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 Group, Inc., (collectively, “Reliability”
or the “Company”), primarily within the United States of America in three industry segments: Employer of Record (“EOR”),
Recruiting and Staffing and Video and Multimedia Production which provides script to screen media talent. EOR which is a unique
workforce management solution, represented 80.7% of the revenue in 2020. 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 Media Group (“Maslow” or “MMG”) became a wholly owned subsidiary of Reliability
via a reverse merger (the “Merger”).
On
December 1, 2019, the Company acquired the customer contracts and trade receivables and assumed certain liabilities of Intelligent
Quality Solutions, Inc. (“IQS”). IQS operates as a division of MMG.
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. This
outbreak continued throughout 2020 and into 2021. 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 impact of this coronavirus has had a material 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.
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
$4,300 of outstanding debt owed to the Company had not been paid and is in default.
|
|
2.
|
The
utilization of cash used in financing Vivos Group affiliated activities of $688
in 2019.
|
|
3.
|
The
inability to access capital markets due to not having any available shares of common stock.
|
Executive
management took swift action on March 16, 2020 by reducing hours of employees who worked on clients significantly impacted by
the COVID-19 virus concerns. Six (6) administrative employees were subsequently furloughed as of March 20, 2020, and a temporary
across the board reduction in pay was instituted across the remaining administrative 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, 2020 in Rockville, MD which saved the Company approximately $246 a year.
On May 5, 2020 (the “Effective Date”), MMG received the proceeds of a loan pursuant to into a promissory note (the
“Note”) under the Paycheck Protection Program with TBK Bank, SSB (“Lender”), in the amount of $5,216 (the
“PPP Loan”). The Paycheck Protection Program (“PPP”) was established under the recently enacted Coronavirus
Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration
(“SBA”). These funds were utilized entirely for payroll
during the 24-week covered period which commenced in May 2020 and ended in October 2020. Maslow exhausted use of the funds for
payroll by the end of August 2020.
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
The
PPP Loan enabled MMG to return furloughed employees who were still available to work and hire additional staff for purposes of
vital sales, marketing and general and administrative projects. Salaries were returned to normal levels and amounts that were
previously suspended were returned to most corporate employees. Those employees who accepted permanent reductions in pay were
given incentives to achieve at those levels and beyond. No employee was reduced below the 25% threshold that the PPP Loan mandated.
Even
after receiving PPP funds, we continued to look for ways to streamline our business by re-structuring IQS, eliminating occupancy
of office in Plymouth, MN, and trimming many non-essential SG&A expenses.
The
Company applied for PPP loan forgiveness on March 3, 2020 for the entire amount borrowed in accordance with the PPP rules and
guidance. The Company believes that the entire $5,216 of the PPP Loan will be forgiven. However, no assurance can be given that
all or any of the PPP Loan will, in fact, be forgiven. Our consolidated financial statements do not include any adjustments to
reflect the possible future effects on the forgiveness of the PPP Loan.
Additionally,
the Company is pursuing CARES Act Paycheck Protection Program round 2 for which we believe we qualify.
During
the year ended December 31, 2020, we incurred a net loss in the amount of $789 and utilized cash from operating activities in
the amount of $2,070. Our revenues decreased by $9,242 or 24% when compared to 2019, largely due to the COVID-19 pandemic. We
also incurred an operating loss of $988 in 2020 compared to operating income of $1,084 in 2019.
All
these conditions noted above, most notably the adverse impact of sales by COVID 19and presumption that all debts coming due
without ability to raise cash from Vivos Holdings receivable, 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 subsidiary, Maslow. All intercompany transactions and balances have been eliminated in consolidation.
Fiscal
Year
The
Company’s fiscal year is from January 1st through December 31st.
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 SUBSIDIARY
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, 2020, 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 29% and 38% of revenue in 2020
and 2019, respectively. AT&T comprised approximately 49% and 50% of the accounts receivable balance as of December 31, 2020
and 2019, respectively. Janssen Pharmaceuticals (which includes workforce partners Johnson & Johnson) accounted for approximately
11% of our total revenues for the years ended December 31, 2020 and 2019. Janssen Pharmaceuticals comprised approximately18% and
19% of accounts receivable as of December 31, 2020 and 2019, 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, 2020 and 2019 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.
