The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1
-
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission. The information furnished in the interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Companys most recent audited consolidated financial statements and notes thereto included in its December 31, 2015 financial statements. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
NOTE 2 -
ORGANIZATION AND DESCRIPTION OF BUSINESS
Cole, Inc. (the Company) was incorporated under the laws of the State of Utah on November 3, 1999. The Company was organized to engage in any lawful activity for which corporations may be organized under the Utah Revised Business Corporation Act. On December 30, 2003 the Company changed its name to Reflect Scientific, Inc.
NOTE 3 FAIR VALUE OF FINANCIAL INSTRUMENTS
The Companys financial instruments consist of cash and cash equivalents, accounts receivable, payables and notes payable. The carrying amount of cash and cash equivalents and payables approximates fair value because of the short-term nature of these items. The carrying amount of the notes payable approximates fair value as the individual borrowings bear interest at rates that approximate market interest rates for similar debt instruments.
NOTE 4 SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE: Accounts receivables are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customers historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At June 30, 2016 and December 31, 2015, the Company had accounts receivable of $228,952 and $140,362, respectively. At June 30, 2016 and December 31, 2015 the allowance for doubtful accounts was $4,000 and $4,000, respectively.
INVENTORY - Inventories are presented net of an allowance for obsolescence and are stated at the lower of cost or market value based upon the average cost inventory method. The Companys inventory consists of parts for scientific vial kits, refrigerant gases, components for detectors and ultra-low temperature freezers which it builds and other scientific items. At June 30, 2016, inventory was made up of $209,278 of finished goods, less an allowance for obsolescence of $12,500. At December 31, 2015, inventory was comprised of $218,909 of finished goods, less an allowance for obsolescence of $12,500.There were no raw materials or work in progress for either period presented.
9
INTANGIBLE ASSETS: Costs to obtain or develop patents are capitalized and amortized over the life of the patents. Patents are amortized from the date the Company acquires or is awarded the patent over their estimated useful lives, which range from 5 to 15 years. An impairment charge is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the intangible assets as determined by projected discounted net future cash flows. The Companys analysis did not indicate any impairment of intangible assets as of June 30, 2016.
GOODWILL: Goodwill represents the excess of the Companys acquisition cost over the fair value of net assets of the acquisition. Goodwill is not amortized, but is tested for impairment annually, or when a triggering event occurs. As described in ACS 360, the Company has adopted the two step goodwill impairment analysis that includes quantitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. A fair-value-based test is applied at the overall Company level. The test compares the estimated fair value of the Company at the date of the analysis to the carrying value of its net assets. The analysis also requires various judgments and estimates, including general and macroeconomic conditions, industry and the Companys targeted market conditions, as well as relevant entity-specific events, such as a change in the market for the Companys products and services. After considering the qualitative factors that would indicate a need for interim impairment of goodwill and applying the two-step process described in ASC 360, management has determined that the value of Companys assets is not more likely than not less than the carrying value of the Company including goodwill, and that no impairment charge needs be recognized during the reporting periods.
EARNINGS PER SHARE: The computation of basic earnings per share of common stock is based on the weighted average number of shares outstanding during the period. Diluted EPS is computed by dividing net earnings by the weighted-average number of common shares and dilutive common stock equivalents during the period. Common stock equivalents are not used in calculating dilutive EPS when their inclusion would be anti-dilutive. At June 30, 2016 and 2015, the Company had no common stock equivalents.
NOTE 5 RECENT ACCOUNTING PRONOUNCEMENTS - UPDATE
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ("ASU") 2016-02, L
eases.
This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases. For public business entities, this ASU is effective for annual periods beginning after December 15, 2018, and interim periods therein. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the impact of this ASU on its financial statements and disclosures.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016, although early adoption is permitted. The Company is currently evaluating the impact of this ASU on its financial statements and disclosures.
10
The Company has reviewed all other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its consolidated results of operation, financial position and cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its current or future earnings or operations.
