12
REFLECT SCIENTIFIC, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 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 September 30, 2019 and December 31, 2018, the Company had accounts receivable, net of the allowance, of $40,689 and $155,543, respectively. At September 30, 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 September 30, 2019 and December 31, 2018, the Company had inventory consisting of finished goods, net of allowance, of $182,724 and $142,325, respectively. At September 30, 2019 and December 31, 2018, the allowance for obsolescence was $86,339 and 86,339, respectively.
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. As of September 30, 2019 and December 31, 2018, all of the intangible assets were fully amortized.
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.
13
REFLECT SCIENTIFIC, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 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.
NET INCOME (LOSS) PER SHARE: The computation of basic profit and loss 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 September 30, 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
14
REFLECT SCIENTIFIC, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2019
(Unaudited)
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.
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 $20,322,951 at September 30, 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.
The following was included in our consolidated condensed balance sheet as of September 30, 2019:
Leases
As of September 30, 2019
Assets
ROU operating lease assets
$ 61,137
Liabilities
Operating lease liabilities – current portion
$ 48,765
Operating lease liabilities
12,877
Total operating lease liabilities $ 61,642
15
REFLECT SCIENTIFIC, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2019
(Unaudited)
We recognize lease expense on a straight-line basis over the term of the lease.
Nine Months Ended
Lease Cost
September 30, 2019
Operating lease cost
Administrative expenses
$ 5,754
Rent expense
28,173
Total operating lease cost
$ 33,927
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 September 30, 2019, the following disclosures for remaining lease term and incremental borrowing rates were applicable:
Nine Months Ended
Supplemental Disclosures
September 30, 2019
Weighted average remaining lease term
1.29 years
Weighted average discount rate
7%
As of September 30, 2019, maturities of operating lease liabilities were the following:
Amounts under
Years ended December 31,
operating leases
Remaining 2019
$ 12,749
2020
48,160
2021
3,774
Total lease payments
64,682
Less imputed interest
(3,040)
Total
$ 61,642
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.
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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.
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 nine-month period ended September 30, 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.
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Plan of Operation and Business Growth
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 are receiving considerable interest in our latest product introduction, which is an ultra-cold chiller used in the manufacture of CBD oil. This unit improves the efficiency of the manufacturing process and enables the production of a higher purity in the CBD oil produced.
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 September 30, 2019 and 2018 follows.
Results of Operations
Three Months Ended September 30, 2019 and 2018
| | | | | | |
| | For the three months ended September 30, |
| | 2019 | | 2018 | | Change |
Revenues | $ | 366,431 | $ | 359,151 | $ | 7,280 |
Cost of goods sold | | 101,366 | | 151,178 | | (49,812) |
Gross profit | | 265,065 | | 207,973 | | 57,092 |
Operating expenses | | 261,828 | | 250,090 | | 11,738 |
Other expense | | 1,716 | | 456 | | 1,260 |
Net profit (loss) | $ | 1,521 | $ | (42,573) | $ | 44,094 |
Revenues increased during the three-month period ended September 30, 2019, to $366,431 from $359,151 for the three-month period ended September 30, 2018, an increase of $7,280 The increase results primarily from increased sale of ultra-low temperature freezers. We are continuing work to increase our market penetration in the ultra-low temperature freezer market and in the ultra-cold chiller.
Cost of goods decreased in the quarter ending September 30, 2019, as compared to September 30, 2018, to $101,366 from $151,178, a decrease of $49,812. We realized a gross profit percentage of 72% for the three months ended September 30, 2019, compared to 58% for the three months ended September 30, 2018. The gross profit percentage is dependent on the mix of product sales, which varies from quarter to quarter. The increases sale of freezers during this period provided the higher margins. 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 $261,828 in the three months ended September 30, 2019, an increase of
18
$11,738 over the expenses of $250,090 incurred in the three-month period ended September 30, 2018. The increase results from small increases in a number of expense accounts. 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.
Research and development expenses for the three months ended September 30, 2019 were $75,417, an increase of $40,875 in expenses for the same period in 2018, due to development work on the ultra-cold CBD oil chiller. R&D expenses are expected to remain above the prior year level as work continues to commercialize this unit.
Net income for the three-month period ended September 30, 2019 was $1,521, which compares to a net loss of $42,573 for the three-month period ended September 30, 2018. Management continues to look for opportunities to increase sales, improve gross margins and control ongoing operating expenses.
The net income of $1,521 for the three-month period ended September 30, 2019 represents income of $0.00 per share. This compares to the net loss of $42,573, or loss of $0.00 per share, for the three months ended September 30, 2018.
