The accompanying notes are an integral part of these consolidated financial statements.
29
REFLECT SCIENTIFIC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
| |
|
For the Years Ended
December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
REVENUES
|
$
|
1,188,610
|
$
|
1,037,324
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
376,064
|
|
407,111
|
|
|
|
|
|
GROSS PROFIT
|
|
812,546
|
|
630,213
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
Salaries and wages
|
|
618,103
|
|
661,931
|
Rent expense
|
|
34,250
|
|
34,424
|
Research and development expense
|
|
70,801
|
|
72,863
|
General and administrative expense
|
|
340,994
|
|
320,947
|
Total Operating Expenses
|
|
1,064,148
|
|
1,090,165
|
|
|
|
|
|
OPERATING LOSS
|
|
(251,602)
|
|
(459,952)
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
Gain on extinguishment of debt
|
|
-
|
|
1,355,375
|
Other income
|
|
35,720
|
|
-
|
Interest expense
|
|
(314)
|
|
(59,486)
|
|
|
|
|
|
Total Other Income (Expenses)
|
|
35,406
|
|
1,295,889
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE INCOME TAX EXPENSE
|
|
(216,196)
|
|
835,937
|
|
|
|
|
|
Income tax expense
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
$
|
(216,196)
|
$
|
835,937
|
|
|
|
|
|
NET INCOME (LOSS) PER SHARE BASIC AND DILUTED
|
$
|
(0.00)
|
$
|
0.01
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING BASIC AND DILUTED
|
|
62,964,438
|
|
58,220,375
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
30
REFLECT SCIENIFIC, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity (Deficit)
Common Stock
|
|
|
|
|
|
| |
|
Shares
|
Amount
|
Additional Paid-In Capital
|
Accumulated Deficit
|
Total
|
Balance, December 31, 2014
|
56,702,501
|
$ 567,024
|
$ 19,135,183
|
$ (20,268,736)
|
$ (566,529)
|
|
|
|
|
|
|
Stock-based compensation
|
3,639,000
|
36,390
|
219,282
|
-
|
255,672
|
|
|
|
|
|
|
Common stock issued for consulting services
|
617,093
|
6,170
|
23,446
|
-
|
29,616
|
|
|
|
|
|
|
Net income for the year ended December 31, 2015
|
-
|
-
|
-
|
835,937
|
835,937
|
|
|
|
|
|
|
Balance, December 31, 2015
|
60,958,514
|
609,584
|
19,377,911
|
(19,432,799)
|
554,696
|
|
|
|
|
|
|
Stock-based compensation
|
3,862,750
|
38,628
|
159,570
|
-
|
198,198
|
|
|
|
|
|
|
Common stock issued for consulting services
|
579,822
|
5,798
|
28,991
|
-
|
34,789
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2016
|
|
|
|
(216,196)
|
(216,196)
|
|
|
|
|
|
|
Balance, December 31, 2016
|
65,401,086
|
$ 654,010
|
$ 19,566,472
|
$ (19,648,995)
|
$ 571,487
|
The accompanying notes are an integral part of these consolidated financial statements.
31
REFLECT SCIENTIFIC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
| |
|
|
|
|
|
|
|
For the Years Ended
December 31
,
|
|
|
2016
|
|
2015
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
Net income (loss)
|
$
|
(216,196)
|
$
|
835,937
|
Adjustments to reconcile net income (loss) to net cash
|
|
|
|
|
from operating activities:
|
|
|
|
|
Amortization
|
|
5,316
|
|
28,727
|
Stock based compensation
|
|
198,198
|
|
255,672
|
Common stock issued for services
|
|
34,789
|
|
29,616
|
Gain on extinguishment of debt
|
|
-
|
|
(1,355,375)
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
|
62,938
|
|
119,808
|
Inventory
|
|
(20,558)
|
|
9,549
|
Accounts payable and accrued expenses
|
|
(25,379)
|
|
49,479
|
Customer deposits
|
|
(57,835)
|
|
-
|
Interest payable
|
|
-
|
|
58,500
|
Net Cash from Operating Activities
|
|
(18,727)
|
|
31,913
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net Cash from Investing Activities
|
|
-
|
|
-
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
Payments on short-term lines of credit
|
|
(9,396)
|
|
(10,879)
|
Net Cash from Financing Activities
|
|
(9,396)
|
|
(10,879)
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
(28,123)
|
|
21,034
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD
|
|
292,087
|
|
271,053
|
|
|
|
|
|
CASH AT END OF PERIOD
|
$
|
263,964
|
$
|
292,087
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
Cash Paid For:
|
|
|
|
|
Interest
|
$
|
314
|
$
|
986
|
Income taxes
|
$
|
-
|
$
|
-
|
The accompanying notes are an integral part of these consolidated financial statements.
