Item 1.01 Entry into a Material Definitive Agreement
Merger Agreement
On September 18, 2019 (the
“Effective Date”), Reliability Incorporated (the “Company”), and The Maslow Media Group, Inc. (“Maslow”),
a Virginia Corporation, Jeffrey E. Eberwein (“Mr. Eberwein”), Naveen Doki (“Mr. Doki”), Silvija Valleru
(“Ms. Valleru”), and R-M Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub”) entered
into a Merger Agreement (the “Merger Agreement”). The Merger Agreement provides for, among other things, a business
combination whereby Merger Sub will merge with and into Maslow, with Maslow as the surviving entity (the “Merger”).
As a result of the Merger, the separate corporate existence of Merger Sub will cease and Maslow will continue as the surviving
corporation and a wholly-owned subsidiary of the Company.
The Company’s principal
office is in the same physical office as Mr. Eberwein. Mr. Eberwein is the Chief Executive Officer of Lone Star Value Management,
LLC, the investment manager of Lone Star Value Investors, LP which beneficially owns 20.1% of the Company’s issued and outstanding
common stock and Lone Star Value Co-Invest I, LP which beneficially owns 40.1% of the Company’s issued and outstanding common
stock. Hannah Bible, the Company’s Chief Executive Officer, is an employee of Lone Star Value Management, LLC, and the members
of the Board of Directors of the Company are members of Mr. Eberwein’s family, or are employee’s under Mr. Eberwein’s
management; thus, the Merger Agreement and Merger were not approved by an independent board of directors, and the Merger Agreement
is a transaction with a related party of the Company, Mr. Eberwein.
Both Mr. Doki and Ms. Valleru own a significant amount of the
shares of Maslow Common Stock, owning respectively at least 50% and 10% of the shares. Prior to the Effective Time it is
expected that Maslow will issue additional shares of Maslow Common Stock and the shareholders of Malow may transfer certain
shares of Maslow Common Stock to other parties. Such issuances and transfers will not increase the total amount of shares of
Reliability Common Stock that will be issued at the Effective Time.
The closing of the Merger
Agreement will occur upon the satisfaction of the terms of the Merger Agreement (the “Closing”). At the Closing, the
parties will cause the Merger to be consummated by filing a Statement of Merger with the Secretary of State of Virginia. At the
date and time the Statement of Merger is filed with the Secretary of State of Virginia, the Merger will be effective (the “Effective
Time”). At the Effective Time, all of the shares of Maslow common stock (the “Maslow Common Stock”) issued and
outstanding immediately prior to the Effective Time will be converted into a number of shares of common stock, no par value per
share, of the Company (the “Reliability Common Stock”) constituting 94% of the total issued and outstanding shares
of Reliability Common Stock at such time (the “Merger Consideration”). It is expected that the Merger Consideration
will be comprised of approximately 282,000,000 shares of Reliability Common Stock. At the Effective Time, Maslow will become a
wholly owned subsidiary of the Company.
The Merger Agreement also
contemplates a change in the composition of the Board at the Closing. Pursuant to the terms of the Merger Agreement, at the Closing,
Mr. Doki, Ms. Valleru, Shirisha Janumpally, and Mark Speck are expected to serve on the Board, and one current member of the Board
will remain. All officers of the Company as of immediately prior to the Closing will also resign and will be replaced by officers
as selected by the newly constituted Board.
Following the Closing,
the Company may undertake such actions as necessary to re-domesticate the Company or change its name as determined by the Board
of Directors of the Company at that time.
Closing Conditions
The Merger is subject to
various customary closing conditions, including, but not limited to, (i) approval under Texas law, (ii) the absence of any order,
injunction, statute, rule, regulation or decree prohibiting, precluding, restraining, enjoining or making illegal the consummation
of the Merger, (iii) the accuracy of the representations and warranties of each party, (iv) performance, in all material respects,
of all obligations and compliance with, in all material respects, agreements and covenants to be performed or complied with by
each party, and (v) the completion of reasonable due diligence by Maslow.
In addition, as a condition
to the Closing, (i) subject to certain limited exceptions the Company agreed to convert all of the issued and outstanding liabilities
and debts of the Company as of immediately prior to the Closing into shares of Reliability Common Stock, and (ii) Maslow agreed
to provide to the Company audited financial statements for Maslow and related auditor reports for each of the two most recently
ended fiscal years and unaudited statements for any other required interim periods, as well as pay the Company for expenses incurred
in pursuit of the consummation of the Merger, subject to certain limitations.
