included elsewhere in this Form 10-K. Certain statements contained in this section are not historical facts, including statements about our strategies and expectations about new and existing products, market demand, acceptance of new and existing products, technologies and opportunities, market and industry segment growth, and return on investments in products and markets. These statements are forward-looking statements and involve substantial risks and uncertainties that may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking statements in this section are based on information available to us on the date of this document, and we assume no obligation to update such forward-looking statements. Readers of this Form 10-K are strongly encouraged to review the section titled "Risk Factors."





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 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.

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.







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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 and www.stsfirst.com. Information contained on our websites does not constitute part of this Form 10-K.





Outlook

Installed Base of Breathalyzers. We believe the installed base of our breathalyzers will increase as the inherent risks associated with drinking while driving or while working in safety sensitive jobs become more widely acknowledged and as our network of distributors and our direct sales force grows. We believe that increased marketing efforts, the introduction of new products and the expansion of our sales network may provide the basis for increased sales and continuing profitable operations. However, these measures, or any others that we may adopt or determine not to adopt, may not result in either increased sales or continuing profitable operations.

Possibility of Operating Losses. Over many of the past several years we have operated profitably; however, prior to that, and in 2022 and 2021, we incurred losses. There is no assurance that we will not incur losses in any given quarter or year in the future.

Sales Growth. We expect to increase sales in the U.S. and worldwide as our network of direct customers and distributors grows and becomes more proficient and expands the number of new accounts. Our growth efforts have focused on expanding our global reach and broadening our product offering in alcohol and drug detection. Orders for all of our products, particularly ignition interlock components, are on an intermittent purchase order basis and there is no assurance they will continue at any given rate, or that orders will repeat.

Sales and Marketing Expenses. We continue our efforts to expand our domestic and international distribution capability, and we believe that sales and marketing expenses will need to be maintained at a healthy level in order to do so. Sales and marketing expenses are expected to increase as we increase our direct sales representatives and marketing efforts.

Research and Development Expenses. We expect to increase our research and development expenses to support refinements to our products, and the development of additional new products.





SpinDx

In August 2016 we entered into an exclusive patent license agreement with Sandia Corporation 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. We believe this license agreement represents the beginning of a relationship that will become material to the Company in near the future. A prototype was built by Sandia under our Cooperative Research and Development Agreement and received in 2018, after which we commenced work on commercializing the device.

In 2022 we purchased SpinDx related test and other equipment totaling $23,999 and in 2021 $265,867. We are optimistic about the results of the work to date and expect market introduction later in 2023 and commercialization in 2024. SpinDx™ uses a centrifugal disk with micro fluidic flow paths allowing multiple tests to be carried out on a single small sample. The SpinDx™ platform has the potential to revolutionize real-time screening for a panel of high abuse drugs, with the ability to quickly and quantitatively measure very low concentrations of drugs such as cocaine, heroin, methamphetamine and others. 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. Resolving the psychoactive levels from metabolites is an important step in establishing impairment. We completed the upgrade of our base breathalyzer platform in 2019 (the LX9), and we remain committed to combining it with the SpinDx technology. If successful, this combination will result in 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.

R.A.D.A.R.

On March 8, 2017, we entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Track Group Inc., a Delaware corporation. Pursuant to the terms and conditions of the Asset Purchase Agreement, we acquired certain assets comprised of: (1) handheld hardware device technology (the "R.A.D.A.R.® Mobile Devices"), designed to measure breath alcohol content of the user; and (2) software technology called R.A.D.A.R.® (Real-time Alcohol Detection and Reporting) Reporting Center designed to allow the Device to be configured and to capture and manage the data being returned from the Device (together with the Device, the "R.A.D.A.R.® Assets"). Although there is no assurance of market acceptance, widespread adoption of the R.A.D.A.R.® Mobile Devices may provide an alternative to, and thus lower, incarceration rates through better offender monitoring. We have updated the R.A.D.A.R.® 200 Mobile Device and it has been released for sale in 2022. On June 1, 2022, we formed a wholly-owned subsidiary, Probation Tracker, Inc., a Colorado corporation ("PTI") and capitalized it with $61,353 in exchange for 613,530 shares of PTI common stock. PTI had no activity during the six months ended December 31, 2022. In August 2022, we filed a Form 10 with the Securities and Exchange Commission in anticipation of distributing all of the 613,530 shares of common stock to our shareholders as a stock dividend. In September, 2022, this Form 10 was withdrawn, and the plan to distribute the PTI shares was canceled. The $61,353 of cash was withdrawn and PTI was deactivated. We have entered into a consulting agreement with a third party to work on developing proof of concept showing that R.A.D.A.R. 300 is feasible.