As
of December 31, 2020, and 2019, the Company’s deferred revenue totaled $182 and $347 respectively.
RELIABILITY,
INC. AND SUBSIDIARY
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, 2020 and 2019 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. The
estimated fair value of the Company’s PPP loan payable approximates its carrying value as the rate on this debt is determined
by the U.S. government which was offered to all participating companies under the CARES Act. 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 building was 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 and amortization expense for the years ended December 31, 2020 and 2019 totaled $46 and
$23, 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, 2020 and 2019.
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. For the years ended December 31, 2020 and 2019, amortization expense was $33 and $3, respectively.
RELIABILITY,
INC. AND SUBSIDIARY
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 was no impairment needed for these assets during the year ended December 31, 2020.
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, 2020.
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 SUBSIDIARY
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. The Company determined that there was no impairment needed for the year ended December 31, 2020.
Revenue
Recognition
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 operations 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.
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, 2020. There were no
revenues recognized during years ended December 31, 2020 and 2019 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 years ended December 31, 2020 and 2019.
Advertising
The
Company recognizes advertising expense in selling, general and administrative expenses as the services are incurred. Total advertising
expense for the years ended December 31, 2020 and 2019 was $24 and $43, respectively.
Earnings
(Loss) Per Share
Basic
earnings (loss) per common share are computed by dividing net income (loss) by the weighted average number of common shares outstanding
during the year.
Diluted
earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of
the 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.
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
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, 2020, and 2019, 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 2017 and forward for U.S. Federal tax purposes and for 2016 and forward for state tax purposes.
Recently
Issued Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred
loss methodology with an expected credit loss model that requires consideration of a broader range of information to estimate
credit losses over the lifetime of the asset, including current conditions and reasonable and supportable forecasts in addition
to historical loss information, to determine expected credit losses. Pooling of assets with similar risk characteristics and the
use of a loss model are also required. Also, in April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic
326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,
to clarify the inclusion of recoveries of trade receivables previously written off when estimating an allowance for credit losses.
The amendments in this update were required to be applied using the modified retrospective method with an adjustment to retained
earnings and were effective for us beginning with fiscal year 2020, including interim periods. The adoption of the amendments
in this update as of January 1, 2020 did not have a material impact on our accounts receivable, retained earnings, as well as
our results of operations for the year ended December 31, 2020.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the
Disclosure Requirements for Fair Value Measurement, to improve the fair value measurement reporting of financial instruments.
The amendments in this update require, among other things, added disclosure of the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements. The amendments in this update eliminate, among other things, disclosure
of the reasons for and amounts of transfers between Level 1 and Level 2 for assets and liabilities that are measured at fair value
on a recurring basis and an entity’s valuation processes for Level 3 fair value measurements. The amendments in this update
were effective for us beginning with fiscal year 2020. Retrospective application is required for all amendments in this update
except the added disclosures, which should be applied prospectively. The adoption of the amendments in this update did not have
a material impact on our consolidated financial position and results of operations as of and for the year ended December 31, 2020.
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, to provide additional guidance on the accounting for costs of implementing cloud computing arrangements that
are service contracts. The amendments in this update require the capitalization of implementation costs during the
application development stage of such hosting arrangements and amortization of the expense over the term of the arrangement,
including any option to extend reasonably certain to be exercised or option to terminate reasonably certain not to be
exercised. Capitalized implementation costs and amortization thereof are also required to be classified in the same line item
in the statements of financial position, operations and cash flows associated with the hosting service fees. The amendments
in this update were effective for us beginning with fiscal year 2020. Entities may select retrospective or prospective
application to all implementation costs incurred after the adoption
date. We selected prospective application to all implementation costs incurred after the adoption date. The adoption of the amendments
in this update did not have a material impact on our property and equipment, net and results of operations as of and for the year
ended December 31, 2020.
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
In
March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference
Rate Reform on Financial Reporting, that provides optional relief to applying reference rate reform to contracts, hedging
relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR), which will be discontinued by
the end of 2021. Also, in January 2021, the FASB issued ASU No. 2021-01 Reference Rate Reform (Topic 848)—Scope,
to clarify that cash flow hedges are eligible for certain optional expedients and exceptions for the application of subsequent
assessment methods to assume perfect effectiveness as previously presented in ASU 2020-04. The amendments in this update are effective
for us immediately and may be applied through December 31, 2022. The adoption of this update is not expected to have a material
impact on our consolidated financial position and results of operations.
