Lifeloc Technologies, Inc - FORM 10-K

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EX-32.2 - EXHIBIT 32.2 - Lifeloc Technologies, Inc	ex32x2.htm
EX-32.1 - EXHIBIT 32.1 - Lifeloc Technologies, Inc	ex32x1.htm
EX-31.2 - EXHIBIT 31.2 - Lifeloc Technologies, Inc	ex31x2.htm
EX-31.1 - EXHIBIT 31.1 - Lifeloc Technologies, Inc	ex31x1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from__________ to __________

Commission File No.: 000-54319

LIFELOC TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Colorado	84-1053680
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

12441 W 49th Ave., Wheat Ridge, Colorado	80033
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (303) 431-9500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, no par value	None

Securities registered under Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☒ No ☐

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of June 30, 2017 (the last business day of the registrant's most recently completed second fiscal quarter), the aggregate market value, computed by reference to the price at which the registrant's common equity was last sold, of the 369,192 shares of common stock held by non-affiliates of the issuer on such date was $3,691,920.

The number of shares outstanding of each of the issuer's classes of common equity, as of March 10, 2018:

Common Stock, no par value	2,454,116

Documents Incorporated by Reference: Items 10, 11, 13 and 14, and a portion of Item 12 of Part III are incorporated by reference from portions of the registrant's Definitive Proxy Statement for the 2018 Annual Shareholders' Meeting, expected to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2017.

Table of Contents

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	14
Item 2.	Properties	15
Item 3.	Legal Proceedings	15
Item 4.	Mine Safety Disclosures	15

PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 6.	Selected Financial Data	15
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 8.	Financial Statements and Supplementary Data	20
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	37
Item 9A.	Controls and Procedures	37
Item 9B.	Other Information	38

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	38
Item 11.	Executive Compensation	38
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	38
Item 13.	Certain Relationships and Related Transactions, and Director Independence	38
Item 14.	Principal Accounting Fees and Services	38

PART IV		39
Item 15.	Exhibits, Financial Statements Schedules
Item 16.	Form 10-K Summary	40

Forward-Looking Statements

Statements contained in this Annual Report on Form 10-K (this "Annual Report") include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 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 Annual Report on Form 10-K, including statements about our strategies, expectations about new and existing products, market demand, acceptance of new and existing products, technologies and opportunities, market size and growth, and return on investments in products and market, are based on information available to us on the date of this document, and we assume no obligation to update such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "could", "expects", "plans", "intends", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" or the negative of such terms or other comparable terminology. Readers of this Annual Report on Form 10-K are strongly encouraged to review the section entitled "Risk Factors".

Lifeloc®, Easycal®, Lifeguard®, and Phoenix® are registered trademarks of Lifeloc Technologies, Inc. This report may also contain trade names and trademarks of other companies. We do not intend our use or display of other companies' trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

PART I

Item 1. Business

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.lifeguardbreathtester.com and www.stsfirst.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 primarily sold directly to consumers in the U.S. and marketed internationally through global distributors.

In 2011 and 2012 Lifeloc introduced Bluetooth wireless keyboard and printer communication options for our popular 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® 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 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. All drivers entering a secure area can be tested quickly and efficiently.

Testers for Drugs of Abuse

In October 2014 we were awarded a $250,000 grant from the Colorado Office of Economic Development to accelerate development of a breathalyzer that tests for Tetrahydrocannabinol ("THC"), the principal psychoactive constituent in cannabis. Terms of the grant required us to submit invoices as work is performed. We received $25,000, $42,396, $44,523, and $11,288 of grant reimbursements of allowed expenses in 2014, 2015, 2016 and 2017 respectively. These reimbursements are included in our Statements of Income as reductions in Research and Development cost. No revenue has been recognized from these grant reimbursements. The grant completion date was August 31, 2017, at which point $126,793 of grant funds remained unused and are no longer available. This development effort is continuing beyond the completion of the grant.

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. SpinDx uses a centrifugal disk with micro fluidic flow paths allowing multiple tests to be carried out on a single small sample. 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 drugs of abuse. SpinDx has demonstrated the ability to detect levels of THC down to 1 nanogram per milliliter under laboratory conditions. 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 believe this license agreement signifies the beginning of a relationship that will become material to the Company in the future. A prototype was built by Sandia under our Cooperative Research and Development Agreement and received in 2017, after which we commenced work on commercializing the device. We plan to continue and intensify these efforts in 2018.

There is no assurance that our efforts to develop a THC breathalyzer will be successful or that significant sales will result from such development if successful.

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 5,531 are currently leased to two tenants under leases that expire at various times in 2020. We intend to continue 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" products and solutions, our acquisition strategy involves purchasing businesses, development resources and assets that are aligned with our areas of interest and that can further aid in our entering additional markets.

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. The assets we acquired from STS complement our existing drug and alcohol training courses.

On March 8, 2017, we acquired certain assets comprised of: (1) handheld hardware device technology (the "RADAR Mobile Devices"), designed to measure breath alcohol content of the user; and (2) software technology called RADAR Reporting Center designed to allow the RADAR Mobile Devices to be configured and to capture and manage the data being returned from the RADAR Mobile Devices (together with the RADAR Mobile Devices, the "RADAR Assets"). The purchase price for these assets was $860,000. Although there is no assurance of market acceptance, widespread adoption of the RADAR Mobile Devices may provide an alternative to, and thus lower, incarceration rates through better offender monitoring.

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.

Competition and Markets

We sell our products in a highly competitive market and we compete for business with both foreign and domestic manufacturers. Most of our competitors are larger and have substantially greater resources than we do. In addition, there is an ongoing risk that other domestic or foreign companies who do not currently service or manufacture products for our target markets may seek to produce products or services that compete directly with ours.

We believe that considerations regarding competition for sales of alcohol monitoring products and services include regulatory approvals, product performance, product delivery, quality, service, training, price, device reliability, ease of use and speed. We sell certain of our components to customers for incorporation into their own product lines and for resale under their own name. We believe that, while our resources are more limited than those of our competitors, we will continue to compete successfully on the basis of product innovation, quality, reputation and continued customer service excellence.

One of our leading competitors is Intoximeters, Inc. of St. Louis, Missouri, a long-established company with strong name recognition in the field of alcohol testing. It has well established sales channels, a large customer base, and a broad product line. CMI, Inc. of Owensboro, Kentucky, another major competitor, also has a well established name, strong position in stationary units used in police work, and international market coverage. Drägerwerk AG & Co. KGaA, based in Germany, manufactures safety and gas testing equipment. Its breath alcohol testers are respected for their quality and performance.

In addition, other technologies for the measurement of breath alcohol exist and are employed in other market and application segments where the technology may be more suitable or developed to specific requirements. These include:

•

Infrared devices, which use infrared light absorption to detect breath alcohol. These devices generally lack portability, and are usually found in fixed locations, such as police stations, where subjects are brought for testing. This technology has the advantage of being mandated by law in most states for evidential use in breath testing.

•	Semiconductor breath testing technology, which is used primarily in consumer breathalyzers. Its primary advantage is low cost, but the technology is not widely accepted by professional users as being as accurate as fuel cell technology.

•	Chemical tests, which are based on urine and saliva testing. This approach to alcohol testing is more invasive, less convenient than breath testing, and may require subsequent analysis for results.

•

Blood alcohol tests, which require blood samples. These tests are widely believed to be the most accurate form of alcohol testing because they measure blood alcohol content directly from a sample of the subject's blood. However, the results are not instantaneous and the tests are more invasive and expensive than breath alcohol testing.

Marketing

Marketing activities associated with our business include the communication of our value proposition through direct mail, direct and indirect sales channels, trade shows and an information-rich online presence. We sell our products to the workplace and international markets primarily through distributors. We sell our law enforcement, corrections and consumer products directly to the end user and our OEM products directly to manufacturers. Leveraging our installed base is important, as is maintaining a well trained distributor network. In 2009, we revised our workplace distributor program to place additional emphasis on volume incentives for growth in the form of a rebate program. Under the program, distributors receive a progressively greater percentage rebate based on the dollar sales they generate. We believe this program helps incentivize our distributors to achieve a higher level of sales than would otherwise be the case.

Domestic Distribution

The majority of our sales into the workplace market are made through distributors. Sales are made by these distributors pursuant to agreements that renew automatically each year unless terminated by either party with advance notice, and such agreements typically grant protected lead generation areas.

International Distribution

Over 90% of our international sales for all product lines are made by local distributors, who are given territories generally pursuant to agreements that renew automatically each year unless terminated by either party with advance notice. Based on reports from our international distributors, we believe that many countries around the world are instituting tougher alcohol abuse prevention laws, strengthening the enforcement of current laws, or both. These laws set limits on the amount of alcohol an individual may have in the blood at specific times (e.g., while driving or during safety-sensitive work activities), or at any time for certain parolees and probationers. Lifeloc has sold instruments to customers in over 60 countries on six continents worldwide.

Research and Development

Lifeloc defines its business broadly to include "near and remote sensing" applications in markets including those outside of traditional alcohol testing. We believe that our future success depends to a large degree on our ability to conceive and develop improved alcohol detection and measurement products, as well as to identify attractive opportunities for growth outside of breath alcohol testing. Accordingly, we expect to continue to invest in research and development. We spent $1,076,763 and $1,037,035 during 2017 and 2016, respectively, on research and development. The amount spent in 2017 was higher than the amount spent in 2016 due primarily to increased research and development related to the RADAR assets, as well as receiving less grant proceeds in 2017 vs. 2016. We expect to increase our emphasis on new product development efforts for existing and new markets.

Raw Materials and Principal Suppliers

A basic component of our instrument product line is the fuel cell, which we obtain from only a few suppliers. We believe that our demand for this component is small relative to the total supply, and that the materials and services required for the production of our products are currently available in sufficient quantities and will be available for the foreseeable future. However, there are relatively few suppliers of the high-quality fuel cells which our breathalyzers require. Any sudden disruption to the supply of our fuel cells would pose a significant risk to our business. New sources of fuel cells are uncertain at this time and changes to our fuel cells require approval by the DOT, which, if not received, could have a material effect on our revenues. While we have traditionally used only one supplier of fuel cells, we have been developing our own fuel cell manufacturing capability. Processes are still being developed for assembly of fuel cells using purchased sensors. We expect to finalize the assembly of our own fuel cells in 2018. Once completed, we intend to submit devices utilizing our assembled fuel cells to the Department of Transportation for approval in our Evidential Breath Testers. If our own fuel cells are approved, Lifeloc will pursue a two-supplier strategy as necessary to meet the needs of the Company.

