Item 7. 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-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.
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.lifelocuniversity.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 2021 through 2025, we incurred operating 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 continue to incur research and development expenses as we near completion of the first phase of SpinDetect™ and to update our base products.
SpinDetect™ Microfluidic Detection Platform
In 2016, we obtained the exclusive rights to develop and commercialize Sandia National Laboratories’ patented centrifugal microfluidic technology (formerly referred to as SpinDx™). Our commercialization effort was initially hampered by the pandemic; however, development has since advanced significantly. A first Lifeloc-owned utility patent application covering improvements to the system was filed in 2024. Under the license agreement, Sandia retains ownership of the foundational patents, while patentable enhancements developed by Lifeloc belong solely to us.
After several rounds of optimization, we have completed the design of the SpinDetect™ microfluidic disk, enabling the design to move into fabrication and validation. All analytical chemistry now occurs on the disk after introduction of the sample. This advancement completes the core system required for beta testing using our prototype reader. We expect commercial launch in 2026, with initial products designed to measure drugs of abuse in oral fluid, followed by expansion into additional drug panels.
The SpinDetect™ analyzer is designed to address key limitations in current drug-testing methods. The platform uses centrifugal forces and microfluidic flow paths to conduct multiple assays on a microliter-level sample, providing rapid, on-site, and quantitative results. The technology is capable of detecting extremely low concentrations of potent substances such as fentanyl, cocaine, and delta-9-THC, and can isolate psychoactive delta-9-THC from inactive metabolites. This separation supports more accurate assessments of recent use—an important distinction from traditional immunoassay-based devices that may report non-impairing metabolites. Development-stage work has demonstrated detection of delta-9-THC at concentrations as low as 5 ng/mL in laboratory settings.
Drug testing using oral fluid represents a sufficiently large unmet need to justify the SpinDetect™ investment. Existing systems lack the analytical specificity needed for accurate, impairment-relevant results. We already serve this market through our established sales channels, and the SpinDetect™ platform is designed to be customizable to various workplace and jurisdictional drug panels.
While oral-fluid drug testing is the initial application, the SpinDetect™ reader is designed to accept multiple disk formats, enabling analysis of different sample types on the same instrument. Potential future applications include human and veterinary blood, breath extract, and neonatal meconium. Each represents a significant problem area:
Veterinary care: Accidental pet ingestion of illicit or recreational drugs is a frequent occurrence, yet veterinarians lack a rapid method to identify the substance involved.
Neonatal screening: Meconium testing for suspected maternal drug use can require several hours, during which some mothers leave the hospital with the newborn before the infant’s safety is assured.
Beyond drug detection, the SpinDetect™ platform can support a broader range of biological and chemical analyses. The same microfluidic “lab-on-a-disk” architecture can be adapted to detect food-safety markers such as bacterial pathogens E. coli , Salmonella , and Listeria ; environmental contaminants; performance-enhancing drugs; and human or veterinary diagnostic targets. These applications will require additional research, regulatory clearances, and, in certain cases, expansion of our license rights. We are actively evaluating and negotiating potential amendments to enable the development of these non-drug-testing markets.
As we advance toward commercialization, SpinDetect™ prototype analyzers have been demonstrated at industry conferences, generating encouraging engagement from potential customers. The feedback we have received—including suggestions for new use cases—supports our belief that the SpinDetect™ platform can address substantial unmet needs in rapid, quantitative testing.
We expect an initial commercial release in 2026. Continued progress toward these milestones is dependent on timely access to capital to support fabrication, validation, regulatory preparation, and market introduction.
In 2025 we purchased SpinDetect™ related test and other equipment totaling $354,381 compared with $667,738 spent in 2024.
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”). We purchased the assets of R.A.D.A.R. 100 knowing the product needed significant upgrading, which was essentially completed and released for sale in 2022 as R.A.D.A.R. 200. This product met with little market acceptance as a result of the underperformance of one feature, generating nominal revenue in 2022 and none in subsequent years. In 2023, we outsourced the development of R.A.D.A.R. 300 to a third party, but that effort is currently on hold.
Results of Operations
For the year ended December 31, 2025 compared to the year ended December 31, 2024 .
