NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
1 - NATURE OF OPERATIONS
Reliability,
Inc. is a leading provider of employer of record and temporary media and information technology (“IT”) staffing services
that operates, along with its wholly owned subsidiary, The Maslow Media, Inc., (collectively, “Reliability”), primarily
within the United States of America in three industry segments: Employer of Record (EOR), Staffing and Video Production segment
provides script to screen media talent. EOR which is a unique workforce management solution, represents 89.6% of the revenue.
Our Staffing segment provides skilled field talent on a nationwide basis for IT and finance and accounting client partner projects.
Our staffing includes revenue derived from permanent placement. Video Production involves assembling and providing crews for special
projects that can last anywhere from a week to 6 months.
On
October 29, 2019, Maslow became a wholly owned subsidiary of Reliability via a reverse merger.
NOTE
2 - LIQUIDITY AND GOING CONCERN
In
December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus
spread to other countries, including the United States, and efforts to contain the spread of this coronavirus intensified. The
outbreak and any preventative or protective actions that governments or we may take in respect of this coronavirus may result
in a period of business disruption, reduced customer traffic and reduced operations. The Company expects that the impact of this
coronavirus will be materially negative in the short term. The full financial impact cannot be reasonably estimated at this time
but may materially affect our business, financial condition and results of operations. The impact of the COVID-19 pandemic
on the Company and its clients continues to evolve and is expected to adversely impact the Company’s profitability, cash,
assumptions and projections. This has exacerbated the Company’s cash constraints and as it likely has for many U.S. companies,
large to small, and created a going concern.
Even
before the state and U.S. governments’ reaction to COVID-19 forced employees to work from their homes starting around March
12, 2020, the Company had begun to experience cash constraints due to the following factors:
|
1.
|
Approximately
$3,400 of outstanding debt owed to the Company has not been paid and is in default.
|
|
2.
|
The
utilization of cash used in financing Vivos affiliated activities of $688 in 2019.
|
|
3.
|
The
inability to access capital markets due to not having any available shares of common stock.
|
|
4.
|
The
inability to factor up to $400 in IQS invoices from January 26, 2020 through March 31, 2020, with $219 still not factored
as of April 2, 2020.
|
Executive
management took swift action on March 16, 2020 by reducing hours employees who clients ceased utilizing due to COVID-19 virus
concerns and office closures. Six (6) SG&A employees were subsequently furloughed as of March 20, 2020 and a temporary across
the board reduction in pay was instituted across the remaining SG&A staff members with executives taking a 50% larger cut
in salary. We also began having employees work from their homes making full use of our cloud-based infrastructure, and subsequently
terminated the lease effective April 30, in
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Rockville
which will save approximately $246 a year. Executive Management is prepared to take additional steps, if necessary, as the Company
monitors its EOR and staffing hours closely. Additionally, the Company is pursuing Coronavirus Aid, Relief, and Economic Security
(“CARES”) Act programs for which it is eligible including the Paycheck Protection Program, which would enable the
Company to pay its employees, and the COVID-19 Economic Injury Disaster Loan. The Company is also looking into selling a portion
of the Vivos notes that are overdue. All these conditions raise substantial doubt about the Company’s ability to continue
as a going concern. There can be no assurances that the Company will be successful in managing the impact of the foregoing or
its ability to maintain sufficient liquidity over a period of time that will allow it to continue as a going concern. The accompanying
consolidated 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 liability that may results from the possible inability of the
Company to continue as a going concern.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
Company’s consolidated financial statements reflect the financial position and operating results of Reliability, Inc. including
its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Fiscal
Year
The
Company’s fiscal year is from January 1st through December 31st.
Reclassification
Certain
amounts in the 2018 consolidated financial statements have been reclassified to conform to the 2019 presentation.
Management
Estimates
The
consolidated financial statements and related disclosures are prepared in conformity with United States (U.S.) generally accepted
accounting principles (“GAAP”). The Company must make estimates and judgments that affect the amounts reported in
the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to revenue recognition,
allowances for doubtful accounts, recoverability of notes receivable, useful lives for depreciation and amortization, loss contingencies,
allocation of purchase price in connection with business combinations, valuation allowances for deferred income taxes, and the
assumptions used for web site development cost classifications. Actual results may be materially different from those estimated.
In making its estimates, the Company considers the current economic and legislative environment.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of 90-days or less to be cash equivalents.
Concentration
of Credit Risk
For
the year ended December 31, 2019, the Company’s top 10 clients generated over 82% of the revenue. A large portion of our business
comes from two clients, AT&T Services, Inc. (inclusive of its DirecTV division) (“AT&T”) and Janssen Pharmaceuticals
(which includes workforce partners Johnson & Johnson). AT&T accounted for 37% of revenue in 2019 and 2018. AT&T comprised
of 50% and 38% of the accounts receivable balance as of December 31, 2019 and 2018, respectively. Janssen Pharmaceuticals (which
includes workforce partners Johnson & Johnson) accounted for approximately 11% of our total revenues for the years ended December
31, 2019 and 2018. Janssen Pharmaceuticals comprised of 19% and 21% of accounts receivable as of December 31, 2019 and 2018, respectively.
No other client exceeded 10% of revenues.
Financial
instruments, which potentially subject the Company to concentrations of credit risk, are primarily cash and accounts receivable.
The Company performs continuing credit evaluations of its customers and does not require collateral. The Company has not experienced
significant losses related to receivables.
Accounts
Receivable, Contract Assets, and Contract Liabilities (Deferred Revenue)
Receivables
represent both trade receivables from customers in relation to fees for the Company’s services and unpaid amounts for benefit
services provided by third-party vendors, such as healthcare providers for which the Company records a receivable for funding
until the payment is received from the customer and a corresponding customer obligations liability until the Company disburses
the balances to the vendors.
The
Company provides for an allowance for doubtful accounts by specifically identifying accounts with a risk of collectability and
providing an estimate of the loss exposure. Management considers all contract receivables as of December 31, 2019 and2018 to be
fully collectible, therefore an allowance for doubtful accounts is not provided for.
The
Company records accounts receivable when its right to consideration becomes unconditional. Contract assets primarily relate to
the Company rights to consideration for services provided that they are conditional on satisfaction of future performance obligations.
The
Company holds customer deposits of certain customers related to its EOR business to minimize cash flow impact and reduces risks
of uncollectible trade receivables.
The
Company records contract liabilities (deferred revenue) when payments are made or due prior to the related performance obligations
being satisfied. The current portion of the Company contract liabilities is included in accrued liabilities in its consolidated
balance sheets. The Company does not have any material contract assets or long-term contract liabilities.