Patents, Intellectual Property and Royalties

We rely, in part, upon patents, trade secrets and proprietary knowledge as well as personnel policies and employee confidentiality agreements concerning inventions and other creative efforts (collectively, "Lifeloc IP") to develop and to maintain our competitive position. We do not believe that our business is dependent upon any patent, patent pending or license, although we believe that trade secrets and confidential know-how may be important to our commercial success.

We file for patents, copyrights and trademarks to protect our intellectual property rights to the extent practicable. We hold the rights to twelve United States patents and have three patent applications pending, along with international patent applications on our EASYCAL^® calibration station and on certain RADAR assets. These patents have expiration dates ranging from October 2020 to August 2033. In 2015 we filed two utility patent applications related to our volatile substance testing equipment and methods, one of which has been abandoned and the other of which is still pending. In 2017, we acquired seven United States patents and several active international patent applications in connection with our purchase of the RADAR assets. The RADAR patents and patent applications provide protection around the biometric identification methods used in the RADAR devices along with a removable sampling chamber for maximum hygienics. We are not aware of any infringements of our patents. We act to protect our patents from infringement in each instance where we determine that doing so would be economical in light of the expense involved and the level and availability of our financial resources. While we believe that each of our pending applications relate to a patentable device or concept, there is no guarantee that the patents will be issued.

We also enter into royalty agreements from time to time. In 2012 we entered into a royalty agreement with an OEM customer which provides for the monthly payment of royalties to us on all products containing certain of our software sold by our customer. The agreement is of perpetual duration, but is terminable by the OEM customer upon six months' notice. In 2013 we began receiving royalties from another customer as a result of entering into a second royalty agreement, which provides for the monthly payment of royalties to us on all products containing certain of our software sold by our customer. The agreement is of perpetual duration, but is terminable by the customer upon six months' notice or by us upon 12 months notice.

Employees

As of December 31, 2017, we had 32 full-time employees and 4 part-time employees. We are not a party to any collective bargaining agreements.

Customers

Revenues from our largest customers, as a percentage of total revenues, for 2017 and 2016 were as follows:

	2017			2016
Customer A		8	%		7	%
Customer B		5	%		5	%
Customer C		4	%		4	%
All others		83	%		84	%
Total		100	%		100	%

Environmental Matters

Our operations are subject to a variety of federal, state and local laws and regulations relating to the discharge of materials into the environment or otherwise related to the protection of the environment. Lifeloc sells cylinders of ethanol in nitrogen (UN1956, Class 2.2) for use in calibrating breath alcohol testers. The gas mixture is a hazardous material as defined by the DOT (see 49 CFR 172). We believe we are in substantial compliance with the appropriate DOT regulations for the handling and shipment of dry gas containers, as well as all other state or local laws governing the transportation of hazardous materials. The DOT regulations include strict labeling and packaging requirements, as well as requirements pertaining to shipping papers and declaration forms that must be completed by the shipper. In addition, we provide a Material Safety Data Sheet ("MSDS") with every tank, and all employees involved in shipping hazardous materials are required to have appropriate certification. Failure to comply with these regulations could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability, which could have a material impact on our business. The cost of complying with these regulations is considered as an ongoing cost of operations, and is not material.

Government Regulation of the Business

All breath testers sold in the United States explicitly for personal use are regulated as Class I medical devices by the Food and Drug Administration ("FDA"). These regulations apply to the manufacture and sale of our LifeGuard® product, and we are subject to inspections by the FDA to determine our compliance with these regulations. FDA inspections are conducted periodically at the discretion of the FDA. On June 26, 2017, we were inspected by the FDA and no violations were issued.

In connection with its distribution of cylinders of ethanol in nitrogen for use in calibrating breath alcohol testers (described above under "—Environmental Matters"), Lifeloc has trained on and is following the requirements of OSHA's Hazardous Communications Standard of 2012 (referred to as "HazCom 2012"). Compliance with HazCom 2012 requires providing employee information and training, labeling of chemicals used by Lifeloc and updating MSDS to the new harmonized Safety Data Sheets ("SDS") as they become available. It also requires us to prepare and implement a hazard communication program to follow for workers potentially exposed to hazardous chemicals.

We are also subject to regulation by the United States Department of Transportation ("DOT") and by various state departments of transportation. The Omnibus Transportation Employee Testing Act of 1991 requires drug and alcohol testing of safety-sensitive transportation employees in aviation, trucking, railroads, mass transit, pipelines, and other transportation industries. The DOT Office of Drug & Alcohol Policy & Compliance ("ODAPC") publishes, implements, and provides authoritative interpretations of these rules. These regulations cover all transportation employers, safety-sensitive transportation employees, and service agents. Manufacturers submit devices to the DOT for testing and approval. Instruments are tested according to their model specifications and, if passed, included on the Conforming Products List of Evidential Breath Alcohol Measurement Devices (the "CPL") published periodically in the Federal Register. Law enforcement applications also require that portable breath testing instruments be included on the CPL. Lifeloc's FC10, FC20, EV30, Phoenix® and Phoenix® 6.0 are included on the CPL. We believe that we were in substantial compliance with the regulations described above as of December 31, 2017 for our products sold into these markets and states.

See also Item 1A. Risk Factors – "We are subject to a high degree of regulatory oversight and, if we do not continue to receive the necessary regulatory approvals, our revenues may decline."

International Regulations

Outside of the United States, Lifeloc is subject to applicable regional and foreign regulations. In order to sell our products in the European Union, a CE mark is required, which declares product conformity to relevant directives. Product directives include electromagnetic compatibility and environmental directives which restrict the use of certain hazardous substances in electronic equipment. Lifeloc has a number of CE marked products and we follow other foreign regulations as they apply.

Many countries into which our products are sold recognize the CPL in their selection criteria or have no regulations applicable to the sale of our products. In the case of sales into countries that do not recognize the CPL in their selection criteria, our products conform to in-country developed specifications or are not subject to significant government regulation.

State and Local Regulations

In certain states, the results of portable fuel-cell breath testers are admissible as evidence of intoxication in DUI prosecution. In other states, infra-red technology is considered the standard for evidence of intoxication, because of its ability to perform real-time analysis of the entire breath exhalation thereby giving it the ability to detect interference from mouth alcohol. In those states, portable fuel-cell based breath testers are not admissible as evidence of intoxication, although they may still be used to establish "probable cause."

Insurance

We are covered under comprehensive general liability insurance policies, which have per occurrence and aggregate limits of $1 million and $2 million, respectively, and a $5 million umbrella policy. We maintain customary property and casualty, workers' compensation, employer liability and other commercial insurance policies.

Item 1A. Risk Factors

You should carefully consider the risk factors described below. If any of the following risk factors actually occur, our business, prospects, financial condition or results of operations would likely suffer. In such case, the trading price of our common stock could fall, resulting in the loss of all or part of your investment. You should look at all these risk factors in total. Some risk factors may stand on their own. Some risk factors may affect (or be affected by) other risk factors. You should not assume we have identified these connections. You should not assume that we will always update these and future risk factors in a timely manner. Except as required under applicable securities laws, we are not undertaking any obligation to update these risk factors to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

Risks Related to Our Business and Industry

Global economic conditions could have a negative impact on our business, operating results and financial condition.

Our business can be positively or negatively affected by fluctuations in exchange rates and country by country economic conditions. Our international customers may increase, reduce, delay or cancel their purchases of our products if exchange rates are unfavorable to importation. Unfavorable economic and currency situations may force us to adjust prices downward to remain competitive. We could incur losses if a customer's business fails and the customer is unable to pay us, or pay us on a timely basis. Likewise, if our suppliers have difficulty in obtaining credit or in operating their businesses, they may not be able to provide us with the materials we use to manufacture our products. Our law enforcement business is dependent on the availability of federal and state grants to fund new equipment purchases. Should this funding be unavailable or delayed, our volume may be negatively affected. Our workplace business may be affected by the health of industries with safety sensitive jobs such as oil and gas and transportation. Demand for our products may be affected by downturns in these segments. These actions could result in reduced revenues and higher operating costs, and have an adverse effect on our results of operations and financial condition.

We rely on customers who may not consistently purchase our products in the future and if we lose any one of these customers, our revenues may decline.

Seventeen percent of our total sales in 2017 were attributable to three customers, with whom we do not have long-term contracts. If orders from those customers are not renewed, our revenues may be adversely affected. Furthermore, at December 31, 2017, our accounts receivable balance included approximately $156,960 or 26% from one customer.

In the future, a small number of customers may continue to represent a significant portion of our total revenues in any given period. These customers may not consistently purchase our products at a particular rate over any subsequent period. A loss of any of these customers could adversely affect our revenues.

We rely heavily upon the talents of our Chief Executive Officer, the loss of whom could severely damage our business.

Our performance depends to a large extent on a small number of key managerial personnel. In particular, we believe our success is highly dependent upon the services and reputation of our Chief Executive Officer and President, Dr. Wayne R. Willkomm. Loss of Dr. Willkomm's services could severely damage our business.

We must continue to be able to attract employees with the scientific and technical skills that our business requires, and if we are unable to attract and retain such individuals, our business could be severely damaged.

Our ability to attract employees with a high degree of scientific and technical talent is crucial to the success of our business. There is intense competition for the services of such persons, and we cannot guarantee that we will continue to be able to attract and retain individuals possessing the necessary qualifications. If we cannot attract such individuals, we may not be able to keep our products current, bring new innovation to market or produce our products. As a result, our business could be damaged.

Our ongoing investment in new products, services, and technologies is inherently risky, and could disrupt our ongoing businesses.

We have invested and expect to continue to invest in new products, services, and technologies. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, insufficient revenues to offset liabilities assumed and expenses associated with these new investments, inadequate return of capital on our investments, and unidentified issues not discovered in our due diligence of such strategies and offerings. Because these new ventures are inherently risky, no assurance can be given that such strategies and offerings will be successful and will not adversely affect our reputation, financial condition, and operating results.

We are subject to a high degree of regulatory oversight, and, if we do not continue to receive the necessary regulatory approvals, our revenues may decline.