In
December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes,
to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect
the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes
the enactment date. The amendments in this update will be effective for us beginning with fiscal year 2021, with early adoption
permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must
be applied on a retrospective or modified retrospective basis. The adoption of the amendments in this update is not expected to
have a material impact on our consolidated financial position and results of operations.
In
October 2020, the FASB issued ASU No. 2020-10 Codification Improvements, to make incremental improvements to U.S. GAAP
and address stakeholder suggestions, including, among other things, clarifying that the requirement to provide comparative information
in the financial statements extends to the corresponding disclosures section. The amendments in this update will be effective
for the Company beginning with fiscal year 2021, with early adoption permitted. The amendments in this update should be applied
retrospectively and at the beginning of the period that includes the adoption date. The adoption of the amendments in this update
is not expected to have a material impact on our consolidated financial position and results of operations.
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An
entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value
of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination.
Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit
with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform
Step 2 of the goodwill impairment test. The amendments in this update will be effective for the Company beginning with fiscal
year 2023, with early adoption permitted. The adoption of the amendments in this update is not expected to have a material impact
on our consolidated financial position and results of operations.
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 SUBSIDIARY
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
Group).
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 operations 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.
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, 2019. 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%.
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Proforma (unaudited)
|
|
2019
|
|
Revenues
|
|
$
|
41,441
|
|
Operating Income
|
|
|
1,218
|
|
Net Profit
|
|
|
248
|
|
NOTE
5 – TRADE RECEIVABLES
Contract receivables consist of the following as of:
|
|
|
2020
|
|
|
2019
|
|
Billed receivables
|
|
$
|
3,630
|
|
|
$
|
1,312
|
|
Unbilled receivables
|
|
|
241
|
|
|
|
209
|
|
Accounts receivable, factored
|
|
|
2,999
|
|
|
|
5,508
|
|
Total
|
|
$
|
6,870
|
|
|
$
|
7,029
|
|
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, 2020 and 2019 consists of the following:
|
|
2020
|
|
|
2019
|
|
Building
|
|
$
|
-
|
|
|
$
|
1,856
|
|
Land
|
|
|
-
|
|
|
|
510
|
|
Office equipment
|
|
|
63
|
|
|
|
248
|
|
Computer software
|
|
|
107
|
|
|
|
61
|
|
Leasehold improvements
|
|
|
-
|
|
|
|
6
|
|
Operating lease asset
|
|
|
18
|
|
|
|
18
|
|
|
|
|
188
|
|
|
|
2,699
|
|
Accumulated depreciation
|
|
|
(112
|
)
|
|
|
(216
|
)
|
Property, plant and equipment, net
|
|
$
|
76
|
|
|
$
|
2,483
|
|
RELIABILITY,
INC. AND SUBSIDIARY
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, 2020 is as follows:
|
|
Gross Value
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Value
|
|
Trade name
|
|
$
|
199
|
|
|
$
|
22
|
|
|
$
|
177
|
|
Customer relationships
|
|
|
41
|
|
|
|
15
|
|
|
|
26
|
|
Total
|
|
$
|
240
|
|
|
$
|
37
|
|
|
$
|
203
|
|
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 $33 and $3, for the years ended December 31, 2020 and 2019, respectively.