At
December 31, 2019 and 2018, the Company’s deferred revenue totaled $347 and $235 respectively.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Fair
Value Measurements
The
Company measures fair value based on the price that the Company would receive upon selling an asset or pay to transfer a liability
in an orderly transaction between market participants at the measurement date. Various inputs are used in determining the fair
value of assets or liabilities. Inputs are classified into a three-tier hierarchy, summarized as follows:
|
●
|
Level
1 – Quoted prices in active markets for identical assets or liabilities;
|
|
●
|
Level
2 – Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the assets
or liabilities;
|
|
●
|
Level
3 – Significant unobservable inputs for the assets or liabilities.
|
When
Level 1 inputs are not available, the Company measures fair value using valuation techniques that maximize the use of relevant
observable inputs (Level 2) and minimizes the use of unobservable inputs (Level 3).The carrying amounts reported as of December
31, 2019 and 2018 for cash and cash equivalents, trade receivables, prepaid expenses and other current assets, accounts payable
and accrued expenses, factoring liability, notes and mortgages payable approximate their fair values due to the short-term nature
of these instruments or are based on interest rates available to the Company that are comparable to current market rates. It is
not practicable to estimate the fair value of the notes receivable from related parties due to their related party nature.
Property
and Equipment
Property
and equipment are stated at cost and are depreciated using primarily the straight-line method over the following estimated useful
lives: furniture, fixtures, and computer equipment — three to seven years; leasehold improvements — over the shorter
of the estimated useful life of asset or the lease term. The estimated useful life of buildings is thirty-nine years. Expenditures
for renewals and betterments are capitalized whereas expenditures for repairs and maintenance are charged to income as incurred.
Upon sale or disposition of property and equipment, the difference between the unamortized cost and the proceeds is recorded as
either a gain or a loss. Depreciation expense for the years ended December 31, 2019 and 2018 totaled $22 and $25,
respectively.
Long-Lived
Assets
The
Company reviews its long-lived assets, primarily fixed assets, intangible assets and goodwill, for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to
the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. There were no impairments
recorded during the years ended December 31, 2019 and 2018.
Intangible
Assets
The
Company holds intangible assets with finite lives. Intangible assets with finite useful lives are amortized over their respective
estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible
asset is realized. As of December 31, 2019, amortization expense was $3.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Identifiable
intangible assets recognized in conjunction with acquisitions are recorded at fair value. Significant unobservable inputs are
used to determine the fair value of the identifiable intangible assets based on the income approach valuation model whereby the
present worth and anticipated future benefits of the identifiable intangible assets were discounted back to their net present
value.
The
Company evaluates the recoverability of intangible assets whenever events or changes in circumstances indicate that an intangible
asset’s carrying amount may not be recoverable. The Company annually evaluates the remaining useful lives of all intangible
assets to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company determined
that there were no impairment indicators for these assets during the year ended December 31, 2019.
Goodwill
Goodwill
represents the difference between the enterprise value/cash paid less the fair value of all recognized net asset fair values including
identifiable intangible asset values in a business combination. The Company reviews goodwill for impairment annually during the
fourth quarter or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.
Based on annual testing, the Company has determined that there was no goodwill impairment during the year ended December 31, 2019.
The
Company first evaluates qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than
50 percent) that the fair value of the reporting unit is less than it’s carrying amount, including goodwill. If after qualitatively
assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value
of the reporting unit is less than it’s carrying amount, then further testing is unnecessary. If after assessing the totality
of events or circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit is
less than its carrying amount, the Company then estimates the fair value of the reporting unit and compares the fair value of
the reporting unit with its carrying amount, including goodwill, as discussed below.
In
assessing whether it is more likely than not that an indefinite-lived intangible asset is impaired, the Company assesses relevant
events and circumstances that could affect the significant inputs used to determine the fair value.
The
quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset
with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, the Company shall recognize an
impairment loss in an amount equal to that excess.
The
quantitative goodwill impairment test involves a two-step process. In the first step, the Company compares the fair value of each
reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired,
and no further testing is required. If the fair value of the reporting unit is less than the carrying value, The Company must
perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit’s
fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets,
in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was
being acquired in a business combination.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
If
the implied fair value of the reporting unit’s goodwill is less than the carrying value, the difference is recorded as an
impairment loss.
Revenue
Recognition
The
Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Updates (“ASU”) ASU
2014-09, Revenue from Contracts with Customers, on January 1, 2019 on a modified retrospective basis. As the initial adoption
of the standard did not have a material impact on the Company’s consolidated financial condition or results of operations,
no cumulative effect was recognized at the date of initial application. The Company also had no significant changes to systems,
processes, or controls.
The
Company derives its revenues from three segments: EOR, Recruiting and Staffing, and Video and Multimedia Production. The Company
provides temporary staffing and permanent placement services. Revenues are recognized when promised services are delivered to
client, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues
as presented on the consolidated statements of income represent services rendered to clients, less sales adjustments and allowances.
Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and the related amounts of reimbursable
expenses are included in cost of services.
The
Company records revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and
expenses. The Company has concluded that gross reporting is appropriate because the Company (i) has the risk of identifying and
hiring qualified field talent, (ii) has the discretion to select the field talent and establish their price and duties and (iii)
bears the risk for services that are not fully paid for by client.
Temporary
staffing revenues - Field talent revenues from contracts with clients are recognized in the amount to which the Company has a
right to invoice, when the services are rendered by the Company’s field talent.
Permanent
placement staffing revenues - Permanent placement staffing revenues are recognized when employment candidates start their permanent
employment. The Company estimates the effect of permanent placement candidates who do not remain with its client through the guarantee
period (generally 90 days) based on historical experience. Allowances, recorded as a liability, are established to estimate these
losses. Fees to client are generally calculated as a percentage of the new worker’s annual compensation. No fees for permanent
placement services are charged to employment candidates.
Refer
to Note 16 for disaggregated revenues by segment.
Payment
terms in our contracts vary by the type and location of our client partner and the services offered. The term between invoicing
and when payment is due is not significant. There were no unsatisfied performance obligations as
of
December 31, 2019. There were no revenues recognized during year ended December 31, 2018 related to performance obligations satisfied
or partially satisfied in previous periods. There are no contract costs capitalized. The Company did not recognize any contract
impairments during the year ended December 31, 2019.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Advertising
The
Company recognizes advertising expense in selling, general and administrative expenses as the services are incurred. Total advertising
expense for the year ended December 31, 2019 and 2018 was $43 and $36, respectively.
Earnings
Per Share
Basic
earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during
the year.