We are subject to regulation by the United States Department of Transportation ("DOT") and by various state departments of transportation. The Omnibus Transportation Employee Testing Act of 1991 requires drug and alcohol testing of safety-sensitive transportation employees in aviation, trucking, railroads, mass transit, pipelines, and other transportation industries. The DOT Office of Drug & Alcohol Policy & Compliance ("ODAPC") publishes, implements, and provides authoritative interpretations of these rules. These regulations cover all transportation employers, safety-sensitive transportation employees, and service agents. Manufacturers submit devices to the DOT for testing and approval. Instruments are tested according to their model specifications and, if passed, included on the CPL. Law enforcement applications also require that portable breath testing instruments be included on the CPL. Lifeloc's FC10, FC20, EV30, Phoenix® and Phoenix® 6.0 are included on the Conforming Products List of Evidential Breath Alcohol Measurement Devices ("CPL"). We believe that we were in substantial compliance with the regulations described above as of December 31, 2017 for our products sold into these markets and states. In addition, our LifeGuard® product is regulated as a Class I medical device by the Food and Drug Administration ("FDA").

The FDA and the DOT have cleared us to market the alcohol monitoring products we currently sell in the United States. However, further FDA or DOT approval will be required before we can domestically market additional alcohol monitoring products that we may develop in the future. We may also seek to sell new medical or drug-related products, or market current products for new uses, either of which could require us to obtain FDA or DOT clearance to market such products. We may also be required to obtain regulatory approvals or licenses from other federal, state or local agencies or comparable agencies in other countries.

We may not continue to receive FDA or DOT clearance to market our current products or we may not obtain the necessary regulatory clearance, approvals or licenses for the marketing of any of our future products. Also, we cannot predict the impact on our business of FDA or DOT regulations or determinations arising from future legislation or administrative action. If we lose FDA or DOT permission to market our current products or we do not obtain regulatory permission to market our future products, our revenues may decline and our business may be harmed.

Our business in the domestic law enforcement area is susceptible to changes in state policies and DUI laws.

Portable breath testers ("PBTs") are not used to the same degree in each state. Usage is determined by a complex combination of individual state DUI laws, historical practice, and individual state directions for alcohol testing. Some states do not accept breath alcohol testing as evidence. Other states may prefer different breath alcohol testing technology, such as infrared. Lifeloc cannot control the direction or timing of changes to individual state DUI laws, public and political sentiment toward the use of PBTs, or individual state preferences for a specific breath alcohol testing technology. These factors may threaten current state contracts and future state contracts and our revenues may decline, harming our business.

Our business relies on state contracts, governed by state contracting policies that are beyond our control.

Many state purchases of PBTs are governed by state contracts with competitive price bids, multiple year terms and without guarantees of purchases. Other states prefer to share PBT usage across several vendors, also without guarantees of volume. These state practices limit Lifeloc's ability to retain current business, forecast volumes and win new business. Furthermore, a significant amount of our law enforcement business is concentrated in seven states (Arizona, Arkansas, California, Colorado, Michigan, Idaho and Texas). Loss of this business, or delays or cancellations in purchasing by these states, could seriously impact our law enforcement business.

Third parties may infringe on our patents, and as a result, we could incur significant expense in protecting our patents or not have sufficient resources to protect them.

We hold several patents that are important to our business. Although we are not currently aware of any past or present infringements of our patents, we plan to protect these patents from infringement and obtain additional patents whenever feasible. To this end, we have obtained confidentiality agreements from our employees and consultants and others who have access to the design of our products and other proprietary information. Protecting and obtaining patents, however, is both time consuming and expensive. We therefore may not have the resources necessary to assert all potential patent infringement claims or pursue all patents that might be available to us. If our competitors or other third parties infringe on our patents, our business may be harmed.

Third parties may claim that we have infringed on their patents and as a result, we could be prohibited from using all or part of any technology used in our products.

Should third parties claim a proprietary right to all or part of any technology that we use in our products, such a claim, regardless of its merit, could involve us in costly litigation. If successful, such a claim could also result in us being unable to freely use the technology that was the subject of the claim, or sell products embodying such technology. If we engage in litigation, our expenses may increase and our business may be harmed. If we are prohibited from using a particular technology in our products, our revenues may decline and our business may be harmed.

We depend on the availability of certain key supplies and services that are available from only a few sources, and if we experience difficulty with a supplier, we may have difficulty finding alternative sources of supply.

We require certain key supplies for our products, particularly fuel cells, that are available from only a few sources. Based upon our ordering experience to date, we believe the materials and services required for the production of our products are currently available in sufficient quantities. However, this does not mean that we will continue to have timely access to adequate supplies of essential materials and services in the future or that supplies of these materials and services will be available on satisfactory terms when the need arises. Our business could be severely damaged if we become unable to procure essential materials and services in adequate quantities and at acceptable prices.

From time to time, subcontractors may produce certain of our products for us, and our business is subject to the risk that these subcontractors may fail to make timely delivery and/or become unable to acquire essential supplies and services from third parties in a timely fashion. If this occurs, we may not be able to deliver our products on a timely basis and our revenues may decline. Our products and services are also from time to time used as components in the products of other manufacturers. We are therefore subject to the risk that manufacturers that integrate our products or services into their own products may change their source of supply to other vendors, may change their product designs in a way that eliminates our components, and/or may choose to have their components manufactured by other means. If this occurs, our sales may decline and our business may be harmed.

We may be exposed to claims of liability.

Like any manufacturer, we are and always have been exposed to liability claims resulting from the use of our products. We maintain product liability insurance to cover us in the event of liability claims, and as of December 31, 2017, no such claims have been asserted or threatened against us. However, our insurance may not be sufficient to cover all possible future product liabilities.

We could be liable if our business operations harmed the environment, and a failure to maintain compliance with environmental laws could severely damage our business.

Our operations are subject to a variety of federal, state and local laws and regulations relating to the protection of the environment. From time to time, we use hazardous materials in our operations. Although we believe that we are in material compliance with all applicable environmental laws and regulations, our business could be severely damaged by any failure to maintain such compliance.

Our quarterly financial results vary quarter to quarter, which may adversely affect our stock price. We cannot predict with any certainty our operating results in any particular fiscal quarter.

Our quarterly operating results may vary significantly depending upon factors such as:

▪	the timing of completion of significant orders;
▪	the timing and amount of our research and development expenditures;
▪	the costs of initial production in connection with new products;
▪	the availability, quality and cost of key components that go into the assembly of our products;
▪	the timing of new product introductions — both by us and by our competitors;
▪	changes in the regulatory environment and regulations under which we operate;
▪	the loss of a major customer;
▪	the timing and level of market acceptance of new products or enhanced versions of our existing products;
▪	our ability to retain existing employees, customers and our customers' continued demand for our products and services;
▪	our customers' inventory levels, and levels of demand for our customers' products and services; and
▪	competitive pricing pressures.

We may not be able to grow or sustain revenues or achieve or maintain profitability on a quarterly or annual basis, and levels of revenue and/or profitability may vary from one such period to another.

Identification of material weakness in internal control may adversely affect our financial results.

We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. Those provisions provide for the identification of material weaknesses in internal control. If such a material weakness is identified, it could indicate a lack of adequate controls to generate accurate financial statements. We routinely assess our internal controls, but we cannot assure you that we will be able to timely remediate any material weaknesses that may be identified in future periods, or maintain all of the controls necessary for continued compliance.

We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.

We monitor our capital adequacy on an ongoing basis. To the extent that our funds are insufficient to fund future operating requirements, we may need to raise additional funds through corporate finance transactions or curtail our growth and reduce our liabilities. Any equity, hybrid or debt financing, if available at all, may be on terms that are not favorable to us. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition and operating results could be adversely affected.

We have a number of large, well-financed competitors who have research and marketing capabilities that are superior to ours.

The industry in which we operate is highly competitive. Many of our existing and potential competitors have greater financial resources and manufacturing capabilities, more established and larger marketing and sales organizations and larger technical staffs than we have. Other companies, some with greater experience in the alcohol monitoring industry, produce products and services that compete with our products and services. If any of our competitors are successful in developing products that are superior to our products, or competing products that sell for lower prices, this may cause a reduction in the demand for our products and a reduction in our revenue and our profits.

Our products rely on technology that may become outdated or out of favor.

All of Lifeloc's products use fuel cell technology for the measurement of breath alcohol results. This technology has been developed and refined over many years by Lifeloc and our major competitors. While we expect it to remain as the dominant technology in breath testing devices, other technologies for the measurement of breath alcohol exist and are employed in other market and application segments where the technology is more suitable or developed to the specific requirements. It is possible that future development of these technologies could pose a risk to Lifeloc's business. See "Item 1. Business – Competition and Markets" for more information about these other technologies.

Risks Related to Our Stock

Shares of our common stock lack a significant trading market.

Shares of our common stock are not eligible for trading on any national securities exchange. Our common stock may be quoted in the over-the-counter market on the OTC Bulletin Board or in what are commonly referred to as "pink sheets." However, these markets are highly illiquid. There is no assurance that an active trading market in our common stock will develop, or if such a market develops, that it will be sustained. In addition, there is a greater chance for market volatility for securities quoted on the OTC Bulletin Board and pink sheets as compared with securities traded on a national exchange. This volatility may be caused by a variety of factors, including the lack of readily available quotations, the absence of consistent administrative supervision of "bid" and "ask" quotations and generally lower trading volume.

Under certain circumstances, shares of our common stock may be sold without registration pursuant to the safe harbor provided in Exchange Act Rule 144 ("Rule 144"). Any sale under Rule 144 or under any other exemption from the Securities Act of 1933, as amended (the "Securities Act"), if available, or pursuant to registration of shares of common stock of present stockholders, may have a depressive effect upon the price of our common stock in any market that may develop.

Additionally, the price of our securities may be volatile as a result of a number of factors, including, but not limited to, the following:

●	our ability to successfully conceive and to develop new products and services to enhance the performance characteristics and methods of manufacture of existing products;

● our ability to retain existing customers and customers' continued demand for our products and services;

●	the timing of our research and development expenditures and of new product introductions;

●	the timing and level of acceptance of new products or enhanced versions of our existing products;

●	price and volume fluctuations in the stock market at large which do not relate to our operating performance; and

●	outside news reports which may or may not accurately convey information about us, our products, our prospects and opportunities.

Our principal stockholder has significant voting power and may take actions that may not be in the best interests of other stockholders.

