ITEM
2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following
is a discussion of our financial condition and results of operations, and should be read in conjunction with our financial statements
and the related notes included elsewhere in this Form 10-Q. Certain statements contained in this section are not historical
facts, including statements about our strategies and expectations about new and existing products, market demand, acceptance of
new and existing products, technologies and opportunities, market and industry segment growth, and return on investments in products
and markets. These statements are forward-looking statements as defined in the Private Securities Litigation Reform
Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange
Act"), and we intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements
contained in these statutes. You can identify forward-looking statements by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," "seeks," "intends,"
"plans" or "anticipates" or the negative of these words and phrases or similar words or phrases that are predictions
of or indicate future events or trends and that do not relate solely to historical matters. Such statements involve
substantial risks and uncertainties that may cause actual results to differ materially from those indicated by the forward-looking
statements. All forward-looking statements in this section are based on information available to us on the date of
this document, and we assume no obligation to update such forward looking statements. Readers of this Form 10-Q are
strongly encouraged to review the section titled "Risk Factors" in our December 31, 2019 Form 10-K.
Overview
Lifeloc Technologies,
Inc., a Colorado corporation ("Lifeloc" or the "Company"), is a Colorado-based developer, manufacturer
and marketer of portable hand-held and fixed station breathalyzers and related accessories, supplies and education. We design,
produce and sell fuel-cell based breath alcohol testing equipment. We compete in all major segments of the portable
breath alcohol testing instrument market, including law enforcement, workplace, corrections, original equipment manufacturing
("OEM") and consumer markets. In addition, we offer a line of supplies, accessories, services, and training to support
customers' alcohol testing programs. We sell globally through distributors as well as directly to users.
We define our
business as providing "near and remote sensing" products and solutions. Today, the majority of our revenues are derived
from products and services for alcohol detection and measurement. We remain committed to growing our breath alcohol testing business.
In the future, we anticipate the commercialization of new sensing and measurement products that may allow Lifeloc to successfully
expand our business into new growth areas where we do not presently compete or where no satisfactory product solutions exist today.
In addition,
with the October 2014 purchase of our corporate headquarters and certain adjacent property, we added a new reporting segment focused
on the ownership and rental of real property through existing commercial leases.
Lifeloc incorporated
in Colorado in December 1983. We filed a registration statement on Form 10 with the Securities and Exchange Commission,
which became effective on May 31, 2011. Our fiscal year end is December 31. Our principal executive offices are located
at 12441 West 49th Avenue, Unit 4, Wheat Ridge, Colorado 80033-3338. Our telephone number is (303) 431-9500.
Our websites are www.lifeloc.com, www.stsfirst.com and lifeguardbreathtester.com. Information contained on our websites
does not constitute part of this Form 10-K.
Principal Products and Services
and Methods of Distribution
Alcohol
Breath Testers
In 1989, we
introduced our first breath alcohol tester, the PBA3000. Our Phoenix® Classic was completed and released for sale in 1998,
superseding the PBA3000. In turn, the Phoenix® Classic has been superseded by our FC Series and Workplace Series of portable
breath alcohol testers, which are discussed below. Neither the PBA3000 nor the Phoenix® Classic is actively sold today.
In 2001, we
completed and released for sale our new FC Series, designed specifically for domestic and international law enforcement and corrections
markets. The portable breath alcohol testers comprising our FC Series are currently being sold worldwide, having contributed to
our growth since their introduction. The FC Series is designed to meet the needs of domestic and international law enforcement
for roadside drink/drive testing and alcohol offender monitoring. The FC Series is approved by the U.S. Department of Transportation
("DOT") as an evidential breath tester, making it suitable for sale to state law enforcement agencies for preliminary
roadside breath alcohol testing. The FC Series is routinely updated with firmware, software and component improvements
as they become available. It is readily adaptable to the specific requirements and regulations of domestic and international
markets.
In 2005 and
2006, we introduced two new models, the EV30 and Phoenix® 6.0 Evidential Breath Tester ("Phoenix® 6.0"), which
constitute our Workplace Series of testing devices. Like their predecessor, the Phoenix® Classic, and our FC Series,
these instruments are DOT approved. The DOT's specifications support the DOT's workplace alcohol testing programs, including those
applicable to workplace alcohol testing for the federally regulated transportation industry. We also sell component parts used
in alcohol testing devices, such as mouthpieces used by our breathalyzers, as well as forms and labels used for record keeping,
and calibration products for user re-calibration of our devices. We offer optional service agreements on our equipment,
re-calibration services, and spare parts, and we sell supporting instrument training and user certification training to our workplace
customers.