Diluted
earnings 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 Company.
Income
Taxes
The
Company accounts for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities
are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax basis, and net operating loss and tax credit carryforwards, using enacted tax rates and laws that are expected
to be in effect when the differences reverse.
A
valuation allowance is recorded against deferred tax assets in these cases when management does not believe that the realization
is more likely than not. While management believes that its judgements and estimates regarding deferred tax assets and liabilities
are appropriate, significant differences in actual results may materially affect the Company’s future financial results.
The
Company recognizes any uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon
audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood
of being sustained. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income
tax expense. As of December 31, 2019, and 2018, the Company did not record any accruals for interest and penalties. The Company
does not foresee material changes to its uncertain tax positions within the next twelve months. The Company’s tax years
are subject to examination for 2016 and forward for U.S. Federal tax purposes and for 2015 and forward for state tax purposes.
Recently
Issued Accounting Pronouncements
In
January 2017, the FASB issued an updated guidance simplifying the subsequent measurement of goodwill by eliminating “Step
2” from the goodwill impairment test. The updated guidance is effective for public companies’ annual or interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual or interim goodwill
impairment tests performed on testing dates after January 1, 2017. The new standard is effective for Reliability for the year
ending December 31, 2019. The Company adopted this standard during the year ended December 31, 2019 and the adoption was not material
to the Company’s consolidated financial statements.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
In
February 2016, the FASB issued ASU No. 2016-02 (Topic 842) “Leases.” Topic 842 supersedes the lease requirements
in Accounting Standards Codification Topic 840, “Leases.” Under Topic 842, lessees are required to recognize
assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases continue to be classified
as either finance or operating. The Company adopted Topic 842 effective January 1, 2019. The most significant effects of Topic
842 were the recognition of $18 of operating lease right to use assets and $18 of operating lease liabilities. The Company also
identified one lease that should have been classified as a financing lease versus operating lease. The Company capitalized $12
in capital assets. The effect on the Company’s consolidated statement of income was not considered material. A retrospective
adjustment was not considered material or necessary. The Company applied Topic 842 to all leases as of January 1, 2019 with comparative
periods continuing to be reported under Topic 840. In the adoption of Topic 842, the Company carried forward the assessment from
Topic 840 of whether its contracts contain or are leases, the classification of its leases, and remaining lease terms. The Company’s
accounting for finance leases remains substantially unchanged.
In
August 2018, the FASB issued new guidance on disclosures related to fair value measurements. The guidance is intended to improve
the effectiveness of the notes to financial statements by facilitating clearer communication, and it includes multiple new, eliminated
and modified disclosure requirements. The guidance was effective for the Company as of January 1, 2020. The adoption of this guidance
is not expected to have a material impact on the Company’s consolidated 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. The new guidance
allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term
of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised. The new
guidance is effective after December 15, 2019. Early adoption is permitted. The Company adopted this ASU during the year ended
December 31, 2019 and the adoption was not material to the Company’s consolidated financial statements.
In
August 2018, the FASB issued new guidance on the accounting for internal-use software. The guidance aligns the accounting for
costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs
associated with developing or obtaining internal-use software. The guidance was effective for the Company as of January 1, 2020.
The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In
December 2019, the FASB issued new guidance on income taxes. The guidance removes certain exceptions to the general income tax
accounting principles and clarifies and amends existing guidance to facilitate consistent application of the accounting principles.
The new guidance is effective for us as of January 1, 2021. The Company is assessing the impact of the adoption of this guidance
on its consolidated 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 consolidated financial statements.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
4 - ACQUISITION
Intelligent
Quality Solutions (“IQS”)
On
December 1, 2019, the Company acquired the customer contracts and trade receivables and assumed certain liabilities of Intelligent
Quality Solutions, Inc. IQS in exchange for a reduction of approximately $691 of the notes receivable from relates parties (Vivos).
The
assets acquired in the IQS asset purchase agreement were acquired by Maslow. The acquisition of IQS allows the Company to strengthen
and expand its IT operations throughout the Midwest U.S. region and expand to markets across the country with talent and software
quality assurance services.
The
consolidated statement of income for the year ended December 31, 2019 includes one month of IQS operations, which was approximately
$245 of revenue and $6 of net operating loss. The purchase price has been allocated to the assets acquired and liabilities assumed
as of the date of acquisition. All amounts recorded to goodwill are expected to be deductible for tax purposes. The allocation
is as follows:
|
|
2019
|
|
Accounts receivable
|
|
$
|
529
|
|
Prepaid expenses and other assets
|
|
|
119
|
|
Intangible assets
|
|
|
240
|
|
Goodwill
|
|
|
451
|
|
Liabilities assumed
|
|
|
759
|
|
Total net assets acquired
|
|
$
|
580
|
|
Cash
|
|
$
|
44
|
|
Working capital adjustment
|
|
|
67
|
|
Total fair value of consideration transferred for acquired business
|
|
$
|
691
|
|
The
allocation of the intangible assets is as follows:
|
|
Estimated Fair Value
|
|
|
Estimated
Useful Lives
|
Customer relationships
|
|
$
|
41
|
|
|
3 years
|
Trade name
|
|
|
199
|
|
|
10 years
|
Total
|
|
$
|
240
|
|
|
|
The
Company incurred costs of $6 related to the IQS acquisition. These costs were expensed as incurred in selling, general and administrative
expenses in 2019.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
The
following unaudited pro forma financial information includes the results of operations of the Company and is presented as if IQS
had been acquired as of January 1, 2018. The unaudited pro forma information has been provided for illustrative purposes only.
The unaudited proforma information does not purport to be indicative of the actual results that would have been achieved by the
combined companies for the periods presented, or the results that may be achieved by the combined companies in the future. Future
results may vary significantly from the results reflected in the following unaudited pro forma financial information because of
future events and transactions, as well as other factors, many of which are beyond the control of the Company. Net profit was
calculated using an assumed blended tax rate of approximately 28%.
Proforma (Unaudited)
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
41,441
|
|
|
$
|
40,980
|
|
Operating income
|
|
$
|
1,218
|
|
|
$
|
1,408
|
|
Net Profit
|
|
$
|
248
|
|
|
$
|
704
|
|
NOTE
5 – TRADE RECEIVABLES
Contract receivables consist of the following as of:
|
|
|
2019
|
|
|
2018
|
|
Billed Receivables
|
|
$
|
1,312
|
|
|
$
|
1,573
|
|
Unbilled Receivables
|
|
|
209
|
|
|
|
139
|
|
Accounts receivable, factored
|
|
|
5,508
|
|
|
|
4,153
|
|
|
|
$
|
7,029
|
|
|
$
|
5,865
|
|
All
of the net trade receivables are pledged as collateral on a loan agreement.