Vern D. Kornelsen, Chairman of our Board of Directors, Secretary, and Chief Financial Officer, beneficially owned approximately 77% of our outstanding common stock as of December 31, 2017. Through this ownership, Mr. Kornelsen is able to control the composition of our Board and direct our management and policies. Accordingly, Mr. Kornelsen has the direct or indirect power to:

●	amend our bylaws and some provisions of our articles of incorporation; and

●	cause or prevent mergers, consolidations, sales of all or substantially all our assets or other extraordinary transactions.

Mr. Kornelsen's significant ownership interest could adversely affect investors' perceptions of our corporate governance. In addition, Mr. Kornelsen may have an interest in pursuing acquisitions, divestitures and other transactions that involve risks to us and you. For example, Mr. Kornelsen could cause us to make acquisitions that increase our indebtedness or to sell revenue generating assets. Mr. Kornelsen may from time to time acquire and hold interests in businesses that compete directly or indirectly with us.

Blue Sky considerations may limit sales in certain states.

The holders of our securities and persons who desire to purchase them in any trading market that might develop in the future should be aware that there may be significant state law restrictions upon the ability of investors to resell our securities. Investors should consider any secondary market for our securities to be a limited one. The "manual exemption" permits a security to be distributed in a particular state without being registered if the company issuing the security has a listing for that security in a securities manual recognized by the state. However, it is not enough for the security to be listed in a recognized manual. The listing entry must contain (1) the names of issuers, officers, and directors, (2) an issuer's balance sheet, and (3) a profit and loss statement for either the fiscal year preceding the balance sheet or for the most recent fiscal year of operations. Since June 14, 2011, we have been listed in Standard & Poor's. While many states expressly recognize this manual, a smaller number of states declare that they "recognize securities manuals" but do not specify the recognized manuals, making applicability of the manual exemption uncertain in those states. The following states do not have provisions expressly recognizing the manual exemption: Alabama, Illinois, Kentucky, Louisiana, Montana, New York, Pennsylvania, Tennessee and Virginia. While we may, in our discretion, cause our securities to be registered under the state securities laws of these or other states, there is no guarantee that we will do so.

Compliance with changing regulations of corporate governance and public disclosure may result in additional expenses.

We are subject to certain federal, state and other rules and regulations, including those required by the Sarbanes-Oxley Act of 2002, new regulations promulgated by the SEC and the rules of the OTC Market. The expense of compliance with these and other laws relating to corporate governance and public disclosure is included in our general and administrative expenses. These laws, regulations and standards are subject to varying interpretations in many cases, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards result in different outcomes from those intended by regulatory or governing bodies, our business may be harmed.

We may issue shares in the future, diluting your interest in us.

We issue options to purchase shares of our common stock to compensate employees, consultants and directors under our 2013 Stock Option Plan, and we may issue additional shares to raise capital. Any such issuances will have the effect of further diluting the interest of the holders of our securities.

Stockholders should not anticipate receiving cash dividends on our stock.

We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain future earnings to support operations and to finance expansion and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Item 1B. Unresolved Staff Comments

Not required for smaller reporting companies.

Item 2. Properties

On October 31, 2014, we purchased the commercial property the Company uses as its corporate headquarters and certain adjacent property in Wheat Ridge, Colorado. The building consists of 22,325 square feet, of which approximately 16,794 square feet are occupied by us and approximately 5,531 square feet are currently leased to two tenants under leases that expire at various times in 2020. We intend to continue 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.

Item 3. Legal Proceedings

We may be involved from time to time in litigation, negotiation and settlement matters that may have a material effect on our operations or finances. We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is subject.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

As of December 31, 2017, we had 75 shareholders of record. Our common stock is not listed on an established public trading market. Since January 17, 2012, our stock has been quoted by the OTC Markets Group, Inc., in the non-NASDAQ over the counter market. The symbol for our shares is LCTC. Trading in our common stock is limited and sporadic. Subject to the foregoing qualification, the following table sets forth the range of bid quotations for the fiscal quarters indicated, as quoted by OTC Markets Group, Inc., and reflects inter-dealer prices, without retail mark up, mark down or commission and may not necessarily represent actual transactions.

Fiscal 2017	Bid Price		Fiscal 2016	Bid Price
1st Quarter	$	7.25 – 21.00	1^st Quarter	$	6.70 – 8.83
2nd Quarter	$	9.00 – 14.96	2nd Quarter	$	4.15 – 7.08
3rd Quarter	$	6.00 – 13.00	3rd Quarter	$	3.80 – 5.20
4th Quarter	$	5.25 – 8.00	4th Quarter	$	4.15 – 14.08

Dividend Policy

We have never declared or paid any cash dividend on shares of our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance our operations and expand our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, operating results, capital requirements, and other factors the board of directors deems relevant.

Recent Sales of Unregistered Securities

None.

Item 6. Selected Financial Data

Not required for smaller reporting companies.

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

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, may not result in either increased sales or continuing profitable operations.

Possibility of Operating Losses. Over the past several years we have operated profitably; however, prior to that 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.

Recent Developments

On March 8, 2017, we entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Track Group Inc., a Delaware corporation, and its wholly owned subsidiary Integrated Monitoring Systems, LLC, a Colorado limited liability company. Pursuant to the terms and conditions of the Asset Purchase Agreement, we acquired certain assets comprised of: (1) handheld hardware device technology (the "RADAR Mobile Devices"), designed to measure breath alcohol content of the user; and (2) software technology called RADAR (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 "RADAR Assets"). The purchase price under the Asset Purchase Agreement was $860,000. Under the Asset Purchase Agreement, we assumed certain liabilities and obligations, including contractual obligations, and various other liabilities and obligations arising out of or relating to the RADAR Assets, including obligations related to current customers of the RADAR Assets. The Asset Purchase Agreement contains customary representations, warranties, and covenants and provides for indemnification rights with respect to a breach of a representation, warranty or covenant by either party. Although there is no assurance of market acceptance, widespread adoption of the RADAR Mobile Devices may provide an alternative to, and thus lower, incarceration rates through better offender monitoring.

Results of Operations

For the year ended December 31, 2017 compared to the year ended December 31, 2016.

Net sales. Our product sales for the year ended December 31, 2017 were $7,629,474, a decrease of 3% from $7,888,786 for the same period a year ago. This decrease is primarily attributable to prevailing market conditions, including a decrease in sales in the oil and gas sector. When royalties of $289,588 and rental income of $71,676 are included, total revenues of $7,990,738 decreased by $390,397, or 5%, for the year ended December 31, 2017 when compared to the same 12 months a year ago. Rental income decreased due to the termination of a tenant lease that was not immediately replaced, and royalties decreased due to a decrease in sales by royalty-paying customers.

Gross profit. Gross profit for the year ended December 31, 2017 of $3,712,864 represented a decrease of 11% from total gross profit of $4,178,406 for the year ended December 31, 2016, primarily as a result of decreased sales volume, decreased rental income in 2017, and lower royalties. Cost of product sales increased from $4,137,206 in the year ended December 31, 2016 to $4,178,268 in the same period in 2017, or 1%, primarily as a result of costs associated with the purchase in March 2017 of the RADAR mobile device product line, which was not yet accompanied by a proportionate increase in revenues. Gross profit margin on products decreased to 45% in the year ended December 31, 2017 from 48% in the year ended December 31, 2016 primarily for the same reason.

Research and development expenses. Research and development expenses were $1,076,763 for the year ended December 31, 2017, representing an increase of 4% over the $1,037,035 in the same period a year ago. This increase resulted mostly from lower grant reimbursements this year vs. a year ago.

Sales and marketing expenses. Sales and marketing expenses of $1,388,927 the year ended December 31, 2017 were higher than the $1,359,043 spent in the same period a year ago by 2%, or $29,884. This increase is attributable primarily to higher advertising costs in 2017.

General and administrative expenses. General and administrative expenses were $1,114,534 for the year ended December 31, 2017 vs. $1,147,349 for the year ended December 31, 2016, a decrease of $32,815 or 3%.

Other income (expense). Other income was affected by a decrease in interest income of $6,446 in the year ended December 31, 2017, mostly as the result of less cash available for investment because of the asset acquisition in Q1 of 2017. A business loan was paid in full in 2016, which resulted in the bad debt recovery of $4,500 in 2016 being absent in 2017. Interest expense of $60,705 in the year ended December 31, 2017 vs. $65,963 in the same period a year ago is the result of the balance of the term loan on our building declining.

Net income. We realized net income of $14,603 for the year ended December 31, 2017 compared to net income of $433,151 for the year ended December 31, 2016. This decrease of $418,548, or 97%, was the result of the decrease in gross profit and of the changes in operating expenses discussed above, offset in part by a decrease in income taxes of $89,479.

Trends and Uncertainties That May Affect Future Results

Revenues in the year 2017 were lower compared to revenues in 2016. We believe increased sales efforts, along with the re-launch of the RADAR Mobile Devices, may result in improved revenues in 2018 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.

Our 2018 operating plan is focused on growing sales, increasing gross profits, and increasing research and development efforts on new products for long-term growth. We cannot predict with certainty the expected sales, gross profit, net income or loss, or usage of cash and cash equivalents for 2018. However, we believe that cash resources and borrowing capacity will be sufficient to fund our operations for the next twelve months under our current operating plan. If we are unable to manage the business operations in line with our budget expectations, it could have a material adverse effect on business viability, financial position, results of operations and cash flows. Further, if we are not successful in sustaining profitability and remaining at least cash flow break-even, additional capital may be required to maintain ongoing operations.

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 increased to $750,000 in 2017) bearing interest at a rate equal to the LIBOR daily floating rate plus 2.5%, secured by all assets of the Company. As a result of payments made on the loan, as well as a reduction of the interest rate in July 2016, our interest expense decreased from $65,963 for FY 16 to $60,705 for FY 17. There were no borrowings under the line of credit as of December 31, 2017.

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.

In October 2014 we were awarded a $250,000 grant from the Colorado Office of Economic Development to accelerate development of a breathalyzer that tests for Tetrahydrocannabinol ("THC"), the principal psychoactive constituent in cannabis. In 2016 the breathalyzer development effort was broadened to include the SpinDx technology as a potential detection method. SpinDx has demonstrated the ability to detect very low levels of THC under laboratory conditions. Terms of the grant require us to submit invoices as work is performed. We received $25,000, $42,396, $44,523, and $11,288 of grant reimbursements of allowed expenses in 2014, 2015, 2016 and 2017 respectively. The grant completion date was August 31, 2017, at which point $126,793 of grant funds remained unused and are no longer available. This development effort is continuing beyond the completion of the grant. There is no assurance that this effort to develop a THC breathalyzer will be successful or that significant sales will result from such development if successful.

