| | | | | | | | |
| Segments | | | | | Total | | | | | | Total |
| Domestic | | $ | 520,901 | | 520,901 | | | $ | 243,593 | | 243,593 |
| International | | | 232,675 | | 232,675 | | | | 318,769 | | 318,769 |
| | | $ | 753,576 | | 753,576 | | | $ | 562,362 | | 562,362 |
| | | | | | | | | | | | |
| Components | | | 251,882 | | 251,882 | | | | 228,533 | | 228,533 |
| Equipment | | | 501,694 | | 501,694 | | | | 333,829 | | 333,829 |
| | | $ | 753,576 | | 753,576 | | | $ | 562,362 | | 562,362 |
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.
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. At March 31, 2022 and December 31, 2021, the Company had accounts receivable, net of the allowance, of $233,401 and $175,649, respectively. At March 31, 2022 and December 31, 2021, the allowance for doubtful accounts was $4,000 and $4,000, respectively.
11
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 fixed assets are depreciated range from 5 to 7 years, except for computer equipment, which is depreciated over a 3-year life.
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.At March 31, 2022 and December 31, 2021, the Company had inventory consisting of raw materials and finished goods, net of allowance, of $695,607 and $624,486, respectively. At March 31, 2022 and December 31, 2021, the allowance for obsolescence was $106,044 and $106,044, respectively.
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. The Company’s analysis did not indicate any impairment of intangible assets as of the impairment analysis conducted December 31, 2021. As of March 31, 2022 and December 31, 2021, all of the intangible assets were fully amortized.
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. The Company’s analysis did not indicate any impairment of Goodwill as of the impairment analysis conducted December 31, 2021.
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.
12
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.
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 718, 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.
RESEARCH AND DEVELOPMENT - 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 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 March 31, 2022 the Company had 750,000 common stock equivalents outstanding in the form of restricted stock units (“RSU’s”). These RSU’s are added to the shares issued and outstanding to calculate the diluted earnings per share. There were no common stock equivalents outstanding at March 31, 2021.
RECENT ACCOUNTING PRONOUNCEMENTS: The Company has reviewed all 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 - LEASES
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, 2023 for the building and July 7, 2021 for the automobile to
13
calculate right of use (“ROU”) assets and lease liabilities.
The following was included in our consolidated condensed balance sheet as of March 31, 2022:
| | |
| Leases | As of March 31, 2022 |
| Assets |
|
| ROU operating lease assets | $ 96,702 |
|
|
|
| Liabilities |
|
| Operating lease liabilities - current portion | $ 58,028 |
| Operating lease liabilities | 42,249 |
| Total operating lease liabilities | $100,277 |
We recognize lease expense on a straight-line basis over the term of the lease.
| | |
|
Lease Cost | Three Months Ended March 31, 2022 |
| Operating lease cost |
|
| Administrative expenses | $ 1,887 |
| Rent expense | 17,609 |
| Total operating lease cost | $ 19,496 |
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, 2022, the following disclosures for remaining lease term and incremental borrowing rates were applicable:
| | |
|
Supplemental Disclosures | Three Months Ended March 31, 2022 |
| Weighted average remaining lease term | 1.67 years |
| Weighted average discount rate | 5.25% |
NOTE 4 – INVENTORIES
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, 2022 and December 31, 2021, the Company had inventory net of allowance, of $695,607 and $624,486, respectively. At March 31, 2022 and December 31, 2021, the allowance for obsolescence was $106,044 and $106,044, respectively.
14
Inventories consisted of the following at March 31, 2022 and December 31, 2021:
| | | | | |
| | | March 31, 2022 | | December 31, 2021 |
| Finished goods | $ | 522,823 | $ | 342,835 |
| Raw materials | | 278,828 | | 387,695 |
| Inventory allowance | | (106,044) | | (106,044) |
| | | | | |
| Total Inventories, net | $ | 695,607 | $ | 624,486 |
| | | | | |
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 ForwardLooking 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.
15
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 believes there have been no other significant changes during the three-month period ended March 31, 2022, to the items disclosed as significant accounting policies in management's Notes to the Financial Statements in the Company's Form 10 for the year ended December 31, 2021.
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 March 31, 2022 and 2021 follows.
