RELIABILITY INC - Quarter Report: 2009 September (Form 10-Q)
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, 2009
|
¨
|
TRANSITION
REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition
period from_____________to______________.
Commission
File Number 0-7092
RELIABILITY
INCORPORATED
(Name
of registrant in its charter)
|
TEXAS
|
75-0868913
|
|||
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
|
410
Park Avenue - 15 th
Floor, New York, NY
|
91362
|
|||
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(212)
231-8359
(Issuer’s
telephone number, including area code)
Check
whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
twelve 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 ninety days. YES x
NO ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.):
Yes
x
No ¨
State
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date: 9,630,000 shares of Common Stock, no
par value, as of November 13, 2009.
1
RELIABILITY
INCORPORATED
RELIABILITY
INCORPORATED, INC.
Quarterly
Report on Form 10-Q
For
the Three Months Ended September 30, 2009
INDEX
|
PART I. FINANCIAL
INFORMATION
|
||
|
Item 1.
|
Financial
Statements
|
|
|
Consolidated Balance Sheets as of
September 30, 2009 (Unaudited) and December 31,
2008
|
3
|
|
|
Consolidated Statement of
Operations for the Three Months Ended September 30, 2009 and 2008
(Unaudited)
|
4
|
|
|
Consolidated Statement of
Operations for the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
|
5
|
|
|
Consolidated Statements of Cash
Flows for the Nine Months ended September 30, 2009 and 2008
(Unaudited)
|
6
|
|
|
Notes to Condensed Consolidated Financial Statements
|
7-12
|
|
|
Item 2.
|
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
|
13-14
|
|
Item 3.
|
Quantitative and Qualitative
Disclosures About Market Risk
|
15
|
|
Item 4.
|
Controls and
Procedures
|
16
|
|
PART II. OTHER
INFORMATION
|
17
|
|
|
Item 6.
|
Exhibits
|
17
|
|
Signatures
|
17
|
|
Item 1.
Financial Statements
UNAUDITED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
|
ASSETS
|
|
September
30,
2009
(unaudited)
|
December 31,
2008
|
|||||
|
Current
assets:
|
|
|||||||
|
Cash
and cash equivalents
|
$
|
29
|
$
|
43
|
||||
|
Total
current assets
|
|
29
|
43
|
|||||
|
|
|
|
|
|||||
|
Total
Assets
|
$
|
29
|
$
|
43
|
||||
|
|
||||||||
|
|
||||||||
|
Current
liabilities:
|
|
|||||||
|
Accounts
payable and accrued liabilities
|
|
$
|
3
|
$
|
31
|
|||
|
Accrued
liabilities of discontinued operations
|
|
13
|
13
|
|||||
|
Total
current liabilities
|
|
16
|
44
|
|||||
|
|
||||||||
|
Stockholders’
equity (deficit):
|
|
|||||||
|
Common
stock, without par value; 20,000,000 shares authorized; 9,984,300
and 6,690,265 shares issued respectively
|
|
9,807
|
9,767
|
|||||
|
Accumulated
deficit
|
|
(8,700
|
)
|
(8,674
|
)
|
|||
|
Less
treasury stock at cost, 354,300 shares
|
|
(1,094
|
)
|
(1,094
|
)
|
|||
|
|
||||||||
|
Total
stockholders’ equity (deficit)
|
|
13
|
(1
|
)
|
||||
|
|
||||||||
|
|
$
|
29
|
$
|
43
|
||||
The
accompanying notes are an integral part of these statements.
3
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
| (unaudited) | ||||||||
|
Three
months ended September 30,
|
||||||||
|
|
2009
|
2008
|
||||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
$ | 11 | $ | 18 | ||||
|
Total
cost and expenses
|
11 | 18 | ||||||
|
Operating
loss
|
(11 | ) | (18 | ) | ||||
|
Other
income (expense)
|
||||||||
|
Other
(expense)
|
- | (4 | ) | |||||
|
Total
other income (expense)
|
- | (4 | ) | |||||
|
Net
Loss
|
$ | (11 | ) | $ | (22 | ) | ||
|
Weighted
average shares:
|
||||||||
|
Basic
|
9,630 | 6,336 | ||||||
|
Diluted
|
9,630 | 6,336 | ||||||
The
accompanying notes are an integral part of these statements.
