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,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
REVENUES
|
$
|
1,551,985
|
$
|
1,065,777
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
487,185
|
|
405,935
|
|
|
|
|
|
GROSS PROFIT
|
|
1,064,800
|
|
659,842
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
Salaries and wages
|
|
585,346
|
|
656,959
|
Rent expense
|
|
39,285
|
|
29,892
|
Research and development expense
|
|
104,046
|
|
46,696
|
General and administrative expense
|
|
584,985
|
|
328,484
|
Total Operating Expenses
|
|
1,313,662
|
|
1,062,031
|
|
|
|
|
|
OPERATING LOSS
|
|
(248,862)
|
|
(402,189)
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
Interest expense
|
|
(661)
|
|
-
|
|
|
|
|
|
Total Other Income (Expenses)
|
|
(661)
|
|
-
|
|
|
|
|
|
NET LOSS BEFORE INCOME TAX EXPENSE
|
|
(249,523)
|
|
(402,189)
|
|
|
|
|
|
Income tax expense
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
$
|
(249,523)
|
$
|
(402,189)
|
|
|
|
|
|
NET LOSS PER SHARE BASIC AND DILUTED
|
$
|
(0.00)
|
$
|
(0.01)
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING BASIC AND DILUTED
|
|
74,631,494
|
|
66,326,382
|
The accompanying notes are an integral part of these consolidated financial statements.
30
REFLECT SCIENIFIC, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity
Common Stock
|
|
|
|
|
|
|
| |
|
Shares
|
Amount
|
Additional Paid-In Capital
|
Accumulated Deficit
|
Total
|
Balance, December 31, 2016
|
65,401,086
|
654,010
|
19,566,472
|
(19,648,995)
|
571,487
|
|
|
|
|
|
|
Stock-based compensation
|
4,781,000
|
47,810
|
184,078
|
-
|
231,888
|
|
|
|
|
|
|
Common stock issued for consulting services
|
1,130,000
|
11,300
|
42,940
|
-
|
54,240
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2017
|
|
|
|
(402,189)
|
(402,189)
|
|
|
|
|
|
|
Balance, December 31, 2017
|
71,312,086
|
713,120
|
19,793,490
|
(20,051,184)
|
455,426
|
|
|
|
|
|
|
Stock-based compensation
|
2,606,000
|
26,060
|
78,180
|
-
|
104,240
|
|
|
|
|
|
|
Common stock issued for consulting services
|
5,190,000
|
51,900
|
155,700
|
-
|
207,600
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2018
|
|
|
|
(249,523)
|
(249,523)
|
|
|
|
|
|
|
Balance, December 31, 2018
|
79,108,086
|
$ 791,080
|
$ 20,027,370
|
$ (20,300,707)
|
$ 517,743
|
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
|
|
|
2018
|
|
2017
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
Net loss
|
$
|
(249,523)
|
$
|
(402,189)
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
from operating activities:
|
|
|
|
|
Depreciation
|
|
2,984
|
|
-
|
Stock based compensation
|
|
104,240
|
|
231,888
|
Common stock issued for consulting services
|
|
207,600
|
|
54,240
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
|
(33,108)
|
|
(49,011)
|
Inventory
|
|
13,027
|
|
71,615
|
Prepaid assets
|
|
(410)
|
|
-
|
Accounts payable and accrued expenses
|
|
(1,057)
|
|
(5,461)
|
Customer deposits
|
|
(58,312)
|
|
70,812
|
Net Cash from Operating Activities
|
|
(14,559)
|
|
(28,106)
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
Purchase of fixed assets
|
|
(10,750)
|
|
-
|
Net Cash used in Investing Activities
|
|
(10,750)
|
|
-
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
Short-term lines of credit
|
|
9,878
|
|
-
|
Net Cash from Financing Activities
|
|
9,878
|
|
-
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
(15,431)
|
|
(28,106)
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD
|
|
235,858
|
|
263,964
|
|
|
|
|
|
CASH AT END OF PERIOD
|
$
|
220,427
|
$
|
235,858
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
Cash Paid For:
|
|
|
|
|
Interest
|
$
|
661
|
$
|
-
|
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, 2018 and 2017
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
We sell our specialty science and environmental lab supplies through direct sales and through distributor relationships. We sell our ultra-low temperature freezers through consultants and commission-only sales personnel. Revenue is recognized when a customer obtains control of promised goods based on the consideration we expect to receive in exchange for these goods. This core principle is achieved through the following steps:
33
Identify the contract with the customer
. A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each partys rights regarding the goods to be transferred and identifies the payment terms related to these goods, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for services that are transferred is probable based on the customers intent and ability to pay the promised consideration. We do not have significant costs to obtain contracts with customers.
