UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q



[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2012


or


[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT of 1934


For the transition period from __________ to __________


Commission File Number 000-31377


REFLECT SCIENTIFIC, INC.

(Exact name of registrant as specified in its charter)


Utah

87-0642556

(State or other jurisdiction of

(IRS Employer Identification No.)

incorporation or organization)


1266 South 1380 West Orem, Utah  84058

 (Address of principal executive offices) (Zip Code)


(801) 226-4100

 (Registrant’s telephone number, including area code)


Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

                                                                                                                                                                Yes [X]   No [   ]


Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):


Large Accelerated filer   ¨

Accelerated filer                      ¨

Non-accelerated filer      ¨

Smaller reporting company   x


Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]   No [X]


Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  

Yes [ ]   No [ X ]


Applicable Only to Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years:


Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.


Not applicable.



1





Applicable Only to Corporate Issuers:


Indicate the number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date.


Class

Outstanding as of November 14, 2012


45,813,634 shares of $0.01 par value common stock on November 14, 2012






2




TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION


Item 1:  Financial Statements


Condensed Consolidated Balance Sheets

As of September 30, 2012 and December 31, 2011

  

              5


Condensed Consolidated Statements of Operations

For the three and nine months ended September 30, 2012 and 2011

  7


Condensed Consolidated Statements of Cash Flows

For the nine months ended September 2012 and 2011

   

         

  8


Notes to Condensed Consolidated Financial Statements

  9


Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

11


Item 3:

Quantitative and Qualitative Disclosure about Market Risk

16

 

                                    

Item 4:  Controls and Procedures                                                                                         

 16


PART II – OTHER INFORMATION


Item 1:  Legal Proceedings

16


Item 2:  Unregistered Sales of Equity Securities and Use of Proceeds

16


Item 3:

Defaults Upon Senior Securities

17


Item 4:  Mine Safety Disclosure

17


Item 5:  Other Information

17


Item 6:  Exhibits

18


Signatures

19



















3






Part I - FINANCIAL INFORMATION


Item 1.  Financial Statements

Reflect Scientific, Inc.


CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

September 30, 2012


The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  However, in the opinion of management, all adjustments (which include only normal recurring accruals) necessary to present fairly the financial position and results of operations for the periods presented have been made.  These financial statements should be read in conjunction with the accompanying notes, and with the historical financial information of the Company.










































REFLECT SCIENTIFIC, INC.



4




Condensed Consolidated Balance Sheets

(Unaudited)


ASSETS



 

 

September 30,

2012

 

December 31,

2011

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 Cash

$

         228,758

$

346,697

 Accounts receivable, net

 

           144,499

 

143,278

 Inventories

 

         378,895

 

393,004

 Prepaid assets

 

           3,100

 

3,100

 

 

 

 

 

   Total Current Assets

 

         755,252

 

886,079

 

 

 

 

 

FIXED ASSETS, NET

 

          12,044

 

19,242

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

 

 

 

 

   Intangible assets, net

 

         2,355,395

 

2,563,951

   Goodwill

 

652,149

 

652,149

   Deposits

 

3,100

 

3,100

 

 

 

 

 

      Total Other Assets

 

         3,010,644

 

3,219,200

 

 

 

 

 

   TOTAL ASSETS

$

         3,777,940

$

4,124,521





















The accompanying notes are an integral part of these condensed consolidated financial statements.




5




REFLECT SCIENTIFIC, INC.

Condensed Consolidated Balance Sheets (Continued)

(Unaudited)


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)



 

 

September 30,

2012

 

December 31,

2011

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

  Accounts payable

$

           77,247

$

           89,641

  Short-term lines of credit

 

           116,807

 

109,721

  Convertible debenture

 

         650,000

 

         2,925,000

  Interest payable

 

397,125

 

1,316,250

  Customer deposits

 

-

 

4,829

  Accrued expenses

 

  -

 

           12,363

  Loan from related party

 

           -

 

24,000

  Income taxes payable

 

100

 

400

 

 

 

 

 

      Total Current Liabilities

 

         1,241,279

 

         4,482,204

 

 