4
RELIABILITY
INCORPORATED
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
| (unaudited) | ||||||||
|
Nine
months ended September 30,
|
||||||||
|
|
2009
|
2008
|
||||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
|
$
|
25
|
$
|
68
|
|||
|
Impairment
on real estate held for sale
|
-
|
126
|
||||||
|
Total
cost and expenses
|
|
25
|
194
|
|||||
|
Operating
loss from continuing operations
|
|
(25
|
)
|
(194
|
)
|
|||
|
Other
income (expense):
|
||||||||
|
Other
income (expense)
|
-
|
(4
|
)
|
|||||
|
Total
other income (expense)
|
-
|
(4
|
)
|
|||||
|
Loss
from continuing operations, before income taxes
|
|
(25
|
)
|
(198
|
)
|
|||
|
Provision
for income taxes
|
|
(1
|
)
|
-
|
||||
|
Loss
from continuing operations
|
|
(26
|
)
|
(198
|
)
|
|||
|
Loss
from discontinued operations, net of income tax provisions of
nil
|
|
-
|
|
(10
|
)
|
|||
|
Net
Loss
|
|
$
|
(26
|
)
|
$
|
(208
|
)
|
|
|
Basic
and diluted loss per share:
|
|
|||||||
|
Continuing
operations
|
|
$
|
Nil
|
$
|
(.03
|
)
|
||
|
Discontinued
operations
|
|
Nil
|
Nil
|
|
||||
|
Net
(loss)
|
|
$
|
Nil
|
$
|
(.03
|
)
|
||
|
Weighted
average shares:
|
|
|||||||
|
Basic
|
|
9,630
|
6,336
|
|||||
|
Diluted
|
|
9,630
|
6,336
|
|||||
The
accompanying notes are an integral part of these statements.
5
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
| (unaudited) | ||||||||
|
Nine
months ended September 30,
|
||||||||
|
|
2009
|
2008
|
||||||
|
Cash
flows from operating activities:
|
|
|||||||
|
Net
loss
|
|
$
|
(26
|
)
|
$
|
(208
|
)
|
|
|
Loss
from discontinued operations
|
|
-
|
(10
|
)
|
||||
|
Loss
from continuing operations
|
|
(26
|
)
|
(198
|
)
|
|||
|
Impairment
of Real Estate
|
-
|
126
|
||||||
|
Changes
in operating assets and liabilities:
|
|
|||||||
|
Prepaid
expenses
|
|
-
|
33
|
|||||
|
Accounts
payable and accrued liabilities
|
|
(28
|
)
|
(21
|
)
|
|||
|
Total
adjustments
|
|
(28
|
)
|
138
|
||||
|
|
||||||||
|
Net
cash (used by) operating activities
|
|
(54
|
)
|
(60
|
)
|
|||
|
Cash
flows from investing activities:
|
||||||||
|
Proceeds
from sale of assets
|
-
|
99
|
||||||
|
Net
cash (used) provided by investing activities
|
|
-
|
99
|
|||||
|
Cash
flows from financing activities:
|
||||||||
|
Issuance
of stock for cash
|
40
|
-
|
||||||
|
Net
cash provided by financing activities
|
|
40
|
-
|
|
||||
|
Net
(decrease) increase in cash
|
|
(14
|
)
|
39
|
|
|||
|
Cash
and cash equivalents:
|
|
|||||||
|
Beginning
of period
|
|
43
|
32
|
|||||
|
End
of period
|
|
$
|
29
|
$
|
71
|
|||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid during the period for:
|
||||||||
|
Interest
|
$
|
-
|
$
|
-
|
||||
|
Income
taxes
|
$
|
-
|
$
|
-
|
||||
The
accompanying notes are an integral part of these statements.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
1. DISCONTINUANCE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Discontinuance
of all Operations and Liquidity
Over a period of years, the Company
sustained significant negative financial results, including substantial
decreases in revenues, net income, and cash flows from operating
activities. Due to the deterioration in its financial position, the
Company undertook significant steps to reduce its expenses and improve the
Company’s liquidity, including the sale and discontinuance of all operations.