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Results of Operations

For the year ended December 31, 2022 compared to the year ended December 31, 2021.

The remnants of Covid-19, as well as supply chain problems, continue to impact our business in 2022, as it has others throughout the world. In addition to straining the budgets of law enforcement agencies and other customers, relocating workers from the workplace to their homes decreased the perceived need to monitor for the presence of alcohol. We reduced costs where possible, while at the same time continuing our new product development efforts and maintaining the high level of customer service that has led to an excellent reputation for outstanding customer service. As the pandemic subsides, we are seeing revenues revert to their former levels. With the introduction of new products, we believe Lifeloc will again be profitable.

Net sales. Our product sales for the year ended December 31, 2022 were $8,350,463, an increase of 21% from $6,898,955 for the same period a year ago. This increase is primarily attributable to prevailing market conditions. When royalties of $40,674 and rental income of $90,856 are included, total revenues of $8,481,993 increased by $1,427,563, or 20%, for the year ended December 31, 2022 when compared to the same 12 months a year ago. Rental income increased by $2,907 due to increased rental rates in 2022, and royalties decreased by $26,852 due to a decrease in sales by royalty-paying customers.

Gross profit. Gross profit for the year ended December 31, 2022 of $3,074,951 represented an increase of 1/2% from total gross profit of $3,060,096 for the year ended December 31, 2021, primarily as a result of inflationary component cost increases and from accelerating the amortization of RADAR 200 related assets, in addition to increased sales volume, offset in part by decreased royalties in 2021. Cost of product sales increased from $3,946,545 in the year ended December 31, 2021 to $5,352,862 in the same period in 2022, an increase of $1,406,317 (36%). Gross profit margin on products decreased to 35.9% in the year ended December 31, 2022 from 42.8% in the year ended December 31, 2021 primarily as a result of the increase in costs.

Research and development expenses. Research and development expenses were $1,385,927 for the year ended December 31, 2022, representing an increase of $172,445 (14%) over the $1,213,482 in the same period a year ago. This increase resulted primarily from the addition of personnel and materials needed for our dedication of resources to SpinDx.

Sales and marketing expenses. Sales and marketing expenses of $1,122,526 for the year ended December 31, 2022 were up by $118,543 from the $1,003,983 or 12%, spent in the same period a year ago as a result of expanded marketing efforts, including attending trade shows, following the decline of the pandemic.

General and administrative expenses. General and administrative expenses were $1,216,843 for the year ended December 31, 2022 versus $1,111,544 for the year ended December 31, 2021, an increase of $105,299 or 10%, which was attributable mostly to inflationary cost increases.

Other income (expense). Other income includes forgiveness of our Paycheck Protection loans totaling $936,444 in 2021 versus none in 2022. Interest income increased from $3,401 a year ago to $13,114 in 2022, as a result of higher yield availability. Interest expense of $43,081 in the year ended December 31, 2022 was down from $51,272 in the previous year as a result of the decrease in the interest rate on our new loan on our building.

Net income (loss). We realized a net loss of $455,757 for the year ended December 31, 2022 compared to net income of $675,967 the year ended December 31, 2021. This decrease of $1,131,724 was the result of the forgiveness of our Paycheck Protection loans in 2021 vs. no similar event in 2022, as well as the changes in gross profit, operating expenses and other income discussed above, offset in part by an increased income tax benefit of $60,673.

