Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our financial condition and results of operations, and should be read in conjunction with our financial statements and the related notes included elsewhere in this Form 10-Q. Certain statements contained in this section are not historical facts, including statements about our strategies and expectations about new and existing products, market demand, acceptance of new and existing products, technologies and opportunities, market and industry segment growth, and return on investments in products and markets. These statements are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and we intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in these statutes. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "intends," "plans" or "anticipates" or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. Such statements involve substantial risks and uncertainties that may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking statements in this section are based on information available to us on the date of this document, and we assume no obligation to update such forward looking statements. Readers of this Form 10-Q are strongly encouraged to review the section titled "Risk Factors" in our December 31, 2025 Form 10-K.

Overview

Lifeloc Technologies, Inc., a Colorado corporation ("Lifeloc" or the "Company"), is a leading developer, manufacturer and marketer of portable hand-held and fixed station breathalyzers, now focused on expanding our offerings into technologies for the detection of drugs of abuse.

We began our alcohol breath testing product line in 1989 with the PBA3000, later replaced by the Phoenix® Classic in 1998, and subsequently by the FC Series and Workplace Series. Our FC Series, launched in 2001, is designed for domestic and international law enforcement and corrections markets and is approved by the U.S. Department of Transportation (DOT) for evidential use. Our Workplace Series, including the EV30 and Phoenix® 6.0 released in 2005 and 2006, also received DOT approval for federally regulated workplace testing. We have since introduced a range of innovations such as Bluetooth connectivity, passive screening devices like the FC5 and Sentinel™ stations, and the EASYCAL® automatic calibration systems.

We compete in all major segments of the portable breath alcohol testing instrument market, including law enforcement, workplace, corrections, and original equipment manufacturing ("OEM") 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.

In August 2016, we entered into a 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. The SpinDetect™ platform uses a centrifugal disk with microfluidic flow paths to conduct multiple quantitative drug assays on a single small sample, delivering on-site results in minutes at a fraction of the cost of conventional laboratory testing. The technology is capable of detecting very low concentrations of high-abuse drugs such as fentanyl, cocaine, and delta-9-THC. Importantly, SpinDetect™ can isolate psychoactive delta-9-THC from its inactive metabolites - a capability that existing devices lack, and that we believe will enable more accurate assessments of marijuana impairment. Under the license agreement, Sandia retains ownership of the foundational patents, while patentable enhancements developed by Lifeloc belong solely to us. Our first utility patent application covering improvements to the system was filed in February 2024.

We have completed the design of the SpinDetect™ microfluidic disk, with all analytical chemistry now occurring on the disk after sample introduction. We will be initiating beta testing of the oral-fluid analyzer focused on delta-9-THC detection using a prototype reader, with final component optimization underway under a signed beta-testing agreement. The initial commercial product is expected to measure delta-9-THC, followed by a multi-drug panel release. We anticipate a limited commercial launch in Q1 of 2027, with subsequent expansion into additional drug panels and sample types, including blood and breath - the latter integrated with our LX9 breathalyzer. The SpinDetect™ reader is designed to accept multiple disk formats, which may also enable future applications beyond drug testing, such as detection of food-safety markers and environmental contaminants; these applications would require additional research, regulatory clearances, and potential expansion of our existing license rights. Continued progress toward commercialization is dependent on timely access to capital to support fabrication, validation, regulatory preparation, and market introduction.

We place strong emphasis on high-quality training as a key component of our testing business. Initially offering in-person instruction through Master Trainers, we expanded into online modules, webcam-based training, and in 2011 launched Lifeloc University, a learning management system (LMS) that was later enhanced for mobile use and regulatory updates. Our 2014 acquisition of Superior Training Solutions (STS) added further online training assets and customers that were contributed to Lifeloc University, which now serves as our unified, modern training platform.

We own our corporate headquarters in Wheat Ridge, Colorado, occupying all of the space ourselves after June 30, 2025. Our tenant's lease expired in June 2025, at which time we expanded into the full space. Additionally, we continue to pursue acquisitions aligned with our mission to deliver near and remote sensing and monitoring solutions, aiming to strengthen own position in existing markets and facilitate entry into new ones.

Outlook

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

Possibility of Operating Losses. Over many of the past several years we have operated profitably; however, prior to that, and in 2021 through 2025, we incurred operating losses. Those operating losses are continuing in 2026 and we expect them to continue as we continue to work toward the commercialization of SpinDetect™. There is no assurance that we will not incur operating 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 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 begin to reduce our research and development expenses in 2026 as we complete development of our new product line.