Based upon its current financial position, the Company concluded that it should
pursue the following course of action: sell its remaining real estate holding
and invest in another line of business through a purchase or
merger.
On
April 1, 2007, Reliability completed the merger of its wholly owned
subsidiary, Reliability-Medallion, Inc., a Florida corporation, into Medallion
Electric Acquisition Corporation and the indirect acquisition, through Medallion
Electric Acquisition Corporation, of Medallion Electric, Inc. Medallion Electric
Acquisition Corporation was incorporated under the laws of the State of Florida
on December 8, 2006 to facilitate a merger between business entities and
was considered to be a development stage company with no operations at
March 31, 2007. On June 21, 2007, the Company changed the name of
Medallion Electric Acquisition Corporation (“MEAC” ) to Reliability
Contractors of Florida, Inc. Reliability Contractors of Florida, Inc. is a
wholly-owned subsidiary of Reliability.
Medallion
Electric, Inc. ( “Medallion
Electric” or “Medallion” ) was
incorporated in the State of Florida in 1980. Medallion Electric is an
electrical contracting company, located in Coral Springs, Florida, specializing
in electrical contracting services to residential homebuilders, with its major
assets consisting of contracts for services to be performed and accounts
receivable. Medallion Electric is a wholly-owned subsidiary of Reliability
Contractors of Florida, Inc. (collectively referred to as “Reliability Florida” or
“Electrical Contracting
Services” ).
All of
the funds used for the initial acquisition payment and the Company’s transaction
costs related to the merger and acquisition were paid out of the Company’s cash
on hand. The Company funded $750,000 to finance the acquisition. $100,000 of
such funds was made available to Medallion Electric as working capital; $150,000
was used by MEAC to pay its transaction related expenses. The remaining $500,000
was used to make the initial payment to the sole shareholder of Medallion
Electric for 100% of the stock of Medallion Electric. The remainder of the
purchase price consisted of two notes- one for $500,000 due in six months and
one for $1.4 million due in six months. The Company secured the $500,000 note
with the pledge of its real property in North Carolina; the $1.4 million note
was secured with the assets of Medallion Electric.
The
Company planned to pay the notes from the Company’s working capital, funds
generated by Electrical Contracting Services, additional debt and/or equity
financing, and the sale of a part of its real estate located in North Carolina.
However, in early September, 2007 it became apparent, the Company was not
generating enough funds and had not been successful in raising debt or equity
funds to meet all of the obligations which would be due on October 1, 2007.
Therefore, the Reliability Board of Directors passed a resolution on
September 25, 2007 that instructed management to enter into an agreement to
sell Medallion Electric, Inc. back to the previous owner.
On
October 12, 2007, the Company and its subsidiaries Reliability Contractors
of Florida, Inc. and Medallion Electric, Inc. entered into a Settlement, Sale of
Stock and Release Agreement ( “Agreement” ) with
Mr. Ronald Masaracchio, the previous owner, pursuant to which
Reliability Contractors sold back the stock of Medallion effective
October 1, 2007. The Company agreed to pay $325,000 upon the closing of the
sale of part of the Company’s North Carolina real estate, which was under a
purchase and sale contract, and transfer 100% of the Medallion stock to the
previous owner, who agreed to release all the liens against the Company’s
assets, cancel all the notes, and release the Company from any and all of
its
7
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
obligations
to him. In addition to the $325,000, Reliability transferred all the stock of
Medallion which held assets that were valued at approximately $1.7 million on
Reliability’s balance sheet and liabilities which were generated in the normal
course of business at Medallion valued at approximately $529,000.
Upon the
closing of the sale of a portion of Reliability’s North Carolina real estate on
October 26, 2007, the previous owner received the $325,000, and the sale of
Medallion Electric, the release of the liens, and cancellation of all the
obligations was consummated. At the time of the sale, the previous owner held
two notes totaling $1.9 million, which were due October 1, 2007, and an
earnout agreement which called for a minimum payment of $750,000 over three
years. The notes were secured by the assets of Medallion and the North Carolina
property owned by Reliability. The sale of Medallion back to previous owner
included a release of all liability on the notes and the earnout agreement,
assumption of all Medallion ordinary course of business debts and obligations,
mutual releases between Reliability and previous owner, including a release of
the security for the notes. The net proceeds from the sale of a part of the
North Carolina real estate to Reliability, after the $325,000 payment and all
other expenses of the sale, were $292,000. The Company retained the ownership of
10 acres of land in North Carolina. An impairment loss of $159,000
was recorded in the third quarter of 2007 to reduce the carrying value of the
land and building sold in October 2008 and the remaining 10 acres of land held
for sale. The ten acres were sold in August of 2008 with net proceeds received
of $98,000. An impairment loss of $126,000 was recorded in June 2008
to further reduce the carrying value on the ten acres to its value of final
disposition.
