The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to the Consolidated Financial Statements
December 31, 2021 and 2020
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Reflect Scientific, Inc. (the Company) was incorporated under the laws of the State of Utah on November 3, 1999 as Cole, Inc. 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
Reflect Scientific is engaged in the manufacture and distribution of innovative products targeted at the life sciences market. Our customers include hospitals, diagnostic laboratories, pharmaceutical and biotech companies, cold chain management, universities, government and private sector research facilities, chemical and industrial companies.
Our Cryometrix brand ultra-ow temperature and blast freezers innovative design enables our customers to save substantially on energy costs related to cryogenic storage. Ultra-low temperature freezers are used worldwide for the storage of vaccines, DNA, RNA, proteins and many other biological and chemical substances. There is a growing need for energy efficient reliable ultra-low temperature storage units. Our Cryometrix freezers are targeted to this growing market and we have had tremendous success in blood storage and pharmaceutical manufacturing applications. The application of this technology for use in refrigerated trailers (commonly called “reefers”) used to transport good which need to be maintained in a cold environment significantly broadens the market for this technology. The utilization of this technology in reefers eliminates the current method of cooling, which uses engines run on hydrocarbon fuels. The Cryometrix technology is pollutant free and is more efficient and cost effective than the technologies currently used. Reflect Scientific has added a new product line of solvent chillers. Solvent chillers are used in natural products extraction for optimizing product yield and purity.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Method
The Company’s 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:
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 party’s 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 customer’s 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.
Ultra-low temperature freezers sold to customers 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 then sign an acceptance of the unit and make payment of the remaining balance on the contract, at which title passes to the customer. The units are FOB ship point. The customer may either arrange to transport the unit with a carrier he uses or ask the Company to arrange such shipment, the charges of which are the responsibility of the customer. A customer may, after accepting the unit, request that it be upgraded with additional hardware or software options. Those options are installed under a new contract, with the deposit and final payment requirements being the same as on the original order.
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, 2021 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.
Contract Balances We have elected to use the practical expedient in ASC 340-40-25-4 (regarding recognition of the incremental costs of obtaining a contact) for costs related to contracts that are estimated to be completed within one year. In other words. We do not have any material accrued contract costs; however, we do require customer deposits to be made on freezer purchases. As of December 31, 2021, we have $118,566 of contract liabilities related to these customer deposits and no contract assets.
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, 2021 |
|
December 31, 2020 |
Segments |
|
Consumer
Products |
|
|
Total |
|
|
Consumer
Products |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
1,786,437 |
|
|
|
1,786,437 |
|
|
$ |
2,173,209 |
|
|
|
2,173,209 |
|
International |
|
|
1,028,233 |
|
|
|
1,028,233 |
|
|
|
619,414 |
|
|
|
619,414 |
|
|
|
$ |
2,814,670 |
|
|
|
2,814,670 |
|
|
$ |
2,792,623 |
|
|
|
2,792,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components |
|
|
904,490 |
|
|
|
904,490 |
|
|
$ |
842,161 |
|
|
|
842,161 |
|
Chillers/Freezers |
|
|
1,910,180 |
|
|
|
1,910,180 |
|
|
|
1,950,462 |
|
|
|
1,950,462 |
|
|
|
$ |
2,814,670 |
|
|
|
2,814,670 |
|
|
$ |
2,792,623 |
|
|
|
2,792,623 |
|
c. Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
d. Cash
The Company considers all deposit accounts and investment accounts with an original maturity of 90 days or less to be cash equivalents.
e. Accounts Receivable
The Company maintains an allowance for doubtful accounts to provide for losses arising from customers’ inability to make required payments. If there is deterioration of our customers’ credit worthiness and/or there is an increase in the length of time that the receivables are past due greater than the historical assumptions used, additional allowances may be required. The Company estimates allowance for doubtful accounts based on the aged receivable balances and historical losses. The Company charges off uncollectible accounts when management determines there is no possibility of collecting the related receivable. The Company considers accounts receivable to be past due or delinquent based on contractual terms, which is generally net 30 days.
