Reflect Scientific, Inc.: Form 10-Q for the period ended Jun 30, 2022

The following management’s discussion and analysis of financial condition and results of operations provides information that management believes is relevant to an assessment and understanding of our plans and financial condition. The following financial information is derived from our financial statements and should be read in conjunction with such financial statements and notes thereto set forth elsewhere herein.

Use of Terms

Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our” and the “Company” refer to Reflect Scientific, Inc., and its consolidated subsidiaries.

Special Note Regarding Forward Looking Statements

This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

• 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.

In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

Overview

Reflect Scientific is engaged in the manufacture and distribution of innovative products targeted at the life science 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 goal is to provide our customers with the best solution for their needs. This philosophy extends into our business strategies and acquisition plans. Through a series of strategic acquisitions, we acquired technology that has enabled us to expand our line of products to align with, and capitalize on, market needs. Our growing product portfolio includes ultra-low temperature freezers, blast freezers, solvent chillers and refrigerated transportation in addition to supplying OEM products to the life sciences industry.

Our Cryometrix brand ultra-low 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 goods 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.

Recent Developments

None.

Impact of Coronavirus Pandemic

Starting in late 2019, a novel strain of the coronavirus, or COVID-19, began to rapidly spread around the world and every state in the United States. Most states and cities have at various times instituted quarantines, restrictions on travel, “stay at home” rules, social distancing measures and restrictions on the types of businesses that could continue to operate, as well as guidance in response to the pandemic and the need to contain it. At this time, there continues to be significant volatility and uncertainty relating to the full extent to which the COVID-19 pandemic and the various responses to it will impact our business, operations and financial results.

The pandemic has impacted and may continue to impact some suppliers and manufacturers on some of our products. As a result, we have faced and may continue to face longer supply chain lead-times and higher logistics costs. Additionally, costs for raw materials have also started to increase due to availability, which could negatively affect its business and financial results.

The extent to which the pandemic may impact our results will depend on future developments, which are highly uncertain and cannot be predicted as of the date of this report, including the effectiveness of vaccines and other treatments for COVID-19, and other new information that may emerge concerning the severity of the pandemic and steps taken to contain the pandemic or treat its impact, among others. Nevertheless, the pandemic and the current financial, economic and capital markets environment, and future developments in the global supply chain and other areas present material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows.

Critical Accounting Policies and Estimates

The preparation of the unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 31, 2022.

During the three and six months ended June 30, 2022, there were no significant changes in our accounting policies and estimates.

Results of Operations

Comparison of the Three Months Ended June 30, 2022 and 2021

The following table sets forth key components of our results of operations during the three months ended June 30, 2022 and 2021, both in dollars and as a percentage of our revenues.

Revenues. Revenues decreased by $151,518, or 21.4%, to $555,615 for the three months ended June 30, 2022 from $707,133 for the three months ended June 30, 2021. Such decrease was primarily due to supply chain delays with manufactures and increased time it takes to receive products, resulting in decreased freezer and chiller sales during the second quarter.

Cost of goods sold. Cost of good sold decreased by $39,358, or 16.7%, to $195,821 for the three months ended June 30, 2022 from $235,179 for the three months ended June 30, 2021. Such decrease was primarily due to decreased revenue, offset by increased product and shipping costs.

Gross profit. Our gross profit as a percentage of sales decreased to 64.8% for the three months ended June 30, 2022, compared to 66.7% for the three months ended June 30, 2021. The decrease in gross profit percentage was primarily due to changes in product mix, and increased product and shipping costs.

Salaries and wages. Salaries and wages increased by $13,449, or 9.2%, to $159,565 for the three months ended June 30, 2022 from $146,116 for the three months ended June 30, 2021. Such increase was primarily due to increased headcount as well as stock-based compensation.

General and administrative. General and administrative expenses decreased by $31,826, or 23.5%, to $103,775 for the three months ended June 30, 2022 from $135,601 for the three months ended June 30, 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.

Research and development. Research and development expenses decreased by $1,127, or 5.8%, to $18,329 for the three months ended June 30, 2022 from $19,456 for the three months ended June 30, 2021. Research and development expenses were comparable both periods.

Net income. As a result of the cumulative effect of the factors described above, our net income was $78,125 for the three months ended June 30, 2022, as compared to net income of $170,781 for the three months ended June 30, 2021. Management continues to look for opportunities to increase sales, improve gross margins and control ongoing operating expenses.

Comparison of the Six Months Ended June 30, 2022 and 2021

The following table sets forth key components of our results of operations during the six months ended June 30, 2022 and 2021, both in dollars and as a percentage of our revenues.

Revenues. Revenues increased by $39,696, or 3.1%, to $1,309,191 for the six months ended June 30, 2022 from $1,269,495 for the six months ended June 30, 2021. Such increase was primarily a result of increased freezer, chiller, and component sales during the first quarter, offset by decreased freezer and chiller sales during the second quarter as a result of supply chain delays with manufactures and increased time it takes to receive products.

Cost of goods sold. Cost of good sold increased by $51,136, or 13.5%, to $430,110 for the six months ended June 30, 2022 from $378,974 for the six months ended June 30, 2021. Such decrease was primarily due to an increase in product and shipping costs.

Gross profit. Our gross profit as a percentage of sales decreased to 67.1% for the six months ended June 30, 2022, compared to 70.1% for the six months ended June 30, 2021. The decrease in gross profit percentage was primarily due to changes in product mix, and increased product and shipping costs.

Salaries and wages. Salaries and wages increased by $47,124, or 16.7%, to $329,844 for the six months ended June 30, 2022 from $282,720 for the six months ended June 30, 2021. Such increase was primarily due to increased headcount as well as stock-based compensation.

General and administrative. General and administrative expenses decreased by $51,411, or 18.9%, to $220,953 for the six months ended June 30, 2022 from $272,364 for the six months ended June 30, 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.

Research and development. Research and development expenses increased by $15,501, or 55.1%, to $43,654 for the six months ended June 30, 2022 from $28,153 for the six months ended June 30, 2021. Such increase is a result of continued enhancements to the ultra-cold CBD oil chiller.

Other income. Other income was $0 for the six months ended June 30, 2022 as compared to $111,265 for the six months ended June 30, 2021, a result of forgiveness of our PPP loans.

Net income. As a result of the cumulative effect of the factors described above, our net income was $284,630 for the six months ended June 30, 2022, as compared to net income of $418,549 for the six months ended June 30, 2021. Management continues to look for opportunities to increase sales, improve gross margins and control ongoing operating expenses.

Liquidity and Capital Resources

As of June 30, 2022and December 31, 2021, our current assets exceeded current liabilities by $2,359,004 and $2,063,516, respectively, and we had cash and cash equivalents of $1,247,754 and $1,473,924, respectively. To date, we have financed our operations primarily through revenue generated from operations, cash proceeds from financing activities, borrowings, and equity contributions by our shareholders.

Summary of Cash Flow

The following table provides detailed information about our net cash flow for the period indicated:

Net cash used in operating activities was $226,170 for the six months ended June 30, 2022, as compared to net cash provided by operating activities of $415,165 for the six months ended June 30, 2021. Significant factors affecting operating cash flows was primarily a result of increased inventory purchases, increased accounts receivables, and decreased net income during the six months ended June 30, 2022.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our chief executive officer and chief principal officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(e) of the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2022. Based upon, and as of the date of this evaluation, our chief executive officer and principal financial officer determined that there have been no changes in our internal controls over financial reporting as of June 30, 2022 to the material weaknesses described in Item 9A “Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, our disclosure controls and procedures were not effective.

PART II

OTHER INFORMATION