Identify the performance obligations in the contract
. Generally, our contracts with our laboratory supply customers do not include multiple performance obligations to be completed over a period of time. Our performance obligations generally relate to delivering specialty laboratory products to a customer, subject to the shipping terms of the contract. Limited warranties are provided, under which we typically accept returns and provide either replacement parts or refunds. We do not have significant returns. We do not typically offer extended warranty or service plans. For ultra-low temperature freezers sold to customers which are built to order, generally, 50% of the value of the contract is paid by the customer prior to work beginning on manufacturing the freezer. Upon completion of manufacturing and testing the customer will accept the unit and make payment of the remaining balance on the contract, at which time control passes to the customer and we have satisfied our performance obligation and recognize revenues. The customer may either arrange to transport the unit with a carrier uses or ask the Company to arrange such shipment, the charges of which are the responsibility of the customer. In some instances, a customer may, after accepting the unit, request that it be upgraded with additional hardware or software options, which is a new contract and performance obligation.
Determine the transaction price
. Payment by the customer is due under customary fixed payment terms, and we evaluate if collectability is reasonably assured. None of our contracts as of December 31, 2018 contained a significant financing component.
Allocate the transaction price to performance obligations in the contract
. We typically do not have multiple performance obligations in our laboratory supply contracts with customers. As such, we generally recognize revenue upon transfer of the product to the customer's control at contractually stated pricing. The freezers likewise do not have milestone or percentage of completion clauses in the contract, so revenue is only recognized when the work has been completed.
Recognize revenue when or as we satisfy a performance obligation.
We generally satisfy performance obligations at a point in time upon shipment of goods, or, with our freezers, upon final acceptance of the unit by the customer, in accordance with the terms of each contract with the customer. We do not have significant service revenue.
A part of our customer base is made up of international customers.
The following table presents Reflect Scientific revenues disaggregated by region and product type:
|
|
|
|
|
|
|
| |
|
|
December 31, 2018
|
|
December 31, 2017
|
Segments
|
|
Consumer Products
|
Long-term Contracts
|
Total
|
|
Consumer Products
|
Long-term Contracts
|
Total
|
Domestic
|
$
|
1,119,597
|
--
|
1,119,597
|
$
|
828,109
|
--
|
828,109
|
International
|
|
432,388
|
--
|
432,388
|
|
237,668
|
--
|
237,668
|
|
$
|
1,551,985
|
--
|
1,551,985
|
$
|
1,065,777
|
--
|
1,065,777
|
|
|
|
|
|
|
|
|
|
Components
|
|
1,113,990
|
--
|
1,113,990
|
$
|
926,424
|
--
|
926,424
|
Engineering services
|
|
437,995
|
--
|
437,995
|
|
139,353
|
--
|
139,353
|
|
$
|
1,551,985
|
--
|
1,551,985
|
$
|
1,065,777
|
--
|
1,065,777
|
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.
