Reflect Scientific, Inc.: Form 10-Q for the period ended Jun 30, 2012

Special Note Regarding Forward-Looking Statements

This periodic report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Plan of Operations provided below, including information regarding the Company’s financial condition, results of operations, business strategies, operating efficiencies or

synergies, competitive positions, growth opportunities, and the plans and objectives of management. The statements made as part of the Plan of Operations that are not historical facts are hereby identified as "forward-looking statements."

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 significant changes during the six month period ended June 30, 2012, 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, 2011.

Plan of Operation and Business Growth

Our focus over the coming months will continue to be on the development and commercialization of products acquired and developed over the last several years. The ultra low temperature refrigerator line with the refrigerated trailer, known as a “reefer”, is receiving highest priority. Significant information was collected using an operational prototype unit. Our first manufactured unit is currently in production, with delivery of the unit expected later this year.

Additionally, we will continue to develop and expand our focus on solutions to retrofit server and computer rooms to reduce the cost of cooling such rooms. We believe that, in addition to reducing operating costs, our technology will provide a more reliable and efficient method to cool such rooms. We also continue to focus on the expansion of our detector line and contract manufacturing operations. Our new detector unit has received very positive reviews from beta tests with two of our current customers. We believe that its enhanced functionality, coupled with its low cost, will provide us with a competitive edge over products currently being sold into that specialized market.

Our revenues during the reporting period decreased during 2012 compared to 2011 revenues. A slow-down in European sales, coupled with the discontinuance of some product lines offered by one of our major distributors are the major reason for the declining revenue. We are currently working to bring on new distributors who will carry our entire line of products. While some of our products are relatively new to the marketplace and we expect the demand for those to grow as customers become more familiar them, there are a number of our product lines which are well established and have strong, consistent demand. If the Company is successful in adding new distribution channels it expects that sales will increase above the current levels by the end of the year.

Results of Operations

Three Months Ended June 30, 2012 and 2011

Revenues decreased during the three months ended June 30, 2012, to $357,697 from $493,830 for the three months ended June 30, 2011, a decrease of $136,133. All of the revenues were generated from our specialized laboratory supplies and detector sales, as we are continuing to refine and commercialize the ultra low temperature freezer technologies. Our largest distributor reduced the sale of our products, removing a number of our products from their catalog. We are currently working to bring on additional distributors to expand the distribution channels for our products. If the Company is successful in its efforts to bring on new and additional distribution channels it expects to see sales volumes increase by the end of the year.

With decreased sales during the reporting period, cost of goods decreased in the quarter ending June 30, 2012, as compared to June 30, 2011 to $163,894 from $260,032, a decrease of $96,138. The gross profit percentage increased to 54% for the three months ended June 30, 2012 from the 47% margin attained for the three months ended June 30, 2011. While the gross profit percentage is dependent on the mix of product sales, we feel our continuing strategy to actively work to obtain more favorable pricing from our current vendors in order to increase the margins realized on our product lines is delivering positive results.

Our continued focus on operating expenses resulted in a reduction of operating expenses in the current period. This reduction is the result of cost reduction efforts implemented by management and an ongoing quest to gain additional operating efficiencies. Operating expenses for the three months ended June 30, 2012 were $273,478, a decrease of $217,261 from the $490,739 in operating expenses recorded for the three month period ended June 30, 2011. The decrease is primarily attributable to reductions in stock-based compensation expense and consulting services. Operating expenses for the remaining reporting periods in 2012 are expected to remain close to the expense levels shown for the three month period of this report.

The net loss for the three month period ended June 30, 2012 was $213,005, a $177,551 decrease from the $390,556 loss for the three month period ended June 30, 2011. Management continues to look for opportunities to improve gross margins and reduce ongoing operating expenses in order to achieve profitability.

The net loss for the three months ended June 30, 2012 was $0.01 per share. The net loss for the three months ended June 30, 2011 was also $0.01 per share.

