Lifeloc Technologies, Inc

June 30, 2025 and 2024

1. ORGANIZATION AND NATURE OF BUSINESS

Lifeloc Technologies, Inc. ("Lifeloc" or the "Company", “Us”, “Our”, or “We”) is a Colorado-based developer, manufacturer and marketer of portable hand-held and fixed station breathalyzers and related accessories, supplies and education. We design, produce and sell fuel-cell based breath alcohol testing equipment. We compete in all major segments of the breath alcohol testing instrument market, including law enforcement, workplace, corrections, original equipment manufacturing ("OEM") and consumer markets. In addition, we offer a line of supplies, accessories, services, and training to support customers' alcohol testing programs. We sell globally through distributors as well as directly to users.

We define our business as providing "near and remote sensing and monitoring" products and solutions. Today, the majority of our revenues are derived from products and services for alcohol detection and measurement. We remain committed to growing our breath alcohol testing business. In the future, we anticipate the commercialization of new sensing and measurement products that may allow Lifeloc to successfully expand our business into new growth areas where we do not presently compete or where no satisfactory product solutions exist today.

Lifeloc incorporated in Colorado in December 1983. We filed a registration statement on Form 10 with the Securities and Exchange Commission, which became effective on May 31, 2011. Our fiscal year end is December 31. Our principal executive offices are located at 12441 West 49th Avenue, Unit 4, Wheat Ridge, Colorado 80033-3338. Our telephone number is (303) 431-9500. Our websites are www.lifeloc.com and www.lifelocuniversity.com.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PROCESSES

Basis of Presentation. These statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") and accounting principles generally accepted in the United States ("GAAP") for interim financial information. They do not include all information and notes required by GAAP for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to financial statements included in Lifeloc's Annual Report on Form 10-K for the year ended December 31, 2024 as filed with the SEC. In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments, consisting of only normal recurring adjustments necessary for a fair statement of the financial position as of June 30, 2025 and December 31, 2024, and the results of operations and cash flows for the three and six months ended June 30, 2025 and June 30, 2024. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for a full year. The Company's 2024 Annual Report on Form 10-K includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q.

Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions regarding allowances for bad debts, inventory obsolescence, accumulated depreciation, and deferred income taxes. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expense during the reporting period. Actual results could differ from those estimates.

Debt Issuance Costs. The term loan and the subordinated debentures are shown in the accompanying balance sheet net of debt issuance costs. Deferred debt issuance costs are amortized over the life of the term loan and the subordinated debentures on a straight-line basis, which approximates the effective interest method. Total debt issuance cost amortization during the three months ended June 30, 2025 and 2024 was $715 and $1,076 respectively, and for the six months ended June 30, 2025 and 2024 $5,886 and $2,102 respectively, and is included within interest expense on the condensed statements of income (loss).

Inventories. Inventories are stated at the lower of standard cost or net realizable value. We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value after cost to sell, based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. At June 30, 2025 and December 31, 2024, inventory consisted of the following:

Income Taxes. We account for income taxes under the provisions of ASC Topic 740,Accounting for Income Taxes ("ASC 740"). ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. ASC 740 also requires recognition of deferred tax assets for the expected future tax effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, are not expected to be realized. We estimate that our current effective tax rate to be 0% for 2025.

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements, uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

Revenue Recognition. Revenue from product sales and supplies is generally recorded when we ship the product and title has passed to the customer, or when agreed milestones are met in the case of product developments, provided that we have evidence of a customer arrangement and can conclude that collection is probable. The prices at which we sell our products are fixed and determinable at the time we accept a customer's order. We recognize revenue from sales to stocking distributors when there is no right of return, other than for normal warranty claims, and generally have no ongoing obligations related to product sales, except for normal warranty.

The sales of licenses to our training courses are recognized as revenue at the time of sale. Training and certification revenues are recognized at the time the training and certification occurs.

Revenues arising from extended warranty contracts are booked as sales over their life on a straight-line basis. Occasionally, we rent used equipment to customers, and in those cases, we recognize the revenues as they are earned over the life of the contract.

Royalty income is recognized in accordance with agreed upon terms, when performance obligations are satisfied, the amount is fixed or determinable and collectability is reasonably assured.

Rental income from 2,774 square feet of space leased to our tenant is recognized in the month in which it is due, which approximates if it were recognized on a straight-line basis over the term of the related lease. The lease expired on June 30, 2025 and was not renewed.