Nine Months Ended September 30, 2019 and 2018
| | | | | | |
| | For the nine months ended September 30, |
| | 2019 | | 2018 | | Change |
Revenues | $ | 977,312 | $ | 1,119,491 | $ | (142,179) |
Cost of goods sold | | 300,901 | | 381,015 | | (80,114) |
Gross profit | | 676,411 | | 738,476 | | (62,065) |
Operating expenses | | 698,072 | | 899,619 | | (201,547) |
Other income (expense) | | 583 | | 456 | | 127 |
Net loss | $ | (22,244) | $ | (161,599) | $ | (139,355) |
Revenues decreased during the nine months ended September 30, 2019, to $977,312 from $1,119,491 for the nine months ended September 30, 2018, a decrease of $142,179. The decrease results primarily lower sales of specialty lab supplies. We are continuing work to increase our sales of specialty lab products.
Cost of goods decreased in the quarter ending September 30, 2019, as compared to September 30, 2018, to $300,901 from $381,015 a decrease of $80,114. We realized a gross profit percentage of 69% for the nine months ended September 30, 2019, compared to 69% for the nine months ended September 30, 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 decreased to $698,072 in the nine months ended September 30, 2019, a decrease of $201,547 over the expenses of $899,619 incurred in the nine-month period ended September 30, 2018. The decrease results primarily from stock-based consulting fees and stock-based compensation paid in 2018. 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.
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Research and development expenses for the nine months ended September 30, 2019 were $105,040, an increase of $55,593 in expenses for the same period in 2018, due to development work on the ultra-cold CBD oil chiller. R&D expenses are expected to remain above the prior year level as work continues to commercialize this unit.
The net loss for the nine-month period ended September 30, 2019 was $22,244, which compares to a net loss of $161,599 for the nine-month period ended September 30, 2018. Management continues to look for opportunities to increase sales, improve gross margins and control ongoing operating expenses.
The net loss of $22,244 for the nine-month period ended September 30, 2019 represents a loss of $0.00 per share. This compares to the net loss of $161,599, or $0.00 per share, for the nine months ended September 30, 2018.
Seasonality and Cyclicality
We do not believe our business is cyclical.
Liquidity and Capital Resources
Our cash resources at September 30, 2019, were $457,094, with accounts receivable of $40,689, net of allowance, and inventory of $182,724, net of allowance. Our working capital on September 30, 2019, was $379,358. Working capital on December 31, 2018 was $446,877.
For the nine-month period ended September 30, 2019, net cash provided by operating activities was $237,535 which compares to $67,371 net cash used in operating activities for the nine-month period ended September 30, 2018.
Off-Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not required.
Item 4. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Principal Financial Officer concluded that information required to be disclosed is recorded, processed, summarized and reported within the specified periods, and is accumulated and communicated to management, including our Chief Executive Officer and
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Principal Financial Officer, to allow for timely decisions regarding required disclosure of material information required to be included in our periodic Securities and Exchange Commission reports. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are not effective at that reasonable assurance level as of the end of the period covered by this report based upon our current level of transactions and staff. However, it should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote
(b)
Changes in Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act. Management reviewed our internal controls over financial reporting, and there have been no changes in our internal controls over financial reporting for the nine-month period ended September 30, 2019 that have materially affected, or are like to affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None; not applicable.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None; not applicable.
Use of Proceeds of Registered Securities
None; not applicable.
Purchases of Equity Securities by Us and Affiliated Purchasers
During the nine months ended September 30, 2019, we have not purchased any equity securities nor have any officers or directors of the Company.
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Mine Safety Disclosure
Not applicable.
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ITEM 5. Other Information.
None
ITEM 6. Exhibits
(a)
Exhibits.
| | |
Exhibit No. | Title of Document | Location if other than attached hereto |
3.1 | Articles of Incorporation | 10-SB Registration Statement* |
3.2 | Articles of Amendment to Articles of Incorporation | 10-SB Registration Statement* |
3.3 | By-Laws | 10-SB Registration Statement* |
3.4 | Articles of Amendment to Articles of Incorporation | 8-K Current Report dated December 31, 2003* |
3.5 | Articles of Amendment to Articles of Incorporation | 8-K Current Report dated December 31, 2003* |
3.6 | Articles of Amendment | September 30, 2004 10-QSB Quarterly Report* |
3.7 | By-Laws Amendment | September 30, 2004 10-QSB Quarterly Report* |
4.1 | Debenture | 8-K Current Report dated June 29, 2008* |
4.2 | Form of Purchasers Warrant | 8-K Current Report dated June 29, 2008* |
4.3 | Registration Rights Agreement | 8-K Current Report dated June 29, 2008* |
4.4 | Form of Placement Agreement | 8-K Current Report dated June 29, 2008* |
10.1 | Securities Purchase Agreement | 8-K Current Report dated June 29, 2008* |
10.2 | Placement Agent Agreement | 8-K Current Report dated June 29, 2008* |
14 | Code of Ethics | December 31, 2003 10-KSB Annual Report* |
21 | Subsidiaries of the Company | December 31, 2004 10-KSB Annual Report* |
| | |
Exhibit No. | Title of Document | Location if other than attached hereto |
31.1 | 302 Certification of Kim Boyce | |
31.2 | 302 Certification of Keith Merrell | |
32 | 906 Certification | |
Exhibits
Additional Exhibits Incorporated by Reference