NOTE
6 – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment as of December 31, 2019 and 2018 consists of the following:
|
|
2019
|
|
|
2018
|
|
Building
|
|
$
|
1,856
|
|
|
$
|
-
|
|
Land
|
|
|
510
|
|
|
|
-
|
|
Office equipment
|
|
|
248
|
|
|
|
43
|
|
Computer software
|
|
|
61
|
|
|
|
41
|
|
Leasehold improvements
|
|
|
6
|
|
|
|
6
|
|
Operating lease asset
|
|
|
18
|
|
|
|
-
|
|
|
|
|
2,699
|
|
|
|
90
|
|
Accumulated depreciation
|
|
|
(216
|
)
|
|
|
(57
|
)
|
Property, plant and equipment, net
|
|
$
|
2,483
|
|
|
$
|
33
|
|
The
Company evaluated its potential variable interest entities and determined it is subject to consolidation. See Note 11 for the
impact as of December 31, 2019.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
7 – GOODWILL AND OTHER INTANGIBLE ASSETS
The
Company acquired intangible assets as part of the IQS acquisition during the year ended December 31, 2019 as discussed in Note
4. The Company recorded $518 of goodwill from this acquisition.
Information
regarding purchased intangible assets as of December 31, 2019 is as follows:
|
|
Gross Value
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Value
|
|
Trade name
|
|
$
|
199
|
|
|
$
|
2
|
|
|
$
|
197
|
|
Customer relationships
|
|
|
41
|
|
|
|
1
|
|
|
|
40
|
|
Total
|
|
$
|
240
|
|
|
$
|
3
|
|
|
$
|
237
|
|
Trade
name and customer relationships are amortized over 10 and 3 years, respectively. Amortization expense relating to purchased intangible
assets was $3, and $0 for the year ended December 31, 2019 and 2018, respectively.
Estimated
future amortization expense for the next five years and thereafter is as follows:
Years Ending December 31:
|
|
|
|
2020
|
|
$
|
34
|
|
2021
|
|
|
34
|
|
2022
|
|
|
32
|
|
2023
|
|
|
20
|
|
2024
|
|
|
20
|
|
Thereafter
|
|
|
97
|
|
Total
|
|
$
|
237
|
|
NOTE
8 - ACCRUED EXPENSES
Accrued
expenses consist of the following as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued vendor costs
|
|
$
|
229
|
|
|
|
144
|
|
Financed insurance payable
|
|
|
258
|
|
|
|
252
|
|
Other
|
|
|
61
|
|
|
|
62
|
|
Accrued expenses
|
|
$
|
548
|
|
|
$
|
458
|
|
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
9 - INCOME TAXES
Income
tax expense for the years ended December 31, 2019 and 2018 are comprised of the following:
|
|
2019
|
|
|
2018
|
|
Current federal income tax
|
|
$
|
246
|
|
|
$
|
239
|
|
Current state income tax
|
|
|
254
|
|
|
|
99
|
|
Deferred income tax (benefit)
|
|
|
(344
|
)
|
|
|
(156
|
)
|
Income tax expense
|
|
$
|
156
|
|
|
|
182
|
|
Significant
components of the Company’s deferred income tax assets (liabilities) are as follows at:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Employee accruals
|
|
$
|
74
|
|
|
$
|
-
|
|
Cash to accrual
|
|
|
(31
|
)
|
|
|
(335
|
)
|
Accrued workers’ compensation/Other
|
|
|
33
|
|
|
|
-
|
|
State deduction
|
|
|
7
|
|
|
|
-
|
|
Acquisition fees
|
|
|
14
|
|
|
|
-
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
-
|
|
|
|
-
|
|
Fixed assets
|
|
|
(13
|
)
|
|
|
(9
|
)
|
Deferred income taxes, net
|
|
|
85
|
|
|
|
(344
|
)
|
Valuation allowance
|
|
|
(85
|
)
|
|
|
-
|
|
Deferred tax assets (liabilities)
|
|
$
|
-
|
|
|
$
|
(344
|
)
|
The
income tax provision, reconciled to the tax computed at the statutory federal rate, is as follows:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Tax expense at federal statutory rate
|
|
$
|
74
|
|
|
|
21.0
|
%
|
|
$
|
119
|
|
|
|
21.0
|
%
|
State income taxes, net
|
|
|
20
|
|
|
|
5.7
|
%
|
|
|
32
|
|
|
|
5.7
|
%
|
Meals & Entertainment
|
|
|
2
|
|
|
|
0.7
|
%
|
|
|
7
|
|
|
|
1.2
|
%
|
Penalties
|
|
|
5
|
|
|
|
1.3
|
%
|
|
|
11
|
|
|
|
1.9
|
%
|
Nondeductible acquisition costs
|
|
|
16
|
|
|
|
4.6
|
%
|
|
|
-
|
|
|
|
0
|
%
|
Valuation allowance
|
|
|
85
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Other, net
|
|
|
(46
|
)
|
|
|
13.3
|
%
|
|
|
1 3
|
|
|
|
2.3
|
%
|
Income tax expense
|
|
$
|
156
|
|
|
|
21.3
|
%
|
|
$
|
182
|
|
|
|
32.5
|
%
|
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
10 - DEBT
Convertible
Debt
The
Company has notes payable in the amount of $890 pursuant to a convertible debt offering that commenced June 13, 2019. The offering
was conducted pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and the rules promulgated thereunder. Pursuant
to this agreement, the Company issued to this individual a warrant for 0.5 shares of Company Common Stock and a convertible promissory
note of same date in the initial principal amount of $50, in exchange for $50. The note bears interest at 12% per year.
The balance is due and payable within 1 year from the issuance date unless earlier converted into shares of Company Common Stock
upon the issuance by Reliability of Company Common Stock for gross proceeds of at least $5,000. Warrants can only be redeemable
if the proceeds of $5,000 are secured. (See Liquidity and Capital Resources and Related Party Relationships)
Tax
Liabilities
When
the Maslow Media Group was initially acquired by Vivos Holdings, LLC in December 2016, Reliability’s corporate status was
changed from an S Corp to a C Corp due to its new ownership structure. This triggered an accelerated tax event, a $215 estimated
annual impact per year for 4 years, that Reliability is working with the IRS to pay off. As of December 31, 2019, the tax liability
was $817 and was $664 was of December 31, 2018.
Factoring
Facilities
Triumph
Business Capital
On
November 4, 2016, the Company entered into a factoring and security agreement with Triumph Business Capital (“Triumph”).