32
REFLECT SCIENTIFIC, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2016 and 2015
NOTE 1 -
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. Reflect has two wholly owned subsidiaries, Cryometrix and Julie Martin Scientific Technology, which are described below.
Reflect Scientific
Reflect Scientific designs, develops and sells scientific equipment for the Life Science and Manufacturing industries. The Companys business activities include the manufacture and distribution of unique laboratory consumables and disposables such as filtration and purification products, customized sample handling vials, electronic wiring assemblies, high temperature silicone, graphite and vespel/graphite sealing components for use by original equipment manufacturers (OEM) in the chemical analysis industries, primarily in the field of gas/liquid chromatography.
The Companys chemical detector products serve the analytical instrumentation sector of the Life Sciences market. These optically based chemical detection instruments provide a cost-effective, high-performance alternative for original equipment manufacturers (OEM). One major use for these detectors is the analysis of whole blood for metabolic diseases.
Cryometrix
The Companys Cryometrix ultra low temperature freezers have technologies that provide energy savings and other critically important benefits to cryo-storage customers in the Life Science related industries. Ultra low temperature freezers are used in multiple industries for the storage of everything from blood to cancer vaccines. These types of freezers are used by companies such as hospitals and biotechnology research facilities. The adaptation of the freezer technology to refrigeration systems used on trailers (reefers) for transporting perishable items opens a significant new market. Trailers can easily be retrofit with the Cryogenix unit, which provides pollutant free and more efficient operations at a cost savings compared to the diesel powered units currently used.
Julie Martin Scientific Technology (JMST)
The Company manufactures and sells a line of chemical detectors which have broad application in research facilities and laboratories. The detectors have a price advantage over competitive products, making them affordable for use in laboratories at educational institutions. The sale of chemical detectors also generates follow on sales of consumable supplies.
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Method
The Companys financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.
b. Revenue Recognition
Revenue is only recognized on product sales once the product has been shipped to the customer, persuasive evidence of an agreement exists, the price is fixed or determinable, and collectability is reasonably assured. The Company sells its products in both the US and internationally through direct sales and independent distributors.
33
c. Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
d. Cash
The Company considers all deposit accounts and investment accounts with an original maturity of 90 days or less to be cash equivalents.
e. Accounts Receivable
The Company maintains an allowance for doubtful accounts to provide for losses arising from customers inability to make required payments. If there is deterioration of our customers credit worthiness and/or there is an increase in the length of time that the receivables are past due greater than the historical assumptions used, additional allowances may be required.
The Company estimates allowance for doubtful accounts based on the aged receivable balances and historical losses. The Company charges off uncollectible accounts when management determines there is no possibility of collecting the related receivable.
The Company considers accounts receivable to be past due or delinquent based on contractual terms, which is generally net 30 days.
The Company charged $0 to bad debt expense for the years ended December 31, 2016 and 2015. As the Company has historically experienced minimal bad debts, management feels the allowance for doubtful accounts balance of $4,000 at December 31, 2016 to be an adequate reserve based on the experience seen over multiple years.
f. Fixed Assets
Fixed assets are stated at cost. Expenditure for minor repairs, maintenance, and replacement parts which do not increase the useful lives of the assets are charged to expense as incurred. All major additions and improvements are capitalized. Depreciation is computed using the straight-line method. The lives over which the fixed assets are depreciated range from 5 to 7 years, except for computer equipment, which is depreciated over a 3 year life.
g. Inventory
Inventories 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 the imaging and inspection systems which it builds, and other scientific items.
h. Advertising Expense
The Company follows the policy of charging the costs of advertising to expense as incurred. The Company recognized $3,461 and $8,847 of advertising expense during the years ended December 31, 2016, and 2015, respectively.
i. Newly Issued Accounting Pronouncements
In October 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (AASU) 2016-16, Income Taxes (Topic 740); Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires entities to recognize the income tax consequences of many intercompany asset transfers at the transaction date. The seller and buyer will immediately recognize the current and deferred income tax consequences of an intercompany transfer of an asset other than inventory. The tax consequences were previously deferred until the asset is sold to a third part or recovered through use. This guidance will become effective on January 1, 2018.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230); Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the following eight specific cash flow issues: Debt costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds
34
from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance will become effective on January 1, 2018. We do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Compensation Stock Compensation (Topic 718); Improvements to Employee Share-Based Payments Accounting. The ASU changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. This guidance will become effective January 1, 2017. We do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements.
