NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 2019
1. OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Operations
Reliability Incorporated (the “Company”)
was incorporated under the laws of the State of Texas in 1953, but the principal business of the Company started in 1971, and was
closed down in 2007. The Company has no further operating activities and is now a shell company.
Going Concern
The accompanying financial statements have
been prepared assuming the Company will continue as a going concern. The Company has concluded that it should look for acquisitions
or identify a merger partner. There can be no assurances that the Company will be successful in completing such a transaction or
be able to maintain sufficient liquidity over a period of time that will allow it to carry out these actions, in which case the
Company might be forced to liquidate or seek protection under the Federal bankruptcy statutes, or both.
The accompanying financial statements do not
include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
The Company is quoted on the OTCQB of the OTC
Marketplace under the symbol “RLBY”.
Basis of presentation
The accompanying unaudited financial statements
have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information
and with instructions to Form 10-Q. Accordingly they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating results for the interim period ended March 31, 2019
are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
For further information, refer to the financial
statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31,
2018.
Accounting Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States requires that management make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from
those estimates.
Cash Equivalents
For the purposes of the statements of cash
flows, the Company considers all highly liquid cash investments that mature in three months or less when purchased, to be cash
equivalents. Cash equivalents are stated at cost, which approximates fair value.
Stock Options
Compensation cost relating to stock-based payments,
including grants of employee stock options, is recognized in financial statements based on the fair value of the equity instruments
issued on the grant date. The Company recognized the fair value of stock-based compensation awards as compensation expense in its
statement of operations on a straight line basis, over the vesting period.
RELIABILITY INCORPORATED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 2019
Income Taxes
Income taxes
are provided under the asset and liability method and reflect the net tax effects of temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial statements
.
The Company
establishes valuation allowances when the realization of specific deferred tax assets is subject to significant uncertainty. The
Company records no tax benefits on its operating losses, as the losses will have to be carried forward and realization of any benefit
is uncertain.
Earnings Per Share
Basic earnings (loss) per share is computed
by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Since the exercise price of the Company’s outstanding stock options exceeded the average market
price of its common shares during the periods presented, the options would have been anti-dilutive and were not considered in these
calculations.
Fair Value of Financial Instruments
The carrying values of the Company’s
current assets and current liabilities approximated fair value due to their short maturity or nature. It is not practicable to
estimate the fair value of the loans from stockholder and affiliate due to the related party nature of the amounts
Reclassification
Certain amounts in the prior period financial
statements have been reclassified to conform to the current period presentation.
2. INCOME TAXES
The Company has substantial U.S. net operating
loss carryforwards that will expire in 2023 through 2038. These carryforwards are subject to certain limitations on annual utilization
and in the event of a change in ownership, as defined by tax law. See Note 2 to the Company’s financial statements in its
Form 10-K for the year ended December 31, 2018.
The Company’s income tax returns remain
subject to examination for the years 2015 through 2018 for federal and state purposes.
3. STOCKHOLDERS’ EQUITY (DEFICIT)
On January 15, 2014, the Company issued 3,401,360
shares of unregistered common stock in a private placement to Lone Star Value Investors, LP, an entity controlled by a former director
and officer of the Company, Jeffrey E. Eberwein for cash proceeds of $50,000.
Mr. Eberwein
is the manager of Lone Star Value Investors LP’s general partner and was the president, chief executive officer and a director
of the Company and owned 6,786,588 shares of the Company at the time of the transaction. Lone Star Value Investors, LP and its
affiliates thus had adequate access to information about the Company.
The proceeds of this issuance were used to assist
in funding the Company’s operating expenses.
RELIABILITY INCORPORATED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 2019
4. LOANS FROM STOCKHOLDER AND AFFILIATE
On June 6, 2014, a shareholder, Lone Star Value
Investors, LP, issued a promissory note to the Company in the amount of $50,000 (“2014 Note”). The proceeds of the
note are being used for ongoing operating expenses. The loan bears interest at 10% per annum. Interest on the loan and the full
amount of the principal is to be repaid on June 30, 2019.
On August
2, 2016, the Company issued a promissory note to an affiliate of a shareholder in the amount of $40,000 (“2016 Note”). The
proceeds of the 2016 Note will be used for ongoing operating expenses. The 2016 Note bears interest at 10% per
annum. Interest and principal on the 2016 Note is to be repaid on August 31, 2021, and all payments are subordinate
to the payment of all outstanding amounts due under the 2014 Note.
On August
10, 2018, the Company issued a promissory note to an affiliate of a shareholder in the amount of $15,000 (“2018 Note”). The
proceeds of the 2018 Note will be used for ongoing operating expenses. The loan bears interest at 10% per annum. Interest
and principal on the loan is to be repaid on August 31, 2021, and all payments are subordinate to the payment of all outstanding
amounts due under the 2014 Note.
During the three months ended March 31, 2019
and March 31, 2018, the Company recognized aggregate interest expense in the amounts of $2,588 and $2,219, respectively. Total
accrued interest on the 2014 Note, 2016 Note, and 2018 Note is $35,670 and $33,082 as of March 31, 2019 and December 31, 2018,
respectively.
As of September 30, 2018, the Company had $821
payable to Lone Star Value Management as reimbursement for a payment made to the Company’s transfer agent on the Company’s
behalf. This amount is included in accounts payable and accrued liabilities on the accompanying March 31, 2019 and December
31, 2018 balance sheets.
.
5. SUBSEQUENT EVENTS
On May
13, 2019, the Company issued a promissory note to an affiliate of a shareholder in the amount of $15,000 (“2019 Note”). The
proceeds of the 2019 Note will be used for ongoing operating expenses. The loan bears interest at 10% per annum. Interest
and principal on the loan is to be repaid on August 31, 2021, and all payments are subordinate to the payment of all outstanding
amounts due under the 2014 Note.
The foregoing description of the 2019 Note is qualified in its entirety by reference to
the full text of the 2019 Note, which is attached hereto as Exhibit 99.1 and is incorporated herein by reference.
No other material
subsequent events have occurred since March 31, 2019 that require recognition or disclosure in the financial statements.
RELIABILITY INCORPORATED