34
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 and $236, respectively, to bad debt expense for the years ended December 31, 2018 and 2017. As the Company has historically experienced minimal bad debts, management feels the allowance for doubtful accounts balance of $4,000 at December 31, 2018 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. An allowance is recorded when it is determined that the amount owing is at high risk. The Company recorded $86,339 and $62,038 in additions to the inventory allowance for the years 2018 and 2017, respectively.
h. Advertising Expense
The Company follows the policy of charging the costs of advertising to expense as incurred. The Company recognized $10,977 and $14,646 of advertising expense during the years ended December 31, 2018, and 2017, respectively.
i. Newly Issued Accounting Pronouncements
Public Law No. 115-97, known as the Tax Cuts and Jobs Act the Tax Act). Enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. Also on December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. As the Company has net operating loss carryforwards which will offset tax liability for the coming year or years, no adjustments for the effect of the income tax rate change is reflected in our financial statements.
In February 2018, the Financial Standards Accounting Board (FASB) issued Accounting Statement Update No. 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
This ASU allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for certain income tax effects stranded in AOCI as a result of the Tax Act. The reclassification eliminates the stranded tax effects resulting from the Tax Act and is intended to improve the usefulness of information reported to financial statement users. ASU No. 2018-02 is effective for reporting periods beginning on January 1, 2019; early adoption is permitted. The Company does not currently have amounts to be reclassified under this and therefore believes it will not have an impact on its financial statements and statements of operations.
35
In June 2018, the FASB issued ASU No. 2018-07, Compensation Stock Compensation (Topic 718), (ASU 2018-07). ASU 2018-07 is intended to reduce cost and complexity of financial reporting for non-employee share-based payments. Currently, the accounting requirements for non-employee and employee share-based payments are significantly different. ASU 2018-07 expands the scope of Topic 718, which currently only includes share-based payments to employees, to include share-based payments to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity Equity-Based Payments to Nonemployees. The amendments to ASU 2018 - 07 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than a companys adoption date of ASU No. 2014-09, (Topic 606), Revenue from Contracts with Customers. The Company is currently evaluating ASU 2018-07 and its impact on its condensed consolidated financial statements or disclosures.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532,
Disclosure Update and Simplification
, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company is in the process of evaluating the impact of the final rule on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test and replaces the qualitative assessment. Impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. Under this revised guidance, failing Step 1 will always result in a goodwill impairment. The amendments in this update should be applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company is evaluating the effect the implementation will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which changes lessee accounting to reflect the financial liability and right-of-use assets that are inherent to leasing an asset on the balance sheet. The standard requires a modified retrospective approach, with restatement of the prior periods presented in the year of adoption, subject to any FASB modifications. This standard will be effective for the first annual reporting period beginning after December 15, 2018. We anticipate adopting this standard on January 1, 2019. In evaluating the effect that ASU No. 2016-02 will have on our consolidated financial statements and related disclosures we believe the impact will be minimal to our ongoing consolidated statements of operations.
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, 2018 and 2017, 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 2018 and 2017 was $47,670 and $28,355, respectively, and is recorded in general and administrative expense.
36
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, 2018 and 2017, 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, 2018 and 2017 relating to unrecognized benefits.
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 $104,046 and $46,696 in research and product development for the years ended December 31, 2018 and 2017, respectively.
o. Stock-Based Compensation
The Company, in accordance with ASC 718,
Compensation Stock Compensation
, records all share-based payments to employees at the grant-date fair value of the equity instruments issued. In accordance with ASC 718-10-30-9,
Measurement Objective Fair Value at Grant Date
, the Company uses the closing price of the stock, as quoted by NASDAQ, on the date of the grant. The Company believes this pricing method provides the best estimate of fair the fair value of the consideration given. Compensation cost is recognized over the requisite service period.
The Company, in accordance with ASC 505,
Compensation Stock Compensation
, establishes the value of equity instruments issued to non-employees for goods and services by using the closing price of the stock, as quoted by NASDAQ, on the date of the grant. The Company believes this method fairly establishes the value of the goods and/or services received.
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, 2018 and 2017.
37
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, 2018 and 2017.