Estimated
future amortization expense for the next five years and thereafter is as follows:
Years Ending December 31:
|
|
|
|
2021
|
|
$
|
34
|
|
2022
|
|
|
32
|
|
2023
|
|
|
20
|
|
2024
|
|
|
20
|
|
2025
|
|
|
20
|
|
Thereafter
|
|
|
77
|
|
Total
|
|
$
|
203
|
|
NOTE
8 - ACCRUED EXPENSES
Accrued
expenses consist of the following as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued vendor costs
|
|
$
|
166
|
|
|
|
229
|
|
Financed insurance payable
|
|
|
133
|
|
|
|
258
|
|
Other
|
|
|
76
|
|
|
|
61
|
|
Accrued expenses
|
|
$
|
375
|
|
|
$
|
548
|
|
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
9 - INCOME TAXES
Income
tax expense (benefit) for the years ended December 31, 2020 and 2019 are comprised of the following:
|
|
2020
|
|
|
2019
|
|
Current federal income tax
|
|
$
|
(276
|
)
|
|
$
|
246
|
|
Current state income tax
|
|
|
46
|
|
|
|
254
|
|
Deferred income tax (benefit)
|
|
|
-
|
|
|
|
(344
|
)
|
Income tax expense (benefit)
|
|
$
|
(230
|
)
|
|
|
156
|
|
Significant
components of the Company’s deferred income tax assets (liabilities) are as follows at:
|
|
December 31
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Employee accruals
|
|
$
|
70
|
|
|
$
|
74
|
|
Cash to accrual
|
|
|
(15
|
)
|
|
|
(31
|
)
|
Accrued workers’ compensation and other
|
|
|
26
|
|
|
|
33
|
|
State deduction
|
|
|
-
|
|
|
|
7
|
|
Acquisition fees
|
|
|
-
|
|
|
|
14
|
|
Sec. 163(j) interest limitation
|
|
|
38
|
|
|
|
-
|
|
Federal and State net operating loss carryforwards
|
|
|
79
|
|
|
|
-
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(5
|
)
|
|
|
-
|
|
Fixed assets
|
|
|
(19
|
)
|
|
|
(13
|
)
|
Deferred income taxes, net
|
|
|
173
|
|
|
|
85
|
|
Valuation allowance
|
|
|
(173
|
)
|
|
|
(85
|
)
|
Deferred tax assets (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
The
income tax provision, reconciled to the tax computed at the statutory federal rate, is as follows:
|
|
December 31
|
|
|
|
2020
|
|
|
2019
|
|
Tax expense at federal statutory rate
|
|
$
|
(214
|
)
|
|
|
21
|
%
|
|
$
|
74
|
|
|
|
21
|
%
|
State income taxes, net
|
|
|
(54
|
)
|
|
|
5.3
|
%
|
|
|
20
|
|
|
|
5.7
|
%
|
Meals and entertainment
|
|
|
1
|
|
|
|
-0.1
|
%
|
|
|
2
|
|
|
|
0.7
|
%
|
Penalties
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
1.3
|
%
|
Nondeductible acquisition costs
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
4.6
|
%
|
Valuation allowance
|
|
|
88
|
|
|
|
-8.7
|
%
|
|
|
85
|
|
|
|
16.7
|
%
|
Other, net
|
|
|
(51
|
)
|
|
|
6.2
|
%
|
|
|
(46
|
)
|
|
|
13.3
|
%
|
Income tax expense
|
|
$
|
(230
|
)
|
|
|
22.58
|
%
|
|
$
|
156
|
|
|
|
21.3
|
%
|
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
10 - DEBT
Convertible
Debt
The
Company had notes payable in the amount of $890 as of December 31, 2019, 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 each 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 notes
bore interest at 12% per year with the balance becoming due 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.
Since this did not happen and the Company did not have Common Stock available to convert into these, notes were paid in full as
they became due over a 3-month period between June 2020 and September 2020.
Warrants
can only be redeemable if the proceeds of $5,000 are secured.
Tax
Liabilities
When
MMG was initially acquired by Vivos Holdings, LLC in December 2016, the Company’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 which was accounted for in subsequent tax returns through 2019. As of December 31, 2020, the Company’s
overall tax liability was $292 which include tax liabilities for 2018, 2019 from completed tax returns and loss carryback provisions
for 2020.
Factoring
Facility
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, 2020,
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.
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 was 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.
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Accounts
receivable were sold with full recourse. Proceeds from the sale of receivables were $13,787 and $29,367 for the years ended December
31, 2020 and 2019, respectively. The total outstanding balance under the recourse contract was $2,999 and $5,508 as of December
31, 2020 and 2019, respectively.
The
Factoring Facility is 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, 2020 and 2019 totaled $65.
PPP
Loan Payable
On
April 29, 2020, MMG was approved for a $5,216 loan through the Paycheck protection Program (the “PPP”) with a term
of two (2) years and an interest rate of 1% per annum. The PPP provides that the Company may apply for forgiveness of this loan
if the loan proceeds were used for payroll and certain other specified operating expenses while maintaining specified headcount
requirements. The accrued interest on the PPP loan as of December 31, 2020 was $34.