Results of Operations

For the three months ended June 30, 2026 compared to the three months ended June 30, 2025.

We work diligently to maintain reduced costs where possible, although inflation is taking a toll, increasing the cost of raw materials, labor, and freight. We continued and intensified our new product development efforts while maintaining the high level of customer service that has led to an excellent reputation for outstanding customer service. With the introduction of new products, we believe Lifeloc will again be profitable.

Net sales.

Our product sales for the three months ended June 30, 2026 were $2,434,697, an increase of 11% from $2,191,260 for the same period a year ago. This increase results from acceleration of several larger orders that may reflect customers' current availability of funds. In addition, the continuing inflationary pressure outlook on customers' budgets may also have played a role. When royalties of $10,260 and rental income of $0 are included, total revenues of $2,444,957 increased by $225,581, or 10%, for the three months ended June 30, 2026 when compared to the same three months a year ago. Rental income was discontinued after June 30, 2025, and royalties decreased by $9,540 due to a decrease in sales by royalty-paying customers.

Gross profit.

Gross profit for the three months ended June 30, 2026 of $1,092,526 represented an increase of 18% from total gross profit of $924,599 for the three months ended June 30, 2025, primarily as a result of higher product sales. Cost of product sales increased from $1,294,777 in the three months ended June 30, 2025 to $1,352,431 in the same period in 2026, an increase of $57,654 (4%). Gross profit margin on products increased to 45% in the three months ended June 30, 2026 from 42% in the three months ended June 30, 2025 primarily as a result of the higher sales and product mix.

Research, development and sustaining engineering expenses.

Research, development and sustaining engineering expenses continued at the high level of $560,281, or 23% of product sales, for the three months ended June 30, 2026, representing a decrease of $62,981 (10%) over the $623,262 in the same period a year ago. This decrease resulted primarily from a lull in payments to outside contractors needed for continuing design work related to SpinDetect™.

Sales and marketing expenses.

Sales and marketing expenses of $320,968 for the three months ended June 30, 2026 were down by $18,560 (or 6%) from the $339,528 spent in the same period a year ago as a result of across the board efforts to lower expenses.

General and administrative expenses.

General and administrative expenses of $314,853 for the three months ended June 30, 2026 were down by $25,221 (or 7%) from the $340,074 spent in the same period a year ago as a result of across the board efforts to lower expenses.

Other income (expense).

Interest income decreased from $10,931 a year ago to $8,856 in 2026 as a result of less funds available at the beginning of the period. Interest expense of $39,610 in the three months ended June 30, 2026 was up from $26,305 in the previous year as a result of the increase in subordinated debentures outstanding in the 2026 quarter vs. less in the same quarter a year ago as well as adding a new term loan in May 2026. The total increase of $15,380 from $15,374 of other expense (net) in the period ended June 30, 2025 to total other expense (net) of $30,754 in the current quarter is expected to continue in future quarters due to the increase in borrowings.

Net income (loss).

We realized a net (loss) of ($134,330) for the three months ended June 30, 2026 compared to a net (loss) of ($393,639) for the three months ended June 30, 2025. This decrease of $259,309 (or 66%) was the result of the changes in gross profit, operating expenses and other income discussed above. The benefit from taxes in the three months ended June 30, 2026 was $0 which was the same amount in the same period a year ago.

For the six months ended June 30, 2026 compared to the six months ended June 30, 2025.

Net sales.

Our product sales for the six months ended June 30, 2026 were $4,724,456, an increase of 6% from $4,454,307 for the same period a year ago. This increase results from acceleration of several larger orders that may reflect customers' current availability of funds. In addition, the continuing inflationary pressure outlook on customers' budgets may also have played a role. When royalties of $14,313 and rental income of $0 are included, total revenues of $4,738,769 increased by $242,359, or 5%, for the six months ended June 30, 2026 when compared to the same six months a year ago. Rental income was discontinued after June 30, 2025, and royalties decreased by $11,158 due to a decrease in sales by royalty-paying customers.

Gross profit.

Gross profit for the six months ended June 30, 2026 of $2,079,600 represented an increase of 13% from total gross profit of $1,833,165 for the six months ended June 30, 2025, primarily as a result of higher product sales. Cost of product sales remained relatively flat from $2,663,245 in the six months ended June 30, 2025 to $2,659,169 in the same period in 2026, a decrease of $4,076 (0%). Gross profit margin on products increased to 44% in the six months ended June 30, 2026 from 41% in the six months ended June 30, 2025 primarily as a result of the higher sales and product mix.