Supply chain problems caused by Covid-19, as well as the other market impacts of Covid-19, were mostly resolved by the end of 2024, and the perceived need to monitor for the presence of alcohol reverted back to the level experienced previously. We maintained our reduced costs at their 2023 levels where possible, although inflation took its toll, increasing the cost of raw materials, labor, and freight. We continued and intensified our new product development efforts while maintaining the high level of customer service that has led to an excellent reputation for outstanding customer service. With the introduction of new products, we believe Lifeloc will again be profitable.
Net sales.
Our product sales for the year ended December 31, 2025 were $8,958,672, an increase of 6% from $8,470,985 for the same period a year ago. This increase is primarily attributable to new customer acquisitions and expansion within existing customer accounts including fleet refresh activity. When royalties of $51,634 and rental income of $16,632 are included, total revenues of $9,026,938 increased by $488,793, or 6%, for the year ended December 31, 2025 when compared to the same 12 months a year ago. Rental income decreased by $16,146 due to electing not to renew or replace a lease for a portion of the space formerly occupied by a tenant, and royalties increased by $17,252 due to an increase in sales by royalty-paying customers.
Gross profit.
Total gross profit for the year ended December 31, 2025 of $3,642,045 represented an increase of 6% from total gross profit of $3,446,099 for the year ended December 31, 2024, primarily as a result of higher product sales. Cost of product sales, excluding rental segment costs, increased from $5,066,779 in the year ended December 31, 2024 to $5,375,787 in the same period in 2025, an increase of $309,008 (6%). Gross profit margin on products was 40% in the year ended December 31, 2025 and 40% in the year ended December 31, 2024.
Research, development and sustaining engineering expenses.
Research, development and sustaining engineering expenses continued at the high level of $2,152,843 for the year ended December 31, 2025, representing a decrease of $90,026 (4%) over the $2,242,869 in the same period a year ago. This decrease resulted primarily from a reduction of payments to outside contractors needed for development of SpinDetect™. In 2026 we expect to continue work on SpinDetect™.
Sales and marketing expenses.
Sales and marketing expenses of $1,331,062 for the year ended December 31, 2025 were similar to the $1,358,211 spent in the same period a year ago.
General and administrative expenses.
General and administrative expenses of $1,388,160 for the year ended December 31, 2025, versus $1,253,236 for the year ended December 31, 2024 were higher by $134,924 (11%) primarily as a result of public company and legal expense attributable to our S-4 filings.
Other income (expense).
Interest income decreased from $42,867 a year ago to $38,010 in 2025, a decrease of $4,857, as a result of less funds available. Interest expense of $119,190 in the year ended December 31, 2025 was up $79,045 from $40,145 in the previous year as a result of the increase in the interest and amortization of debt issuance costs on our debentures. Combined, these changes resulted in a total expense increase of $83,902, or 3082%, in the year ended December 31, 2025 from the year ended December 31, 2024.
Net income (loss).
We realized a net loss of $2,470,399 for the year ended December 31, 2025 compared to a net loss of $1,052,948 for the year ended December 31, 2024. This increase in loss of $1,417,451 was the result of the changes in gross profit, operating expenses and other income discussed above, which resulted in a loss before taxes of $1,311,200 in 2025, or a decrease of $94,295 from the loss before taxes of $1,405,495 in 2024. After the provision for valuation allowance from deferred taxes of $1,159,199 in 2025 versus a benefit from taxes of $352,547 a year ago, we realized a net loss of $2,470,399 in 2025 compared to a net loss of $1,052,948 in 2024. The benefit from taxes of $352,547 in 2024 resulted in an increase to our deferred tax asset from $806,652 at December 31, 2023 to $1,159,199 at December 31, 2024. The deferred tax asset reserve was increased by $1,159,199 in 2025 which resulted in a net deferred asset of $0 in 2025.
Trends and Uncertainties That May Affect Future Results
Revenues in the year 2025 were higher compared to revenues in 2024. We believe that continued increased sales efforts, together with the expected availability of SpinDetect™ for sale in 2026 may result in modest improved revenues in 2026 and beyond. Inflationary pressures have affected our business in a number of ways, including increasing the cost of raw materials, labor, and freight. Our actions to mitigate the impact of inflation, including pre-ordering components in higher than usual quantities, sourcing new vendors and increasing prices have been somewhat successful.
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 launching SpinDetect™ into the market.