NOTE 6 SUBSEQUENT EVENTS
None.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of our Company. Our Company and our representatives may from time to time make written or oral statements that are forward-looking, including statements contained in this Annual Report and other filings with the Securities and Exchange Commission and in reports to our Companys stockholders. Management believes that all statements that express expectations and projections with respect to future matters, as well as from developments beyond our Companys control including changes in global economic conditions are forward-looking statements within the meaning of the Act. These statements are made on the basis of managements views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance however, that managements expectations will necessarily come to pass. Factors that may affect forward- looking statements include a wide range of factors that could materially affect future developments and performance, including the following:
·
Changes in Company-wide strategies, which may result in changes in the types or mix of businesses in which our Company is involved or chooses to invest;
·
Changes in U.S., global or regional economic conditions;
·
Changes in U.S. and global financial and equity markets, including significant interest rate fluctuations, which may impede our Companys access to, or increase the cost of, external financing for our operations and investments;
·
Increased competitive pressures, both domestically and internationally;
·
Legal and regulatory developments, such as regulatory actions affecting environmental activities;
·
The imposition by foreign countries of trade restrictions and changes in international tax laws or currency controls;
·
Adverse weather conditions or natural disasters, such as hurricanes and earthquakes, labor disputes, which may lead to increased costs or disruption of operations.
This list of factors that may affect future performance and the accuracy of forward-looking statements are illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited Financial Statements and accompanying
11
notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. The Company believes there have been no significant changes during the six month period ended June 30, 2016, to the items disclosed as significant accounting policies in management's Notes to the Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
Plan of Operation and Business Growth
Our efforts continue to be focused on increasing the sales of our life science consumables and detectors while, at the same time, working to commercialize our liquid nitrogen refrigeration products. Of those liquid nitrogen refrigeration products, the ultra-low temperature freezer is receiving highest priority. We also continue work on the refrigerated trailer, or reefer. We have our first manufactured unit operational, have conducted a number of road tests and are working to develop alliances with contract manufacturers for those products.
We also continue to focus on the expansion of our detector. We believe that the enhanced functionality of our new detector, coupled with its low cost, provides us with a competitive edge over products currently being sold in that specialized market.
Concurrent with the development and commercialization of the above products, we have completed our on-line catalog and are making progress in enrolling new distributors for our consumable products.
Our revenues during the three and six month reporting periods increased 96% and 49%, respectively, during 2016 compared to 2015 revenues.
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Results of Operations
Three Months Ended June 30, 2016 and 2015
|
|
|
|
|
| |
|
|
For the three months ended June 30,
|
|
|
2016
|
|
2015
|
|
Change
|
Revenues
|
$
|
387,393
|
$
|
198,076
|
$
|
189,317
|
Cost of goods sold
|
|
105,184
|
|
56,349
|
|
48,835
|
Gross profit
|
|
282,209
|
|
141,727
|
|
140,482
|
Operating expenses
|
|
200,312
|
|
189,579
|
|
10,733
|
Other income (expense)
|
|
(102)
|
|
1,325,862
|
|
(1,325,964)
|
Net income (loss)
|
$
|
81,795
|
$
|
1,278,010
|
$
|
(1,196,215)
|
Revenues increased during the quarter ended June 30, 2015, to $387,393 from $198,076 for the quarter ended June 30, 2016, an increase of $189,317. The increase in revenues seen during the quarter resulted from the increased sales levels of our specialized laboratory supplies and sales of ultra-low temperature freezers
With increased sales during the reporting period, cost of goods correspondingly increased in the quarter ending June 30, 2016, as compared to June 30, 2015 to $105,184 from $56,349, an increase of $48,835. The gross profit percentage increased to 73% for the three months ended June 30, 2016, compared to 71% for the three months ended June 30, 2015. The gross profit percentage is dependent on the mix of product sales, which varies from quarter to quarter. We continue to actively work to obtain more favorable pricing from our vendors in order to increase the margins realized on our product lines.
Our operating expenses we increased by $10,733 in the three-month period ended June 30, 2016 over the comparable 2015 period. This increase results primarily from commissions paid on the sales of the ultra-low temperature freezers. Operating expenses for the three months ended June 30, 2016 were $200,312, compared to operating expenses of $189,579 for the three-month period ended June 30, 2015. Management continues to look for operating efficiencies which will reduce operating expense levels. Operating expenses for the remaining six months of 2016 are expected to approximate the expense levels shown for the three-month period ended June 30, 2016.