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 2016), 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 (raised to $750,000 in 2017) from Bank of America secured by all assets of the Company. The line of credit bears interest at a rate calculated at the LIBOR daily floating rate plus 2.5%. At December 31, 2017 this credit facility had not been used.

Except for normal operating contractual commitments and purchase orders, and aside from the commitments under our term loan and line of credit with Bank of America, 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 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, 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, 2017, cash was $2,669,455, trade accounts receivable were $593,326 and current liabilities were $745,387 resulting in net liquid assets of $2,517,394. 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, which are required in order for us to maintain profitability. If these revenues are not achieved on a timely basis, we may be required to seek additional sources of capital and/or to implement cost reduction measures, as necessary.

Property and equipment expenditures during FY 17 were $11,846 compared to $42,807 for FY 16. We filed patent applications at a cost to us of $17,217 in 2017 versus $8,954 in 2016. The acquisition of RADAR equipment and software in 2017 was $748,198, and the related patents were $100,000.

We generally provide a standard one-year limited warranty on materials and workmanship to our customers. In 2014 we began providing a lifetime warranty on fuel cells. 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, 2017 and for the year ended December 31, 2016, warranty costs were not deemed significant.

Critical Accounting Policies and Estimates

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, sales returns, warranty, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.

We have concluded that we have two operating segments, including our primary business which is as a developer, manufacturer and marketer of portable hand-held breathalyzers and related accessories, supplies and education, and a second segment consisting of renting portions of our building to existing tenants.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required, which would increase our expenses during the periods in which any such allowances were made. The amount recorded as a provision for bad debts in each period is based upon our assessment of the likelihood that we will be paid on our outstanding receivables, based on customer-specific as well as general considerations. To the extent that our estimates prove to be too high, and we ultimately collect a receivable previously determined to be impaired, we may record a reversal of the provision in the period of such determination.

We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Any write-downs of inventory would reduce our reported net income during the period in which such write-downs were applied.

Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally five years (three years for software and technology licenses). We use the double declining method of depreciation for property and equipment, and the straight line method for software and technology licenses. We purchased all of the assets of STS, an online education company, in 2014, which consisted of training courses that are amortized over 15 years using the straight line method. In October 2014, we purchased our building. A majority of the cost of the building is depreciated over 39 years using the straight line method. In addition, based on the results of a third party analysis, a portion of the cost was allocated to components integral to the building. Such components are depreciated over 5 and 15 years, using the double declining method and the straight line method respectively. The RADAR mobile devices, and the RADAR software and patents that were purchased in March 2017 are depreciated over 5 years using the double declining balance method, and amortized over 15 years, using the straight line method, respectively. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.

Revenue from product sales 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.

Revenues arising from extended warranty contracts are booked as sales over their life on a straight-line basis. Supplies are recognized as sales when they are shipped. The sales of licenses to our training courses and the sale of training courses are recognized as revenue at the time of sale. We have discontinued arranging for customer financing and leasing through unrelated third parties and instead are providing for 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.

The sales of licenses to our training courses are recognized as revenue at the time of sale.

Rental income from space leased to our tenants is recognized in the month in which it is due.

On occasion we receive customer deposits for future product orders. Customer deposits are initially recorded as a liability and recognized as revenue when the product is shipped and title has passed to the customer.

Stock-based compensation is presented in accordance with the guidance of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718, Compensation — Stock Compensation ("ASC 718"). Under the provisions of ASC 718, companies are required to estimate the fair value of share-based payment awards made to employees and directors including employee stock options based on estimated fair values on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our statement of operations.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies.

Item 8. Financial Statements and Supplementary Data

The following financial statements are included in this Report:


	Page
Report of Independent Registered Public Accounting Firm for the Years Ended December 31, 2017 and 2016	21

Balance Sheets as of December 31, 2017 and 2016	22

Statements of Income for the Years Ended December 31, 2017 and 2016	23

Statements of Stockholders' Equity for the Years Ended December 31, 2017 and 2016	24

Statements of Cash Flows for the Years Ended December 31, 2017 and 2016	25

Notes to Financial Statements	26

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Lifeloc Technologies, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Lifeloc Technologies, Inc. (the "Company") as of December 31, 2017 and 2016, the related statements of income, stockholders' equity and cash flows for the years then ended and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016 and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Causey Demgen & Moore P.C.

Causey Demgen & Moore P.C.

We have served as the Company's auditor since 2016.

Denver, Colorado

March 23, 2018

LIFELOC TECHNOLOGIES, INC.
Balance Sheets

ASSETS
	December 31,			December 31,
CURRENT ASSETS:	2017			2016
Cash	$	2,669,455		$	3,772,064
Accounts receivable, net		593,326			495,397
Inventories, net		1,175,103			835,609
Income taxes receivable		121,401			114,673
Prepaid expenses and other		21,804			52,072
Total current assets		4,581,089			5,269,815

PROPERTY AND EQUIPMENT, at cost:
Land		317,932			317,932
Building		1,928,795			1,928,795
Real-time Alcohol Detection And Recognition equipment and software		569,448			0
Production equipment and software		556,025			456,005
Training courses		432,375			432,375
Office equipment and software		204,282			193,332
Sales and marketing equipment		216,330			228,908
Research and development equipment and software		131,770			78,157
Less accumulated depreciation		(1,349,499	)		(1,112,498	)
Total property and equipment, net		3,007,458			2,523,006

OTHER ASSETS:
Patents, net		177,244			71,909
Deposits and other		259,037			98,991
Deferred taxes		66,531			109,727
Total other assets		502,812			280,627

Total assets	$	8,091,359		$	8,073,448

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	297,096		$	284,590
Term loan payable, current portion		42,101			40,218
Customer deposits		48,763			51,611
Accrued expenses		264,290			239,833
Deferred revenue, current portion		53,137			64,283
Reserve for warranty expense		40,000			40,000
Total current liabilities		745,387			720,535

TERM LOAN PAYABLE, net of current portion and
debt issuance costs		1,410,185			1,455,604

DEFERRED REVENUE, net of current portion		9,683			8,665

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Common stock, no par value; 50,000,000 shares
authorized, 2,454,116 shares outstanding		4,580,177			4,557,320
Retained earnings		1,345,927			1,331,324
Total stockholders' equity		5,926,104			5,888,644

Total liabilities and stockholders' equity	$	8,091,359		$	8,073,448

See accompanying notes.

LIFELOC TECHNOLOGIES, INC.
Statements of Income

	Years Ended December 31,
	2017			2016
REVENUES:
Product sales	$	7,629,474		$	7,888,786
Royalties		289,588			392,603
Rental income		71,676			99,746
Total		7,990,738			8,381,135

COST OF SALES		4,277,874			4,202,729

GROSS PROFIT		3,712,864			4,178,406

OPERATING EXPENSES:
Research and development		1,076,763			1,037,035
Sales and marketing		1,388,927			1,359,043
General and administrative		1,114,534			1,147,349
Total		3,580,224			3,543,427

OPERATING INCOME		132,640			634,979

OTHER INCOME (EXPENSE):
Interest income		6,824			13,270
Bad debt recovery		-			4,500
Interest expense		(60,705	)		(65,963	)
Total		(53,881	)		(48,193	)

NET INCOME BEFORE PROVISION FOR TAXES		78,759			586,786

PROVISION FOR FEDERAL AND STATE INCOME TAXES		(64,156	)		(153,635	)

NET INCOME	$	14,603		$	433,151

NET INCOME PER SHARE, BASIC	$	0.01		$	0.18

NET INCOME PER SHARE, DILUTED	$	0.01		$	0.17

WEIGHTED AVERAGE SHARES, BASIC		2,454,116			2,454,116

WEIGHTED AVERAGE SHARES, DILUTED		2,518,188			2,547,430
See accompanying notes.

LIFELOC TECHNOLOGIES, INC.
Statements of Cash Flows

	Years Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:	2017			2016
Net income	$	14,603		$	433,151
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Depreciation and amortization		288,017			283,165
Provision for doubtful accounts, net change		-			(4,500	)
Provision for inventory obsolescence, net change		27,500			-
Deferred taxes, net change		43,196			11,613
Reserve for warranty expense, net change		-			6,900
Stock based compensation expense related to
stock options		22,857			24,308
Changes in operating assets and liabilities-
Accounts receivable		(97,929	)		112,920
Inventories		(366,994	)		(33,948	)
Income taxes receivable		(6,728	)		(33,642	)
Prepaid expenses and other		30,268			(28,793	)
Deposits and other		(160,046	)		(89,677	)
Accounts payable		12,506			61,614
Customer deposits and deferred grant revenue		(2,848	)		(41,259	)
Accrued expenses		24,457			(35,163	)
Deferred revenue		(10,128	)		(35,395	)
Net cash provided from (used in)
operating activities		(181,269	)		631,294

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(11,846	)		(42,807	)
Cash paid for equipment and software acquired in
asset acquisition		(748,198	)		-
Cash paid for patents and patent applications acquired
in asset acquisition		(100,000	)		-
Patent filing expense		(17,217	)		(8,954	)
Net cash (used in) investing activities		(877,261	)		(51,761	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments made on term loan		(44,079	)		(34,659	)
Net cash (used in) financing
activities		(44,079	)		(34,659	)

NET (DECREASE) INCREASE IN CASH		(1,102,609	)		544,874

CASH, BEGINNING OF PERIOD		3,772,064			3,227,190

CASH, END OF PERIOD	$	2,669,455		$	3,772,064

SUPPLEMENTAL INFORMATION:
Cash paid for interest	$	65,348		$	65,421

Cash paid for income tax	$	40,096		$	163,337

See accompanying notes.

Lifeloc Technologies, Inc.
Statement of Stockholders' Equity
Years Ended December 31, 2017 and 2016



	Common Stock
	Shares		Amount			Retained Earnings			Total
BALANCES, DECEMBER 31, 2015		2,454,116		$	4,533,012		$	898,173		$	5,431,185

Net income		-			-			433,151			433,151
Stock based compensation expense
related to stock options		-			24,308			-			24,308

BALANCES, DECEMBER 31, 2016		2,454,116			4,557,320			1,331,324			5,888,644

Net income		-			-			14,603			14,603
Stock based compensation expense
related to stock options		-			22,857			-			22,857

BALANCES, DECEMBER 31, 2017		2,454,116		$	4,580,177		$	1,345,927		$	5,926,104

See accompanying notes.