On
March 11, 2009, Reliability Incorporated issued 3,294,035 shares of its
common stock, no par value, to five individual investors for $0.012 per share,
or approximately $39,500, resulting in a change in control of the
Company.
The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America, which
contemplates continuation of the Company as a going concern. However, upon the
completion of the sale of Medallion Electric, the Company has no further
operating activities, and has limited working capital and stockholders’ equity.
These matters raise substantial doubt about the Company’s ability to
continue as a going concern. In view of these matters, realization of
certain of the assets in the accompanying balance sheet is dependent upon the
Company’s ability to meet its financing requirements, raise additional capital,
and the success of its future operations. Management’s plans are to
complete a merger or acquisition or be able to maintain sufficient liquidity to
continue to seek a merger or acquisition. There can be no assurances
that the Company will be able to accomplish this successfully, in which case the
Company might be forced to liquidate or seek protection under the Federal
bankruptcy statutes, or both. Management believes that actions planned and
presently being taken provide an opportunity for the Company to continue as a
going concern. The financial statements do not include any
adjustments that might result from these uncertainties.
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.
Basis
of presentation
The
accompanying unaudited consolidated 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 September 30, 2009 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2009.
The
consolidated financial statements include the financial transactions and
accounts of the Company and its wholly-owned subsidiary. All significant
intercompany balances and transactions have been eliminated in consolidation.
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, 2008.
8
RELIABILITY
INCORPORATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
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.
Stock
Options
The
Company recognizes compensation cost relating to stock-based payments, including
grants of employee stock options, in the financial statements. That cost is
measured based on the fair value of the equity instruments issued. The Company
adopted the modified-prospective method for determining the effects of the
transition. Under this transition method, the Company recognizes 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, for awards granted
after January 1, 2006.
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.
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 Company
generated net losses in the first two quarters of 2009 and 2008, outstanding
stock options would have been anti-dilutive and were not considered in these
calculations.
RELIABILITY
INCORPORATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
2.
INCOME TAXES
Deferred
income taxes are provided under the 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 consolidated financial statements. The Company
establishes valuation allowances when the realization of specific deferred tax
assets are subject to significant uncertainty. The Company has recorded no tax
benefits on its operating losses, as the losses will have to be carried forward
and realization of any benefit is uncertain.
At
September 30, 2009, the Company had U.S. net operating loss carryforwards that
will expire commencing in 2023 through 2027. These carryforwards may be subject
to certain limitations on annual utilization due to the change in ownership, as
defined by tax law. See Note 5 in the Company’s 10-K dated December 31, 2008.
3.
ACCRUED LIABILITIES
Accrued
liabilities as of September 30, 2009 and December 31, 2008 consist of the
following (in thousands):
|
2009
|
2008
|
|||||||
|
Professional
Fees
|
3
|
27
|
||||||
|
Other
|
—
|
4
|
||||||
|
Total
|
$
|
3
|
$
|
31
|
||||
4.
ASSETS HELD FOR SALE AND IMPAIRMENT LOSS
The ten
acres of land was sold in August of 2008 with net proceeds received of
$98,000. An impairment loss of $126,000 was recorded in June 2008 to
further reduce the carrying value on the ten acres to its value of final
disposition.
5. STOCK
OPTION PLAN
Under the
Company’s Amended and Restated 1997 Stock Option Plan (“Option Plan”), stock
option grants are available for officers, directors, and key employees. The
objectives of the Option Plan are to promote the interest of the Company by
providing an ownership incentive to officers, directors, and key employees, to
reward outstanding performance, and to encourage continued employment. The Board
of Directors, which acts as the Plan Administrator, determines to whom options
are granted, the type of options, the number of shares covered by such options
and the option vesting schedule. The Option Plan provides for the grant of stock
options to purchase an aggregate of up to 1,500,000 shares of the Company’s
Common Stock. All options are issued at market value on the date of the grant
and generally have a ten-year contractual term with graded vesting.