NOTE 3 GOING CONCERN
The Company continues to accumulate significant operating losses and has an accumulated deficit of $20,300,707 at December 31, 2018. These factors raise substantial doubt about the Companys ability to continue as a going concern for a period of one year from the issuance of these financial statements. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
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,
2018
|
|
December 31,
2017
|
|
Machinery and equipment
|
$
|
142,752
|
$
|
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
|
|
(150,237)
|
|
(147,253)
|
|
|
|
|
|
|
|
Total Fixed Assets
|
$
|
7,766
|
$
|
-
|
|
Depreciation expense for the years ended December 31, 2018, and 2017, was $2,984 and $-0-, respectively.
NOTE 5 -
INVENTORIES
Inventory consisted of the following at December 31, 2018 and 2017:
|
|
|
|
|
| |
|
|
December 31,
2018
|
|
December 31,
2017
|
|
|
Finished goods
|
$
|
228,664
|
$
|
241,691
|
|
|
Inventory allowance
|
|
(86,339)
|
|
(86,339)
|
|
|
|
|
|
|
|
|
|
Total Inventory, net
|
$
|
142,325
|
$
|
155,352
|
|
|
|
|
|
|
|
|
|
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 $3,480 per month on a lease with an expiration date of November 30, 2020.
38
Rent expense was $39,285 and $29,892 for the years ended December 31, 2018, and 2017, respectively.
Automobile Lease The Company currently leases one vehicle with a monthly lease payment of $629 per month. The automobile lease will expire on July 7, 2021.
Automobile lease expense was $7,548 and $6,263 for the years ended December 31, 2018, and 2017, respectively.
Minimum rental payments under the non-cancelable operating leases are as follows:
|
|
| |
Years ending
December 31,
|
|
Amount
|
|
2019
|
$
|
50,669
|
|
2020
|
|
48,159
|
|
2021
|
|
3,774
|
|
|
|
|
|
|
$
|
102,602
|
|
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, 2018 and 2017, 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
The Series A Preferred Stock is 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, 2018 and 2017, the following stock transactions occurred:
·
During 2018, the Board of Directors approved the issuance of 1,000,000 shares of restricted common stock, valued at $40,000, to the President/CEO.
During 2018, the Board of Directors approved the issuance of 200,000 shares of restricted common stock, valued at $8,000 to Directors of the Company.
During 2018, the Board of Directors approved the issuance of 81,000 shares of restricted common stock, valued at $3,240 to the CFO of the Company.
During 2018, in addition to the shares stated above, the Board of Directors approved the issuance of 1,325,000 shares of restricted common stock, valued at $53,000, to employees and 5,190,000 shares of restricted common stock, valued at $207,600, to consultants
·
During 2017, the Board of Directors approved the issuance of 4,000,000 shares of restricted common stock, valued at $194,400, to the President/CEO.
During 2017, the Board of Directors approved the issuance of 200,000 shares of restricted common stock, valued at $9,600 to Directors of the Company.
39
During 2017, the Board of Directors approved the issuance of 81,000 shares of restricted common stock, valued at $3,888 to the CFO of the Company.
During 2017, the Board of Directors approved the issuance of 500,000 shares of restricted common stock, valued at $24,000, to employees and 1,130,000 shares of restricted common stock, valued at $54,240, to consultants for services rendered.
NOTE 9 -
CONCENTRATIONS OF RISK
Cash in Excess of Federally Insured Amount
While the Company, at December 31, 2018 and 2017 were below the FDIC insurance limit, at times during those years the Company had cash balances that exceed the federally insured limits of $250,000 per depositor per banking institution. 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 four major customers who represent a significant portion of revenue. These four customers represented 44% and 54% of total sales revenue for the year ended December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, accounts receivable balances from these customers represent 41% and 64% 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. We have identified primary and secondary sources for each of the products we purchase for resale and for the raw materials we use to manufacture our products, so do not anticipate any difficulty in filling the orders placed by our customers.
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, 2018, there was a $9,878 drawn against that line of credit, leaving an available balance of $90,122. The line automatically renews on April 1 of each year and the $100,000 credit amount was available at December 31, 2018.