LIFELOC TECHNOLOGIES, INC.

Notes to Financial Statements

December 31, 2017 and 2016

1. ORGANIZATION AND NATURE OF BUSINESS

Lifeloc Technologies, Inc. ("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 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.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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. 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. In 2016, the Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). This standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. Deferred loan costs are amortized over the 20-year life of the term loan on a straight line basis, which approximates the effective interest method. Total amortization during the years ended December 31, 2017 and 2016 was $542 and $542, respectively, and is included within interest expense on the statements of income.

Deferred Taxes. In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). This standard requires that deferred income tax assets and liabilities be presented as noncurrent assets or liabilities in the balance sheet. ASU 2015-17 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and may be applied either prospectively to all deferred tax assets or liabilities or retrospectively to all periods presented. Early adoption is permitted. We have adopted this new standard in 2017. As a result of adopting this standard, current deferred taxes of $109,727 have been reclassified in the accompanying balance sheet for December 31, 2016 as non-current.

Fair Value Measurement. Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements and Disclosures ("ASC 820"), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:

Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equity securities listed on the New York Stock Exchange.

Level 2 - Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.

Level 3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.

Cash and Cash Equivalents. For purposes of reporting cash flows, we consider all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents. There were no cash equivalents as of December 31, 2017 and 2016.

Fair Value of Financial Instruments. Our financial instruments consist of cash, short-term trade receivables, payables and a term loan secured by a first mortgage. The carrying values of cash, short-term receivables, and payables approximate their fair value due to their short term maturities. The carrying value of the term loan approximates its fair value based on interest rates currently obtainable.

Concentration of Credit Risk. Financial instruments with significant credit risk include cash and accounts receivable. The amount of cash on deposit with two financial institutions exceeded the $250,000 federally insured limit at December 31, 2017 by $1,919,223. However, we believe that the financial institutions are financially sound and the risk of loss is minimal.

We have no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.

Accounts Receivable. Accounts receivable are typically unsecured and are derived from transactions with and from entities primarily located in the United States or from international distributors with a proven payment history; we require pre-payment for most international orders. Accordingly, we may be exposed to credit risks generally associated with the alcohol monitoring industry. Our credit policy calls for payment in accordance with prevailing industry standards, generally 30 days with occasional exceptions of up to 60 days for large established customers. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. A summary of the activity in our allowance for doubtful accounts is as follows:

Years Ended December 31	2017			2016
Balance, beginning of year	$	35,000		$	35,000
Provision for estimated losses		10,669			5,301
Write-off of uncollectible accounts		(10,669	)		(5,301	)
Balance, end of year	$	35,000		$	35,000

The net accounts receivable balance at December 31, 2017 of $593,326 included an account from one customer of $156,960 (26%), and no more than 10% from any other single customer. The net accounts receivable balance at December 31, 2016 of $495,397 included an account from one customer of $113,948 (23%) and no more than 6% from any other single customer.

Inventories. Inventories are stated at the lower of cost (first-in, first-out basis) or market. 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. At December 31, 2017 and December 31, 2016, inventory consisted of the following:

	2017			2016
Raw materials & deposits	$	809,867		$	592,771
Work-in-process		181,976			42,366
Finished goods		243,260			287,972
Total gross inventories		1,235,103			923,109
Less reserve for obsolescence		(60,000	)		(87,500	)
Total net inventories	$	1,175,103		$	835,609

A summary of the activity in our inventory reserve for obsolescence is as follows:

Years Ended December 31	2017			2016
Balance, beginning of year	$	87,500		$	87,500
Provision for estimated obsolescence		21,965			30,134
Write-off of obsolete inventory		(49,465	)		(30,134	)
Balance, end of year	$	60,000		$	87,500

Property and Equipment. 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; 15 years for training courses; 39 years for the cost of the building we purchased in October 2014. We utilize the double-declining method of depreciation for property and equipment, and the straight-line method of depreciation for software, training courses, and the building, due to the expected usage of these assets over time. These methods are expected to continue throughout the life of the assets. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized. Depreciation expense for the years ended December 31, 2017 and 2016 was $275,592 and $243,326 respectively.

Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A long-lived asset is considered impaired when estimated future cash flows related to the asset, undiscounted and without interest, are insufficient to recover the carrying amount of the asset. If deemed impaired, the long-lived asset is reduced to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell. No impairments were recorded for the years ended December 31, 2017 and 2016 respectively.

Patents. The costs of applying for patents are capitalized and amortized on a straight-line basis over the lesser of the patent's economic or legal life (20 years for utility patents in the United States, and 14 years for design patents). Amortization expense, including impairments, for the years ended December 31, 2017 and 2016 was $11,882 and $39,297 respectively. Amortization expense for each of the next 5 years is estimated to be $13,227 per year. Capitalized costs are expensed if patents are not granted. We review the carrying value of our patents periodically to determine whether the patents have continuing value and such reviews could result in the conclusion that the recorded amounts have been impaired. Impairments of $0 and $29,386 were included in amortization expense for the years ended December 31, 2017 and 2016 respectively. A summary of our patents at December 31, 2017 and 2016 is as follows:

	2017			2016
Patents issued	$	190,508		$	22,775
Patent applications		24,321			74,837
Accumulated amortization		(37,585	)		(25,703	)
Total net patents	$	177,244		$	71,909

Deposits and Other Assets. We include the long-term portion of installment receivables and the long-term portion of prepaid consulting with deposits.

Accrued Expenses. We have accrued various expenses in our December 31 balance sheets, as follows.

	2017		2016
Compensation	$	139,841	$	135,585
Property and other taxes		96,097		49,092
Rebates		28,352		37,562
State income tax		-		12,408
Interest		-		5,186
	$	264,290	$	239,833

Product Warranty Reserve. We provide for the estimated cost of product warranties at the time sales are recognized. Our warranty obligation is based upon historical experience and will be affected by product failure rates and material usage incurred in correcting a product failure. Should actual product failure rates or material usage costs differ from our estimates, revisions to the estimated warranty liability would be required. A summary of the activity in our product warranty reserve is as follows:

Years Ended December 31	2017			2016
Balance, beginning of year	$	40,000		$	33,100
Provision for estimated warranty claims		38,153			46,980
Claims made		(38,153	)		(40,080	)
Balance, end of year	$	40,000		$	40,000

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.

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. For the years ended December 31, 2017 and 2016, we did not have any interest or penalties or any significant uncertain tax positions.

Revenue Recognition. Revenue from product sales 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.

Supplies are recognized as sales when they are shipped. Training revenues are recognized at the time the training occurs. We have discontinued arranging for customer financing and leasing through unrelated third parties and instead are providing for 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. Revenues from these activities are included in product revenue in our statements of income.

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.

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

Rental income from space leased to our tenants 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.

Deferred Revenue. Deferred revenues arise from service contracts and from development contracts. 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. 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 progress payments received on development contracts; those revenues are recognized when the contract is complete, and are included in product revenue in our statements of income. All development contracts are for less than one year and all deferred revenues from this source are shown in our balance sheets as short term.

Grants. We apply for and receive job training and other grants. In September 2014 we were notified that we had been awarded a $250,000 grant from the Colorado Office of Economic Development to accelerate development of a marijuana breathalyzer that is currently under development. Grants are recognized as reductions of expense when received. In 2017 and 2016, we received expense reimbursement grants of $11,288 and $44,523 respectively.

Rebates. Our rebate program is available to certain of our North American workplace distributors in good standing who are responsible for sales equaling at least $25,000 in one calendar year. Distributors who meet the required sales threshold automatically earn a rebate equal to between 1 and 10 percent of that distributor's total sales of the Company's products. We accrue for these rebates monthly; they are shown in our balance sheets as accrued expenses and are included in sales and marketing expense in our statements of income.

Research and Development Expenses. We expense research and development costs for products and processes as incurred.

Stock-Based Compensation. Stock-based compensation is presented in accordance with the guidance of 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 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 income.

ASC 718 requires companies to estimate the fair value of share-based payment awards 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 the accompanying statement of income.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. We used the Black-Scholes option-pricing model ("Black-Scholes model") to determine fair value. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Although the fair value of employee stock options is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Stock-based compensation expense recognized under ASC 718 for years 2017 and 2016 was $22,857 and $24,308 respectively. Stock-based compensation expense related to employee stock options under ASC 718 is allocated to General and Administrative Expense when incurred.

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 existing tenants, whose leases expire at various times until July 31, 2020.

Basic and Diluted Income and Loss per Common Share. Net income or loss per share is calculated in accordance with ASC Topic 260, Earnings Per Share ("ASC 260"). Under the provisions of ASC 260, 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 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. Dilution from potential common shares outstanding at December 31, 2017 and 2016 was $0.00 and $0.01 per share, respectively.

Recent Accounting Pronouncements. We have reviewed all recently issued, but not yet effective, accounting pronouncements.

The FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). It outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." In August 2015, the FASB issued ASU No. 2015-14, which deferred by one year the mandatory effective date of ASU 2014-09. As a result, public entities are required to adopt the new revenue standard in annual periods beginning after December 15, 2017 and in interim periods within those annual periods. The standard may be applied either retrospectively to prior periods or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted, but not before annual periods beginning after December 15, 2016. We have determined that we will adopt the new revenue standard in 2018 retrospectively, with the cumulative effect of initial application recognized in retained earnings. We do not expect this new standard to have a material impact on our financial statements or related disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). This update substantially revises standards for the recognition, measurement and presentation of financial instruments. This standard revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements. We have determined that we will adopt this new standard in 2018. We do not expect this new standard to have a material impact on our financial statements or related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for us beginning on January 1, 2019 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We have determined that we will adopt this new standard in 2019. We do not expect this new standard to have a material impact on our financial statements or related disclosures.