The
Company recognizes compensation cost relating to stock-based payments, including
grants of employee stock options, in the financial statements. The Company
recognizes 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, for awards granted after January 1, 2006.
10
The fair
value of each option is estimated on the date of grant using a Black-Scholes
option-pricing model. Expected volatilities are based on a number of factors,
including historical volatility of the Company’s stock. The Company uses the
“shortcut” method described in SAB Topic 14D.2 for determining the expected life
used in the valuation model. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of the grant. As the Company has not declared dividends since
it became a public entity, no dividend yield is used in the calculation. No
options were granted during the three months ended September 30,
2009.
At
September 30, 2009, there were no unvested option grants, thus no further stock
option expense will be recorded until such time that additional grants are made.
The weighted-average remaining contractual term, as of September 30, 2009, was
7.3 years for outstanding and exercisable options. The following table
summarizes option activity for the three months ended September 30,
2009:
|
Number of
Options
|
Weighted
Average
Price
|
|||||||
|
Balance
as of December 31, 2008
|
370,000
|
$
|
.21
|
|||||
|
Forfeited
or canceled
|
—
|
—
|
||||||
|
Exercised
|
—
|
—
|
||||||
|
Granted
|
—
|
—
|
||||||
|
Balance
as of September 30, 2009
|
370,000
|
$
|
.21
|
|||||
In
addition to the options outstanding under The Company’s Stock Option Plan,
100,000 options were issued in connection with a business combination and were
outstanding and exercisable at December 31, 2007. These options were
canceled as of January 2008.
11
RELIABILITY
INCORPORATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
6. DISCONTINUED
OPERATIONS
On
April 18, 2006, the Company announced plans to close down its Services
division located in Singapore. During the wind down of operations, the division
maintained a small number of employees to complete unfinished jobs, provide
limited services for its customers while they seek alternative service
providers, prepare equipment for sale and vacate the division’s leased facility.
The liquidation of the Company’s former Services division was substantially
complete as of June 30, 2007.
In April
of 2007, following the acquisition of Medallion Electric, the Company concluded
that it should abandon its Testing Products business in favor of concentrating
all available resources on its newly acquired business line, Electrical
Contracting Services.
On
September 25, 2007, the Company’s Board of Directors passed a resolution to
sell Medallion Electric to the previous owner. Therefore, all operations,
including Electrical Contracting Services (Medallion Electric, Inc.) are
included as a discontinued operation.
The
assets and liabilities of the Company’s former Services segment are reported as
assets of discontinued operations and accrued liabilities of discontinued
operations in the accompanying Consolidated Balance Sheet for each period
presented. The company expects these liabilities to be settled in the three
months ending December 31, 2009. There are no remaining assets or liabilities of
the Company’s former Power Sources or Testing Products segment. As of September
30, 2009 and December 31, 2008 the Company’s liabilities included $13,000 in
accrued payroll and termination benefits.
September
30, 2009
FORWARD-LOOKING
STATEMENTS
This
Management’s Discussion and Analysis and other parts of this report contain
forward-looking statements that involve risks and uncertainties, as well as
current expectations and assumptions. From time to time, the Company may publish
forward-looking statements, including those that are contained in this report,
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company’s actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company’s
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company’s business
include, but are not limited to, its ability maintain sufficient working
capital, adverse changes in the economy, the ability to attract and maintain key
personnel, the ability to sell its remaining real estate holdings or business
line, its ability to identify and complete mergers or acquisitions, and future
results related to acquisitions, mergers or investment activities. The Company’s
actual results could differ materially from those anticipated in these
forward-looking statements, including those set forth elsewhere in this report.
The Company assumes no obligation to update any such forward-looking
statements.
