The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
March 31, 2019
(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 Company’s most recent audited consolidated financial statements and notes thereto included in its December 31, 2018 financial statements. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
NOTE 2 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND LINE 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 Scientific designs, develops and sells scientific equipment for the Life Science and Manufacturing industries. The Company’s 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.
SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of Reflect Scientific, Inc. and its wholly owned subsidiary, Cryometrix. Intercompany transactions and accounts have been eliminated in consolidation.
10
REFLECT SCIENTIFIC, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)
USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
.
We have applied the new revenue standard to all contracts from the date of initial application. We 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.
A part of our customer base is made up of international customers. The table below allocates revenue between domestic and international customers.
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
Consumer
|
Long-term
|
|
|
|
|
Consumer
|
Long-term
|
|
|
Segments
|
|
|
Products
|
Contract
|
Total
|
|
|
|
Products
|
Contract
|
Total
|
|
Domestic
|
|
$
|
225,157
|
-
|
225,157
|
|
|
$
|
321,389
|
|
321,389
|
|
International
|
|
|
101,157
|
|
101,157
|
|
|
|
104,292
|
|
104,292
|
|
|
|
$
|
326,314
|
|
326,314
|
|
|
$
|
425,681
|
|
425,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
|
|
|
253,895
|
-
|
253,895
|
|
|
|
294,031
|
-
|
294,031
|
|
|
Engineering Services
|
|
|
72,419
|
|
72,419
|
|
|
|
131,650
|
|
131,650
|
|
|
|
|
$
|
326,314
|
|
326,314
|
|
|
$
|
425,681
|
|
425,681
|
|
11
REFLECT SCIENTIFIC, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)
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 customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At March 31, 2019 and December 31, 2018, the Company had accounts receivable, net of the allowance, of $131,702 and $155,543, respectively. At March 31, 2019 and December 31, 2018 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 Company’s 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 March 31, 2019, inventory was made up of $241,374 of finished goods, less an allowance for obsolescence of $86,339. At December 31, 2018, inventory was comprised of $228,664 of finished goods, less an allowance for obsolescence of $86,339. There were no raw materials or work in progress for either period presented.
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. We perform an impairment analysis on an annual basis. The Company’s analysis did not indicate any impairment of intangible assets as of the impairment analysis conducted December 31, 2018.
GOODWILL: Goodwill represents the excess of the Company’s 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 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 Company’s targeted market conditions, as well as relevant entity-specific events, such as a change in the market for the Company’s 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 Company’s 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.
12
REFLECT SCIENTIFIC, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)
LEASES: In February of 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2016-02 - Leases (Topic 842), which significantly amends the way companies are required to account for leases. Under the updated leasing guidance, some leases that did not have to be reported previously are now required to be presented as an asset and liability on the balance sheet. In addition, for certain leases, what was previously classified as an operating expense must now be allocated between amortization expense and interest expense. The Company adopted this update as of January 1, 2019 using the modified retrospective transition method. Prior periods have not been restated. Upon implementation, the Company recognized an initial right-of-use asset of $95,087 and lease liability of $95,087. Due to the simplistic nature of the Company's leases, no change to retained earnings was required. See
Note
4
for further details.
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.
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 March 31, 2019 and 2018, the Company had no common stock equivalents.
RECENT ACCOUNTING PRONOUNCEMENTS
:
In March 2019 the Financial Accounting Standards Board issued ASU No. 2019-01 “
Leases
”, a clarification of the guidance issued in February 2016, ASU No. 2016-02, “
Leases
” Topic 842. The Company adopted this standard effective January 2019. The adoption of this standard resulted in recording right-of-use assets and lease liabilities on its balance sheet. The adoption was made on a prospective basis and, as a result, prior period amounts were not adjusted to reflect the impact of the updated guidance. The adoption of this new accounting guidance did not have a significant impact on our financial statements.
June 2018, the FASB issued ASU 2018-07,
Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
, which simplifies the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718,
Compensation - Stock Compensation
, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard became effective for us on January 1, 2019. The adoption of this standard did not have a material impact on our consolidated financial statements.
13
REFLECT SCIENTIFIC, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)
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 3 - GOING CONCERN
The Company continues to accumulate significant operating losses and has an accumulated deficit of $20,306,242 at March 31, 2019. These factors raise substantial doubt about the Company’s 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 - LEASES
We adopted ASC 842 using the modified retrospective approach, which allows us not to restate our comparative periods prior to the adoption of the standard on January 1, 2019. As a result prior period presented before this adoption are not adjusted to reflect the effect of this new standard.
We have operating leases for our office and warehouse facility as well as for an automobile. We used the lease termination dates of November 30, 2020 for the building and July 7, 2021 for the automobile to calculate right of use (“ROU”) assets and lease liabilities.
14
REFLECT SCIENTIFIC, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited The following was included in our consolidated condensed balance sheet as of March 31, 2019:
Leases
As of March 31, 2019
Assets
ROU operating lease assets
$ 83,230
Liabilities
Short-term operating lease liabilities
$ 46,318
Long-term operating lease liabilities
37,830
Total operating lease liabilities
$ 84,148
We recognize lease expense on a straight-line basis over the term of the lease.