 

 

 

      Total Liabilities

 

1,241,279

 

4,482,204

 

 

 

 

 

SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

   Preferred stock, $0.01 par value, authorized

    5,000,000 shares; No shares issued and outstanding

 


-

 


-

   Common stock, $0.01 par value, authorized

      100,000,000 shares; 45,813,634 and 44,791,890

      issued and outstanding, respectively

 

           458,137

 

           447,919

   Additional paid in capital

 

       17,880,724

 

       17,810,045

   Accumulated deficit

 

       (15,802,200)

 

       (18,615,647)

 

 

 

 

 

      Total Shareholders’ Equity (Deficit)

 

         2,536,661

 

         (357,683)

 

 

 

 

 


TOTAL LIABILITIES AND SHAREHOLDERS’

EQUITY (DEFICIT)



$


        

 3,777,940



         

4,124,521











The accompanying notes are an integral part of these condensed consolidated financial statements.



6




REFLECT SCIENTIFIC, INC.

Condensed Consolidated Statements of Operations

(Unaudited)


 

For the Three Months Ended

September 30,

 

For the Nine Months Ended September 30,

 

 

2012

 

2011

 

 2012

 

2011

REVENUES

$

        305,713

$

        481,325


$

        988,427


$

        1,562,737

 

 

 

 

 

 

 

 

 

 

COST OF GOODS SOLD

 

145,822

 

224,307

 

481,811

 

780,119

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

159,891

 

257,018

 

506,616

 

782,618

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

   Salaries and wages

 

95,280

 

100,973

 

304,168

 

445,685

 

   Rent expense

 

9,102

 

10,641

 

28,620

 

38,356

 

   Research and development expense

 

19,466

 

14,281

 

29,297

 

21,537

 

   General and administrative expense

 

154,820

 

183,712

 

468,986

 

645,125

 

      Total Operating Expenses

 

278,668

 

309,607

 

831,071

 

1,150,703

 

 

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

(118,777)

 

(52,589)

 

(324,455)

 

(368,085)

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

  Interest income

 

-

 

-

 

-

 

1

 

  Interest expense – other

 

(1,852)

 

(1,946)

 

(3,223)

 

(5,989)

 

  Interest on debentures

 

(22,500)

 

(131,625)

 

(287,750)

 

(394,875)

 

  Gain on extinguishment of debt

 

3,428,875

 

-

 

3,428,875

 

-

 

 

 

 

 

 

 

 

 

 

 

      Total Other Income (Expenses)

 

3,404,523

 

(133,571)

 

3,137,902

 

(400,863)

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) BEFORE TAXES

 

3,285,746

 

(186,160)

 

2,813,447

 

(768,948)

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense)

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

3,285,746

 

$

(186,160)

 

$

2,813,447

 

$

(768,948)

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) PER SHARE - BASIC


 

$

0.07


 

$

(0.01)


 

$

0.06


 

$

(0.02)

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) PER SHARE - DILUTED


 

$

0.07


 

$

(0.01)


 

$

0.06


 

$

(0.02)

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC

 

45,702,575

 

44,711,890


45,098,787

 

40,862,732


 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED

 

45,702,575

 

44,711,890


45,098,787

 

40,862,732


 

 


The accompanying notes are an integral part of these condensed consolidated financial statements.



7





REFLECT SCIENTIFIC, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

For the

Nine Months Ended

September 30,

 

 

2012

 

2011

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net income (loss)

$

2,813,447

$

(768,948)

Adjustments to reconcile net income (loss) to net cash

 

 

 

 

 from operating activities:

 

 

 

 

  Depreciation

 

7,198

 

25,105

  Amortization

 

208,556

 

223,344

  Stock-based compensation

 

-

 

153,426

  Gain on extinguishment of debt

 

(3,428,875)

 

-

  Common stock issued for services

 

5,897

 

94,577

Changes in operating assets and liabilities:

 

 

 

 

  (Increase)/decrease in accounts receivable

 

(1,221)

 

81,047

  (Increase)/decrease in inventory

 

14,109

 

(69,102)