On
June 5, 2020, the Paycheck Protection Program Flexibility Act (the “PPPF Act”) went into effect providing more flexibility
to participants in the PPP which included extending the time to begin repayment of the PPP loan until the amount of forgiveness,
if any, is determined, which could be as late as December 31, 2020. The Company may apply for forgiveness earlier if they determine
that doing so will maximize the amount of loan forgiveness (see Note 17).
Other
Debt
In
February 2020, the Company took out a $250 6-month term loan from Triumph at 10% per annum, in order to meet the Company’s
cash obligations (“Triumph Term Loan”). On April 7, 2020, in the face of the COVID 19 lockdown, Triumph offered a
2-month payment holiday and to extend the note payment, which ultimately was agreed to end in February 2021. As of December 31,
2020, $37 was outstanding under the Triumph Term Loan Arrangement.
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
related parties, 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 leased 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.
|
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Although
the Company had neither any decision-making authority over VREH, nor financial interest in the operations of VREH, the Company
was required to consolidate its financial statements with those of VREH for the reasons mentioned above, as it was considered
the primary beneficiary of the VIE.
Due
to a lack of cooperation from VREH, the Company had 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.
The
assets and liability of the consolidated VIE were 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 in the amount of $772 was eliminated in 2019.
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 $1,745 as of December 31, 2020, with $126 due within the next year. VREH is currently three months behind
on payments. To date, the Company has not been called on for any loan repayment guarantee. The Company believes there is adequate
equity in the property should the bank decide to foreclose, and the Company decides not to make past due payments.
The
Company terminated the lease of the property at 22 Baltimore Road effective April 30, 2020. As a result, VREH was considered a
VIE for only four months of the 2020 fiscal year.
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.
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
On
September 28, 2018, Credit Cash filed a complaint against Maslow, Vivos Holdings, Vivos Acquisitions, LLC, Mr. Doki,
Mrs. 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. Because
the Parties acknowledged and agreed, that the Credit Cash relationship benefitted Parties other than Maslow, certain of the Parties
and their related parties, executed and delivered to the Company that certain Agreement for the Contingent Liquidation of the
Common Stock of Maslow Media Group, Inc., dated as of October 28, 2019 (the “Liquidation Agreement”). Pursuant to
the Liquidation Agreement the parties thereto pledged shares of Company Common Stock to Maslow to be used to obtain releases from
the Lenders defined therein, including Credit Cash and its affiliates. The Liquidation Agreement permits Maslow to either transfer
the shares to the Lenders in satisfaction of the outstanding obligations or to arrange for the sale of the shares and using the
cash to satisfy such obligations.
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 the Vivos Group. 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. As of March 2021, we have
not been contacted again on this matter, nor have we been notified on any developments The Company will defend itself from this
case.
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. The Company intends to continue to vigorously prosecute this litigation.
On February 28,
2020, Healthcare Resource Network, LLC filed a complaint against Maslow in the Circuit Court of Montgomery County, Maryland alleging
that Maslow participated with the Vivos Group to financially harm the plaintiff. 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.
On March
16th, 2020, CC Business Solutions, a division of Credit Cash NJ, LLC domesticated a foreign judgement in the Montgomery County
Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions,
LLC, Naveen Doki and Silvija Valleru. This foreign judgement relates to Vivos Holdings adding Maslow Media Group as a guarantor
on a loan made to Health Care Resources Network which is in default by HCRN and Vivos Holdings. Foreign judgement total
is $820. This judgement relates to the default on the settlement agreement dated December 10, 2018 referenced above.
On May
5th, 2020, Libertas Funding, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care
Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Vivos IT, LLC, Vivos Global Services,
LLC, Alliance Micro, Inc. and Naveen Doki. This foreign judgement from the State of New York relates to loans the Vivos
Group took out by adding Maslow Media Group additional collateral. This loan is currently in default. Foreign Judgement
total is $229.
On May
5th, 2020, Kinetic Direct Funding domesticated a foreign judgement in the Montgomery County Circuit Court system again Health
Care Resources Network (HCRN), Maslow Media Group, US IT Solutions Inc., 360 IT Professionals, Alliance Micro, Inc. and Naveen
Doki. This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding Maslow Media
Group as additional collateral. This loan is currently in default. Foreign Judgement total is $579.
