Reflect Scientific [letterhead]
May 10, 2006
Tia Jenkins
Senior Assistant Chief Accountant
Office of Emerging Growth Companies
United States Securities and Exchange
Commission
100 F Street, North East
Washington, D.C. 20549
Re: Reflect Scientific, Inc.
Form 10KSB
Filed February 28, 2006
File No. 000-31377
Dear Ms. Jenkins:
In response to your letter under date of May 3, 2006:
1) We note from your disclosure on F-16 (Note 6 Preferred Stock)
that the $700,000 deemed dividend was recorded in additional paid
in capital since you did not have sufficient retained earnings.
Consistent with the guidance in EITF 98-5 (see footnote 5 to
paragraph 8) the discount related to the beneifical conversion
feature should be amortized through retained earnings, whether
there are sufficient retained earnings or not. Please revise your
financial statements and related notes accordingly, or tell us why
a revision is not required and cit the literature that supports
your accounting treatment.
Response:
The Company will revise the presentation of the deemed dividend to
increase the additional paid in capital by $700,000 and the
retained deficit by $700,000.
2) We note that you issued 380,000 shares of common stock on May 6,
2005 for services rendered and valued the transaction at $9,056.
We also note that the Bulletin Board quotes for your common stock
during that period far exceeded the approximately $0.03 per share
used in your valuation. Please provide a note that discloses your
policy for compensatory issuances of equity to employees and non-
employees, and tell us how your accounting treatment is consistent
with GAAP (refer to APB 25 and SFAS 123 and 148).
Response:
The Company will provide a note that discloses its policy for
compensatory issuances of equity to employees and non-employees as
follows:
Non-employees Equity Transactions The Company accounts for
equity instruments issued to non-employees in accordance with the
provisions of Statement of Financial Accounting Standards SFAS No.
123 and the Emerging Issues Task Force (EITF) Issue No. 00-18,
Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. SFAS No. 123 states that equity instruments that are
issued in exchange for the receipt of goods or services should be
measured a the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more
reliably measurable. Under the guidance in EITF 00-18, the
measurement date occurs as of the earlier of (a) the date at which
a performance commitment is reached or (b) absent a performance
commitment, the date at which the performance necessary to earn
the equity instrument is complete (that is, the vesting date).
Employee equity transactions The Company has adopted, effective
January 1, 2006, SFAS No. 123 R Share Based Payment. SFAS No.
123R establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity
incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that
may be settled by the issuance of those equity instruments. SFAS
No. 123R focuses primarily on accounting for transactions in which
and entity obtains employee services in share-based payment
transactions. SFAS No. 123R requires a public entity to measure
the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award
( with limited exceptions). That cost will be recognized over
the period during which an employee is required to provide service
in exchange for the aware the requisite service period (usually
the vesting period). SFAS No. 123R requires that the compensation
cost relating to share based payment transactions be recognized in
the financial statements. The cost will be measured based on the
fair value of the equity or liability instruments issued. The
Company also notes that Staff Accounting Bulletin 107 has been
issued by the SEC staff as additional guidance on the
implementation of SFAS No. 123R.
The Company issued the 380,000 shares of common stock at the value
of the services which was more readily determinable than the value
of the common stock. The Company did not believe that the bid
price and asked prices for our common stock was an appropriate
valuation for the following reasons:
a. Based upon broker/dealer information available to us, there
was a $0.10 bid and a $0.10 asked price for our common stock
on May 6, 2005, each good for 1,000 shares only;
b. There had been no trades whatsoever of our shares of common
stock for the period from September, 2004, to July 1, 2005,
so accordingly, there was not a trading history to review.
c. The securities issued were "restricted securities" that
could not be publicly traded for one year under Rule 144,
and these types of securities are usually sold for one-third
to one-half of the bid price.
d. We requested an "inside quote" report on our securities on
May 6, 2005, and the OTCBB advised us that one was not
available, and that the primary reason for that could have
been that there were not at least two market makers in our
common stock.
Because the value of the common stock was not readily
determinable, pursuant to the requirements of SFAS No. 123, the
Company determined a value for the services rendered by examining
the hours put in multiplied by the current hourly rate of the
employees or consultants. Accordingly, the fair value of the
services rendered was more readily determinable. The pay rates of
the employees varied from $10 per hour to $75 per hour and the
hours by person varied from 1 to 74 hours. There was a total of
210 hours valued at an average price of $43 per hour. There was
also some mileage which was reimbursed at $0.405 per mile.
This method of determining value seems to be the most logical,
given that there were no trades in our common stock for at least
six months before these shares were issued and approximately two
months after they were issued. In these circumstances, that would
hardly be considered to be a "trading market" or something upon
which an adequate valuation could be made, especially when any
such quotations are good for only 1,000 shares.
We confirm to you that we are responsible fort the adequacy and
the accuracy of the disclosure in our filings with the Securities
and Exchange Commission; that Securities and Exchange Commission
staff comments or changes to disclosure in response to staff
comments do not foreclose the SEC from taking any action with
respect to the particular filing; and that we may not assert SEC
staff comments as a defense in any proceeding initiated by the SEC
or any person under the federal securities laws of the United
States.
If the foregoing meets with your approval, we will amend our 10-
KSB Annual Report for December 31, 2005, as indicated in response
to SEC staff comment No. 1, on your advise in that respect.
Thank you.
Sincerely,
/s/Kim Boyce
Kim Boyce, President