Research, development and sustaining engineering expenses.

Research, development and sustaining engineering expenses continued at the high level of $974,726, or 21% of product sales, for the six months ended June 30, 2026, representing a decrease of $118,216 (11%) over the $1,092,942 in the same period a year ago. This decrease resulted primarily from a lull in payments to outside contractors needed for continuing design work related to SpinDetect™.

Sales and marketing expenses.

Sales and marketing expenses of $634,197 for the six months ended June 30, 2026 were down by $39,887 (or 6%) from the $674,084 spent in the same period a year ago as a result of across the board efforts to lower expenses.

General and administrative expenses.

General and administrative expenses of $702,255 for the six months ended June 30, 2026 were down by $22,697 (or 3%) from the $724,952 spent in the same period a year ago as a result of across the board efforts to lower expenses.

Other income (expense).

Interest income decreased from $23,288 a year ago to $15,387 in 2026 as a result of less funds available at the beginning of the period. Interest expense of $70,852 in the six months ended June 30, 2026 was up from $50,800 in the previous year as a result of the increase in subordinated debentures outstanding in the 2026 quarter vs. less in the same quarter a year ago as well as adding a new term loan in May 2026. The total increase of $27,953 from $27,512 of other expense (net) in the period ended June 30, 2025 to total other expense (net) of $55,465 in the current quarter is expected to continue in future quarters due to the increase in borrowings.

Net income (loss).

We realized a net (loss) of ($287,043) for the six months ended June 30, 2026 compared to a net (loss) of ($686,325) for the six months ended June 30, 2025. This decrease of $399,282 (or 58%) was the result of the changes in gross profit, operating expenses and other income discussed above. The benefit from taxes in the six months ended June 30, 2026 was $0 which was the same amount in the same period a year ago.

Trends and Uncertainties That May Affect Future Results

Revenues in the first six months of 2026 were slightly higher compared to revenues during the same period in 2025. We believe that continued increased sales efforts may result in modestly improved revenues in 2026 and beyond with the anticipated availability of SpinDetect™. Revenues in 2026 may be similar to revenues in 2025. Inflationary pressures have affected our business in a number of ways, including increasing the cost of raw materials, labor, and freight. Our actions to mitigate the impact of inflation, including pre-ordering components in higher than usual quantities, sourcing new vendors and increasing prices have been somewhat successful.

We expect our quarter-to-quarter revenue fluctuations to continue, due to the unpredictable timing of large orders from customers and the size of those orders in relation to total revenues. Going forward, we intend to focus our development efforts on products we believe offer the best prospects to increase our intermediate and near-term revenues, with particular emphasis on completing SpinDetect™.

Our operating plan for the remainder of 2026 is focused on growing sales, increasing gross profits, and continuing research and development efforts on new products, including SpinDetect™, 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 2026. However, we believe that cash resources will be sufficient to fund our operations for the next twelve months under our current operating plan. If we are unable to manage the business operations in line with our budget expectations, it could have a material adverse effect on business viability, financial position, results of operations and cash flows. Further, if we are not successful in sustaining profitability and remaining at least cash flow break-even, additional borrowings or 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. The Bank of America loan was paid on September 30, 2021 with proceeds from a new term loan from UMB (formerly Citywide Banks), also secured by a first-priority mortgage on the property, in the principal amount of $1,350,000. The new loan is payable in monthly installments of $7,453, with interest at 2.95% and a maturity date of September 30, 2031.

On December 31, 2024 we issued an unsecured $750,000 subordinated debenture bearing interest at 8.25%, including 62,500 warrants exercisable on or before December 31, 2030 into 62,500 shares of our common stock at a price of $4.50 per share. On March 1, 2025 we issued an unsecured $75,000 subordinated debenture bearing interest at 8.25%, including 6,250 warrants exercisable on or before December 31, 2030 into 6,250 shares of our common stock at a price of $4.50 per share. Using the Black Scholes model, the fair market value of these warrants resulted in deferred financing cost of $132,000, which is included in our balance sheet at June 30, 2026 at $99,257 after amortization in the six months ending June 30, 2026 of $10,514 , and which resulted in an increase to capital of $120,000 on December 31, 2024 and $12,000 on March 1, 2025. The interest of 8.25% was paid in quarterly increments in 2025, and will be included in monthly payments of $10,119 including principal in 2026.

