RLBY Reliability Incorporated (PK)

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

Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This quarterly report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of our annual report on Form 10-K as filed with the SEC on March 28, 2019, and the same may be amended or updated from time to time in documents that we file with the SEC, including in the current report on Form 8-K as filed with the SEC on October 30, 2019.

We caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

The following discussion should be read in conjunction with our unaudited financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q.

Overview and Recent Developments

Prior to October 29, 2019, Reliability Incorporated (“Reliability” and together with its subsidiaries, “we,” “us,” “our” or the “Company”) had no operating activities and was a shell company. On September 18, 2019, Reliability, R-M Merger Sub, Inc., a wholly owned subsidiary of Reliability (“Merger Sub”), The Maslow Media Group, Inc. (“Maslow”), Jeffrey Eberwein, Naveen Doki, and Silvija Valleru (together with Dr. Doki, the “Shareholders”) entered into a Merger Agreement (the “Merger Agreement”). The Merger Agreement provided for, among other things, a business combination whereby Merger Sub would merge with and into Maslow, with Maslow as the surviving entity (the “Merger”). The Merger closed in accordance with the terms of the Merger Agreement on October 29, 2019. As a result of the Merger, the separate corporate existence of Merger Sub ceased, and Maslow continued as the surviving corporation and a wholly owned subsidiary of Reliability.

Prior to the closing of the Merger, as required by the Merger Agreement, Reliability undertook certain actions, including, but not limited to, certain debt conversions. Pursuant to a debt conversion agreement dated October 28, 2019 between Reliability and Lone Star Value Co-Invest I, LP (“LSV Co-Invest”) and a debt conversion agreement dated October 28, 2019 between Reliability and Lone Star Value Investors, LP (“LSV Investors”) (together, the “Debt Conversion Agreements”), Reliability converted substantially all of its issued and outstanding liabilities and debts into 1,085,307 shares of its authorized, issued and outstanding common stock, pursuant to which $50,000 and $70,000 in principal and interest accrued through September 18, 2019, was converted into 514,893 and 570,414 shares of Reliability common stock for LSV Investors and LSV Co-Invest, respectively. As of the date of the Debt Conversion Agreements, each of LSV Investors and LSV Co-Invest were significant shareholders of Reliability’s common stock, each owning greater than 5%, and therefore were related parties of Reliability.

As a result of the Merger, Reliability ceased to be a shell company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and by virtue of its ownership of Maslow became an indirect operating entity. The Merger is intended to be a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and the Merger Agreement is intended to be a “plan of reorganization” within the meaning of the regulations promulgated under Section 368(a) of the Code and for the purpose of qualifying as a tax-free transaction for federal income tax purposes. The parties to the Merger Agreement agreed to report the Merger as a tax-free reorganization under the provisions of Section 368(a), and covenanted that none of them will take or cause to be taken any action which would prevent the transactions contemplated by the Merger Agreement from qualifying as a reorganization under Section 368(a).

At the effective time of the Merger, all shares of Maslow common stock issued and outstanding immediately prior to the effective time of the Merger were converted into a number of shares of Reliability common stock constituting 94% of the total issued and outstanding shares of Reliability common stock, or 282,000,000 shares (the “Merger Consideration”). The shareholders of Reliability as of immediately prior to the closing collectively retained a total aggregate number of shares of Reliability common stock constituting 6% of the issued and outstanding shares of Reliability common stock immediately following the effective time of the Merger, or 18,000,000 shares of Reliability common stock.

In addition, at the effective time of the Merger, each share of Maslow common stock that was issued and outstanding immediately prior to the effective time of the Merger that was owned by Maslow as treasury stock was canceled and retired without any payment or distribution with respect to such shares; any outstanding shares of Maslow common stock that were owned by Reliability, Merger Sub or any other direct or indirect wholly owned subsidiary of Reliability or Merger Sub, were cancelled and retired and ceased to exist and no cash or consideration was delivered in exchange for such shares; and all outstanding shares of common stock of Merger Sub issued and outstanding immediately prior to the effective time of the Merger were converted into and became, collectively, one share of Maslow common stock and constitute the only outstanding share of capital stock of Maslow.

At the closing, the then-current members of the Reliability Board of Directors consisting of Hannah Bible, Shawn Miles, and Julia Dayton elected Mark Speck to serve on the Reliability Board of Directors, and subsequently each of Mr. Miles and Ms. Dayton resigned. Mr. Eberwein remained as a Board observer.

Also, at the closing, the officers of Reliability as of immediately before the closing resigned, and the Reliability Board of Directors, as newly constituted as set forth above, elected new officers of Reliability, consisting of Nick Tsahalis (as President) and Mark Speck (as Chief Financial Officer and Secretary).

On October 30, 2019, the Company’s Board of Directors appointed Nick Tsahalis, the Company’s President, as a member of the Board of Directors. Following Mr. Tsahalis’ appointment to the Board of Directors, the Company’s Board of Directors consists of three directors: Nick Tsahalis, Mark Speck and Hannah Bible.