(Increase)/decrease in prepaid assets

 

-    

 

(3,100)

  Increase/(decrease) in accounts payable

    and accrued expenses

 

260,693

 

366,430

  Increase/(decrease) in customer deposits

 

(4,829)

 

-

       Net Cash (used by) provided from Operations

 

(125,025)

 

102,779

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

           Net Cash from Investing Activities

 

-

 

-

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

  Principal payments on capital leases

 

-

 

(7,930)

  Increase in lines of credit

 

19,100

 

-

  Payments made against lines of credit

 

(12,014)

 

(11,862)

  Issuance of common stock for cash

 

75,000

 

-

  Principal payments on debenture debt

 

(75,000)

 

-

       Net Cash provided from (used by)  Financing Activities

 

7,086

 

(19,792)

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

(117,939)

 

82,987

CASH AT BEGINNING OF PERIOD

 

346,697

 

242,136

CASH AT END OF PERIOD

 

$                        228,758

$

325,123


 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

Cash Paid For:

 

 

 

 

    Interest

$

3,223

$

4,042

    Income taxes

$

-

$

-


The accompanying notes are an integral part of these condensed consolidated financial statements.



8






REFLECT SCIENTIFIC, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)


NOTE 1 -

BASIS OF FINANCIAL STATEMENT PRESENTATION


The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission.  The information furnished in the interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements.  Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company’s most recent audited consolidated financial statements and notes thereto included in its December 31, 2011 financial statements.  Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.


NOTE 2 -

ORGANIZATION AND DESCRIPTION OF BUSINESS


The Company was incorporated under the laws of the State of Utah on November 3, 1999. The Company was organized to engage in any lawful activity for which corporations may be organized under the Utah Revised Business Corporation Act.  


NOTE 3 – GOING CONCERN


The Company is currently in default on the remainder of its issued and outstanding debentures (See note 4).  The Company has taken and will continue to take actions to reduce operating expenses and increase margins.  The measures taken have reduced the cash used for operations, but will not be sufficient to generate the cash required to retire the remaining debentures. While the Company is working diligently to secure funding to enable it to retire the remaining debenture obligations, there can be no assurance that such funding will be available.  The Company has also accumulated significant operating losses. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.


NOTE 4 – DEFAULT ON CONVERTIBLE DEBENTURES


At December 31, 2011, the outstanding indebtedness for the debentures and penalty resulting from forfeiture was $2,925,000. Assuming all remaining debentures were converted, 1,000,000 shares of restricted common stock would be issued.  As a result of the default the debentures bear an 18% interest rate.


In June 2012, management reached agreement with the holders of $1,750,000 in debentures on a plan to settle the debentures held by them that are in default.  The settlement agreement provided that, upon the Company making a cash payment in the amount of $75,000, all indebtedness would be extinguished, which included the principal amount of $1,750,000, default penalties of $525,000 and accrued interest of $1,228,875.  It was also agreed that warrants exercisable for 43,749,999 shares of restricted common stock be extinguished in the settlement agreement. The Company made the $75,000 payment in



9






compliance with the settlement agreement on July 10, 2012.  The Company recognized a net gain of $3,428,875 on the settlement agreement, which gain is reported in the financial statements for the three and nine months ended September 30, 2012.  The gain on the settlement represents $0.07 per share for the nine months ended September 30, 2012, basic and diluted.

 

The holder of the remaining debentures, which include principal of $500,000, default penalty of $150,000 and accrued interest of $397,125 is involved in bankruptcy proceedings in the Cayman Islands and the resolution of those debentures and related liabilities is undetermined.


Warrants were issued with the debentures as a part of the original debenture transaction.  There were 1,923,077 Series A debentures issued with an exercise price of $0.80 per share and 1,023,077 Series B debentures issued with an exercise price of $1,00 per share.  The debentures had an exercise term of five years from the June 29, 2007 date of issue.  None of the debentures were exercised and all issued and outstanding Series A and Series B warrants expired on June 29, 2012.