Pursuant to the agreement, the Company received advances on its accounts receivable (i.e. invoices) through Triumph to fund growth
and operations. The proceeds of this agreement were used to pay operating costs of the business which include employee salaries,
vendor payments and overhead expenses. On January 5, 2018, the agreement was amended to lower the factoring fee and interest rate
for a term of one year. The agreement was amended again on January 19, 2018, to increase the maximum advance rate to $5,500. In
January 2020, a new agreement was negotiated with Triumph lowering advance rate from 18 basis points to 15 and the interest rate
from prime plus 2.5% to prime plus 2%. The amount of an invoice eligible for sale to Triumph went from 90% to 93%. The agreement
which previously renewed annually, is now month to month. The Company continues to be obligated to meet certain financial covenants
in respect to invoicing and reserve account balance.
In
accordance with the agreement, a reserve amount is required for the total unpaid balance of all purchased accounts multiplied
by a percentage equal to the difference between one hundred percent and the advanced rate percentage. As of December 31, 2019,
the required amount was 10%. Any excess of the reserve amount is paid to the Company on a weekly basis, as requested. If a reserve
shortfall exists for a period of ten-days, the Company is required to make payment to the financial institution for the shortage.
Accounts
receivable were sold with full recourse. Proceeds from the sale of receivables were $29,367 and $30,458 for the years ended December
31, 2019 and 2018, respectively. The total outstanding balance under the recourse contract was $5,030 and $4,153 as of December
31, 2019 and 2018, respectively.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
The
Factoring Facilities are collateralized by substantially all the assets of the Company. In the event of a default, the Factor
may demand that the Company repurchase the receivable or debit the reserve account. Total finance line fees for the years ended
December 31, 2019 totaled $65.
Wilco
Capital Management
In
order to be able to factor IQS invoices after the IQS asset acquisition as discussed in Note 4, the Company took on a factoring
relationship with Wilco Capital Management (formerly known as First Avenue Funding, LLC) (“Wilco”). The original agreement
was signed on January 7, 2019 with a minimum monthly volume of $125 with a maximum advance of $500 for a term of one year. The
advanced rate is 90% of eligible accounts receivable (as defined by the agreement) and a finance rate of 1.275% per month and
adjusted with any increase to the prime rate. As of December 31, 2019, the outstanding balance was $479. This relationship ended
on March 31, 2020, when Triumph bought out this factoring relationship.
NOTE
11 – VARIABLE INTEREST ENTITY (VIE)
In
December 2019, the Company’s executive management learned that prior to the Merger, in January 2017, one of the Company’s
majority shareholders, on behalf of Maslow, executed a guarantee of obligations of Vivos Real Estate Holdings, LLC (“VREH”),
under a mortgage loan for the purchase of the property at 22 Baltimore Rd., Rockville, Maryland. Maslow leases this space
on market terms. This obligation had not been included in Maslow’s financial statements and were not separately disclosed
prior to the Merger.
U.S.
GAAP requires the Company to assess whether VREH is a variable interest entity (“VIE”) because Maslow (i) share common
shareholders who may or may not have significant influence or control, (ii) is a guarantor of the mortgage loan, (iii) is the
sole lessee under a lease where the landlord is an affiliate of the Company, and (iv) has no other business in VREH.
A
VIE is a legal business structure (such as a corporation, partnership, or trust) that:
|
●
|
does
not provide equity investors with voting rights; or
|
|
●
|
the
equity investors do not have sufficient financial resources to meet the ongoing operating needs of the business. This is referred
to as a thinly capitalized structure.
|
Although
the Company has neither any decision-making authority over VREH, nor financial interest in the operations of VREH, the Company
is required to consolidate its financial statements with those of VREH for the reasons mentioned above, as it is considered the
primary beneficiary of the VIE.
Due
to a lack of cooperation from VREH, the Company has not been able to acquire financial information about this entity for consolidation
purposes prior to 2019. As a result, the Company has consolidated this entity for 2019.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
The
assets and liability of the consolidated VIE are comprised of the following:
|
|
2019
|
|
Building
|
|
$
|
1,856
|
|
Office equipment
|
|
|
185
|
|
Land
|
|
|
510
|
|
Accumulated depreciation
|
|
|
148
|
|
Liabilities assumed
|
|
|
1,790
|
|
Total net assets consolidated
|
|
$
|
613
|
|
In
addition, the related party note receivable with the VIE of $772 was eliminated.
The
potential financial exposure to loss as a guarantor could equal all the book value of the related party mortgage loan payable,
a total of approximately $1,790 as of December 31, 2019, with $45 due within the next year. To date, the Company has not been
called on for any loan repayment guarantee.
The
Company terminated the lease of the property at 22 Baltimore Road effective April 30, 2020. As a result, VREH will be considered
a VIE for only four months of the 2020 fiscal year.
As
a result of the consolidation, the notes receivable held between Maslow and VREH was eliminated in consolidation. See Note 14
for details on the related party notes receivable.
NOTE
12 – COMMITMENTS AND CONTINGENCIES
The
Company is engaged from time to time in legal matters and proceedings arising out of its normal course of business. The Company
establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company
has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably
possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss,
or include a statement that no estimate of the loss can be made.
On
or about February 17, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland
against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and Naveen Doki, to enforce Maslow’s rights under certain promissory
notes and a personal guarantee made by the defendants. The case is proceeding. The Company believes that it will be granted a
judgment in its favor. Maslow intends to continue to vigorously prosecute this litigation.
On
February 28, 2020, On Healthcare Resource Network, LLC filed a complaint against Maslow in the Circuit Court of Montgomery County,
Maryland. The plaintiff has not specified any alleged damage caused by Maslow and the Company believes any claims are without
merit. The Company will defend itself from this case.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
On
September 28, 2018, Credit Cash filed a complaint against Maslow, Vivos, Vivos Acquisitions, LLC, Dr. Doki, Dr. Valleru (the “Parties”)
and other defendants in the United States District Court for the District of New Jersey for, among other things, breach of contract
of the Maslow and HRCN Credit Facilities and their respective guaranties in relation to the November 15, 2017 agreement (the “DNJ
Action”). On October 30, 2018, Credit Cash filed a motion to intervene in an action pending in New York State, Monroe County,
filed by HCRN and LE Finance, LLC against the Parties and other defendants (“NY State Action”). On December 10, 2018,
the Parties entered into a settlement agreement for the purpose of settling certain claims related to the DNJ Action only. Pursuant
to the settlement agreement, certain repayment terms were agreed upon between Credit Cash and the Parties, but Credit Cash did
not relinquish the right to pursue any claims related to the NY State Action, nor to pursue any remedies against any of the parties
in relation to the November 15, 2017 agreement. Agreement for the Contingent Liquidation of the Common Stock of Maslow Media Group,
Inc., dated as of October 28, 2019 (the “Liquidation Agreement”) permitting Maslow to liquidate up to the full amount
of Maslow equity held by such persons in order to satisfy the obligations under the Settlement Agreements.