The Company charged $0 and $0, respectively, to bad debt expense for the years ended December 31, 2021 and 2020. As the Company has historically experienced minimal bad debts, management feels the allowance for doubtful accounts balance of $4,000 at December 31, 2021 to be an adequate reserve based on the experience seen over multiple years.
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.
f. Property and Equipment
Property and equipment 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 property and equipment are depreciated range from 5 to 7 years, except for computer equipment, which is depreciated over a 3-year life.
g. Inventories
Inventories 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 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 $106,044 and $106,044 in the inventory allowance for the years 2021 and 2020, respectively.
h. Cost of Sales
Charges to cost of sales are made on a first-in first-out method (FIFO). In addition to the component costs, some labor costs are allocated to cost of goods for the direct labor utilized to build the sub-assemblies and finished goods.
i. Advertising Expense
The Company follows the policy of charging the costs of advertising to expense as incurred. The Company recognized $21,971 and $22,175 of advertising expense during the years ended December 31, 2021, and 2020, respectively.
j. Newly Issued Accounting Pronouncements
The Company has reviewed all 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 company’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Company’s financial management and certain standards are under consideration.
k. 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, 2021 and 2020, the Company had no common stock equivalents.
|
|
For the year ended
December 31, 2021 |
|
|
For the year ended
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
Net income (numerator) |
|
$ |
939,065 |
|
|
$ |
660,115 |
|
Shares (denominator) |
|
|
84,739,770 |
|
|
|
84,739,086 |
|
Net earnings per share amount - basic |
|
$ |
0.01 |
|
|
$ |
0.04 |
|
Shares (denominator) |
|
|
84,739,770 |
|
|
|
84,739,086 |
|
Net earnings per share amount - diluted |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
l. Shipping and Handling Fees and Costs
The Company records all shipping and handling costs as operating costs. Freight paid on outgoing shipments in 2021 and 2020 was $122,677 and $81,089, respectively, and is recorded in general and administrative expense.
m. 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 Company’s policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended December 31, 2021 and 2020, 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, 2021 and 2020 relating to unrecognized benefits.
n. 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.
o. 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 $58,340 and $185,295 in research and product development for the years ended December 31, 2021 and 2020, respectively.
p. 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.
q. 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 asset’s carrying value and estimated fair value. Fair value is determined through various valuation techniques, including cost-based, market and income approaches as considered necessary.
r. Goodwill
Goodwill represents the excess of the JMST assets acquired 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 on impairment of goodwill for the years ended December 31, 2021 and 2020.
s. 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.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment and related depreciation for the period are as follows:
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
|
|
|
|
|
|
|
Machinery and equipment |
|
$ |
142,752 |
|
|
$ |
142,752 |
|
Furniture and fixtures |
|
|
2,697 |
|
|
|
2,697 |
|
Computer and office equipment |
|
|
2,390 |
|
|
|
2,390 |
|
Leasehold improvements |
|
|
10,164 |
|
|
|
10,164 |
|
Accumulated depreciation |
|
|
(158,003 |
) |
|
|
(158,003 |
) |
|
|
|
|
|
|
|
|
|
Total Property and Equipment |
|
$ |
- |
|
|
$ |
- |
|
Depreciation expense for the years ended December 31, 2021, and 2020, was $-0- and $-0-, respectively.
NOTE 4 - INVENTORIES
Inventories consisted of the following at December 31, 2021 and 2020:
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
|
|
|
|
|
|
|
Finished goods |
|
$ |
342,835 |
|
|
$ |
202,890 |
|
Raw materials |
|
|
387,695 |
|
|
|
341,760 |
|
Inventory allowance |
|
|
(106,044 |
) |
|
|
(106,044 |
) |
|
|
|
|
|
|
|
|
|
Total Inventories, net |
|
$ |
624,486 |
|
|
$ |
438,606 |
|
NOTE 5 - 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 $4,999 per month on a lease with an expiration date of November 30, 2023.
Rent expense relating to the building lease was $59,684 and $40,492 for the years ended December 31, 2021, and 2020, respectively.