The Merger is expected
to occur prior to October 31, 2019. However the Closing of the Merger is subject to the satisfaction of customary conditions found
within the Merger Agreement and no guarantee can be made as to the likelihood of the Closing occurring or the time of the Closing
of the Merger.
Covenants, Representations, and Warranties
The parties to the Merger
Agreement, except for items disclosed within the disclosure schedules provided by Maslow and the Company, have made customary representations,
warranties and covenants in the Merger Agreement, including but not limited to, as to Maslow and the Company, (i) authority to
enter into the Merger Agreement, (ii) confirmation of financials, (iii) absence of certain adverse events, (iv) disclosure of material
contracts, (v) confirmation of title to assets, (vi) lack of legal proceedings and (vii) tax liabilities.
Termination Rights
The Merger Agreement contains
certain termination rights for both the Company and Maslow. The Merger Agreement may be terminated:
|
|
·
|
by mutual written consent of Maslow, both Mr. Doki and Ms. Valleru,
and the Company;
|
|
|
·
|
by any of the Company, Maslow, or either Mr. Doki and Ms. Valleru,
upon written notice to the other parties, if there is an order, judgment, injunction or decree prohibiting the consummation of
the Merger or other transactions contemplated in the Merger Agreement;
|
|
|
·
|
by any of the Company if Maslow or either Mr. Doki and Ms. Valleru
fails to perform any of their respective material obligations under the Merger Agreement, or is in breach of any representation,
warranty, covenant or agreement, if such breach not been cured within 5 business days after notice of such breach;
|
|
|
·
|
by Maslow if the Company, Merger Sub or Mr. Eberwein fails to perform
any of their respective material obligations under the Merger Agreement, or is in breach of any representation, warranty, covenant
or agreement, if such breach not been cured within 5 business days after notice of such breach;
|
|
|
·
|
by the Company, in the event that a Material Adverse Effect (as defined
in the Merger Agreement) with respect to Maslow has occurred prior to the Closing;
|
|
|
·
|
by Maslow in the event that a Material Adverse Effect (as defined
in the Merger Agreement) with respect to the Company or Merger Sub has occurred prior to the Closing;
|
|
|
·
|
by either Maslow or the Company if the Closing has not occurred by
October 31, 2019, provided, however, that the right to terminate the Merger Agreement as described herein is not available to a
party who caused such failure.
|
If the Merger Agreement
is validly terminated by a party as a result of a default by another party, the defaulting party is obligated to pay to the other
parties such other parties’ respective reasonable out of pocket costs incurred with respect to the transactions contemplated
in the Merger Agreement, up to a maximum amount.
Indemnification
If the Closing occurs, Mr. Eberwein has agreed
to indemnify Maslow, Mr. Doki and Ms. Valleru jointly and severally, and their affiliates, against all losses incurred arising
out of, among other things, any breach of any representation, warranty, covenant, agreement or obligation of the Company, Merger
Sub or Mr. Eberwein contained in the Merger Agreement following the Closing. Mr. Doki and Ms. Valleru, jointly and severally, have
also agreed to indemnify the Company, Mr. Eberwein, and each of their affiliates against all losses incurred arising out of such
events. 30 days’ notice must be provided to the party against whom such claims are asserted for any indemnification claim.
The foregoing description
of the Merger Agreement and the Company’s obligations therein does not purport to be complete and is qualified in its entirety
by reference to the full text of the Merger Agreement, a copy of which is attached hereto as Exhibit 10.1 and incorporated herein
by reference.
Registration Rights Agreement
Upon the Closing of the
Merger, certain holders of Reliability Common Stock will execute a registration rights agreement with the Company allowing them
to piggyback on the registration of other shares the Company may endeavor to register under certain circumstances. (“Piggyback
Registration Rights Agreement”). If at any time after the Effective Date the Company determines to register for sale for
cash on a registration statement under the Securities Act of 1933 any Reliability Common Stock, then the Company must give written
notice to those certain holders of Reliability Common Stock (or “Investors”, as defined in the Piggyback Registration
Rights Agreement) at least twenty (20) calendar days prior to the filing of such registration statement, and must allow Investors
to include their “Registrable Securities” (as defined in the Piggyback Registration Rights Agreement) in the registration.