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ("ASU") 2016-02, Leases.
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.
The Company has reviewed all other FASB-issued ASU accounting pronouncements and interpretations thereof that have effective dates during the period reported and in future periods. The Company has carefully considered the new pronouncements that alter previous GAAP and does not believe that any new or modified principles will have a material impact on the companys reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Companys financial management and certain standards are under consideration.
j. 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 December 31, 2016 and 2015, the Company had no common stock equivalents.
k. Shipping and Handling Fees and Costs
The Company records all shipping and handling costs as operating costs. Freight paid on outgoing shipments in 2016 was $37,411 and is recorded in general and administrative expense.
l. Income Taxes
Deferred taxes are provided on an asset and liability approach whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Companys policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended December 31, 2016 and 2015, it did not recognize any interest or penalties in its Statement of Operations, nor did it have any interest or penalties accrued in its Balance Sheet at December 31, 2016 and 2015 relating to unrecognized benefits.
35
m. Principles of consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, which include Cryometrix (previously Cryomastor). All subsidiaries are wholly owned. All material intercompany accounts and transactions are eliminated in consolidation.
n. Research and development expense
The Company accounts for research and development costs in accordance with the Financial Accounting Standards Board's Accounting Standard Codification Topic 730 Research and Development". Under ASC 730, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company had $70,801 and $72,863 in research and product development for the years ended December 31, 2016 and 2015, respectively.
o. Stock-Based Compensation
The Company applies the provisions of FASB ASC Topic 718 Stock Based Compensation which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in their financial statements. The Company recorded $198,197 and $255,672 in stock compensation expense for the years ended December 31, 2016 and 2015.
p. Intangible Assets
Intangible assets include trademarks, trade secrets, patents, customer lists and goodwill acquired through acquisition of subsidiaries. The patents have been registered with the United States Patent and Trademarks Office. The costs of obtaining patents are capitalized as incurred. Intangibles, except for goodwill, are amortized over their estimated useful lives. The Company regularly evaluates whether events or circumstances have occurred that indicate possible impairment and relies on a number of factors, including operating results, business plans, economic projections, and anticipated future cash flows. The Company uses an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether the assets are recoverable. Measurement of the amount of impairment, if any, is based upon the difference between the assets carrying value and estimated fair value. Fair value is determined through various valuation techniques, including cost-based, market and income approaches as considered necessary. Accordingly, the Company recorded no impairment of long-lived assets during the years ended December 31, 2016 and 2015.
q. Goodwill
Goodwill represents the excess of purchase price of an acquisition over the fair value of net assets acquired. Goodwill is not amortized but instead is tested for impairment, at a reporting unit level, annually and when events and circumstances warrant an evaluation. The Company evaluates goodwill on an annual basis, as of the end of the fourth quarter, and whenever events and changes in circumstances indicate that there may be a potential impairment. In making this assessment, management relies on a number of factors, including operating results, business plans, economic projections, anticipated future cash flows, business trends and market conditions. Accordingly, the Company recorded no impairment of goodwill for the years ended December 31, 2016 and 2015.
r. Reclassification of Financial Statement Accounts
Certain balances in previously issued financial statements have been reclassified to be consistent with the current period presentation.
NOTE 3 GOING CONCERN
The Company continues to accumulate significant operating losses and has an accumulated deficit of $19,648,995 at December 31, 2016. These factors raise substantial doubt about the Companys ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
36
Management has taken a number of actions to reduce expenses. Management is seeking additional funding through the capital markets to facilitate the settlement of the remaining debentures, as well as to provide operating capital for its operations. However, there is no assurance that additional funding will be available on acceptable terms, if at all.
NOTE 4 -
FIXED ASSETS
Fixed assets and related depreciation for the period are as follows:
|
|
|
|
| |
|
|
December 31,
2016
|
|
December 31,
2015
|
|
Machinery and equipment
|
$
|
132,002
|
$
|
132,002
|
|
Furniture and fixtures
|
|
2,697
|
|
2,697
|
|
Computer and office equipment
|
|
2,390
|
|
2,390
|
|
Leasehold improvements
|
|
10,164
|
|
10,164
|
|
Accumulated depreciation
|
|
(147,253)
|
|
(147,253)
|
|
|
|
|
|
|
|
Total Fixed Assets
|
$
|
-
|
$
|
-
|
|
Depreciation expense for the years ended December 31, 2016, and 2015, was $-0- and $-0-, respectively.
