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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One) |
|
☒ |
QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
|
|
|
For
the quarterly period ended
June 30, 2022 |
|
|
|
or |
|
|
☐ |
TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
|
|
|
For
the transition period from ___________to
____________. |
Commission
File Number
0-7092

RELIABILITY INCORPORATED
(Exact
name of registrant as specified in its charter)
texas |
|
75-0868913 |
(State
or other jurisdiction of |
|
(I.R.S.
Employer |
incorporation
or organization) |
|
Identification
No.) |
22505 Gateway Center Drive,
P.O. Box 71,
Clarksburg,
Maryland
|
|
20871
|
(Address
of principal executive offices) |
|
(Zip
Code) |
(202)
965-1100 |
(Registrant’s
telephone number, including area code) |
(Former
name, former address and former fiscal year, if changed since last
report) |
Securities
registered pursuant to Section 12(b) of the Act: |
Title
of each class |
|
Trading
Symbol(s) |
|
Name
each exchange on which registered |
Common Stock, no par value |
|
RLBY |
|
OTC
Pink Sheets |
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. ☒
YES ☐
NO
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). ☒
YES ☐
NO
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ☐ |
|
Accelerated
filer ☐ |
|
Non-accelerated filer ☐ |
|
Smaller
reporting company
☒ |
|
|
|
Emerging
growth company
☐ |
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). ☐ YES ☒
NO
Indicate
the number of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date:
300,000,000 shares of Common Stock, no par value, as of June
30, 2022.
RELIABILITY
INCORPORATED
Quarterly
Report on Form 10-Q
As
of and For the Three and Six Months Ended June 30,
2022
INDEX
PART I. FINANCIAL INFORMATION
Item
1. Financial Statements
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED
CONSOLIDATED BALANCE SHEETS
(amounts
in thousands, except per share data)
The
accompanying notes are an integral part of these
statements.
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts
in thousands, except per share data)
The
accompanying notes are an integral part of these
statements.
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts
in thousands, except per share data)
The
accompanying notes are an integral part of these
statements.
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED
CONSOLIDATED STATEMENTS OF CHANGE IN EQUITY
For
the Six Months Ended June 30, 2022 and 2021
(amounts
in thousands, except per share data)
The
accompanying notes are an integral part of these
statements.
RELIABILITY
INC. AND SUBSIDIARY
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts
in thousands)
The
accompanying notes are an integral part of these
statements.
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(amounts
in thousands)
|
|
For the Six
Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
Supplemental
disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
66 |
|
|
$ |
40 |
|
Income
taxes |
|
$ |
733 |
|
|
$ |
217 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
The Company
received forgiveness from the SBA of its PPP loan payable |
|
$ |
- |
|
|
$ |
5,216 |
|
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
June
30, 2022
(amounts
in thousands, except per share data)
NOTE
1. NATURE OF
OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Reliability,
Inc. is a leading provider of employer of record and media and
information technology (“IT”) staffing services that operates,
along with its wholly owned subsidiary, The Maslow Media Group, Inc
(“MMG”), (collectively, “Reliability” or the “Company”), primarily
within the United States of America in four industry segments:
Employer of Record (“EOR”), Recruiting and Staffing, Permanent
Direct Placements, and Video and Multimedia Production, which
provides script to screen media talent. Our Staffing segment
provides skilled field talent on a nationwide basis for Media, IT,
and finance and accounting client partner projects. Our Staffing
segment occasionally received requests for (direct) placements.
Because of an uptick in direct hire requests in 2021, factoring in
the much higher margins that business derives. Video Production
involves assembling and providing crews for special projects that
can last anywhere from a week to 6 months.
Reliability
was incorporated under the laws of the State of Texas in 1953, but
the then principal business of the Company started in 1971 was
closed in 2007. The Company completed a reverse merger with MMG
(the “Merger”) on October 29, 2019.
Company Background
Linda
Maslow founded Maslow Group initially in 1988 and incorporated the
firm under the name the Maslow Media Group Inc., in March
1992.
On
November 9, 2016, Linda Maslow sold the business to Vivos Holdings,
LLC (“Vivos Holdings”) owned by Dr. Naveen Doki (“Dr. Doki”) and
Silvija Valleru (“Ms. Valleru”).
In
2018, Vivos Holdings and several other Vivos companies, (“Vivos
Group”) engaged an investment banker who approached management of
Reliability to discuss a potential reverse merger transaction. The
other investors who collaborated on a share swap of MMG for other
Vivos companies were Shirisha Janumpally (“Mrs.