On May
5th, 2020, Libertas Funding, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care
Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Vivos IT, LLC, Vivos Global Services,
LLC, Alliance Micro, Inc. and Silvija Valleru. This foreign judgement from the State of New York relates to loans the Vivos
Group took out by adding Maslow Media Group additional collateral. This loan is currently in default. Foreign Judgement
total is $229.
On
or about May 6, 2020, the Defendants filed with the Circuit Court of Montgomery County, Maryland a Counterclaim and Third-Party
Complaint for Damages, Declaratory and Injunctive Relief and Jury Demand (the “Counterclaim”), The Company believes
that the Counterclaim has no merit. The Company will vigorously defend itself and its indemnified officers, directors and other
parties as permitted by the Company’s organizational documents. The Company and the other Counterclaim defendants have moved
to have the Debt Collection Suit and the Counterclaim stayed pending the outcome of the Arbitration described below. Trial on
this matter is scheduled for March 2021.
On
or about June 5, 2020, the Company submitted a Claimant’s Notice of Intention to Arbitrate and Demand for Arbitration
(the “Arbitration”) with the American Arbitration Association in New York, and to the Respondents thereto: Naveen
Doki; Silvija Valleru; Shirisha Janumpally (individually and in her capacity as trustee of Judos Trust); Kalyan Pathuri (individually
in his capacity as trustee of Igly Trust) and Federal Systems (the “Respondents”). The Arbitration alleges that the
Respondents breached the Merger Agreement in a number of significant respects and committed fraud in connection with the Merger.
The Company is seeking damages which if granted will likely be the remedy set forth within the Merger Agreement which is in whole
or in part shares of Company Common Stock received by the Respondents in connection with the Merger. The Company has brought a
motion to compel the Arbitration which is currently being decided by the Federal Courts in New York. The Company believes a strong
basis for the motion exists, but no assurance can be given that it will be granted. Regardless, the Company intends to pursue
claims under the Merger Agreement in whatever venue is required.
On
June 12, 2020, Igly Trust, a Vivos entity, asked the Texas court for an injunction requiring the Company to provide a shareholder
list and to hold a shareholder meeting. On October 20, 2020, the Texas court denied the injunction but, incongruously, dismissed
all the Vivos plaintiffs for lack of personal jurisdiction. The Company appealed the dismissal because the court had jurisdiction
over Igly Trust once it made affirmative claims in Texas and because the Court’s order denying the injunction is an important
precedent for establishing that the directors under Texas law retain control of shareholder lists and determining the timing of
shareholder meetings.
On
December 23, 2020, at a hearing in the Maryland District Court, a motion by the Vivos Group to compel a shareholder
meeting was summarily dismissed. The judge agreed with the Company that permitting the Vivos Group to vote their
shares at a meeting of shareholders could materially harm the interests of the Company as a whole, its employees and minority
shareholders. This judge will be presiding over a full trial regarding these matters over a two-week period starting on October
4, 2021, absent any COVID-19 disruptions that could affect scheduling.
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”), 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 the Vivos
Holdings. Vivos Holdings subsequently entered into a promissory note receivable with the Company, described below,
for the full stock purchase price.
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Notes
Receivable
The Company has notes receivable from Vivos
Holdings and VREH, a member of the Vivos Group, 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 Holdings 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 20 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 Holdings to the seller by the Company.
These payments, plus any other payments made by the Company on behalf of Vivos Holdings, 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 Holdings. As of December 31, 2020, and 2019, the total outstanding balances were $2,736 and $2,666,
which includes accrued interest receivable of $229 and $162, respectively.
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 Holdings. In addition, principal
payments totaling $30 were made by Vivos Holdings. As of December 31, 2020, and 2019, the total outstanding balance was
$753 and $772, respectively.
On June 12, 2019, Maslow entered into
a Personal Guaranty agreement with Mr. Doki, pursuant to which Mr. Naveen Doki personally guaranteed to Maslow the 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. Mr. 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.
In summary the Vivos Holdings receivable
totaled $4,169 on December 31, 2019 which included $2,007 of additional borrowings over the period between November 2016 and December
31, 2109. As of December 31, 2020, the receivable totaled $4,258.