NOTE 5 -
INVENTORIES
Inventory consisted of the following at December 31, 2016 and 2015:
|
|
|
|
|
| |
|
|
December 31,
2016
|
|
December 31,
2015
|
|
|
Finished goods, net
|
|
226,967
|
|
206,409
|
|
|
|
|
|
|
|
|
|
Total Inventory
|
$
|
226,967
|
$
|
206,409
|
|
|
NOTE 6 -
COMMITMENTS AND CONTINGENCIES
Operating Lease Obligations
The Company leases its office and warehouse space under a non-cancelable lease agreement accounted for as operating leases. The Company also leases an automobile under a similar non-cancelable lease agreement, which is also accounted for as an operating lease.
Building Lease - Orem, Utah: The Company leases a manufacturing and office facility with 6,000 square feet of space. We lease this facility at $3,100 per month on a lease with an expiration date of November 30, 2017.
Rent expense was $34,250 and $34,424 for the years ended December 31, 2016, and 2015, respectively.
Automobile Lease The Company currently leases one vehicle with a monthly lease payment of $624 per month. The automobile lease will expire on August 8, 2017.
Automobile lease expense was $7,490 and $7,488 for the years ended December 31, 2016, and 2015, respectively.
Minimum rental payments under the non-cancelable operating leases are as follows:
|
|
| |
Years ending
December 31,
|
|
Amount
|
|
2017
|
$
|
38,468
|
|
Thereafter
|
|
-
|
|
|
|
|
|
|
$
|
38,468
|
|
37
NOTE 7 -
PREFERRED STOCK
In November 2004 the Company amended its Articles of Incorporation so as to authorize 5,000,000 shares of preferred stock. Of this total, 750,000 shares have been designated as Series A Convertible Preferred Stock. As of December 31, 2016 and 2015, no shares of the preferred stock are issued and outstanding.
Dividends
The holders of the Series A Preferred Stock would be entitled to dividends at the rate of 8 percent per year of the liquidation preference of $1.00 per share, payable annually, if and when declared by the board of directors. Dividends are not cumulative and the board of directors is under no obligation to declare dividends.
Convertibility
Upon the potential approval by the Board of Directors, Series A Preferred Stock may be convertible into the Companys common stock by dividing $1.00 plus any unpaid dividends by 50% of the five day average closing bid price of the common shares.
NOTE 8 -
COMMON STOCK TRANSACTIONS
During the years ended December 31, 2016 and 2015, the following stock transactions occurred:
·
During 2016, the Board of Directors approved the issuance of 3,356,750 shares of restricted common stock, valued at $201,495, to the President/CEO.
During 2016, the Board of Directors approved the issuance of 100,000 shares of restricted common stock, valued at $6,000 to a Director of the Company.
During 2016, the Board of Directors approved the issuance of 100,000 shares of restricted common stock, valued at $6,000 to a Director of the Company.
During 2016, the Board of Directors approved the issuance of 81,000 shares of restricted common stock, valued at $4,860 to the CFO of the Company.
During 2016, the Board of Directors approved the issuance of 225,000 shares of restricted common stock, valued at $13,500, to employees and 579,822 shares of restricted common stock, valued at $34,789, to consultants for services rendered.
·
During 2015, the Board of Directors approved the issuance of 3,000,000 shares of restricted common stock, valued at $225,000, to the President/CEO.
During 2015, the Board of Directors approved the issuance of 139,000 shares of restricted common stock, valued at $6,672 to a Director of the Company.
During 2015, the Board of Directors approved the issuance of 250,000 shares of restricted common stock, valued at $12,000 to a Director of the Company.
During 2015, the Board of Directors approved the issuance of 53,333 shares of restricted common stock, valued at $2,560 to the CFO of the Company..
During 2015, the Board of Directors approved the issuance of 250,000 shares of restricted common stock, valued at $12,000, to employees and 563,680 shares of restricted common stock, valued at $22,057, to consultants for services rendered.
.
38
NOTE 9 -
CONCENTRATIONS OF RISK
Cash in Excess of Federally Insured Amount
The Company, at December 31, 2016 and 2015, and at times during those years, had cash balances that may exceed federally insured limits. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk with respect to its cash balances.