Janumpally”), wife of Dr.
Doki, and Kalyan Pathuri (“Mr. Pathuri”), husband of Silvija
Valleru.
These 4 individuals, Dr. Doki, Mrs. Janumpally, Mr. Pathuri, and
Mrs. Valleru, also have common ownership combinations in a number
of other entities [Vivos Holdings, LLC. Vivos Real Estate Holdings,
LLC (“VREH”), Vivos Holdings, Inc., Vivos Group, Vivos
Acquisitions, LLC., and Federal Systems, LLC], (collectively
referred to herein as “Vivos Group”).
The
reverse merger was consummated on October 29, 2019. As a result of
the Merger, the Vivos Group (Vivos Holdings LLC, officially)
acquired approximately 84% of the
issued and outstanding shares of Reliability which were distributed
by Vivos Holdings, LLC.
On October 29, 2019, MMG became a wholly owned subsidiary of
Reliability by merging R-M Merger Sub, Inc., a Virginia corporation
and a wholly owned subsidiary of Reliability, with and into Maslow,
with MMG being the surviving corporation.
The
Company ceased to be a “shell” company as defined by Rule 12b-2 of
the Securities Exchange Act of 1934, as amended, (the “Exchange
Act”) by virtue of its ownership of MMG following the Merger. The
acquisition of MMG also resulted in a “change in control” of
Reliability.
On or
about February 25, 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
Dr. Doki (collectively “Vivos Debtors”), to enforce Maslow’s rights
under certain promissory notes and a personal guarantee made by the
Dr. Doki.
On or
about May 6, 2020, the Vivos Debtors filed a counterclaim and
third-party complaint for damages, declaratory and injunctive
relief, and jury demand (the “Counterclaim”).
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2022
(amounts
in thousands, except per share data)
The
Company also began pursuing arbitration in New York in 2020, which
was the contractual remedy for breaches of the Merger agreement
between MMG and Reliability. It is the Company’s contention that
the Vivos Group failed to disclose several material pieces of
information to Reliability management pre-merger as was required by
the Merger agreement. Additionally, the Vivos Group declined to
honor multiple commitments made to Reliability, including a $3,000
promissory note and an agreement to shield the Company from their
personal debt per the “Liquidation Agreement.” Per the Merger
Agreement, these breaches can lead to a loss of up to all shares in
Reliability for the Vivos Group.
On
December 23, 2020, at a hearing in the Maryland Circuit Court of
Montgomery County, Maryland, a motion by the Vivos Group to compel
a shareholder meeting was summarily dismissed. On January 20, 2021,
Defendants and Counter/Third-Party Plaintiffs, Vivos, VREH, Dr.
Doki, Mr. Pathuri, Igly, Judos, by counsel, filed a Notice of
Appeal on the dismissal. However, the deadline to pursue the appeal
lapsed absent additional filings by the Vivos Group.
On
July 21, 2021, MMG settled the obligation which with it had been
committed by Vivos Holdings, LLC in July 2018, with Libertas
Funding, LLC and Kinetic for $475. This debt belonged to Vivos
Holdings, LLC, and the aforementioned Liquidation Agreement, had
been created as a safeguard to shelter MMG should Vivos Holdings,
LLC default, which actually transpired prior to the Merger closing
in October 2019.
On September 7, 2021, the Company entered to Arbitration and
Tolling Agreements (the “Agreements”) with the Vivos Group and all
other persons who were parties to the pending litigation previously
reported in the Texas, New York, and Maryland courts and before the
American Arbitration Association. The Agreements call for the stay
or dismissal of the pending litigation, with the parties agreeing
to resolve their disputes before a single arbitrator in
Maryland.
On
March 21, 2022, the Company began its arbitration proceedings
against the Vivos Group. MMG contends the Vivos Group committed
merger violations which could result in relinquishment in whole or
in part shares of Company common stock received by the Respondents
in connection with the Merger. We anticipate an arbitration
decision in the third quarter 2022.
We refer below to the disputes between Reliability and the Vivos
Group as the “Vivos Matter.”
Upon
a final resolution as to the underlying ownership and rights of
certain shareholders, the Company intends to hold an annual meeting
of shareholders within a reasonable time thereafter.
Basis of presentation
The
unaudited consolidated interim financial statements include the
accounts of the Company and all wholly owned divisions, including
its 100%
owned subsidiary, MMG. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The
accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States and the rules of the SEC and should
be read in conjunction with the audited financial statements and
notes thereto contained in our Form 10-K. In the opinion of
management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial
position and the results of operations for the periods presented
have been reflected herein. The results of operations for the
periods presented are not necessarily indicative of the results to
be expected for the full year.