On May 1, 2026 the Company entered into a loan agreement for $500,000 with its CFO and Board Chairman. The loan bears interest at 10.5% per annum, with interest only payments of $4,375 due monthly from May 31, 2026 through December 31, 2026. Beginning January 31, 2027, the loan will be paid over five years with equal monthly payments of principal and interest of $10,747, at which time the note will be paid in full. The interest rate is subject to adjustment based on changes in the prime rate. If the prime rate, as published in the Eastern edition of The Wall Street Journal on the last business day of any calendar quarter beginning June 30, 2026 (the "Published Rate"), exceeds 6.75%, the interest rate on the note will increase for the remaining term by the amount of such excess. Any subsequent increases in the Published Rate will result in corresponding increases in the interest rate. The loan is secured by substantially all assets of the Company, including its building, and is subordinate to the prior perfected security interest held by UMB (formerly Citywide Banks).

Liquidity and Capital Resources

We compete in a highly technical, very competitive and, in most cases, price driven alcohol testing marketplace, where products can take years to develop and introduce to distributors and end users. Furthermore, manufacturing, marketing and distribution activities are regulated by the DOT and other regulatory bodies that, while intended to enhance the ultimate quality and functionality of products produced, can contribute to the cost and time needed to maintain existing products and develop and introduce new products.

Except for normal operating contractual commitments and purchase orders, we do not have any material contractual commitments requiring settlement in the future.

We have traditionally funded working capital needs through product sales and close management of working capital components of our business. Historically, we have also received cash from private offerings of our common stock, warrants to purchase shares of our common stock, and notes. In July, 2024 we completed a private placement of 210,000 shares of our common stock at $3.80 per share for a total raise of $798,000 with a related party. On December 31, 2024, we completed the issuance of a six year subordinated debenture for $750,000 with a third party. On March 1, 2025, we completed the issuance of a 70-month subordinated debenture for $75,000 with a third party. In our earlier years, we incurred quarter to quarter operating losses to develop current product applications, utilizing a number of proprietary and patent-pending technologies. Between 2002 and 2020, we were consistently profitable, due to stabilization and then growth in our core breathalyzer products. Our recent net losses in 2024 and 2025 reflect a deliberate investment in the development of our SpinDetect™ platform rather than a deterioration of our core breathalyzer business, which has remained stable. We believe our core product and services business, at current revenue levels, is capable of supporting ongoing operations on a cost-reduced basis. We intend to continue managing costs carefully while advancing SpinDetect™ toward its anticipated commercial launch later in 2026. If the development or market acceptance of SpinDetect™ takes longer than expected, or if we require additional capital to support commercialization, we may seek additional financing through equity or debt offerings.

During the six months ended June 30, 2026, net cash used in operating activities was $262,577, reflecting the net loss partially offset by non-cash charges and working capital changes. Net cash used in investing activities was $19,781, primarily for equipment purchases. Net cash provided from financing activities was $444,565, consisting primarily of $500,000 in proceeds from a new related-party term loan, partially offset by scheduled principal payments on our term loan and subordinated debentures.

As of June 30, 2026, cash and cash equivalents were $908,208, trade accounts receivable were $826,715 and current liabilities were $1,099,030 resulting in net liquid assets of $635,893. We believe our core breathalyzer business has remained fundamentally sound and, together with the anticipated commercialization of SpinDetect™, provides a reasonable basis for a return to profitability. However, if revenues from our core business do not grow as expected, if the commercialization of SpinDetect™ is delayed or requires more capital than anticipated, or if general economic conditions deteriorate, we may be required to seek additional sources of capital and/or to implement further cost reduction measures, as necessary.

Equipment expenditures during the six months ended June 30, 2026 consisted of SpinDetect™ related equipment of $14,411 compared to $236,789 in the first six months of 2025, and $5,370 in sales and marketing equipment versus $5,462 in 2025. No patent application costs were incurred during either period. As development of SpinDetect™ progresses, and as normal wear and tear of equipment occurs, we expect to incur outlays for equipment and patent filings in 2026 and beyond.

We generally provide a standard one-year limited warranty on materials and workmanship to our customers. We provide for estimated warranty costs at the time product revenue is recognized. Warranty costs are included as a component of cost of goods sold in the accompanying statements of operations. For the six months ended June 30, 2026 and 2025, warranty costs were not deemed significant.

Critical Accounting Policies and Estimates

There have been no material changes to the Company's critical accounting policies and estimates from those disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the Company's Annual Report on Form 10-K for the year ended December 31, 2025.