The Piggyback Registration
Rights Agreement will terminate with respect to each Investor on the earlier of (i) the second anniversary of the Effective Date;
(ii) the date on which all Registrable Securities held by such Investor are transferred or sold.
The foregoing description
of the Piggyback Registration Rights Agreement and the Company’s obligations therein does not purport to be complete and
is qualified in its entirety by reference to the full text of the Piggyback Registration Rights Agreement, a copy of which is attached
hereto as Exhibit 10.2 and incorporated herein by reference.
Lock Up Agreement
Upon the Closing of the
Merger, each of Mr. Eberwein and any shareholder of Maslow who has more than ten (10%) beneficial ownership of Maslow Common Stock
immediately prior the Closing will enter into a lock-up agreement (“Lock Up Agreement”) restricting their transfer
and sale of the shares of Reliability Common Stock received at the Effective Time for a period of 12 months thereafter. Both Mr.
Doki and Ms. Valleru are expected to beneficially own more than 10% of the Reliability Common Stock; and thus will remain restricted
in their ability to generally transfer the shares. The Lock Up Agreement does not restrict, among other types of transfers, transfers
of Reliability Common Stock as (i) a bona fide gift, (ii) to any trust, partnership, limited liability company of the holder or
the immediate family of the holder, (iii) to any beneficiary of the holder pursuant to a will, or (iv) to the Company by way of
a repurchase or redemption.
The foregoing description
of the Lock-Up Agreement and the Company’s obligations therein does not purport to be complete and is qualified in its entirety
by reference to the full text of the Lock-Up Agreement, a copy of which is attached hereto as Exhibit 10.3 and incorporated herein
by reference.
Forward-Looking Statements
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. Certain statements in this report are forward-looking statements and are made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995, as amended. These forward-looking statements
reflect, among other things, the Company’s current expectations, plans, strategies, and anticipated financial results. There
are a number of risks, uncertainties, and conditions that may cause the Company’s actual results to differ materially from
those expressed or implied by these forward-looking statements. These risks and uncertainties include the Company’s
ability to complete the Merger and successfully integrate Maslow’s operations and realize the synergies from the Merger,
as well as a number of factors related to the Company’s business and that of Maslow, including economic and financial market
conditions generally and economic conditions in the Company’s and Maslow’s markets; various risks to preferred stockholders
of not receiving dividends and risks to the Company’s ability to pursue growth opportunities if the Company continues to
pay dividends according to the terms of the Company Preferred Stock; various risks to the price and volatility of the Company’s
Preferred Stock; changes in the valuation of pension plan assets; the substantial amount of debt and the Company’s ability
to repay or refinance it or incur additional debt in the future; the Company’s need for a significant amount of cash to service
and repay the debt and to pay dividends on the Company Preferred Stock; restrictions contained in the debt agreements that limit
the discretion of management in operating the
business; regulatory changes, including changes to reimbursement policies, development
and introduction of new technologies and intense competition in the healthcare industry; risks associated with the Company’s
possible pursuit of acquisitions; system failures; losses significant contracts; disruptions in the relationship with third party
vendors; losses of key management personnel and the inability to attract and retain highly qualified management and personnel in
the future; changes in the extensive governmental legislation and regulations governing healthcare providers and the provision
of healthcare services; high costs of regulatory compliance; the competitive impact of legislation and regulatory changes in the
healthcare industry; and liability and compliance costs regarding environmental regulations. A detailed discussion of
these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking
statements are discussed in more detail in the Company’s filings with the SEC, including their reports on Form 10-K and Form
10-Q. Many of these circumstances are beyond the Company’s ability to control or predict. Moreover,
forward-looking statements necessarily involve assumptions on the Company’s part. These forward-looking statements
generally are identified by the words “believe”, “expect”, “anticipate”, “estimate”,
“project”, “intend”, “plan”, “should”, “may”, “will”, “would”,
“will be”, “will continue” or similar expressions. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company and
its subsidiaries to be different from those expressed or implied in the forward-looking statements. All forward-looking
statements attributable to us or persons acting on the Company’s behalf are expressly qualified in their entirety by the
cautionary statements that appear throughout this report. Furthermore, forward-looking statements speak only as of the date they
are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we disclaim
any intention or obligation to update or revise publicly any forward-looking statements. You should not place undue
reliance on forward-looking statements.