In 2006, we
commenced selling breath alcohol equipment components that we manufacture to other OEMs for inclusion as subassemblies or components
in their breath alcohol testing devices.
In late 2009,
Lifeloc released the LifeGuard® Personal Breathalyzer ("LifeGuard®"), a personal alcohol breath tester
that incorporates the same fuel-cell technology used in our professional devices. Intended for the global consumer
breathalyzer market, LifeGuard® is marketed internationally through global distributors.
In 2011 and
2012, Lifeloc introduced Bluetooth wireless keyboard and printer communication options for our Phoenix® 6.0 along with a series
of web based workplace training courses. We believe these two product innovations have been key to our success and leadership
in workplace breath testing.
In 2013, Lifeloc
expanded our FC Series of professional breath alcohol testers targeted at domestic and international law enforcement and corrections
markets with the addition of the FC5 Hornet (the "FC5"). The FC5 is a passive (no mouthpieces required) portable handheld
alcohol screening device that competes directly with passive alcohol screeners from our competitors in the education, law enforcement,
workplace and corrections markets.
In 2013, we
also introduced the Sentinel™ zero tolerance alcohol screening station, a fully automated wall mounted screening station
for use in safety sensitive industries such as oil and gas and mining. Both devices expand Lifeloc's products for passive alcohol
screening.
In the third
quarter of 2014, we received approval from DOT for our EASYCAL® automatic calibration station for use with our Phoenix ®
6.0 Evidential Breath Testers, and we began shipments of the EASYCAL® to our law enforcement, corrections, workplace and international
customers. The EASYCAL® calibration station is a first of its kind device that automatically performs breath tester
instrument calibration, calibration verification and gas management. As compared to manual instrument calibration, the EASYCAL®
reduces the opportunity for human error, saves time and reduces operating costs. In May of 2019, we received DOT approval
on a second generation EASYCAL® with broader capabilities called the EASYCAL® G2.
In October 2015,
we expanded our Sentinel™ line with the Sentinel™ VA alcohol screening station, a fully automated station to control
vehicular access to safety critical facilities, such as mines, refineries, power stations and nuclear facilities. The Sentinel™
VA alcohol screening station is intended to allow all drivers entering a secure area to be tested quickly and efficiently without
leaving their vehicle.
In November
2019, we received approval from DOT for our LX9 and LT7 base unit alcohol breathalyzers. These units are versatile breathalyzers.
They are readily configurable, are able to process different languages, are capable of a wide temperature testing range, and they
feature an ambidextrous mouthpiece.
Testers for
Drugs of Abuse
In August 2016,
we entered into an exclusive patent license agreement with Sandia Corporation, Albuquerque, NM, pursuant to which we acquired
the exclusive rights to develop, manufacture and market Sandia's patented SpinDx™ technology for the detection of drugs
of abuse. SpinDx™ uses a centrifugal disk with micro fluidic flow paths allowing multiple tests to be carried out on a single
small sample. Sandia Corporation developed a prototype using the SpinDx™ technology under our Cooperative Research
and Development Agreement. We received the prototype in 2018 and are now commercializing the device. The SpinDx™ platform
has the potential to improve real-time screening for a panel of high-abuse drugs, with the ability to efficiently and quantitatively
measure relatively low concentrations of drugs such as cocaine, heroin, methamphetamine, fentanyl and other high-abuse drugs. We
intend to use this technology, sometimes referred to as "Lab on a Disk", to develop devices and tests that could be
used at roadside, emergency rooms and in workplace testing to get a rapid and quantitative measure for a panel of such drugs of
abuse. We have detected delta-9-THC (the primary psychoactive component of marijuana) down to concentrations of 5 nanograms
per milliliter in our laboratory. This includes resolving the psychoactive delta-9-THC from its inactive metabolites, an
important step in differentiating current impairment from historical usage. We completed the upgrade of our base breathalyzer
platform in 2019 (the LX9), and we remain committed to combining it with the SpinDx™ technology. Our goal is to use this
combination to develop a THC breathalyzer. Earlier this year, we added to our expertise by hiring staff who bring skills
highly relevant to the development of SpinDx. We believe these advances in our team’s expertise will better equip us in
our attempts to introduce this important product by the end of 2021. There is no assurance that our efforts to develop a marijuana
breathalyzer will be successful or that significant sales will result from such development if successful.