On
October 9, 2018, Maslow Media Group, Inc. was named as a defendant in an Affidavit of Confession of Judgment filed in the Supreme
Court of the State of New York in relation to a case brought by Hop Capital, which the defendants collectively agree to pay a
sum of $400 to Hop Capital. Maslow Media Group, Inc. is named as one defendant among six other defendants, all of which are entities
related to Vivos. The claim brought by Hop Capital against the defendants in this case is in relation to a Merchant Agreement
dated October 4, 2018; an agreement to which Maslow Media Group, Inc. was not a party. As such, Maslow Media Group, Inc. contends
that being named in the Affidavit of Confession of Judgment as a defendant was made in error and is currently seeking to have
its name removed from Affidavit of Confession of Judgment as a defendant. The Company will defend itself from this case.
NOTE
13 - EQUITY
The
Company’s authorized capital stock consists of 300,000,000 shares of common stock, with no par value. All authorized shares
of Company Common Stock are issued and outstanding.
NOTE
14 - RELATED PARTY TRANSACTIONS
Stock
Purchase Agreement
On
November 9, 2016, Vivos Holdings LLC (“Vivos LLC”), a related party affiliate and
former owner of Maslow Media Group, acquired 100% of the Company through a stock acquisition exchange for a purchase price
of $1,750. $1,400 was paid at settlement with proceeds from the Company and also entered into a promissory note to pay the remaining
$350. The promissory note was to be paid in twenty-four equal installments, including interest at 4.5%, in the amount of approximately
$15, commencing six months after closing with the last payment on March 1, 2019; these payments were paid by the Company on behalf
of Vivos LLC. Vivos LLC subsequently entered into a promissory note receivable with the Company, described below,
for the full stock purchase price.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Management
Fees
In
connection with the transaction described in above, the Company was required to pay management fees to Vivos. Payments commenced
on March 1, 2017 and were payable monthly in the amount of $20. In 2018, the Company offset management fees payable against accrued
interest income on the related party receivable from Vivos. Effective on January 1, 2019, management fees paid to Vivos were suspended.
Total management fees for the years ending December 31, 2019 and 2018 were $0 and $260, respectively.
Notes
Receivable
The
Company has notes receivable from Vivos and VREH, a member of Vivos, both related party affiliates.
In
connection with the stock purchase agreement noted above, on November 15, 2016, the Company executed a promissory note receivable
with Vivos in the amount of $1,400. As defined by the agreement, the loan consists of two periods, whereby the first period from
November 15, 2016 until September 30, 2018, no principal or interest payments were required. Interest will accrue monthly and
a new loan in the amount of $1,773 will be subject to a second loan period. During the second loan period, interest shall be paid
in twenty equal consecutive payments, quarterly. Principal plus any unpaid interest is due September 20, 2023. Interest during
both loan periods accrues at a rate of 2.5%. Additionally, monthly payments of $15 are made on behalf of Vivos to the seller by
the Company. These payments, plus any other payments made by the Company on behalf of Vivos, are added to the principal balance
of the promissory note receivable. In 2018, all quarterly interest payments to be made in phase 2 were offset by the management
fees due to Vivos. As of December 31,2019 and 2018, the total outstanding balances were $2,666 and $2,569, which includes accrued
interest receivable of $162 and $94, respectively.
On
June 12, 2019, Maslow entered into a Personal Guaranty agreement with Dr. Doki, pursuant to which Dr. Naveen Doki personally guaranteed
to Maslow repayment of $3,000 of the balance of the Promissory Note issued to Vivos on November 15, 2017 within the 2019 calendar
year via cash, stock, or other business assets acceptable to the Company. Dr. Doki is a 5% or greater beneficial holder of Company
Common Stock, and therefore is a related party. As of February 2020, the Company filed a lawsuit against the majority stockholder,
pursuant to the personal guaranty agreement for defaulting on the outstanding notes receivables.
On
November 15, 2017, the Company executed an intercompany promissory note receivable with VREH in the amount of $772. As defined
by the agreement, the loan consists of two periods, whereby the first period from November 15, 2017 until March 31, 2018, no principal
or interest payments are required. During the first loan period, interest accrued monthly and a new loan amount of $781 will be
subject to a second loan period. During the second period, interest is payable in 20 equal consecutive installments and the principal
balance plus accrued and unpaid interest is due March 31, 2023. Interest during both periods accrues at a rate of 3.5% annually.
In 2018, all quarterly interest payments to be made in Phase 2 were offset by the management fees due to Vivos. In addition, principal
payments totaling $30 were made by Vivos. As of December 31, 2019, and 2018, the total outstanding balance was $772 and $746,
respectively. This December 31, 2019 balance was eliminated during consolidation of the VIE. See Note 11.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
On
September 5, 2019, Maslow entered into a Secured Promissory Note agreement with Vivos, pursuant to which Maslow issued a secured
promissory note to Vivos in the principal amount of $750. The note bears interest at 2.5% per year and requires Vivos to make
monthly payments to Maslow of $10 beginning December 1, 2019, with balance due and payable on November 1, 2026. Upon an event
of default, which occurs upon failure of Vivos to make any monthly payment due under the terms of the note, Maslow has the right
to declare the entire unpaid balance of the note due and payable. The note is secured by 30,000,000 shares of Company Common Stock,
which is due and payable upon a default by Vivos, which occurs upon failure of Vivos to make any monthly payment due under the
terms of the note. In addition, both Naveen Doki and Silvija Valleru personally guaranty the repayment of the note by Vivos. Naveen
Doki and Silvija Valleru are beneficial owners of Vivos and are also 5% or greater beneficial owners of Company Common Stock.
As of December 31, 2019, the total outstanding balance was $752, which includes interest of $2.
Debt
Settlement Agreements
On
July 10, 2018, Vivos executed a receivable financing agreement with a financial institution and agreed to remit $670 of accounts
receivable over a six-month period through daily remittances of $5 in exchange for $485. The agreement is guaranteed by Vivos,
both shareholders and Maslow. In October 2018, Vivos defaulted on the agreement and on October 25, 2018, executed a settlement
agreement whereby the Maslow is to pay the outstanding balance over eleven installments with the final amount due August 31, 2019.