Three Months Ended
Lease Cost
March 31, 2019
Operating lease cost
Administrative expenses
$ 11,066
Our building lease does not specify an implicit rate of interest. Therefore, we estimate our incremental borrowing rate, which is defined as the interest rate we would pay to borrow on a collateralized basis, considering such factors as length of lease term and the risks of the economic environment in which the leased asset operates. As of March 31, 209, the following disclosures for remaining lease term and incremental borrowing rates were applicable:
Three Months Ended
Supplemental Disclosures
March 31, 2019
Weighted average remaining lease term
1.76 years
Weighted average discount rate
7% years
As of March 31, 2019, maturities of operating lease liabilities were the following:
Amounts under
Years ended December 31,
operating leases
Remaining 2019
$ 38,028
2020
48,160
2021
3,774
Total lease payments
89,962
Less imputed interest
(5,814)
Total
$ 84,148
15
REFLECT SCIENTIFIC, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2019
NOTE 5 - SUBSEQUENT EVENTS
In accordance with ASC 855-10 management reviewed all material events through the date of this report. There are no material subsequent events to report.
Item 2. Management’s 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 Company’s stockholders. Management believes that all statements that express expectations and projections with respect to future matters, as well as from developments beyond our Company’s 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 management’s views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance however, that management’s 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 Company’s 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.
16
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 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 has adopted the new revenue recognition and lease accounting standards. The Company believes there have been no other significant changes during the three month period ended March 31, 2019, 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, 2018.
Plan of Operation and Business Growth
Our revenues during the three month reporting periods decreased 23% during 2019 compared to 2018 revenues, as freezer sales for the period were $59,231 lower in 2019 than 2018.
Our efforts continue to be focused on increasing the sales of our life science consumables while, at the same time, working to enhance the design of our liquid nitrogen refrigeration products. Of those liquid nitrogen refrigeration products, the ultra-low temperature freezer is receiving highest priority. We have received positive feedback of the improvements and enhancements made to the design of the ultra-low temperature freezer. 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.
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.
An analysis of operating results for the three months ended March 31, 2019 and 2018 follows.
Results of Operations
Three Months Ended March 31, 2019 and 2018
|
|
|
|
|
|
| |
|
|
|
For the three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Revenues
|
$
|
326,314
|
$
|
425,681
|
$
|
(99,367)
|
|
Cost of goods sold
|
|
93,906
|
|
109,310
|
|
(15,404)
|
|
Gross profit
|
|
232,408
|
|
316,371
|
|
(83,963)
|
|
Operating expenses
|
|
237,744
|
|
217,650
|
|
20,094
|
|
Other expense
|
|
199
|
|
-
|
|
199
|
|
Net profit (loss)
|
$
|
(5,535)
|
$
|
98,721
|
$
|
(104,256)
|
Revenues decreased during the quarter ended March 31, 2019, to $326,314 from $425,681 for the quarter ended March 31, 2018, a decrease of $99,367. The decrease results primarily from the sale of ultra-low
17
temperature freezers which generated revenue of $72,419 in 2019 compared to revenue of $131,650 in 2018. We are continuing work to increase our market penetration in the ultra-low temperature freezer market.
Cost of goods decreased in the quarter ending March 31, 2019, as compared to March 31, 2018, to $93,906 from $109,310, a decrease of $15,404. We realized a gross profit percentage of 71% for the three months ended March 31, 2019, compared to 74% for the three months ended March 31, 2018. 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 all product lines.
Operating expenses increased to $237,744 in the three months ended March 31, 2019, an increase of $20,094 over the expenses of $217,650 incurred in the three-month period ended March 31, 2018. The increase results primarily from increases in salaries, research and development, health insurance, professional fees, and advertising and commissions, offset by small increases in a number of other expense categories. While we continue to monitor and minimize operating costs, we also realize that certain levels of expenditures are required in order to commercialize the products and achieve market penetration.
The net loss for the three-month period ended March 31, 2019 was $5,535, which compares to a net income of $98,721for the three-month period ended March 31, 2018. Management continues to look for opportunities to increase sales, improve gross margins and control ongoing operating expenses.
The net loss of $5,535 for the three-month period ended March 31, 2019 represents a loss of $0.00 per share. This compares to the net income of $98,271, or gain of $0.00 per share, for the three months ended March 31, 2018.
Seasonality and Cyclicality
We do not believe our business is cyclical.
Liquidity and Capital Resources
Our cash resources at March 31, 2019, were $255,481, with accounts receivable of $131,702, net of allowance, and inventory of $155,035, net of allowance. Our working capital on March 31, 2019, was $396,937. Working capital on December 31, 2018 was $446,877.
For the three-month period ended March 31, 2019, net cash provided by operating activities was $35,351 which compares to $6,818 net cash provided by operating activities for the three-month period ended March 31, 2018.
Off-Balance Sheet Arrangements
None.