In March 2017
we acquired substantially all of the assets related to the Real-time Alcohol Detection and Reporting product ("R.A.D.A.R.®")
from Track Group, Inc. ("TRCK") for $860,000 in cash. The purchased assets included the R.A.D.A.R.® device
with cellular reporting for real-time alcohol monitoring, database infrastructure to tabulate and manage subscriber behavior,
and biometric methodology and intellectual property to fully automate identity verification. The R.A.D.A.R.® device
was designed to be part of an offender supervision program as an alternative to incarceration, and it is assigned to offenders
as a condition of parole or probation with random testing throughout the day to demonstrate that they are meeting the conditions
of their sentence. We essentially completed improving the manufacturability of R.A.D.A.R.® devices in Q2 of 2020, and
completed final testing in Q3. We expect sales and leasing to commence in Q4.
Training
Drug and alcohol
testing is highly regulated; thus quality training is an important component of our business. Initially, our network of
Master Trainers provided classroom training which generated certification fees. This was expanded to include instructor
materials, online training modules and direct (live) training via webcam. In 2011, we launched Lifeloc University, a Learning
Management System (LMS), defined as "a software application for the administration, documentation, tracking, reporting and
delivery of educational courses or training programs." Lifeloc University is a critical component for online training courses
since it provides student accountability. In 2018, we updated and revised the Lifeloc University LMS utilizing responsive
design so it could be viewed on mobile devices.
In December
2014, we acquired substantially all of the assets of Superior Training Solutions, Inc. ("STS"), a company that develops
and sells online drug and alcohol training and refresher courses. We have augmented and updated the assets we acquired from STS
to enable mobile device usage. These assets complement our existing drug and alcohol training courses.
Real Property
On October 31,
2014, we purchased the commercial property we use as our corporate headquarters and certain adjacent property in Wheat Ridge,
Colorado. The building consists of 22,325 square feet, of which 14,412 square feet are occupied by us and 7,913 square feet
are currently leased to two tenants under leases that expire at various times until June 30, 2023. We intend to continue to attempt
to lease the space we are not occupying, but in the future may elect to expand our own operations into space currently leased
to other tenants. Our purchase of the property was partially financed through a term loan in an original principal amount
of $1,581,106, secured by a first-priority mortgage on the property. The loan matures in October 2024.
Additional
Areas of Interest
Consistent with
our business goal of providing "near and remote sensing and monitoring" 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 September 30, 2020 compared to the three months ended September 30, 2019.
Net sales.
Our product sales for the quarter ended September 30, 2020 were $1,502,034, a decrease of 28% from $2,083,044 for the quarter
ended September 30, 2019. This decrease is primarily attributable to a decrease in demand, which is impacted by Covid-19. When
royalties of $31,395 and rental income of $21,639 are included, total revenues of $1,555,068 decreased by $703,087, or 31%, for
the quarter ended September 30, 2020 when compared to the same quarter a year ago. Product sales and royalties are expected to
continue at this lower level in Q4 as a continuing result of the Covid-19 impact.
Gross profit.
Our total gross profit for the three months ended September 30, 2020 of $597,104 represented a decrease of 44% from
total gross profit of $1,065,067 for the same period a year earlier. This decrease is primarily as a result of decreased sales
volume, as well as decreased royalties. Cost of product sales decreased from $1,174,960 in Q3 of 2019 to $945,989 in Q3 of
2020, or 19%, primarily as a result of decreased sales volume and fixed production overhead. Gross profit margin on products
went from 44% in Q3 of 2019 to 37% in Q3 of 2020, also as a result of reduced sales volume.
Research
and development expenses. Our research and development expenses were $335,075 for the quarter ended September 30, 2020,
representing an increase of 32% over the $253,716 in the same quarter a year ago. This increase resulted mostly from
higher compensation and payments to outside vendors in connection with the work needed to final test and complete upgrading the
R.A.D.A.R.® devices, as well as the commercialization of the SpinDx™ products.
Sales and
marketing expenses. Our sales and marketing expenses of $235,733 for the quarter ended September 30, 2020 were down
29% from the $329,824 for the quarter ended September 30, 2019, due to the lower sales volume and lower commissions.