3. ASSET ACQUISITION

In March 2017 we acquired all of the assets related to R.A.D.A.R. from Track Group, Inc. ("TRCK") for $860,000 in cash. Based on Level 3 inputs, which consisted of estimates of future cash flows, return on investment analyses, and replacement costs, the purchase price was allocated as follows:

Asset	Allocation		Depreciable Life and Method	Estimated Future Annual Depreciation
Software	$	396,948	15 years; straight line		$	26,463
Rental equipment		172,500	5 years; double declining balance	Varies
Rental equipment not yet in service		178,052	5 years; double declining balance	Varies
Patents and patent applications		100,000	15 years; straight line		$	6,667
Production equipment		12,500	5 years; double declining balance	Varies
Total	$	860,000

The original rental equipment not yet in service of $178,052 was transferred to inventory.

The purpose of this acquisition was to expand our offering of substance abuse monitoring services.

4. BASIC AND DILUTED INCOME AND LOSS PER COMMON SHARE

We report both basic and diluted net income per common share. Basic net income per common share is computed by dividing net income for the period by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing the net income 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 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 income per common share:

	Years Ended
	December 31, 2017		December 31, 2016
Net income	$	14,603	$	433,151
Weighted average shares-basic		2,454,116		2,454,116
Effect of dilutive potential common shares		64,072		93,314
Weighted average shares-diluted		2,518,188		2,547,430
Net income per share-basic	$	.01	$	.18
Net income per share-diluted	$	.01	$	.17
Antidilutive employee stock options		-		-

5. STOCKHOLDERS' EQUITY

Stock Option Plan. In January 2013, we adopted our 2013 Stock Option Plan (the "2013 Plan") to promote the Company's and its stockholders' interests by helping us to attract, retain and motivate our key employees and associates. Under the terms of the 2013 Plan, our Board of Directors (the "Board") can grant either "nonqualified" or "incentive" stock options, as defined by the Internal Revenue Code and related regulations. The purchase price of the shares subject to a stock option is the fair market value of our common stock on the date the stock option is granted. Generally, all stock options must be exercised within five years from the date granted. The number of common shares reserved for issuance under the 2013 Plan is 150,000 shares of common stock, subject to adjustment for dividend, stock split or other relevant changes in our capitalization. The 2013 Plan was approved by our shareholders at their regular annual meeting on April 1, 2013.

Under ASC 718, the value of each employee stock option was estimated on the date of grant using the Black-Scholes model for the purpose of financial information in accordance with ASC 718. The use of a Black-Scholes model requires the use of actual employee exercise behavior data and the use of a number of assumptions including expected volatility, risk-free interest rate and expected dividends. Options to purchase 50,000 shares of stock at $6.00 apiece were granted in 2017 and remain outstanding. Options to purchase 50,000 shares of stock at $8.83 apiece were granted in 2016, all of which were cancelled in 2017.

Cumulative compensation cost recognized in net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of compensation expense in the period of forfeiture. The volatility of the stock is based on a comparable public company's historical volatility since our stock is rarely traded. Fair value computations are highly sensitive to the volatility factor; the greater the volatility, the higher the computed fair value of options granted.

The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the use of assumptions, including the expected stock price volatility. Because our employee stock options have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. A summary of our stock option activity and related information for equity compensation plans approved by security holders for each of the fiscal years ended December 31, 2017 and 2016 is as follows:

	STOCK OPTIONS OUTSTANDING
	Number Outstanding			Weighted Average Exercise Price Per Share
BALANCE AT DECEMBER 31, 2015		79,000		$	2.66
Granted		50,000			-
Exercised		-			-
Forfeited/expired		(43,500	)		-
BALANCE AT DECEMBER 31, 2016		85,500		$	6.13
Granted		50,000			-
Exercised		-			-
Forfeited/expired		(75,500	)		-
BALANCE AT DECEMBER 31, 2017		60,000		$	5.39

The following table summarizes information about employee stock options outstanding and exercisable at December 31, 2017:

		STOCK OPTIONS OUTSTANDING						STOCK OPTIONS EXERCISABLE
Range of Exercise Prices		Number Outstanding		Weighted-Average Remaining Contractual Life (in Years)		Weighted-Average Exercise Price per Share		Number Exercisable		Weighted-Average Exercise Price per Share
	$2.32		10,000		.75		$2.32		10,000		$2.32
	$6.00		50,000		4.50		$6.00		-		-
			60,000						10,000

Of the 10,000 options exercisable as of December 31, 2017, all are incentive stock options. The exercise price of all options granted through December 31, 2017 has been equal to or greater than the fair market value as of the date of grant, as determined by the Board. As of December 31, 2017, 83,300 options exercisable for our common stock remain available for grant under the 2013 Plan.

Options to purchase 50,000 shares of stock at $8.83 apiece were granted during the year ended December 31, 2016. These options were forfeited and replaced with options to purchase 50,000 shares of stock at $6.00 apiece in 2017 in conjunction with the amendment of an employment agreement. Vesting of these options is subject to performance achieved during the years ending December 31, 2019 and 2020. The provisions of ASC 718-10-55 require the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options, based on estimated fair values. Share-based compensation cost for stock options is measured at the grant date, based on the fair value as calculated by the Black-Scholes-Merton ("BSM") option-pricing model. The BSM option pricing model requires the use of actual employee exercise behavior data and the application of a number of assumptions, including expected volatility, risk free interest rate and expected dividends. For the options granted in 2017, the pricing model assumptions were: risk-free interest rate 1.94%, expected life 5 years, expected volatility 29%, expected dividend rate 0%. Applying these assumptions resulted in a fair value of $87,341, which will result in stock option expense of approximately $1,456 per month through September 30, 2022 being charged against operations with a corresponding credit to capital. Share-based compensation cost for the year ended December 31, 2017 was $22,857 and $24,308 for the year ended December 31, 2016.

No options were exercised during the years ended December 31, 2017 and 2016.

The total number of authorized shares of common stock continues to be 50,000,000, with no change in the par value per share.

6. COMMITMENTS AND CONTINGENCIES

Mortgage Expense. We purchased our facilities in Wheat Ridge, Colorado on October 31, 2014 for $1,949,139 and took out a term loan secured by a first mortgage on the property in the amount of $1,581,106 with Bank of America for a portion of the purchase price. Effective June 30, 2016 the note was amended to revise the interest rate from 4.45% to 4.00% per annum. The revised note is payable in 99 equal monthly installments of $8,417, including interest, plus a final payment of $1,138,104 (excluding interest) on October 31, 2024. Our minimum future principal payments on this term loan, by year, are as follows:

Year	Amount

2018	$	42,535
2019		44,292
2020		45,964
2021		48,021
2022		50,005
2023– 2024		1,230,599
Total		1,461,416
Less financing cost		(9,130	)
Net term loan payable		1,452,286
Less current portion		(42,101	)
Long term portion	$	1,410,185

Employee Severance Benefits. Our obligation with respect to employee severance benefits is minimized by the "at will" nature of the employee relationships. As of December 31, 2017 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 $1,770,157 at December 31, 2017.

Regulatory Commitments. With respect to our LifeGuard® product, we are subject to regulation by the United States Food and Drug Administration ("FDA"). The FDA provides regulations governing the manufacture and sale of our LifeGuard® product, and we are subject to inspections by the FDA to determine our compliance with these regulations. FDA inspections are conducted periodically at the discretion of the FDA. On June 26, 2017, we were inspected by the FDA and no violations were issued. We are also subject to regulation by the DOT and by various state departments of transportation so far as our other products are concerned. We believe that we are in substantial compliance with all known applicable regulations.

7. LINE OF CREDIT

As part of the long-term financing of our property purchased on October 31, 2014, we obtained a one-year $250,000 revolving line of credit facility with Bank of America, which matured on October 31, 2015 and was extended to June 30, 2017, and bears interest at a rate equal to the LIBOR daily floating rate of 1.4375% and .6882% on December 31, 2017 and 2016, respectively, plus 2.5%. The agreement was amended May 15, 2017 to increase the amount of the line to $750,000 and extend the maturity date to June 30, 2018. The revolving line of credit facility is secured by all personal property and assets, whether now owned or hereafter acquired, wherever located. There was no balance due on the line of credit as of December 31, 2017 and December 31, 2016.

8. INCOME TAXES

We account for income taxes under ASC 740, which requires the use of the liability method. ASC 740 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized. We have a Federal General Business Credit carryover available for 2018 of $63,881.

Our income tax provision is summarized below:

Years Ended	December 31, 2017		December 31, 2016
Current:
Federal	$	15,177	$	114,335
State		5,783		27,686
Total current		20,960		142,021
Deferred:
Federal		41,845		10,199
State		1,351		1,415
Total deferred		43,196		11,614
Total	$	64,156	$	153,635

On December 22, 2017, the new Federal tax law was signed, lowering the corporate tax rate to 21%. The resulting change in deferred taxes is noted in the table below. The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes consists of the following:

Years Ended	December 31, 2017			December 31, 2016
Federal statutory rate	$	29,706		$	193,896
Effect of:
State taxes, net of federal tax benefit		7,134			29,101
Research & development credit		(14,529	)		(67,330	)
Federal tax rate change		32,110			-
Other		9,735			(2,032	)
Total	$	64,156		$	153,635

The components of the deferred tax asset are as follows:

	Years Ended December 31,
Current Deferred Tax Assets:	2017		2016
Bad debt reserve	$	8,971	$	13,300
Inventory reserve		15,378		33,250
Accrued vacation		15,830		20,256
Deferred income		16,100		27,721
Warranty reserve		10,252		15,200
Total deferred tax assets	$	66,531	$	109,727

Our income tax returns are no longer subject to Federal tax examinations by tax authorities for years before 2014 or state examinations for years before 2013.

9. LEGAL PROCEEDINGS

We were not involved or party to any legal proceedings at December 31, 2017 or December 31, 2016, and therefore made no accruals for legal proceedings in either 2017 or 2016.

10. MAJOR CUSTOMERS/SUPPLIERS

We depend on sales that are generated from our customers' ongoing usage of alcohol testing instruments.

One customer contributed 8% ($623,506) to our total sales in 2017, a second customer contributed 5% ($418,819), a third customer contributed 4% ($290,098), and no other customer contributed more than 3%. One customer contributed 7% ($625,874) to our total sales in 2016, a second customer contributed 5% ($385,840), a third customer contributed 4% ($369,815), and no other customer contributed more than 3%. In making this determination, we considered the federal government, state governments, local governments, and foreign governments each as a single customer.

In 2017, we depended upon three vendors for approximately 35% of our purchases (three vendors and 24% respectively in 2016).