Sales and Accounts Receivable
The Company has three major customers who represent a significant portion of revenue. These three customers represented 49% and 57% of total sales revenue for the year ended December 31, 2016 and 2015, respectively. At December 31, 2016 and 2015, accounts receivable balances from these customers represent 46% and 81%, respectively, of the total receivables. The Company has strong relationships with each of these customers and does not believe this concentration poses a significant risk due to those long-term relationships and uniqueness of the products they purchase from the Company.
NOTE 10 -
LINE OF CREDIT
The Company has a credit line with a commercial bank of $100,000 secured by its inventory and accounts receivable bearing a variable interest rate, which was 5.50% as of the balance sheet date, and automatically renews so long as the Company is in compliance with the loan covenants. As of December 31, 2016, there was no balance due on that line of credit. The line automatically renews on April 1 of each year and the $100,000 credit amount was available at December 31, 2016.
The Company has an additional credit line with a different commercial bank of $50,000 secured by its inventory and accounts receivable bearing a fixed interest rate, which was 7.75% as of the balance sheet date, and automatically renews so long as the Company is in compliance with the loan covenants. As of December 31, 2016, there was no balance due on that line of credit. The line automatically renews on June 7 of each year.
NOTE 11 CONVERTIBLE DEBENTURES AND WARRANTS
On June 29, 2007, the Company entered into an agreement to sell $2,500,000 in 12% senior convertible debentures with a maturity date of June 29, 2009. The debentures are convertible at $0.65 per share. The agreement provided for the issuance of 1,923,077 A warrants and 1,923,077 B warrants. The warrants are exercisable at a price of $0.80 per share for the A warrants and $1.00 per share for the B warrants. As payment for services provided to bring this transaction to completion, the Company also issued 192,308 Series A warrants and 192,308 Series B. All outstanding unexercised warrants expired June 29, 2012.
At December 31, 2014, the remaining outstanding indebtedness for the convertible debentures in default was $650,000, including the default penalty. The debentures carried an 18% interest rate. The Company had accrued $58,500 in interest during the six months ended June 30, 2015. The total accrued interest on this remaining debenture was $705,375 as of June 1, 2015. The holder of the debentures filed bankruptcy in 2009. No communication from the debenture holder has been received since that time. Under laws in the State of New York, which is the judicial jurisdiction of the agreement, written contracts have a statute of limitations of six years. As that six year period has passed, management made the decision, after receiving an opinion from legal counsel, to remove from its books the debentures and the related default penalty and accrued interest, the aggregate of which totals $1,355,375.
NOTE 12 COMMON STOCK OPTIONS
On December 31, 2007, the Companys Board of Directors approved an equity plan. The equity plan known as the 2007 Equity Incentive Plan (the Plan) reserves up to 6,000,000 shares of the Companys authorized common stock for issuance to officers, directors, employees and consultants under the terms of the Plan. On December 31, 2009, the Companys board of directors amended the Plan to authorize 12,000,000 shares. The Plan permits the Board of Directors to issue stock options and restricted stock. At December 31, 2016 there were no options outstanding.
39
NOTE 13 INTANGIBLE ASSETS
Definite lived intangible assets are stated at cost and amortized using the straight-line method. The remaining lives over which the intangible assets will be amortized is approximately 2 years, at which time the intangible assets will become fully amortized.
Intangible assets and related amortization and impairment for the period are as follows:
|
|
| |
December 31, 2016
|
|
|
|
|
Cost
|
Accumulated Amortization
|
Net Book Value
|
Patents
|
$ 1,403,045
|
$ 1,403,045
|
$ -
|
Customer lists
|
414,532
|
414,532
|
-
|
|
|
|
|
Totals
|
$ 1,817,577
|
$ 1,817,577
|
$ -
|
|
|
| |
December 31, 2015
|
|
|
|
|
Cost
|
Accumulated Amortization
|
Net Book Value
|
Patents
|
$ 1,403,045
|
$ 1,401,179
|
$ 1,866
|
Customer lists
|
414,532
|
411,082
|
3,450
|
|
|
|
|
Totals
|
$ 1,817,577
|
$ 1,812,261
|
$ 5,316
|
Amortization expense for the years ended December 31, 2016, and 2015, was $5,316 and $28,727, respectively.