The total outstanding balance as of December 31, 2018 was $212. As of December 31, 2019, there was no outstanding balance due.
On
July 5, 2018, Vivos executed a receivable financing agreement with a financial institution whereby Vivos agreed to remit $556
of accounts receivable over a six-month period through daily remittances of $4 in exchange for $400. The agreement is guaranteed
by the Vivos, both majority shareholders and the Company. In October of 2018, Vivos defaulted on the agreement and on January
24, 2019, executed a settlement agreement whereby the Company is to pay the outstanding balance over eight installments with the
final amount due August 31, 2019. On July 10, 2018, the Company (as a “merchant”) and Vivos (as a “owner/guarantor”)
entered into a receivable financing agreement with Kinetic Direct Funding LLC pursuant to which the Company and Vivos agreed to
remit $670 of the Company’s accounts receivable over a six-month period through daily remittances of $5 in exchange for
$485 (the “Kinetic Financing Agreement”). The agreement is guaranteed by Vivos as well as Naveen Doki in his individual
capacity, and an owner of Vivos. In October of 2018, there was a default under the Kinetic Financing Agreement by Vivos. On October
25, 2018, the Company, Naveen Doki, Silvija Valleru, and Vivos (among other entities) entered into a settlement agreement with
Kinetic Direct Funders LLC in relation to default of the Kinetic Financing Agreement whereby the Company is to pay the outstanding
balance over eleven installments with the final amount due August 31, 2019. On April 10, 2019, the settlement agreement was amended
extending the remaining payment term to July 15, 2020. The Company has a binding and enforceable agreement with certain shareholders
permitting the Company to liquidate up to the full amount of the Company’s equity held by such shareholders in order to
satisfy the shareholders’ obligations under the Settlement Agreements. The total outstanding balance owed by the Company
as of December 31, 2018 was $231. As of October 31, 2019, the Company has paid its portion of the outstanding balance due under
the settlement agreement in full.
On
August 10, 2017, Vivos executed a receivable advance agreement with Argus Capital Funding. The Company received a net advance
of $487 in exchange for $705 of the Company’s accounts receivable. Included in this loan is a fee of $218. The agreement
was refinanced on November 15, 2017, when Vivos, and Vivos Acquisitions, LLC, via Dr. Naveen Doki and Dr. Silvija Valleru entered
into an agreement with CC Business Solutions, a division of Credit Cash NJ, LLC (“Credit Cash”) pursuant to which
Credit Cash advanced to the Company $600 in exchange for $780 of the Company’s accounts receivable, to be repaid fully by
approximately May 20, 2019 (the “Maslow Credit Facility”).
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
In
addition, pursuant to the same agreement, Credit Cash advanced to Healthcare Resource Network, a company owned by Vivos (“HCRN”)
a credit facility in the principal amount of $1,005 (“HCRN Credit Facility”). Each of Maslow, Vivos, Vivos Acquisitions,
LLC, Dr. Naveen Doki and Dr. Silvija Valleru guaranteed the HCRN Credit Facility. To secure repayment of their guarantee obligations,
the Company and Vivos granted to Credit Cash a security interest in all their assets. On September 14, 2018, the Company defaulted
on the Maslow Credit Facility. In addition, on same date, the HCRN Credit Facility went into default. As a result, repayment on
both facilities was accelerated, with the full balance for each becoming immediately due and payable. On December 10, 2018, the
Company, Vivos, Vivos Acquisitions, LLC, Dr. Doki, and Dr. Valleru and Credit Cash entered into a settlement agreement in connection
the November 15, 2017 agreement to govern the terms of the repayment of the HCRN Credit Facility and Maslow Credit Facility. Pursuant
to the settlement agreement, the Company agreed to pay $10 per week until the entire balance of the Maslow Credit Facility was
paid off. Pursuant to a subsequent agreement dated May 17, 2019 not involving the Company, Vivos and Vivos Acquisitions, LLC agreed
to fully repay the HCRN Credit Facility via quarterly payments beginning June 30, 2019. The HCRN Credit Facility is still being
repaid by Vivos, and as of October 29, 2019, has an outstanding balance of approximately $635. The Company has a binding and enforceable
agreement with certain shareholders permitting Maslow to liquidate up to the full amount of Maslow equity held by such shareholders
in order to satisfy the shareholders’ obligations under the Settlement Agreements. The total outstanding balance owed by
the Company as of December 31, 2018 was $351. As of December 31, 2019, the Company has repaid the outstanding balance due for
the Maslow Credit Facility under the settlement agreement in full.
Related
Party Relationships
On
October 29, 2019 prior to the Merger, pursuant to the Merger Agreement, Naveen Doki and Silvija Valleru became beneficial owners
of 207,384,793 and 51,844,970 shares of RLBY Common Stock, respectively, equal to 69.13% and 17.13% of the total number of shares
of RLBY Common Stock outstanding after giving effect to the Merger, respectively.
On
June 27, 2019 prior to the Merger, Maslow entered into a Securities Purchase Agreement with Hawkeye Enterprises, Inc., a company
owned and controlled by Mark Speck, an officer and director of the Company. Pursuant to this agreement, Maslow issued to Hawkeye
Enterprises 16,323 (on a post-Merger basis) shares of Company Common Stock, a warrant (as defined below) for 81,616 (on a post-Merger
basis) shares of Company Common Stock and a convertible promissory note of same date in the initial principal amount of $50, in
exchange for $50. The note bears interest at 12% per year, with balance due and payable on June 27, 2020. As of December 31, 2019,
the amount under this agreement totaled to $53.
On
July 31, 2019 prior to the Merger, the Company entered into a Securities Purchase Agreement with the same officer and director
discussed above. Pursuant to this agreement, the Company issued to this individual a Warrant for 81,616 (on a post-Merger basis)
shares of Company Common Stock and a convertible promissory note of same date in the initial principal amount of $50, in exchange
for $50. The note bears interest at 12% per year, with balance due and payable on July 31, 2020. As of December 31, 2019, the
amount under this agreement totaled to $53.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
On
July 31, 2019 prior to the Merger, the Company entered into a Securities Purchase Agreement with Nick Tsahalis, an executive officer
and director of the Company. Pursuant to this agreement, the Company issued to this individual 32,646 (on a post-Merger basis)
shares of RLBY Common Stock, and a Warrant to purchase 16,323 (on a post-Merger basis) shares of the RLBY Common Stock, and a
Convertible Promissory Note of same date in the initial principal amount of $100, in exchange for $100. The note bears interest
at 12% per year, with balance due and payable on July 31, 2020. As of December 31, 2019, the amount totaled to $105.