Automobile Lease – The Company currently leases one vehicle with a monthly lease payment of $629 per month. The automobile lease expired on July 7, 2021.
Automobile lease expense was $7,548 and $7,548 for the years ended December 31, 2021, and 2020, respectively.
Minimum rental payments under the non-cancelable operating leases are as follows:
Years ending
December 31, |
|
Amount |
2022 |
|
$ |
61,091 |
2023 |
|
|
58,920 |
|
|
|
|
|
|
$ |
120,011 |
NOTE 6 - 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, 2021 and 2020, 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 may be convertible into the Company’s 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 7 - COMMON STOCK TRANSACTIONS
During the years ended December 31, 2021 and 2020, the following stock transactions occurred:
In December 2021, the Board of Directors approved the issuance of 1,000,000 shares of restricted common stock to its patent attorney. Of the grant, 250,000 shares vested on the grant date, for which a charge of $27,500 was recorded in 2021. An additional 250,000 shares will vest on the next three anniversary dates with the appropriate expenses charged to each of those periods.
NOTE 8 - CONCENTRATIONS OF RISK
Cash in Excess of Federally Insured Amount
While the Company, at December 31, 2021 and at various other times during 2021 and 2020 had cash balances that exceed the $250,000 FDIC insurance limit per depositor per banking institution. There were $1,223,924 and $392,542 on deposit at December 31, 2021 and 2020, respectively. 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 45% and 24% of total sales revenue for the year ended December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, accounts receivable balances from these customers represent 70% and 78% 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 9 - 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, 2021, there was $-0- drawn against that line of credit, leaving an available balance of $100,000. The line automatically renews on April 1 of each year and the $100,000 credit amount was available at December 31, 2021.
The Company applied for and received $111,265 in loans under the Small Business Administration PPP loan program. When it was announced that applications were being accepted requesting forgiveness of these loans the Company completed that application process. On January 7, 2021 the Company received notice that their application had been approved and the principal and all accrued interest was forgiven. Accordingly a gain of $111,265 was recognized and recorded as other income in 2021.
NOTE 10 - INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, 2021 and 2020 consist of the following:
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
Federal: |
|
|
|
|
|
|
|
|
Current |
|
$ |
- |
|
|
$ |
- |
|
Deferred |
|
|
- |
|
|
|
- |
|
State: |
|
|
|
|
|
|
|
|
Current |
|
|
- |
|
|
|
- |
|
Deferred |
|
|
- |
|
|
|
- |
|
Valuation allowance |
|
|
- |
|
|
|
- |
|
|
|
$ |
- |
|
|
$ |
- |
|
Net deferred tax assets consist of the following components as of December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOL Carryover |
|
$ |
2,853,471 |
|
|
$ |
3,050,675 |
|
Property and Equipment |
|
|
(30,307 |
) |
|
|
(76,011 |
) |
Other Reserves |
|
|
(19,694 |
) |
|
|
3,193 |
|
Valuation Allowance |
|
|
(2,803,470 |
) |
|
|
(2,977,857 |
) |
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, 2021 and 2020 due to the following:
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
Tax at statutory rate: |
|
$ |
197,204 |
|
|
$ |
136,711 |
|
Effects of: |
|
|
|
|
|
|
|
|
Meals and Entertainment |
|
|
3,672 |
|
|
|
3,769 |
|
Depreciation and Amortization |
|
|
(30,307 |
) |
|
|
(76,011 |
) |
Other, net |
|
|
(23,366 |
) |
|
|
(576 |
) |
Change in Valuation Allowance |
|
|
(147,203 |
) |
|
|
(63,893 |
) |
|
|
$ |
- |
|
|
$ |
- |
|
At December 31, 2021, the Company had net operating loss carryforwards of approximately $7,061,603 that may be offset against future income from the year 2021 through 2039.
No tax benefit has been reported in the December 31, 2021 consolidated financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
NOTE 12 - RELATED PARTY TRANSACTIONS
There were no related party transactions in the years ended December 31, 2021 and 2020.
NOTE 13 - SUBSEQUENT EVENTS
None.