On occasion we receive customer deposits for future product orders and product developments. Customer deposits are initially recorded as a liability and recognized as revenue when the product is shipped and title has passed to the customer, or when agreed milestones are met in the case of product developments.

Deferred Revenue. Deferred revenues arise from service contracts and from direct training revenue. Revenues from service contracts are recognized on a straight-line basis over the life of the contract, generally one year, and are included in product revenue in our statements of income (loss). However, there are occasions when they are written for longer terms up to four years. The revenues from that portion of the contract that extend beyond one year are shown in our balance sheets as long term. Deferred revenues also result from direct training revenue that needs to be scheduled based on the customer’s and Lifeloc’s availability. Revenue is recognized when training is complete and is included in product sales in our condensed statements of income (loss). All direct training is for less than one year and all deferred revenues from this source are shown in our balance sheets as short term.

Recently Issued Accounting Pronouncements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures, amending income tax disclosure requirements for the effective tax rate reconciliation and income taxes paid. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024 and are applied prospectively. Early adoption and retrospective application of the amendments are permitted. We continue to evaluate the impact of this update on our financial statements, but do not expect any changes to our current reportable segments.

In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which requires disclosure about the types of costs and expenses included in certain expense captions presented on the income statement. The new disclosure requirements are effective for the Company's annual periods for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted, and may be applied either prospectively or retrospectively. We are currently evaluating the ASU to determine its impact on our consolidated financial statements and disclosures.

The Company does not believe that issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s financial statements.

Segment Reporting. We have concluded that we have two operating segments, including our primary business which is as a developer, manufacturer and marketer of portable hand-held breathalyzers and related accessories, supplies and education. As a result of purchasing our building on October 31, 2014, we have a second segment consisting of renting portions of our building to one tenant, whose lease expired on June 30, 2025 and was not renewed.

The chief operating decision maker evaluates the performance of the Company’s reportable segments based on segment profit or loss from operations, which is inclusive of all respective expenses. The profitability target of each segment is at the profit or loss from operations level, which is how the chief operating decision maker assesses performance. The chief operating decision maker also uses profit or loss from operations to allocate capital and personnel to the segments, which is typically done to improve the efficiency and effectiveness of operations or for expansion of operations, and ultimately to increase profit from operations. The Company’s reportable segments are strategic business units that offer different products. They are managed separately because each business requires different expertise to ensure quality products are produced in an efficient manner and because each business has a different customer base. We view our rentals segment as immaterial as the chief operating decision maker is focused primarily on the products segment. The Company’s chief operating decision maker is the chief executive officer.

3. BASIC AND DILUTED (LOSS) PER COMMON SHARE

We report both basic and diluted net income or loss per common share. Basic net income or loss per common share is computed by dividing net income or loss for the period by the weighted average number of common shares outstanding for the period. Diluted net income or loss per common share is computed by dividing the net income or loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. The shares used in the calculation of dilutive potential common shares exclude options and warrants to purchase shares where the exercise price was greater than the average market price of common shares for the period.

The following table presents the calculation of basic and diluted net (loss) per common share for three and six months ended June 30, 2025 and June 30, 2024.

4. STOCKHOLDERS' EQUITY

In February 2025, options to purchase 88,500 shares of our common stock were exercised at a price of $3.80 per share for total proceeds of $336,300. Our president and CEO exercised 37,500 options, and 2 directors exercised 1,000 options each. EDCO Partners, LLLP, of which our CFO and board chairman is the general partner provided $132,240 to enable 19 option holders to exercise and simultaneously sell their shares to EDCO Partners, to be held on behalf of certain of its limited partners, including a third director and an entity controlled by our CFO and board chairman. There was no intrinsic value on the exercised options. At June 30, 202533,500 options remained outstanding with a weighted average life of 1.08 years and a weighted average exercise price of $3.80. All 33,500 of these options were fully vested. The options outstanding at June 30, 2025 had an intrinsic value of $0.

At June 30, 2025 there were 68,750 warrants outstanding, all with an exercise price of $4.50 and all expiring December 31, 2030. There were 62,500 warrants outstanding at December 31, 2024.

5. DEBT

Debentures. On December 31, 2024 we issued a $750,000 debenture subordinated to obligations to the Company’s general and secured creditors 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 based on a ten year amortization schedule. A balloon payment of $451,012 is due in full on December 31, 2030.

In consideration of the lender providing the 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 72 months. If the debenture is paid in full on or before December 31, 2029, the warrants will have a life of 60 months.

On March 1, 2025 we issued a $75,000 debenture subordinated to obligations to the Company’s general and secured creditors 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 based on a ten year amortization schedule. A balloon payment of $45,707 is due in full on December 31, 2030.