General and
administrative expenses. Our general and administrative expenses of $297,128 for the quarter ended September 30, 2020
were relatively unchanged from the $287,814 in the same period a year ago.
Other income
(expense). Our other income consisted of interest income of $2,598 in the quarter ended September 30, 2020, which
decreased from the $10,454 in the same quarter a year ago, as the result of decreased yield on reduced cash available for investment
in Q3 of 2020. Our interest expense of $14,051 in the quarter ended September 30, 2020 vs. $14,513 in the same period a
year ago is the result of the balance of the term loan on our building declining.
Net income
(loss). We realized a net loss of $212,766 for the quarter ended September 30, 2020 compared to net income of $151,525
for the quarter ended September 30, 2019. This decrease of $364,291 was the result of the changes in gross profit and
operating expenses discussed above, offset in part by a reduction of income taxes of $107,648.
For the nine months ended September
30, 2020 compared to the nine months ended September 30, 2019.
Net sales.
Our product sales for the nine months ended September 30, 2020 were $4,705,598, a decrease of 1,514,181 (24%) from $6,219,779
for the same period a year ago. When royalties of $123,527 and rental income of $64,317 are included, total revenues
of $4,893,442 decreased by $1,771,196, or 27%, for the nine months ended September 30, 2020 when compared to the same nine months
a year ago, as a result of decreased demand, which is impacted by Covid-19.
Gross profit.
Total gross profit for the nine months ended September 30, 2020 of $1,703,249 represented a decrease of 46% from total
gross profit of $3,152,403 for the nine months a year earlier primarily as a result of decreased sales volume, royalties and rental
income. Cost of product sales were reduced from $3,460,986 in the nine months ended September 30, 2019 to $3,149,369,
or $311,617 (9%), in the nine months ended September 30, 2020 as a result of the lower sales volume and fixed costs. Gross profit
margin on products went from 44% in 2019 to 33% in 2020.
Research
and development expenses. Research and development expenses were $814,457 for the nine months ended September 30, 2020,
an increase of $71,573, or 10%, over the $742,884 in the same period a year ago, which was primarily related to regulatory approval
and manufacturing upgrade costs of the R.A.D.A.R.® devices, as well as increased expenses related to commercialization of
the SpinDx™ products.
Sales and
marketing expenses. Sales and marketing expenses of $837,077 for the nine months ended September 30, 2020 decreased
$124,669, or 13%, from the $961,746 in the same nine months ended September 30, 2019, mostly as a result of the lower sales volume.
General and
administrative expenses. General and administrative expenses of $978,056 for the nine months ended September 30, 2020
were up by $69,449, or 8%, from the $908,607 spent in the same nine months a year ago. This increase resulted primarily from increased
stock option expense and from a one-time patent fee.
Other
income (expense). Other income consisted of interest income of $13,016 in the nine months ended September
30, 2020 vs. $27,726 in the same period a year ago, primarily as the result of lower yields available on less cash invested during
the recent period. Interest expense of $42,198 in the nine months ended September 30, 2020 is down from $43,404 in the same
period a year ago as the result of the balance of the term loan on our building declining.
Net income
(loss). We realized a net loss of $727,664 for the nine months ended September 30, 2020 compared to net income of $401,209
for the same nine months ended September 30, 2019. This decrease of $1,128,873 was the result of the changes in gross
profit and operating expenses discussed above, offset in part by a decrease in income taxes of $350,138.
Trends and
Uncertainties That May Affect Future Results
The current
novel coronavirus (Covid-19) pandemic is having an impact on overall global economic conditions throughout the world, and the
ultimate impact on our business will depend on the length and severity of the outbreak. If conditions caused by the pandemic continue
or worsen and our earnings and cash flow from operations do not start to recover, we plan to continue to take certain measures
to maintain financial flexibility, including accelerating our cost saving initiatives, while still protecting our employees and
customers.
Revenues in
the first three quarters of 2020 were lower compared to revenues in 2019 as a result of the Covid-19 pandemic and related governmental
orders, although revenues in Q3, 2020 were up over Q2, 2020 by 18%. We believe these depressed revenues will continue into Q4. 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. Additionally, the Covid-19
pandemic and related governmental orders may adversely impact our ability to retain tenants or otherwise successfully lease our
commercial property.