NOTE 5 – EQUITY TRANSACTIONS


The Company accepted subscriptions totaling $75,000 under a Private Placement Memorandum (“PPM”) to raise the funds to meet the agreed upon settlement described in Note 4.  A total of 937,500 shares of restricted common stock were issued to satisfy the subscription agreements.  All of the shares were subscribed to and issued at $0.08 per share.


The Company issued 84,244 shares of restricted common stock for professional services valued at $5,897, or $0.07 per share.


NOTE 6 – FAIR VALUE OF FINANCIAL INSTRUMENTS


The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, payables and notes payable.  The carrying amount of cash and cash equivalents and payables approximates fair value because of the short-term nature of these items.  The carrying amount of the notes payable approximates fair value as the individual borrowings bear interest at rates that approximate market interest rates for similar debt instruments.


NOTE 7 – RECENT ACCOUNTING PRONOUNCEMENTS


In July 2012 the Financial Accounting Standards Board issued a new accounting standard that simplifies the impairment test for indefinite-lived intangible assets, other than goodwill.  The new guidance gives the option to first assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative valuation test.  The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after September 15, 2012.  The Company will adopt this accounting standard in the fourth quarter of 2012.  It does not anticipate that this adoption will have a significant impact on its financial position, results of operations or cash flow.


The Company has reviewed all other 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.




10






Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


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 nine month period ended September 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 Company develops and sells specialty equipment and the related consumable products into life science laboratories, the pharmaceutical industry and the transportation industry.  The following provides an overview of the marketing plans for our commercialized products and the status of products under development.    


Life Science Consumables:


Early in the fourth quarter of 2012, our first ever Life Science Consumables Catalog will be completed and distributed to over 800 distributors around the world.  In addition to consumables, we are highlighting our Life Science Ultra Low Temperature Freezers and UV Detectors in this catalog, enabling us to utilize this group of distributors to expand the sales of these capital equipment products.


Life Science and Medical Instruments:


We are nearing completion on two projects on instruments that we anticipate could have significant impact on our instrument sales.  The instruments are state of the art, competitively priced at $800 to $1,500 each, and could add sales of up to 600 additional instruments during the next 18 months.


Liquid Nitrogen Platform Technology:


CB40 Refrigerated Truck Cooling System


Progress continues to be made on our CB40 refrigerated truck cooling system.  This green technology cooling system provides an environmentally responsible cooling system alternative to trucking companies



11






and conforms to new trucking regulations.  Additional benefits to the trucking industry include enabling them to carry more cargo weight while significantly reducing operating costs.  The CB40 will be beta tested during the first quarter of 2013, with an expected product launch date later in that year.  The units will sell for approximately $20,000 each.  There are currently in excess of 350,000 refrigerated trucks in the United States with an additional 35,000 new units produced each year.


T-150 Ultra Low Temperature Freezers


We are currently finalizing a floor plan design for a large pharmaceutical company that has indicated it will be purchasing freezers for their facility.  The anticipated order is expected to be received during the first quarter of 2013.  The freezer units sell for approximately $50,000 each.


Results of Operations


Three Months Ended September 30, 2012 and 2011


 

 

For the three months ended September 30,

 

 

2012

 

2011

 

Change

Revenues

$

305,713

$

481,325

$

(175,612)

Cost of goods sold

 

145,822

 

224,307

 

(78,485)

Gross profit

 

159,891

 

257,018

 

(97,127)

Operating expenses

 

278,668

 

309,607

 

(30,939)

Other income (expense)

 

3,404,523

 

(133,571)

 

3,538,094

Net income (loss)

$

3,285,746

$

(186,160)

$

3,471,906


Revenues decreased during the three months ended September 30, 2012, to $305,713 from $481,325 for the three months ended September 30, 2011, a decrease of $175,612.  All of the revenues were generated from our specialized laboratory supplies and detector sales.  We are continuing to refine and commercialize the ultra low temperature freezer technologies and our new detectors.  If the Company is successful in its efforts to bring on new distributors and distribution channels through our catalog, 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 September 30, 2012, as compared to September 30, 2011 to $145,822 from $224,307, a decrease of $78,485. The gross profit percentage for the three month periods ended September 30, 2012 and 2011 was 52.3% and 53.4%, respectively.  While the gross profit percentage will fluctuate, depending 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 goal to gain additional operating efficiencies.  Operating expenses for the three months ended September 30, 2012 were $278,668, a decrease of $30,939 from the $309,607 in operating expenses recorded for the three month period ended September 30, 2011.  The decrease is primarily attributable to reductions in outside services, building rent, salaries and client relations.  Operating expenses for the remaining reporting period in 2012 are expected to remain close to the expense levels shown for the three month period of this report.