NOTE 14 ROYALTIES
A royalty agreement was executed with JMST as a condition of the Companys acquisitions. Terms of the royalty agreement are as follows:
JMST David Carver will receive a royalty payment on gross revenues related to revenues derived from the Carver Patents or Carver Technology. Such payments are due on revenue in excess of $500,000 derived from products under the Carver Patents or Carver Technology. The royalty payment is 2.5% on the revenue in excess of $500,000 and is payable quarterly. Payments are to be made in Reflect Scientifics common stock not to exceed 500,000 shares in total. New products developed from the Carver Technology are subject to a royalty of 3% of gross revenues in excess of $100,000, with an additional 2% if gross revenues exceed $600,000. Royalties will also be paid in our common stock annually. Common stock will be valued at $3.00 per share for these purposes. Royalty payments are only due for years where there are valid Carver Patents.
As sales did not reach or exceed the triggering threshold, no royalty payments were made under the royalty agreement during 2016 and 2015.
40
NOTE 15 INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, 2016 and 2015 consist of the following:
|
|
|
|
| |
|
2016
|
|
2015
|
Federal:
|
|
|
|
|
|
Current
|
$
|
-
|
|
$
|
-
|
Deferred
|
|
(26,093)
|
|
|
548,820
|
State:
|
|
|
|
|
|
Current
|
|
-
|
|
|
-
|
Deferred
|
|
(807)
|
|
|
1,700
|
Valuation allowance
|
|
26,900
|
|
|
(550,520)
|
|
$
|
-
|
|
$
|
-
|
Net deferred tax assets consist of the following components as of December 31, 2016 and 2015:
|
|
|
|
| |
|
2016
|
|
2015
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
NOL Carryover
|
$
|
2,359,051
|
|
$
|
2,233,958
|
Stock Based Compensation
|
|
158,854
|
|
|
89,485
|
Depreciation and Amortization
|
|
(355,962)
|
|
|
(184,846)
|
Inventory Reserves
|
|
(3,800)
|
|
|
(7,354)
|
R&D Tax Credits
|
|
(39,667)
|
|
|
(39,667)
|
Debenture Interest Payable
|
|
(474,381)
|
|
|
(474,381)
|
Other Reserves
|
|
19,884
|
|
|
19,884
|
Valuation Allowance
|
|
(1,663,979)
|
|
|
(1,637,079)
|
Net deferred tax asset (liability)
|
$
|
-
|
|
$
|
-
|
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years ended December 31, 2016 and 2015 due to the following:
|
|
|
|
| |
|
2016
|
|
2015
|
|
|
|
|
|
|
Tax at statutory rate:
|
$
|
(75,669)
|
|
$
|
292,578
|
Effects of:
|
|
|
|
|
|
Debenture write-off
|
|
-
|
|
|
225,019
|
Meals and Entertainment
|
|
(3,506)
|
|
|
-
|
Stock-Based Compensation
|
|
(69,369)
|
|
|
(89,485)
|
Depreciation and Amortization
|
|
125,853
|
|
|
115,054
|
Inventory Reserve
|
|
(3,553)
|
|
|
7,354
|
Other, net
|
|
(656)
|
|
|
-
|
Change in Valuation Allowance
|
|
26,900
|
|
|
(550,520)
|
|
$
|
-
|
|
$
|
-
|
At December 31, 2016, the Company had net operating loss carryforwards of approximately $6,740,147 that may be offset against future income from the year 2016 through 2036.
No tax benefit has been reported in the December 31, 2016 consolidated financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
The valuation allowance increased by $26,900 to $1,663,979 as of December 31, 2016.
41
NOTE 16 RELATED PARTY TRANSACTIONS
Stock Issuances
In June 2016 the Board of Directors approved the issuance of 3,356,750 shares of restricted common stock to the President/CEO. In December 2016 the Board of Directors approved the issuance of 281,000 shares of restricted common stock to officers and directors.
NOTE 17 FOURTH QUARTER ADJUSTMENTS
In June 2016, the Board of Directors approved the issuance of 3,356,750 shares of restricted common stock, valued at $201,945, to the President/CEO. The total financial impact of this transaction was incorrectly recorded in the 4
th
quarter rather than being amortized over the portion of the year remaining subsequent to the grant date. The following table shows the adjustment to the net income (loss) of the 2
nd
and 3
rd
quarters of 2016 had the expense been properly amortized:
Three months
Three months
Ended 6/30/16
Ended 9/30/16
Net income (loss) as previously reported
$ 81,795
$ (49,920)
Adjustment
(26,672)
(87,637)
Net income (loss) as adjusted
55,123
(137,557)
The adjustment did not have an effect on Earnings (loss) per share for either of the periods indicated above.
NOTE 18 SUBSEQUENT EVENTS
None.
42