The Company previously indicated that at the closing of the Merger, the Company entered into a Lock-Up Agreement with each of Mr. Eberwein, Dr. Doki, Shirisha Janumpally, Dr. Valleru, Igly Trust, a trust for which Kalyan Pathuri (Dr. Valleru’s spouse) is sole trustee and beneficiary, and Judos Trust, a trust for which Mrs. Janumpally is the sole trustee and beneficiary (each a “Holder”) (each, a “Lock-Up Agreement”) pursuant to which each Holder agreed not to (i) offer for sale, sell, pledge or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Company common stock; (ii) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of shares of Company common stock, whether any such transaction is to be settled by delivery of shares of Company common stock or other securities, in case or otherwise; or (iii) publicly disclose the intention to do (i) or (ii) constituting the merger consideration or held by the Holders as of the closing of the Merger for a period of one year following the closing of the Merger. However, the Company waived the requirement that each of Mrs. Janumpally, Federal Systems (a company owned and controlled by Mrs. Janumpally), Mrs. Pathuri and Mr. Eberwein enter into a Lock-Up Agreement. Accordingly, such persons did not enter into a Lock-Up Agreement with the Company. Although shares held by such persons are not subject to a Lock-Up Agreement, the shares are restricted and may not be sold without registration or an exemption from registration. Because the Company was a shell company prior to the Merger, Rule 144 will not be available for the resale of such shares until one year has elapsed, in addition to certain other requirements.

Results of Operations

The following comparative analysis on results of operations was based primarily on the comparative financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the audited financial statements and the notes to those statements for the three and nine months ended September 30, 2019 and 2018, which are included elsewhere in this quarterly report on Form 10-Q. The results discussed below are for the three and nine months ended September 30, 2019 and 2018.

Comparison of Results of Operations for the Three and Nine Months ended September 30, 2019 and 2018

Revenues. Revenues for the three and nine months ended September 30, 2019 were $0 as the Company did not have any sources of revenue.

General and Administrative Expenses. General and administrative expenses for the three and nine months ended September 30, 2019 were $3,814 and $11,618, respectively, as compared to $3,734 and $10,570 for the comparable periods in 2018. The increase of $1,048 for the nine months is predominantly driven by higher legal costs in 2019.

Interest Expense. The Company recognized interest expense in the amount of $ 3,025 and $8,432 for the three and nine months ended September 30, 2019, respectively, related to loans from stockholders and affiliates. The interest expense for three and nine months ended September 30, 2018 was $2,449 and $6,912 respectively. The increase in interest expense was due to the Loan balance increasing from $105,000 to $120,000.

Liquidity and Capital Resources

The Company has undertaken steps to reduce its expenses and improve the Company’s liquidity, including the previous 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.

The Company is in preliminary active discussions with interested parties as to possible acquisitions and or mergers, for which the impact of a successful transaction would be significant.

The Company used cash of $(20,716) for operating activities for a total change in cash of ($5,716) during the nine months ended September 30, 2019 compared to $105 in the comparable period of 2018. The increase was attributable to an increase in cash used in operating activities during the nine months ended September 30, 2019.

Off-balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our audited and unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the unaudited financial statements.

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, 2018.

Recent Accounting Pronouncements

The Company, qualifies as an emerging growth company (“EGC”) under the Jumpstart Our Business Startups Act (JOBS Act) which qualifies it to use the private company application dates for all Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASUs”) for its first five years of operation after going public. The Company has elected to use the private company application dates for all accounting pronouncements discussed below.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. The FASB has also issued several updates to ASU 2014-09. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 one year, making it effective for annual reporting periods beginning after December 15, 2018. The Company has not yet selected a transition method and is currently evaluating the impact the adoption of this guidance will have on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use (ROU) asset for all leases. For finance leases, the lessee would recognize interest expense and amortization of the ROU asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The new lease guidance also simplified the accounting-for-sale and leaseback transactions, primarily because lessees must recognize lease assets and lease liabilities. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which provides clarity on various narrow aspects of the original guidance. Also, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which amends the lease guidance on separating components of a contract. In December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, which provides an accounting policy election for lessors. In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements, which clarifies the lease codification surrounding fair value determination, presentation on the cash flow statement, and transition disclosure. The standards are effective for annual and interim reporting periods within those years beginning after December 15, 2020, and early adoption is permitted. This ASU should be applied through a modified, retrospective transition approach for leases existing at-or entered into after-evaluation, at the beginning of the earliest comparative period presented in the financial statements. The Company’s management expects the new guidance to have a material impact on its financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments should be presented and classified in the statement of cash flows with the objective of reducing existing diversity in practice with respect to these items. ASU 2016-15 is effective for annual periods, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. ASU 2016-15 requires a retrospective transition method. However, if it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of this guidance will have on its statement of cash flows.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). The ASU simplifies the measurement of goodwill impairment by eliminating the requirement that an entity compute the implied fair value of goodwill based on the fair values of its assets and liabilities to measure impairment. Instead, goodwill impairment will be measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The ASU also clarifies the treatment of the income tax effect of tax deductible goodwill when measuring goodwill impairment loss. ASU 2017-04 is effective for reporting periods beginning after December 15, 2021. The Company’s management does not expect the adoption of this new guidance to have a material effect on the Company’s financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting. The amendments in this ASU expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in the ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company’s management does not expect the adoption of this new guidance to have a material effect on the Company’s financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal- Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred for internal-use software. ASU 2018-15 is effective for the Company beginning on January 1, 2021. The amendments in this ASU may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact the adoption of this guidance will have on its financial statements.

The Company does not believe any other recently issued but not yet effective accounting pronouncement, if adopted, would have a material effect on its present or future financial statements.