In consideration of the lender providing the 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.

The factors used to calculate the estimated value of the warrants and the resulting fair value, were as follows.

Applying these assumptions resulted in a relative fair value of $132,000, all of which was recorded as debt discount with a corresponding credit to common stock. The debt discount will be amortized as interest expense of $22,000 annually over the respective terms of the debt.

Our minimum future principal payments on these subordinated debentures are as follows:

Term Loan Payable. The term loan is secured by a first mortgage on our building, and is payable in 119 equal monthly installments of $7,453 from inception, including principal and interest at 2.95% based on a 360 day year, plus a final payment of $773,727 (excluding interest) on September 30, 2031. Our minimum future principal payments on this term loan, by year, are as follows:

6. COMMITMENTS AND CONTINGENCIES

Employee Severance Benefits. Our obligation with respect to employee severance benefits is minimized by the "at will" nature of the employee relationships. As of June 30, 2025, we had no obligation with respect to contingent severance benefit obligations other than the Company's obligations under the employment agreement with its chief executive officer, Dr. Wayne Willkomm. In the event that Dr. Willkomm's employment is terminated by the Company without Cause (including through a decision by the Company not to renew the employment agreement) or by Dr. Willkomm with Good Reason (as each are defined in the employment agreement), Dr. Willkomm will be eligible, upon satisfaction of certain conditions, for severance equal to two months of salary continuation plus 12 months of health insurance continuation.

Contractual Commitments and Purchase Orders. Contractual commitments under development agreements and outstanding purchase orders issued to vendors in the ordinary course of business totaled $2,090,369 at June 30, 2025.

Regulatory Commitments. We are subject to certain regulations of the United States Department of Transportation and various state departments of transportation. We believe that we are in substantial compliance with all known applicable regulations.

7. LEGAL PROCEEDINGS

We were not involved or party to any legal proceedings at June 30, 2025 or December 31, 2024, and therefore made no accruals for legal proceedings in either 2025 or 2024.

8. BUSINESS SEGMENTS

We currently have two business segments: (i) the sale of physical products, including portable hand-held breathalyzers and related accessories, supplies, education, training (“Product Sales”), and royalties from development contracts with OEM manufacturers (“Royalties” and, together with Product Sales, the "Products" segment), and (ii) rental of a portion of our building (the “Rentals” segment). The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2.

Operating losses for these segments exclude unallocated corporate items. Administrative and staff costs were commonly used by all business segments and were indistinguishable.

The following sets forth information about the operations of the business segments for the three months ended June 30, 2025 and 2024. There were no intersegment revenues.

The following sets forth information about the operations of the business segments for the six months ended June 30, 2025 and 2024. There were no intersegment revenues.

Significant segment expenses for the three months ended June 30, 2025 are as follows. We have excluded our rentals segment and allocated all expenses to the products segment in the table below as the rentals segment is immaterial. Similarly, royalties are excluded as none of the expenses are attributable to royalties. Operating income from royalties was $19,800 and $8,824 for the three months ended June 30, 2025 and 2024 respectively, and for building rentals it was $3,896 and $4,692 respectively.

Significant segment expenses for the six months ended June 30, 2025 are as follows. We have excluded our rentals segment and allocated all expenses to the products segment in the table below as the rentals segment is immaterial. Similarly, royalties are excluded as none of the expenses are attributable to royalties. Operating income from royalties was $25,471 and $19,760 for the six months ended June 30, 2025 and 2024 respectively, and for building rentals it was $7,549 and $6,840 respectively.

The following sets forth domestic and international product sales for the three months ended June 30, 2025 and 2024.

The following sets forth domestic and international product sales for the six months ended June 30, 2025 and 2024.

Our purchases of assets for the above products segment for the six months ended June 30, 2025 and June 30, 2024 were as follows.

No assets were purchased for the rentals segment.

At June 30, 2025, $104,697 of our assets were used in the Rentals segment, with the remainder, $8,518,457, used in the Products and unallocated segments. The lease in place at June 30, 2025 expired for our Rentals segment and was not renewed. At December 31, 2024, $104,697 of our assets were used in the Rentals segment, with the remainder, $8,620,072 used in the Products and unallocated segments.

The following is the disaggregation of revenue into broad categories, which we have defined as shown below for the three months ended June 30, 2025 and June 30, 2024.

The following is the disaggregation of revenue into broad categories, which we have defined as shown below for the six months ended June 30, 2025 and June 30, 2024.