Our 2026 operating plan is focused on growing sales of our base products, and on bringing SpinDetect to market, thereby increasing gross profits. We cannot predict with certainty the expected sales, gross profit, net income or loss, or usage of cash and cash equivalents for 2026. 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 regaining profitability and achieving 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.
On December 31, 2024 we issued a $750,000 debenture subordinated to obligations to the Company’s secured creditors holding a lien on all assets that calls for interest only at 8.25% payable quarterly in 2025, with monthly payments of $9,199 including principal and interest at 8.25% commencing on January 31, 2026. A balloon payment of $451,012 is due in full on December 31, 2030. In consideration of the lender providing this financing, the Company issued warrants which entitle the holder to purchase 62,500 shares of our common stock at $4.50 per share. The warrants have a life of 70 months. If the debenture is paid in full on or before December 31, 2029, the warrants will have a remaining life of 58 months.
On March 1, 2025 we issued a $75,000 debenture subordinated to obligations to the Company’s secured creditors holding a lien on all assets that calls for interest only at 8.25% payable quarterly in 2025, with monthly payments of $920 including principal and interest at 8.25% commencing on January 31, 2026. A balloon payment of $45,707 is due in full on December 31, 2030. In consideration of the lender providing this financing, the Company issued warrants which entitle the holder to purchase 6,250 shares of our common stock at $4.50 per share. The warrants have a life of 70 months. If the debenture is paid in full on or before December 31, 2029, the warrants will have a remaining life of 58 months.
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 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, we do not have any material contractual commitments requiring settlement in the future. See “Note 6 – 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 July, 2024 we completed a private placement of 210,000 shares of our common stock at $3.80 per share for a total raise of $798,000 with a related party. On December 31, 2024 we completed the issuance of a six year unsecured subordinated debenture for $750,000 with a third party. On March 1, 2025 we completed the issuance of a 70 month unsecured subordinated debenture for $75,000 with a third party. 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. Between 2002 and 2020, we were consistently profitable, due to stabilization and then growth in our core breathalyzer products. Our recent net losses in 2024 and 2025 reflect a deliberate investment in the development of our SpinDetect™ platform rather than a deterioration of our core breathalyzer business, which has remained stable. We believe our core product and services business, at current revenue levels, is capable of supporting ongoing operations on a cost-reduced basis. We intend to continue managing costs carefully while SpinDetect™ toward its anticipated commercial launch later in 2026. If the development or market acceptance of SpinDetect™ takes longer than expected, or if we require additional capital to support commercialization, we may seek additional financing through equity or debt offerings.
As of December 31, 2025, cash and cash equivalents were $746,001, trade accounts receivable were $772,380 and current liabilities were $836,870 resulting in net liquid assets of $681,511. We believe our core breathalyzer business has remained fundamentally sound and, together with the anticipated commercialization of SpinDetect™, provides a reasonable basis for a return to profitability. However, if revenues from our core business do not grow as expected, if the commercialization of SpinDetect™ is delayed or requires more capital than anticipated, or if general economic conditions deteriorate, 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 SpinDetect™ related equipment, during FY 25 were $354,381 compared to $667,738 for FY 24, a decrease of $313,357. We incurred patent application costs in preparation for filing of $0 in 2025 versus $21,708 in 2024. Fully depreciated equipment of $510,767 was removed from our balance sheet in 2025 vs. none in 2024. Fully amortized patents of $2,821 were removed from our balance sheet in 2025 vs. none in 2024. As development of SpinDetect progresses, and as normal wear and tear of equipment occurs, we expect to incur outlays for equipment and patent filings in 2026 and beyond.
As the SpinDetect™ disk design nears completion, we expect our outside contractor expenses to decrease materially beginning in Q2 2026. Our outstanding subordinated debentures require combined monthly payments of approximately $10,100 commencing January 2026, with balloon payments not due until December 2030. We believe that our cash and receivables position, combined with cash generated from ongoing product sales, cost reductions already implemented, and the availability of additional financing if needed, are sufficient to fund our operations and meet our financial obligations for the foreseeable future.
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 loss. For the year ended December 31, 2025 and for the year ended December 31, 2024, 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 one operating segment consisting of our primary business which is as a developer, manufacturer and marketer of portable hand-held breathalyzers and related accessories, supplies and education.
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 2025, we accelerated the amortization of the remaining cost and fully amortized the asset by December 31, 2025. 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, 2025. 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.
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.