The gain of $3,428,875 realized on the extinguishment of debt provided a net income for the three month



12






period ended September 2012 of $3,285,746, a $3,471,906 increase from the net loss of $186,160 loss for the three month period ended September 30, 2011.  While this one-time event generated a net income for the period, management continues to look for opportunities to improve gross margins and reduce ongoing operating expenses in order to achieve profitability.


The net income for the three months ended September 30, 2012 was $0.07 per share.  The net loss for the three months ended September 30, 2011 was also $0.01 per share.


Nine Months Ended September 30, 2012 and 2011


 

 

For the nine months ended September 30,

 

 

2012

 

2011

 

Change

Revenues

$

988,427

$

1,562,737

$

(574,310)

Cost of goods sold

 

481,811

 

780,119

 

(298,308)

Gross profit

 

506,616

 

782,618

 

(276,002)

Operating expenses

 

831,071

 

1,150,703

 

(319,632)

Other income (expense)

 

3,137,902

 

(400,863)

 

3,538,765

Net income (loss)

$

2,813,447

$

(768,948)

$

3,582,395


Revenues decreased during the nine months ended September 30, 2012, to $988,427 from $1,562,737 for the nine months ended September 30, 2011, a decrease of $574,310.  The decrease in revenue is in large part due to the loss of a major distributor in 2012.  All of the revenues during both 2012 and 2011 were generated from our specialized laboratory supplies and detector sales, as we are continuing to refine and commercialize the ultra low temperature freezer technologies.  It is not expected that the revenue shortfall for the first nine months will be reversed or be made up during the final three months of 2012; 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 nine months ended September 30, 2012, as compared to September 30, 2011 to $481,811 from $780,119, a decrease of $298,308. The gross profit percentage increased to 51.3% for the nine months ended September 30, 2012, compared to 50.1% for the nine months ended September 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 focus on reducing operating expenses continues to deliver positive results, as a significant reduction of operating expenses is evidenced in the periods being compared.  This reduction is the result of cost reduction efforts implemented by management and our ongoing objective is to gain additional operating efficiencies.  Operating expenses for the nine months ended September 30, 2012 were $831,071, a decrease of $319,632 from the $1,150,703 in operating expenses recorded for the nine month period ended September 30, 2011.  The decrease results primarily reductions in stock-based compensation, investor relations, building rent and consulting fees.  Operating expenses for the remaining reporting period in 2012 are expected to remain close to the expense levels shown for the three month period reported above.


The gain realized on the extinguishment of debt provided net income of $2,813,447 for the nine month period ended September 30, 2012, a $3,582,395 improvement from the $768,948 loss for the nine month period ended September 30, 2011.  Management will continue to look for opportunities to improve gross margins and reduce ongoing operating expenses in order to sustain profitability.




13






The net income per share for the nine months ended September 30, 2012 was $0.06, basic and diluted. The net loss per share for the nine months ended September 30, 2011 was $0.02 per share, basic and diluted.




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Seasonality and Cyclicality


We do not believe our business is cyclical.


Liquidity and Capital Resources


Our cash resources at September 30, 2012, were $228,758, with accounts receivable of $144,499 and inventory of $378,895, 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 September 30, 2012, was $486,027, due primarily to the $650,000 in outstanding debentures and $397,125 in accrued interest on those debentures.  Working capital on December 31, 2011 was a deficit of $3,596,125.  During this reporting period management was able to obtain the $75,000 of financing required to retire $3,503,875 of the liabilities relating to the outstanding debentures.  Additional funding will be required 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 nine month period ended September 30, 2012, net cash used for operating activities was $125,025 which compares to $102,779 of net cash provided from operations nine month period ended September 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 September 30, 2012 are $80,600 for that facility.  In addition, we have automobile leases with future minimum lease payments of $5,895.