The net income for the three-month period ended June 30, 2016 was $81,795, a decrease of $1,196,215 from the $1,278,010 profit for the three-month period ended June 30, 2015. That period benefited from the $1,355,375 one-time gain realized on extinguishment of debt. Management continues to look for opportunities to increase sales, improve gross margins and reduce ongoing operating expenses
The net income for the three months ended June 30, 2016 was $0.00 per share. This compares to a net income of $0.02 per share for the three-month period ended June 30, 2015.
13
Six Months Ended June 30, 2016 and 2015
|
|
|
|
|
| |
|
|
For the six months ended June 30,
|
|
|
2016
|
|
2015
|
|
Change
|
Revenues
|
$
|
761,357
|
$
|
511,298
|
$
|
250,059
|
Cost of goods sold
|
|
212,365
|
|
177,666
|
|
34,699
|
Gross profit
|
|
548,992
|
|
333,632
|
|
215,360
|
Operating expenses
|
|
431,063
|
|
383,207
|
|
47,856
|
Other income (expense)
|
|
(245)
|
|
1,296,309
|
|
(1,296,554)
|
Net profit (loss)
|
$
|
117,684
|
$
|
1,246,734
|
$
|
(1,129,050)
|
Revenues increased during the six-month period ended June 30, 2015 to $761,357 from $511,298 for the six- month period ended June 30, 2015, an increase of $250,059. The revenues were generated from our specialized laboratory supplies, detectors and ultra-low temperature freezers. We are beginning to see sales increases resulting from having completed our catalog web site.
Due to the increase in sales, cost of goods in the six-month period ending June 30, 2016 increased by $34,699, to $212,365 from $177,666 for the six-month period ended June 30, 2015. The gross profit percentage increased to 72% for the six-month period ended June 30, 2016, compared to 65% for the six months ended June 30, 2015. The gross profit percentage is dependent on the mix of product sales, which varies from quarter to quarter. We continue to actively work to obtain more favorable pricing from our vendors in order to increase the margins realized on our product lines.
Operating expenses for the six-month period ended June 30, 2016 increased to $431,063 compared to $383,207 for the six months ended June 30, 2015, an increase of $47,856. As we continue to work to commercialize the ultra-low temperature product line we anticipate expenses levels for the remaining six months of 2016 will remain close to the level experienced through the initial six months
Net income for the six-month period ended June 30, 2016 was $117,684, a $1,129,050 decline from the $1,246,734 net income for the six-month period ended June 30, 2015, which benefited from the one-time gain on extinguishment of debt of $1,355,375. Management continues to look for opportunities to increase revenue, improve gross margins and reduce ongoing operating expenses in order to achieve profitability.
Earnings for the six months ended June 30, 2016 was $0.00 per share. Earnings for the six months ended June 30, 2015 was $0.02 per share.
Seasonality and Cyclicality
We do not believe our business is cyclical.
Liquidity and Capital Resources
Our cash resources at June 30, 2015, were $237,986, with accounts receivable of $224,952, net of allowance, and inventory of $196,778, net of allowance. Accounts receivable increased $88,590 as the result of ultra-low temperature sales, which customer deposits decreased by $51,861, as the deposits made with orders were applied to invoiced amounts upon shipment of the freezers. To this point in time we have relied on revenues and sales of equity and debt securities for our cash resources. Our working capital on June 30, 2016, was $609,280, which is an increase of $123,000 over the working capital on December 31, 2015 of $486,280.
14
For the six-month period ended June 30, 2016, net cash used for operating activities was $48,588 which compares to $43,965 net cash provided from operating activities for the six-month period ended June 30, 2015, a change of $92,553. The change results primarily from the paying down of accounts payable, the application of customer deposits held, and the increase in accounts receivable which have resulted from increased sales levels.
Off-Balance Sheet Arrangements
We lease office and warehouse space under a non-cancelable operating lease in Utah which runs through November 30, 2017. Future minimum lease payments under the operating lease at June 30, 2016 are $52,700 for that facility. In addition, on May 9, 2014, the Company entered into an automobile lease. Future minimum lease payments under this lease are $8,112 at June 30, 2016, with minimum lease payments of $3,744 due for the remainder of 2016 and $4,368 in 2017.