NOTE 11 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, 2018 there were no options outstanding. The plan has a current expiration date of December 30, 2019.
NOTE 12 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.
40
Intangible assets and related amortization and impairment for the period are as follows:
|
|
| |
December 31, 2018
|
|
|
|
|
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, 2017
|
|
|
|
|
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)
|
$ -
|
Amortization expense for the years ended December 31, 2018, and 2017, was $0 and $0, respectively.
NOTE 13 ROYALTIES
A royalty agreement was executed with JMST as a condition of the Companys acquisitions during 2006. 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 2018 and 2017. In December 2018, management made the decision to remove detectors from their product line due to lack of demand for the product.
NOTE 14 INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, 2018 and 2017 consist of the following:
|
|
|
|
| |
|
2018
|
|
2017
|
Federal:
|
|
|
|
|
|
Current
|
$
|
-
|
|
$
|
-
|
Deferred
|
|
-
|
|
|
-
|
State:
|
|
|
|
|
|
Current
|
|
-
|
|
|
-
|
Deferred
|
|
-
|
|
|
-
|
|
$
|
-
|
|
$
|
-
|
41
Net deferred tax assets consist of the following components as of December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
| |
|
2018
|
|
2017
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
NOL Carryover
|
$
|
2,568,963
|
|
$
|
2,509,214
|
Stock Based Compensation
|
|
283,611
|
|
|
240,015
|
Depreciation and Amortization
|
|
(557,735)
|
|
|
(481,815)
|
Inventory Reserves
|
|
18,490
|
|
|
18,490
|
R&D Tax Credits
|
|
(1,473)
|
|
|
(23,323)
|
|
Debenture Interest Payable
|
|
(474,381)
|
|
|
(474,381)
|
|
Other Reserves
|
|
13,060
|
|
|
13,060
|
Valuation Allowance
|
|
(1,850,535)
|
|
|
(1,801,260)
|
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, 2018 and 2017 due to the following:
|
|
|
|
| |
|
2018
|
|
2017
|
|
|
|
|
|
|
Tax at statutory rate:
|
$
|
(52,400)
|
|
$
|
(140,766)
|
Effects of:
|
|
|
|
|
|
Meals and Entertainment
|
|
(3,125)
|
|
|
(3,485)
|
Stock-Based Compensation
|
|
(21,890)
|
|
|
(81,161)
|
Depreciation and Amortization
|
|
75,512
|
|
|
125,853
|
Inventory Reserve
|
|
(3,808)
|
|
|
(22,290)
|
R & D Tax Credits
|
|
(21,850)
|
|
|
(16,344)
|
Other, net
|
|
-
|
|
|
913
|
Change in Valuation Allowance
|
|
27,561
|
|
|
137,281
|
|
$
|
-
|
|
$
|
-
|
At December 31, 2018, the Company had net operating loss carryforwards of approximately $7,520,180 that may be offset against future income from the year 2018 through 2038.
No tax benefit has been reported in the December 31, 2018 consolidated financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
NOTE 15 RELATED PARTY TRANSACTIONS
Stock Issuances
In December 2018 the Board of Directors approved the issuance of 1,000,000 shares of restricted common stock to the President/CEO and the issuance of 281,000 shares of restricted common stock to other officers and directors. These shares were for compensation. These shares were recorded at the trading price at the time of approval, for an average of $0.04 per share, resulting in $51,240 recorded as stock-based compensation expense.
In October 2017 the Board of Directors approved the issuance of 4,000,000 shares of restricted common stock to the President/CEO. In December 2017 the Board of Directors approved the issuance of 281,000 shares of restricted common stock to officers and directors. These shares were for compensation. These shares were recorded at the trading price at the time of approval, for an average of $0.05 per share, resulting in $231,888 recorded as stock-based compensation expense.
NOTE 16 SUBSEQUENT EVENTS
None.
42