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



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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.


Item 3.  Quantitative and Qualitative Disclosure about Market Risk


Not required


Item 4.  Controls and Procedures


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.



PART II - OTHER INFORMATION


ITEM 1.  Legal Proceedings


On October 16, 2009, the Company filed a complaint in the Third District Court in the State of Utah in which it seeks the return of the stock issued for the acquisition of Cryomastor.  The action alleges misrepresentation and, in addition to the return of the stock, seeks monetary damages.


In December 2011 the case was submitted to arbitration and a settlement agreement was reached.  As a part of the settlement two patents were assigned to the Company, the royalty agreement was terminated and agreement was reached on the return of stock issued as a part of the acquisition of Cryomastor.  As of the date of this filing, the defendant has assigned the patents but has not submitted the stock agreed upon and is thus in breach of the terms of the settlement agreement.  Notice of such breach has been sent.


ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds


Recent Sales of Unregistered Securities


We accepted subscriptions totaling $75,000 under a Private Placement Memorandum (“PPM”) to raise the funds to meet the agreed upon settlement described in Note 4 to the financial statements.  A total of 937,500 shares of restricted common stock were issued to satisfy the subscription agreements.  



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The Company issued 84,244 shares of restricted common stock for professional services valued at $5,897, or $0.07 per share.


Use of Proceeds of Registered Securities


None; not applicable.


Purchases of Equity Securities by Us and Affiliated Purchasers


During the nine months ended September 30, 2012, we have not purchased any equity securities nor have any officers or directors of the Company.


ITEM 3.  Defaults Upon Senior Securities


In June 2012, management reached agreement with the holders of $1,750,000 in debentures on a plan to settle the debentures held by them that are in default.  The settlement agreement provided that, upon the Company making a cash payment in the amount of $75,000, all indebtedness would be extinguished, which included the principal amount of $1,750,000, default penalties of $525,000 and accrued interest of $1,228,875.  It was also agreed that warrants exercisable for 43,749,999 shares of restricted common stock be extinguished in the settlement agreement. We made the $75,000 payment in compliance with the settlement agreement on July 10, 2012.  We recognized a net gain of $3,428,875 on the settlement agreement, which gain is reported in the financial statements for the three and nine months ended September 30, 2012.


The holder of the remaining debentures, which include principal of $500,000, default penalty of $150,000 and accrued interest of $397,125 is involved in bankruptcy proceedings in the Cayman Islands and the resolution of those debentures and related liabilities is undetermined.


ITEM 4.  Mine Safety Disclosure


Not applicable.


ITEM 5.  Other Information.


None

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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*

31.1

302 Certification of Kim Boyce

 

31.2

302 Certification of Keith Merrell

 

32

906 Certification

 


Exhibits


Additional Exhibits Incorporated by Reference

 

 

 

*

Reflect California Reorganization

8-K Current Report dated December 31, 2003

*

JMST Acquisition

8-K Current Report dated April 4, 2006

*

Cryomastor Reorganization

8-K Current Report dated September 27, 2006

*

Image Labs Merger Agreement Signing

8-K Current Report dated November 15, 2006

*

All Temp Merger Agreement Signing

8-K Current Report dated November 17, 2006

*

All Temp Merger Agreement Closing

8-KA Current Report dated November 17, 2006

*

Image Labs Merger Agreement Closing

8-KA Current Report dated November 15, 2006


* Previously filed and incorporated by reference.




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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Reflect Scientific, Inc.

(Registrant)


Date:

November 14, 2012

By:  /s/ Kim Boyce

       Kim Boyce, CEO, President and Director


Date:

November 14, 2012

By:  /s/ Tom Tait

        Tom Tait, Vice President and Director


Date:

November 14, 2012

By:  /s/ Keith Merrell

        Keith Merrell, CFO, Principal Financial

Officer

















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