11. DEFINED CONTRIBUTION EMPLOYEE BENEFIT PLAN

We have adopted a 401(k) Profit Sharing Plan ("401(k) Plan") which covers all full-time employees who have completed 3 months of full-time continuous service and are age eighteen or older. Participants may defer up to 100% of their gross pay up to 401(k) Plan limits. Participants are immediately vested in their contributions. We make monthly discretionary matching contributions of 3% of the total payroll of the participating employees. In 2017 and 2016 we contributed $51,456 and $45,142 respectively. The participants vest in Company contributions based on years of service, with a participant fully vested after six years of credited service.

12. LICENSE OF SOFTWARE

In 2012 we granted a non-exclusive license to two customers for the use of our patented breath alcohol testing algorithms. The agreement provides for termination pursuant to notice requirements, and further provides for royalties based on the number of units sold which incorporate our software. The transaction is being accounted for under the guidance of ASC 605-10, Revenue Recognition, which states, in part, revenue can be recognized when collection of the fee agreement can be reasonably assured.

13. 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 profits 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 years ended December 31, 2017 and 2016.

	2017			2016
Product sales	$	7,629,474		$	7,888,786
Royalties		289,588			392,603
Products subtotal		7,919,062			8,281,389
Rentals		71,676			99,746
Total	$	7,990,738		$	8,381,135

Gross profit (loss):
Product sales	$	3,451,206		$	3,751,580
Royalties		289,588			392,603
Products subtotal		3,740,794			4,144,183
Rentals		(27,930	)		34,223
Total	$	3,712,864		$	4,178,406

Interest expense:
Product sales	$	31,827		$	38,582
Royalties		-			-
Products subtotal		31,827			38,582
Rentals		28,878			27,381
Total	$	60,705		$	65,963

Net income before taxes:
Product sales	$	(154,021	)	$	187,341
Royalties		289,588			392,603
Products subtotal		135,567			579,944
Rentals		(56,808	)		6,842
Total	$	78,759		$	586,786

There were no intersegment revenues.

At December 31, 2017, $904,768 of our assets were used in the Rentals segment, with the remainder, $7,186,591, used in the Products and unallocated segments.

Future rental income and related expenses will depend on whether existing leases are renewed. Minimum base rents for leases in place at December 31, 2017 are scheduled to be $58,886 in 2018, $59,892 in 2019, and $32,768 in 2020.

14. SUBSEQUENT EVENTS

We evaluated all of our activity and concluded that no subsequent events have occurred that would require recognition in our financial statements or disclosure in the notes to our financial statements.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10-K, our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) (the "Exchange Act"). Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2017.

Internal Control over Financial Reporting

(a)	Management's Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in 2014. Based on our evaluation under the framework in Internal Control-Integrated Framework issued by the COSO in 2014, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.

(b)	Attestation report of the registered public accounting firm.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC, which permit us to provide only management's report in this Annual Report.

(c)	Changes in Internal Control over Financial Reporting

There were no significant changes in our internal controls over financial reporting during the fiscal quarter ended December 31, 2017 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Our management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that the Company's disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information in response to this item is incorporated by reference from the registrant's definitive proxy statement for its 2018 Annual Meeting of Shareholders to be filed within 120 days after December 31, 2017.

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The following table summarizes certain information regarding our equity compensation plan as of December 31, 2017:

Plan Category	Number of securities to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options		Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders		60,000	$	6.13		83,300
Equity compensation plans not approved by security holders		-		-		-
Total		60,000	$	6.13		83,300

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) Documents filed as part of this Annual Report or incorporated by reference:

(1)

Our financial statements are provided under Item 8 of this Annual Report.

(b) The following exhibits are filed with this Annual Report or incorporated by reference, as indicated:

Exhibit No.		Description of Exhibit
2.1		Asset Purchase Agreement dated as of March 8, 2017, by and among Lifeloc Technologies, Inc., Integrated Monitoring Systems, LLC, and Track Group Inc. (5)
3.1		Articles of Incorporation, dated as of December 29, 1983 (1)
3.2		Articles of Amendment to the Articles of Incorporation, dated as of July 10, 1986 (1)
3.3		Articles of Amendment to the Articles of Incorporation, dated as of August 18, 1986 (1)
3.4		Articles of Amendment to the Articles of Incorporation, dated as of April 18, 1988 (1)
3.5		Articles of Amendment to the Articles of Incorporation, dated as of April 1, 1991 (1)
3.6		Articles of Amendment to the Articles of Incorporation, dated as of May 10, 1993 (1)
3.7		Articles of Amendment to the Articles of Incorporation, dated as of May 11, 1992 (1)
3.8		Articles of Amendment to the Articles of Incorporation, dated as of November 17, 1997 (1)
3.9		Articles of Amendment to the Articles of Incorporation, dated as of July 15, 1998 (1)
3.10		Articles of Amendment to the Articles of Incorporation, dated as of April 1, 1994 (1)
3.11		Bylaws (4)
4.1		Form of Certificate representing Common Stock (1)
10.1		Contract No. 071B0200005 between the State of Michigan and Lifeloc Technologies, Inc., dated October 5, 2009 (1)
10.2		Form of Standard Distribution Agreement (1)
10.3		Loan Agreement with Bank of America (Term Loan), dated October 29, 2014 (3)
10.4		Deed of Trust with Bank of America, dated October 29, 2014 (3)
10.5		Security Agreement with Bank of America, dated October 29, 2014 (3)
10.6		Loan Agreement with Bank of America (Line of Credit), dated October 29, 2014 (3)
10.7		Amendment No. 3 to Loan Agreement dated May 15, 2017 (6)
10.8†		2013 Stock Option Plan (2)
10.9†		Amended and Restated Employment Agreement with Wayne Willkomm, Ph.D., dated October 5, 2017 (7)
23.1*		Consent of Causey Demgen & Moore P.C. (contained in Item 8. Financial Statements and Supplementary Data - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016, in this Annual Report)
31.1*		Certification of Principal Executive Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002
31.2*		Certification of Principal Financial Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002
32.1*		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		Interactive Data Files Pursuant to Rule 405 of Regulation S-T.

(1) Incorporated by reference to our Registration Statement on Form 10-12G, filed on March 31, 2011.

(2) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.

(3) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2014.

(4) Incorporated by reference to our Current Report on Form 8-K filed on April 4, 2017.

(5) Incorporated by reference to our Current Report on Form 8-K filed on March 10, 2017.

(6) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.

(7) Incorporated by reference to our Current Report on Form 8-K filed October 10, 2017.

* Filed herewith.

† Indicates a management contract or compensatory plan or arrangement.

Item 16. Form 10-K Summary

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 23, 2018

	LIFELOC TECHNOLOGIES, INC.

	By:	/s/ Wayne R. Willkomm
		Wayne R. Willkomm, Ph.D.
		Chief Executive Officer and President

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


/s/ Wayne R. Willkomm			March 23, 2018
Wayne R. Willkomm, Ph.D.
Chief Executive Officer and President (Principal Executive Officer) Director

/s/ Vern D. Kornelsen			March 23, 2018
Vern D. Kornelsen
Chief Financial Officer (Principal Financial Officer) Director

/s/ Kristie L. LaRose			March 23, 2018
Kristie L. LaRose Controller (Principal Accounting Officer)

/s/ Robert Greenlee			March 23, 2018
Robert Greenlee Director
/s/ Michael J. Kornelsen			March 23, 2018
Michael J. Kornelsen, D.M.A. Director

/s/ Donald E. Siecke			March 23, 2018
Donald E. Siecke Director

INDEX TO EXHIBITS

Exhibit No.		Description of Exhibit
2.1		Asset Purchase Agreement dated as of March 8, 2017, by and among Lifeloc Technologies, Inc., Integrated Monitoring Systems, LLC, and Track Group Inc. (5)
3.1		Articles of Incorporation, dated as of December 29, 1983 (1)
3.2		Articles of Amendment to the Articles of Incorporation, dated as of July 10, 1986 (1)
3.3		Articles of Amendment to the Articles of Incorporation, dated as of August 18, 1986 (1)
3.4		Articles of Amendment to the Articles of Incorporation, dated as of April 18, 1988 (1)
3.5		Articles of Amendment to the Articles of Incorporation, dated as of April 1, 1991 (1)
3.6		Articles of Amendment to the Articles of Incorporation, dated as of May 10, 1993 (1)
3.7		Articles of Amendment to the Articles of Incorporation, dated as of May 11, 1992 (1)
3.8		Articles of Amendment to the Articles of Incorporation, dated as of November 17, 1997 (1)
3.9		Articles of Amendment to the Articles of Incorporation, dated as of July 15, 1998 (1)
3.10		Articles of Amendment to the Articles of Incorporation, dated as of April 1, 1994 (1)
3.11		Bylaws (4)
4.1		Form of Certificate representing Common Stock (1)
10.1		Contract No. 071B0200005 between the State of Michigan and Lifeloc Technologies, Inc., dated October 5, 2009 (1)
10.2		Form of Standard Distribution Agreement (1)
10.3		Loan Agreement with Bank of America (Term Loan), dated October 29, 2014 (3)
10.4		Deed of Trust with Bank of America, dated October 29, 2014 (3)
10.5		Security Agreement with Bank of America, dated October 29, 2014 (3)
10.6		Loan Agreement with Bank of America (Line of Credit), dated October 29, 2014 (3)
		Amendment No. 3 to Loan Agreement dated May 15, 2017 (6)
10.7†		2013 Stock Option Plan (2)
10.8†		Amended and Restated Employment Agreement with Dr. Wayne Willkomm, Ph.D., dated October 5, 2017 (7)
23.1*		Consent of Causey Demgen & Moore P.C. (contained in Item 8. Financial Statements and Supplementary Data - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016, in this Annual Report)
31.1*		Certification of Principal Executive Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002
31.2*		Certification of Principal Financial Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002
32.1*		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		Interactive Data Files Pursuant to Rule 405 of Regulation S-T.

(1) Incorporated by reference to our Registration Statement on Form 10-12G, filed on March 31, 2011.

(2) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.

(3) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2014.

(4) Incorporated by reference to our Current Report on Form 8-K filed on April 4, 2017.

(5) Incorporated by reference to our Current Report on Form 8-K filed on March 10, 2017.

(6) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.

(7) Incorporated by reference to our Current Report on Form 8-K filed October 10, 2017.

* Filed herewith.

† Indicates a management contract or compensatory plan or arrangement.

Attached files

Lifeloc Technologies, Inc Reports

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