Our 2020 operating
plan is focused on growing sales, increasing gross profits, and increasing research and development efforts on new products for
long term growth. We cannot predict with certainty the expected sales, gross profit, net income or loss, or usage of
cash and cash equivalents for 2020. However, we believe that cash resources and borrowing capacity will be sufficient
to fund our operations for the next twelve months under our current operating plan. If we are unable to manage the
business operations in line with our budget expectations, it could have a material adverse effect on business viability, financial
position, results of operations and cash flows. Further, if we are not successful in returning to profitability and positive cash
flow, 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 prior
to 2020, we expect that current operating losses will continue into at least part of 2021. Should they continue for an extended
period, 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 revolving line of credit facility is secured by all personal property and assets, whether now owned or hereafter
acquired, wherever located. The revolving line of credit facility requires that certain financial ratios be maintained. As a result
of the loss in 2020, these ratios were not met and the revolving line of credit is unavailable until such time as these ratio
requirements are met. The line of credit bears interest at a rate calculated at the LIBOR daily floating rate plus 2.5%.
As of September 30, 2020, this credit facility had not been used.
Equipment and
software purchased during the nine months ended September 30, 2020 were $9,088, compared to $142,936 in the same period a year
ago. Building improvements during the nine months ended September 30, 2019 were $23,552, compared to none in 2020. We filed
patent applications at a cost to us of $18,772 in the first nine months of 2020 and $0 in the same period in 2019.
As of September
30, 2020, cash was $2,264,887, accounts receivable were $517,618 and current liabilities were $1,248,131 resulting in a net liquid
asset amount of $1,534,374. Subject to the continuing impact of Covid-19, 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 return to profitability. We are implementing cost reduction measures, as necessary.
We generally
provide a standard one-year warranty on materials and workmanship to our customers. We provide for estimated warranty
costs at the time product revenue is recognized. Warranty costs are included as a component of cost of goods sold in
the accompanying statements of income. For the quarter ended September 30, 2020 and for the quarter ended September
30, 2019, 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, lessor and marketer
of portable hand-held breathalyzers and related accessories, supplies, education, training and royalties from development contracts
and a second segment consisting of renting portions of our building to existing tenants.
We maintain
allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If
the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional
allowances would be required, which would increase our expenses during the periods in which any such allowances were made. The
amount recorded as a provision for bad debts in each period is based upon our assessment of the likelihood that we will be paid
on our outstanding receivables, based on customer-specific as well as general considerations. To the extent that our
estimates prove to be too high, and we ultimately collect a receivable previously determined to be impaired, we may record a reversal
of the provision in the period of such determination.
We reduce inventory
for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be required. Any write-downs of inventory
would reduce our reported net income during the period in which such write-downs were applied.
Property and
equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally five years (three
years for software and technology licenses). We use the double declining method of depreciation for property and equipment,
and the straight line method for software and technology licenses. We purchased all of the assets of STS, an online education
company, in 2014, which consisted of training courses that are amortized over 15 years using the straight line method. In
October 2014, we purchased our building. A majority of the cost of the building is depreciated over 39 years using the straight
line method. In addition, based on the results of a third party analysis, a portion of the cost was allocated to components integral
to the building. Such components are depreciated over 5 and 15 years, using the double declining method and the straight
line method respectively. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements
are capitalized.
In March 2017,
we acquired the R.A.D.A.R.® assets from TRCK, which consisted of production equipment and of hardware device technology (the
"Devices") that are depreciated over 5 years using the double declining balance method when placed in service. With
the R.A.D.A.R.® assets, we also purchased software designed to measure breath alcohol content of the user and software technology
designed to allow the Devices to be configured and to capture and manage the data being returned from the Device, as well as 6
issued U.S. patents and 16 domestic and international patent applications. This software and the patents and patent applications
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.
The sales of
licenses to our training courses are recognized as revenue at the time of sale. Training and certification revenues are
recognized at the time the training and certification occurs. Data recording revenue is recognized based on each day's
usage of enrolled devices.
Revenues arising
from extended warranty contracts are booked as sales over their life on a straight-line basis. We are providing for customer
financing and leasing, which we recognize as revenue over the applicable lease term. Occasionally, we rent used equipment
to customers, and in those cases, we recognize the revenues as they are earned over the life of the contract. Revenues from
rental of equipment and extended service plans are recognized over the life of the contracts.
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.