On
September 18, 2019, in anticipation of the closing of the Merger and intending that it be assumed by Maslow after the closing
of the Merger, Hawkeye entered into a letter of intent (the “LOI”) regarding the potential acquisition of a complementary
business. Maslow was then prohibited from entering into the LOI directly. In connection with the LOI, Hawkeye paid a non-refundable
deposit of $75 with the understanding that after the closing of the Merger, the LOI would be assigned to the Company and the Company
would reimburse Hawkeye for the deposit. On October 17, 2019, Hawkeye assigned, and Maslow agreed to assume the LOI and reimbursed
Hawkeye for the deposit.
The
term “warrant” herein refers to warrants issued by Maslow and assumed by RLBY as a result of the Merger. The terms
of all Warrants are the same other than as to the number of shares covered thereby. The Warrant may be exercised at any time or
from time to time during the period commencing at 10:00 a.m. Eastern time on first business day following the completion of the
Qualified Financing (as defined below) and expiring at 5:00 p.m. Eastern time on the fifth annual anniversary thereof (the “Exercise
Period”). For purposes herein, a “Qualified Financing” means the issuance by the Company, other than certain
excluded issuances of shares of Common Stock, in one transaction or series of related transactions, which transaction(s) result
in aggregate gross proceeds actually received by the Company of at least $5,000. The exercise price per full share of RLBY Common
Stock shall be 120% of the average sale price of the RLBY Common Stock across all transactions constituting a part of the Qualified
Financing, with equitable adjustments being made for any splits, combinations or dividends relating to the RLBY Common Stock,
or combinations, recapitalization, reclassifications, extraordinary distributions and similar events, that occur following one
transaction constituting a part of the Qualified Financing and prior to one or more other transactions constituting a part of
the Qualified Financing (the “Exercise Price”).
Convertible
note warrants were not valued and included as liability on balance sheet because of uncertainty around their pricing, value and
low probability at this juncture in receiving the $5,000 trigger.
On
December 1, 2019, the Company acquired assets of IQS from Vivos Holdings Inc. as described in Note 4 above.
NOTE
15 - EMPLOYEE BENEFIT PLAN
The
Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible full-time employees.
The 401(k) Plan allows employees to make contributions subject to applicable statutory limitations. The Company currently does
not match employee contributions.
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
16 - BUSINESS SEGMENTS
The
Company operates within three industry segments: EOR, Recruiting and Staffing, and Video and Multimedia Production. The EOR segment
provides media field talent to a host of large corporate customers in all 50 states. The Recruiting and Staffing segment provides
skilled media and IT field talent on a nationwide basis for customers in a myriad of industries. The Video and Multimedia Production
segment provides Script to Screen services for corporate, government and non-profit clients, globally.
Segment
operating income includes revenue and cost of services only. Currently, the Company is not allocating sales, general and administrative
costs at the segment level.
The
following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results for the
periods indicated:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Revenue:
|
|
|
|
|
|
|
|
|
EOR
|
|
$
|
34,452
|
|
|
$
|
34,573
|
|
Recruiting and Staffing
|
|
|
2,190
|
|
|
|
1,739
|
|
Video and Multimedia Production
|
|
|
1,641
|
|
|
|
1,228
|
|
Other
|
|
|
161
|
|
|
|
98
|
|
Total
|
|
$
|
38,444
|
|
|
$
|
37,638
|
|
NOTE
17 – MORTGAGE LOAN ON REAL ESTATE
As
described in Note 11, VREH executed a mortgage loan for the purchase of the property at 22 Baltimore Rd., Rockville, Maryland
with the Company as a guarantor of this loan on January 22, 2018. The loan was in the amount of $1,875 with an interest rate of
4.5% annually for the first 60 months of the loan and changes to 5.25% annually on January 28, 2023 for 59 months. The monthly
payments during repayment period is $11 with a lump sum payment of $1,393 on December 28th, 2027. The outstanding balance
on this mortgage loan as of December 31, 2019 was $1,790.
The
mortgage loan as of December 31, 2019 is as follows:
|
|
2019
|
|
Mortgage Loan
|
|
$
|
1,790
|
|
Less current portion of mortgage loan payable
|
|
|
45
|
|
Mortgage loan payable, net of current portion
|
|
$
|
1,745
|
|
RELIABILITY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Estimated
future maturities of the mortgage loan for the next five years and thereafter is as follows:
Years Ending December 31:
|
|
|
|
2020
|
|
$
|
47
|
|
2021
|
|
|
50
|
|
2022
|
|
|
47
|
|
2023
|
|
|
41
|
|
2024
|
|
|
63
|
|
Thereafter
|
|
|
1,542
|
|
Total
|
|
$
|
1,790
|
|
NOTE
18- SUBSEQUENT EVENTS
The
Company has evaluated subsequent events after the balance sheet date of December 31, 2019 through April 29, 2020, the date
on which the consolidated financial statements were available to be issued. Based upon this evaluation, management has determined
that no material subsequent events have occurred that would require recognition in or disclosures in the accompanying consolidated
financial statements, except as follows:
In
January 2020, a new agreement was negotiated with Triumph, increasing the maximum advance total to $7,000, lowering advance rate
from 18 basis points to 15 and the interest rate from prime plus 2.5% to prime plus 2%. Triumph advances 93% of our eligible receivables
(compared with 90% prior to the modification), at an advance rate of 15 basis points (20 basis points prior to modification),
an interest rate of prime plus 2%, from 2.5% prior to modification, and our prime floor rate reduced from 5% down to 4%.
In
February 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos
Holdings, LLC, Vivos Real Estate Holdings, LLC and Naveen Doki, to enforce the Company’s rights under certain promissory
notes and a personal guarantee made by the defendants. The case is proceeding. The Company believes that it will be granted a
judgment in its favor.
In
February 2020, Maslow took out a $250 6-month term loan from Triumph at 10% APR, in order to meet its cash obligations.
On
February 28, 2020, On Healthcare Resource Network, LLC filed a complaint against the Company in the Circuit Court of Montgomery
County, Maryland. The plaintiff has not specified any alleged damage caused by Maslow and the Company believes any claims are
without merit.
On
March 31, 2020, Maslow terminated the IQS factoring agreement with Wilco Capital Management.
In
early 2020, the World Health Organization declared the coronavirus outbreak as a pandemic. The impact of the COVID-19 pandemic
on the Company and its clients continues to evolve and is expected to adversely impact its profitability, cash, assumptions and
projections.
Effective
April 30, 2020, the Company terminated the related party lease held with VREH.