Results of Operations
Three Months Ended March 31, 2022 and 2021
| | | | | | | |
|
|
| For the three months ended March 31, |
|
|
| 2022 |
| 2021 |
| Change |
| Revenues | $ | 753,576 | $ | 562,362 | $ | 191,214 |
| Cost of goods sold |
| 234,289 |
| 143,795 |
| 90,494 |
| Gross profit |
| 519,287 |
| 418,567 |
| 100,720 |
| Operating expenses |
| 312,782 |
| 282,064 |
| 30,718 |
|
Net income (loss) |
$ |
206,506 |
$ |
247,768 |
$ |
(41,263) |
16
Revenues increased during the three-month period ended March 31, 2022, to $753,576 from $562,362 for the three-month period ended March 31, 2021, an increase of $191,214. The increase in revenue is primarily attributable to a $167,865 increase in the sale of freezers and chillers. Cost of goods increased in the quarter ending March 31, 2022, as compared to March 31, 2021, to $234,289 from $143,795, an increase of $90,494. We realized a gross profit percentage of 69% for the three months ended March 31, 2022, compared to 74% for the three months ended March 31, 2021. The gross profit percentage is dependent on the mix of product sales, which varies from quarter to quarter. The increased sale of freezers and chillers during the 2022 period was offset slightly by higher costs, resulting in the slightly lower 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 were $312,782 for the three months ended March 31, 2022, an increase of $30,718 over the expenses of $282,064 incurred in the three-month period ended March 31, 2021. The increase results from a $33,675 increase in salaries and wages, as we have hired additional personnel to meet the demand for freezers and chillers, and a $16,628 increase in research and development costs, offset in part by a $19,585 decrease in general and administrative expenses. 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 March 31, 2022 were $25,325, an increase of $16,628 in expenses for the same period in 2021, as enhancements to the ultra-cold CBD oil chiller continue to be made.
Salaries and wages for the three months ended March 31, 2022 were $170,279, an increase of $33,675 as compared to the expense for the three month period ended March 31, 2021. Additional personnel have been hired in order to enable the company to meet the sales demand for our chillers and freezers.
General and administrative expenses for the three months ended March 31, 2022 were $117,178, a $19,585 decrease from the $136,763 for the same period in 2021. The lower expense level was not the result of significant savings in any one expense category but is, rather, the cumulative result of small savings in numerous expenses.
Net income for the three-month period ended March 31, 2022 was $206,506, a $41,263 decrease from the $282,064 net income for the three-month period ended March 31, 2021. Management continues to look for opportunities to increase sales, improve gross margins and control ongoing operating expenses.
The net income of $206,506 for the three-month period ended March 31, 2022 represents income of $0.00 per share. This compares to net income of $282,064, or $0.00 per share, for the three months ended March 31, 2021.
Seasonality and Cyclicality
We do not believe our business is cyclical.
17
Liquidity and Capital Resources
Our cash resources at March 31, 2022, were $1,579,533, with accounts receivable of $233,329, net of allowance, and inventory of $695,607, net of allowance. Our working capital on March 31, 2022, was $2,281,502. Working capital on December 31, 2021 was $2,063,516.
For the three-month period ended March 31, 2022, net cash provided by operating activities was $105,609, which is a decrease of $158,664 over the $264,273 net cash provided by operating activities for the three-month period ended March 31, 2021.
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 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 three-month period ended March 31, 2022 that have materially affected, or are like to affect, our internal controls over financial reporting.
18
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 three months ended March 31, 2022, 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.
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, 2007* |
| 4.2 | Form of Purchasers Warrant | 8-K Current Report dated June 29, 2007* |
| 4.3 | Registration Rights Agreement | 8-K Current Report dated June 29, 2007* |
| 4.4 | Form of Placement Agreement | 8-K Current Report dated June 29, 2007* |
| 10.1 | Securities Purchase Agreement | 8-K Current Report dated June 29, 2007* |
| 10.2 | Placement Agent Agreement | 8-K Current Report dated June 29, 2007* |
| 14 | Code of Ethics | December 31, 2003 10-KSB Annual Report* |
| 21 | Subsidiaries of the Company | December 31, 2004 10-KSB Annual Report* |
19
| | | |
| 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
10-Q
REFLECT SCIENTIFIC INC
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