Six Months Ended June 30, 2012 and 2011

Revenues decreased during the six months ended June 30, 2012, to $682,714 from $1,081,412 for the six months ended June 30, 2011, a decrease of $398,698. All of the revenues were generated from our specialized laboratory supplies and detector sales, as we are continuing to refine and commercialize the ultra low temperature freezer technologies. Our largest distributor has reduced their sale of our products, removing a number of our products from their catalog. We are currently working to bring on additional distributors to expand the distribution channels for our products and recapture our market share in that market. If the Company is successful in its efforts to bring on new and additional distribution channels it expects to see sales volumes increase by the end of the year.

It is not expected that the revenue shortfall for the first six months can be made up; therefore sales for the year 2012 will end lower than the 2011 sales.

With decreased sales during the reporting period, cost of goods decreased in the six months ending June 30, 2012, as compared to June 30, 2011 to $335,989 from $555,812, a decrease of $219,823. The gross profit percentage increased to nearly 51% for the six months ended June 30, 2012, compared to 48% for the six months ended June 30, 2011. While the gross profit percentage is dependent on the mix of product sales, we continue to actively work to obtain more favorable pricing from our vendors in order to increase the margins realized on our product lines.

Our continued focus on operating expenses resulted in a reduction of operating expenses in the current period. This reduction is the result of cost reduction efforts implemented by management and an ongoing quest to gain additional operating efficiencies. Operating expenses for the six months ended June 30, 2012 were $552,403, a decrease of $288,693 from the $841,096 in operating expenses recorded for the six month period ended June 30, 2011. The decrease results primarily reductions in stock-based compensation and consulting fees. Operating expenses for the remaining reporting periods in 2012 are expected to remain close to the expense levels shown for the period of this report.

The net loss for the six month period ended June 30, 2012 was $472,299, a $110,489 reduction from the $582,788 loss for the six month period ended June 30, 2011. Management continues to look for opportunities to improve gross margins and reduce ongoing operating expenses in order to achieve profitability.

The net loss for the six months ended June 30, 2012 was $0.01 per share. The net loss for the six months ended June 30, 2011 was $0.02 per share.

Seasonality and Cyclicality

We do not believe our business is cyclical.

Liquidity and Capital Resources

Our cash resources at June 30, 2012, were $279,641, with accounts receivable of $143,437 and inventory of $370,872, both net of provisions. To date we have relied on revenues and sales of equity and debt securities for our cash resources. Our working capital deficit on June 30, 2012, was $3,924,587, due primarily to the $2,925,000 in outstanding debentures and $1,579,500 in accrued interest on those debentures. Working capital on December 31, 2011 was a deficit of $3,596,125. Subsequent to the end of the reporting period management was able to obtain the financing required to retire $3,401,125 of the outstanding debentures. Additional funding is needed to commercialize the low temperature freezer and refrigeration technology. There can be no assurance that funds will be available, or that terms of available funds will be acceptable to the Company. The inability of the Company to obtain funding at acceptable terms could negatively impact its ability to execute its business plan.

For the six month period ended June 30, 2012, net cash used for operating activities was $59,189 which compares to $3,569 of net cash provided from operations six month period ended June 30, 2011.

Off-Balance Sheet Arrangements

We lease office and warehouse space under a non-cancelable operating lease in Utah. Future minimum lease payments under the operating lease at June 30, 2012 are $91,100 for that facility. In addition, we have automobile leases with future minimum lease payments of $7,860.

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.

As of June 30, 2012 the Company was in default on its Senior Secured Convertible Debenture. The Company was unable to repay the debenture as demanded by the debenture holders. The total amount under default was $2,300,000 plus a default principal of 30% or $690,000. The total amount in default was $2,925,000 after $65,000 of the debentures and penalty were converted in September 2009. Under the terms of the debenture the interest rate increases from 12% to 18% upon default. The Company was not current on its interest payments.

In June 2012, management reached agreement with all but one of the debenture holders on a plan to settle the debentures held by them that are in default. The settlement agreement was contingent upon the Company making a cash payment to them in the amount of $75,000 in full satisfaction of the indebtedness. Subsequent to the end of the reporting period the Company was successful in securing the required funding to enable it to fulfill the payment obligation under this agreement.

The Company maintains (a) disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, (the “Exchange Act”)), and (b) internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

There have not been any changes in the Company’s internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.