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
On
September 5, 2019, Maslow entered into a Secured Promissory Note agreement with Vivos Holdings, 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 Holdings 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 Holdings 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 Holdings. Naveen Doki and Silvija Valleru are beneficial owners of Vivos Holdings
and are also 5% or greater beneficial owners of Company Common Stock. As of December 31, 2020, and 2019, the total
outstanding balance was $769 and $752, respectively which includes interest of $19 and $2 respectively.
Debt
Settlement Agreements
On July 10, 2018, Vivos Holdings
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 Holdings, both
shareholders and Maslow. In October 2018, Vivos defaulted on the agreement and on October 25, 2018, executed a settlement agreement
whereby Maslow was 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, 2020, and 2019, there was no outstanding balance
due.
On July 5, 2018, Vivos Holdings executed
a receivable financing agreement with a financial institution whereby Vivos Holdings agreed to remit $556 of accounts receivable
over a six-month period through daily remittances of $4 in exchange for $400. The agreement was guaranteed by Vivos Holdings,
it’s shareholders and the Company. In October of 2018, Vivos Holdings 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 Holdings (as a
“owner/guarantor”) entered into a receivable financing agreement with Kinetic Direct Funding LLC pursuant to which
the Company and Vivos Holdings 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 Holdings as well as Naveen Doki in his individual capacity, and an owner of Vivos Holdings. In October
of 2018, there was a default under the Kinetic Financing Agreement by Vivos Holdings. On October 25, 2018, the Company,
Naveen Doki, Silvija Valleru, and Vivos Holdings (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. 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 Holdings 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 Holdings,
and Vivos Acquisitions, LLC, via Mr. Naveen Doki and Mrs. 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 SUBSIDIARY
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 the Vivos Group
(“HCRN”) a credit facility in the principal amount of $1,005 (“HCRN Credit Facility”). Each of Maslow, Vivos
Holdings, Vivos Acquisitions, LLC, Mr. Naveen Doki and Mrs. Silvija Valleru guaranteed the HCRN Credit Facility.
To secure repayment of their guarantee obligations, the Company and Vivos Holdings 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 Holdings, Vivos Acquisitions, LLC, Mr. Doki, and
Mrs. 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 Holdings 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 Holdings, 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. As of December 31, 2019, the Company had repaid the outstanding balance due for the Maslow
Credit Facility under the settlement agreement in full.
Related
Party Relationships and Transactions
On
October 29, 2019, prior to the Merger, pursuant to the Merger Agreement, Naveen Doki and Silvija Valleru became beneficial owners of
206,606,528 and 51,652,908 shares of RLBY Common Stock, respectively, equal to 68.9% and 17.2% of the total
number of shares of RLBY Common Stock outstanding after giving effect to the Merger, respectively. The Company is seeking damages
which if granted will likely be the remedy set forth within the merger agreement which is primarily the relinquishment in whole or in
part shares of Company Common Stock received by the Respondents in connection with the Merger.
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 then 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 bore interest at 12% per year, with the balance of $56 paid in full on June 26, 2020.
On
July 31, 2019, prior to the Merger, the Company entered into a Securities Purchase Agreement with the same officer and then 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 bore interest at 12% per year, with balance of $56 paid in full on August 4, 2020.
RELIABILITY,
INC. AND SUBSIDIARY
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 bore interest
at 12% per year, with balance of $112 becoming due and paid on July 31, 2020.
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 reimbursement took place on May 8, 2020 and totaled $83.
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.
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 SUBSIDIARY
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
|
|
|
|
2020
|
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
EOR
|
|
$
|
23,564
|
|
|
$
|
34,452
|
|
Recruiting and Staffing
|
|
|
4,478
|
|
|
|
2,190
|
|
Video and Multimedia Production
|
|
|
1,125
|
|
|
|
1,641
|
|
Other
|
|
|
35
|
|
|
|
161
|
|
Total
|
|
$
|
29,202
|
|
|
$
|
38,444
|
|
NOTE
17- SUBSEQUENT EVENTS
The
Company has evaluated subsequent events after the balance sheet date of December 31, 2020 through March 16, 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:
On
March 4, 2021, Maslow Media Group submitted an application with the SBA for 100% forgiveness of its PPP loan payable.