Trends and Uncertainties That May Affect Future Results

Revenues in the year 2022 were higher compared to revenues in 2021. We believe that the anticipated slowdown of the pandemic, along with continued increased sales efforts, may result in improved revenues in 2023 and beyond. We expect our quarter-to-quarter revenue fluctuations to continue, due to the unpredictable timing of large orders from customers and the size of those orders in relation to total revenues. Going forward, we intend to focus our development efforts on products we believe offer the best prospects to increase our intermediate and near-term revenues, with particular emphasis on completing SpinDx™.







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Our 2022 operating plan is focused on growing sales, increasing gross profits, and increasing research and development efforts on new products, including SpinDx™, 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 2023. However, we believe that cash resources will be sufficient to fund our operations for the next twelve months under our current operating plan. If we are unable to manage the business operations in line with our budget expectations, it could have a material adverse effect on business viability, financial position, results of operations and cash flows. Further, if we are not successful in sustaining profitability and remaining at least cash flow break-even, additional capital may be required to maintain ongoing operations.

Interest expense. In connection with the financing of our building purchase on October 31, 2014 we obtained a 10-year term loan from Bank of America in an initial principal amount of $1,581,106 bearing interest at 4.45% per annum (which was decreased to 4% in 2016) and secured by a first-priority mortgage in the acquired property, as well as a one-year $250,000 line of credit, which was later increased to $750,000 with a maturity date of September 28, 2021. The Bank of America loan was paid on September 30, 2021 with proceeds from a new term loan from Citywide Banks, also secured by a first-priority mortgage on the property, in the principal amount of $1,350,000. The new loan is payable in monthly installments of $7,453, with interest at 2.95% and a maturity date of September 30, 2031. The revolving line of credit facility expired in accordance with its terms and has not been renewed.

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.

Except for normal operating contractual commitments and purchase orders, and aside from the commitments under our term loan and line of credit with Citywide Banks, we do not have any material contractual commitments requiring settlement in the future. See "Note 5 - Commitments and Contingencies" to our Financial Statements in Part II - Item 8.

We have traditionally funded working capital needs through product sales and close management of working capital components of our business. Historically, we have also received cash from private offerings of our common stock, warrants to purchase shares of our common stock, and notes. In our earlier years, we incurred quarter to quarter operating losses to develop current product applications, utilizing a number of proprietary and patent-pending technologies. Although we have been profitable in recent years except 2020 and 2022, we can provide no assurances that operating losses will not occur in the future. Should that situation arise, we may not be able to obtain working capital funds necessary in the time frame needed and at satisfactory terms, if at all.

As of December 31, 2022, cash and cash equivalents was $2,352,754, trade accounts receivable were $627,919 and current liabilities were $1,136,682 resulting in net liquid assets of $1,843,991. We believe that the diminishing of the Covid-19 pandemic and the introduction of several new products during the last several years, along with new and on-going customer relationships will allow Lifeloc to operate profitably. If the revenue levels during the last several years prior to 2020 are not achieved on a timely basis, we may be required to seek additional sources of capital and/or to implement further cost reduction measures, as necessary.

Equipment expenditures, consisting of updated production equipment and SpinDx related equipment, during FY 22 were $213,206 compared to $265,867 for FY 21, a decrease of $52,661. We incurred patent application costs in preparation for filing of $9,370 in 2022 versus $2,609 in 2021. Expired and fully amortized patents of $13,758 were removed from our financial statements in 2022.

We generally provide a standard one-year limited 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 operations. For the year ended December 31, 2022 and for the year ended December 31, 2021, 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.







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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 declining method of depreciation for property, including space modifications, 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 declining method. The R.A.D.A.R.® software and patents that were purchased in March 2017 were originally set to amortize over 15 years using the straight line method, but in 2022 we accelerated the amortization of the remaining cost to fully amortize the assets by December 31, 2022. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.

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. Direct training performed by us is recognized when training is completed by the trainer, with the unearned portion classified as deferred revenue. 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 provide 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.







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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 and for product development. 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 in the case of product development, when agreed milestones are met.

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.

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