CRITICAL
ACCOUNTING POLICIES AND COMMENTS RELATED TO OPERATIONS
The
Company has defined a critical accounting policy as one that is both important
to the portrayal of the Company’s financial condition and results of operations
and requires the management of the Company to make difficult, subjective or
complex judgments. Estimates and assumptions about future events and their
effects cannot be perceived with certainty. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments. These estimates may change as new events occur, as more
experience is acquired, as additional information is obtained and as the
Company’s operating environment changes. There have been no material changes or
developments in the Company’s evaluation of the accounting estimates and the
underlying assumptions or methodologies that it believes to be Critical
Accounting Policies and Estimates as disclosed in its Form 10-K for the year
ended December 31, 2008.
Management’s
Discussion included in the Form 10-K for the year ended December 31, 2008
includes discussion of various factors related to the decline in the Company’s
revenues and items related to the Company’s results of operations, liquidity,
merger and acquisition. There have been no other significant changes in most of
the factors discussed in the Form 10-K and many of the items discussed in the
Form 10-K are relevant to 2009 operations; thus the reader of this report should
read Management’s Discussion included in Form 10-K for the year ended
December 31, 2008.
13
RELIABILITY
INCORPORATED
MANAGEMENT’S
DISCUSSION AND ANALYSIS
September
30, 2009
RESULTS
OF OPERATIONS
Nine
months ended September 30, 2009 compared to nine months ended September,
2008.
Revenues
and Gross Profit.
Revenues
and gross profit for the nine months ended September 30, 2009, and September 30,
2008 were both reported as zero, since all operations have been
discontinued.
General
and Administrative
General
and administrative expenses decreased from $68,000 for the nine months ended
September 30, 2008 to $25,000 for the nine months ended September 30,
2009. This was partially due to lowered expenses and reversal of
accrued liabilities. tten acres of land was sold in August of 2008 with net
proceeds received of $98,000. An impairment loss of $126,000 was
recorded in June 2008 to further reduce the carrying value on the ten acres to
its value of final disposition
LIQUIDITY
AND CAPITAL RESOURCES
The
Company has undertaken steps to reduce its expenses and improve the Company’s
liquidity, including the sale and discontinuance of all operations.
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. However, the Company currently has no operating
activities. There can be no assurances that the Company will be able to
successfully complete a merger or acquisition or be able to maintain sufficient
liquidity to continue to seek a merger or acquisition, in which case the Company
might be forced to liquidate or seek protection under the Federal bankruptcy
statutes, or both.
Net cash
used by operating activities during the nine months ended September 30, 2009 was
$54,000 compared to $60,000 in the comparable period of 2008. The principal
items contributing to the difference were a lower loss from continuing
operations of $26,000 in 2009 as compared to $198,000 in 2008, and the payment
of $28,000 of accounts payable in 2009.
The
company received $39,500 in paid in capital in March 2009 from the sale of
3,294,035 new shares to accredited investors.
On
March 13, 2009, Fitts, Roberts & Co., P.C. (“Fitts, Roberts”), the
Company’s independent accountant, resigned by mutual agreement with the Company,
due to scheduling matters at Fitts Roberts and its withdrawal from the public
company auditing practice. The audit reports of Fitts, Roberts for the Company’s
fiscal year ended December 31, 2007 and for the fiscal year ended
December 31, 2006 included an emphasis paragraph regarding uncertainty
about the Company’s ability to continue as a going concern. Except for the going
concern paragraph in the audit reports on the financial statements for the last
two years, the reports of Fitts, Roberts did not contain an adverse opinion or
disclaimer of opinion, and were not otherwise qualified or modified as to
uncertainty, audit scope or accounting principles. The resignation of Fitts,
Roberts. was considered by the Board of Directors of the Company and approved by
the Chairman of the Audit Committee, under authority from the Board of
Directors.
During
the two most recent fiscal years and in the subsequent interim period, there
have been no disagreements with Fitts, Roberts on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure in connection with its reports of the nature identified in
Item 304(a)(1)(iv).
During
the two most recent fiscal years and the subsequent interim period, Fitts,
Roberts has not advised Reliability of any of the events identified in
Item 304(a)(1)(v) of Regulation S-K, nor does any issue with Fitts, Roberts
remain unresolved.
Reliability
provided to Fitts, Roberts the disclosure contained in this Form 8-K and
requested Fitts, Roberts to furnish a letter addressed to the Securities and
Exchange Commission stating whether Fitts, Roberts agrees with the statements
made by the Company herein, and if not, stating the respects in which Fitts,
Roberts does not agree.
On
March 13, 2009, pursuant to authority from the Board of Directors, the
Company engaged Ramirez International as independent auditors for the Company
for the 2008 audit.
Neither
the Company, nor anyone acting on its behalf, consulted with Ramirez
International regarding (i) the application of accounting principles to a
specified transaction, either completed or proposed or the type of audit opinion
that might be rendered on the Company’s financial statements; or (ii) any
matter that was the subject of a disagreement or event identified in response to
Item 304(a)(1)(iv) of Regulation S-K (there being none).
On July
22, 2009 Reliability, Inc. announced that the Board of Directors of the Company
has by mutual consent terminated the appointment of Ramirez International
Financial & Accounting Services, Inc. (Ramirez International) as independent
accountants of the Company, and appointed the firm of Schumacher &
Associates, Inc. as the new independent accountants of the Company.
The
change in accountants resulted from a desire to conserve corporate assets and
reduce expenses.
The
Company stated that during its most recently completed fiscal year ended
December 31st 2008, the
subsequent interim period ended March 31, 2009 and through termination
on July 21, 2009, there were no disagreements with Ramirez International on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.
The audit
report of Ramirez International for the Company’s fiscal year ended
December 31, 2008 included an emphasis paragraph regarding uncertainty
about the Company’s ability to continue as a going concern.
On March
30, 2009 a change of control occurred. At a March 30, 2009 Special
Meeting of Shareholders, Jay A. Gottlieb, Greggory A. Schneider, Michael Pearce,
Joshua Krom and Ron Gutterson were elected by a majority of the outstanding
voting common stock.
15
The sole
purpose of Meeting was the election of a Board of Directors, noting that none of
the old directors stood for re-election. A total of 5,083,355 common shares (or
53% of Registrant’s outstanding common) was present in person or by proxy at the
Meeting and voted in favor of the election of all Board Designees. As permitted
under Texas law and specific provisions of Registrant’s Bylaws, the Board
Designees will fill out the terms until the next election of
Directors.
Concurrently,
the following officerships were elected: Mr. Gottlieb (Chairman of the Board,
Secretary and Treasurer) and Mr. Schneider (Chief Financial
Officer).
Not
applicable.
After
current management gained control of the Company in April 2009, the Company
appointed a Chief Financial Officer so that the respective duties of the
principal executive officer and principal financial officer are
segregated.. There now being three people involved in any Company
financial transactions. Specifically, all bills are sent to the bookkeeper
and the President/CEO authorizes all expenditures, checks are then drawn by the
bookkeeper for payment based on such authorization and, finally, the CFO signs
the check and distributes. In fact, with regard to all expenditures, the
President/CEO has never signed a check, the CFO can not sign a check unless the
bookkeeper has prepared and the bookkeeper has no check signing authority.
With regard to revenues, since the Company has discontinued operations,
its only function being to find a merger partner.
a) Evaluation of Disclosure
Controls and Procedures. The Chief Executive Officer and Principal
Financial Officer, evaluated the effectiveness of the Company’s disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities and Exchange Act of 1934, as of the end of the period covered by this
report. Based on that evaluation, the CEO concluded that the disclosure controls
and procedures as of the end of the period covered by this report were
effective.
(b) Changes in Internal Control over
Financial Reporting. There were no changes in the Company’s internal
controls over financial reporting, known to the CEO, that occurred during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
RELIABILITY
INCORPORATED
OTHER
INFORMATION
September
30, 2009
Items
1 through 5 are not applicable and have been omitted.
The
following exhibits are filed as part of this report:
|
31.1
|
|
Certification
Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as Amended
|
|
31.2
|
|
Certification
Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as Amended
|
|
32.1
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
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.
|
RELIABILITY
INCORPORATED
(Registrant)
|
||
|
November 13,
2009
|
/s/ Jay
Gottlieb
|
|
|
Jay
Gottlieb
President
and Chief Executive Officer
|
|
/s/
Gregg Schneider
|
||
|
Gregg
Schneider
Chief
Financial Officer
|
17