For
further information, refer to the consolidated financial statements
and footnotes thereto included in the Company’s annual report on
Form 10-K for the year ended December 31, 2021.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2022
(amounts
in thousands, except per share data)
Concentration of Credit Risk
For
the six months ended June 30, 2022, 22.5% of revenue came from
AT&T Services, Inc. (inclusive of its DirecTV division)
(“AT&T”), 21.1% from Goldman Sachs, and
13.2% from Janssen
Pharmaceuticals (which includes workforce partner Johnson &
Johnson). Combined, this totals 56.8% of revenue. AT&T,
Goldman Sachs, Janssen, and Morgan Stanley accounted for
24.1%,
16.3%,
11.2% and
13.5%, respectively,
65.1% in aggregate revenue for the same period ended June
30, 2021. No other client
has exceeded 10% of revenues in 2022 or 2021.
NOTE
2. LIQUIDITY AND GOING
CONCERN
Going Concern
Management
considers on a regular basis, the Company’s ability to continue as
a going concern. The factors which have impacted the business and
our liquidity are:
|
● |
Uncertainty
in outcome of the arbitration hearing with Vivos Group which will
likely have decision rendered in the third quarter
2022; |
|
● |
Operating
losses in nine of the last ten quarters starting with the first
quarter of 2020 through the second quarter of 2022 ending June 30,
2022, totaling in aggregate $; |
|
● |
The
slow-moving rebound of client demand for our services to
pre-pandemic levels; |
|
● |
Difficulties
in raising cash via public markets for organic and inorganic
growth, due to lack of unissued authorized shares available for
Company use; |
|
● |
Inability
to realize approximately $5,094 in notes receivables from
Vivos Group; |
|
● |
Commitments
and Contingencies, described further in Note 6. |
All
these conditions noted and factored above with the primary risk
being that the arbitration (see Item 1) outcome is not in the
Company’s favor, and the $5,094 in notes receivable is not
realized in full, part, or all, creates substantial doubt about the
Company’s ability to continue as a going concern.
Additionally, from an
operational view the underlying business has yet to fully recover
from COVID-19 with current quarterly comparative revenue levels
down 32% from 2019 standards.
Therefore,
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 that might
result from the outcome from these uncertainties.
The
Company is quoted on the OTC Marketplace under the symbol
“RLBY.”
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2022
(amounts
in thousands, except per share data)
NOTE
3. ACCOUNTS
RECEIVABLE
Accounts
receivable can be broken down as follows
SCHEDULE OF ACCOUNTS
RECEIVABLE
|
|
6/30/2022 |
|
|
12/31/2021 |
|
Accounts
Receivable |
|
|
|
|
|
|
|
|
Trade
receivables |
|
$ |
4,698 |
|
|
|
5,592 |
|
Unbilled
receivables |
|
|
802 |
|
|
|
813 |
|
Less
allowance for doubtful accounts |
|
|
- |
|
|
|
- |
|
Total trade
accounts receivable |
|
|
5,500 |
|
|
|
6,405 |
|
NOTE
4. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Adopted Accounting Pronouncements
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 Company adopted this
during 2021 resulting in an impairment charge as stated in the
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.
NOTE
5. DEBT
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. In 2021, MMG completed settlement of the
estimated $860 tax liability
caused by the Vivos Group in 2017, paying the final estimated
portion of $300 in
2021.
As of
June 30, 2022, the Company no longer has a federal tax liability
related to tax periods prior to 2020, with the combined federal and
state tax liability at $93.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2022
(amounts
in thousands, except per share data)
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 50 basis points to 15 and the interest rate from
prime plus 3.5% 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 June 30, 2022, the required
amount was 7%. 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
receivables were sold with full recourse. Proceeds from the sale of
receivables were $4,149
for the three-month period ending June 30, 2022, compared to
$1,131 for
the same period ending on June 30, 2021, and $6,960
compared to $2,453
for the six months ended June 30, 2022 and 2021, respectively. The
total outstanding balance under the recourse contract was
$2,725 on June 30, 2022,
compared to $946 as of December 31,
2021.
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 three months ended
June 30, 2022 and 2021 totaled $36 and $18,
respectively and $66 and $63 for the six months ended June
30, 2022 and 2021, respectively.
NOTE
6. COMMITMENTS AND
CONTINGENCIES
There
are a number of debts and confessions of judgement (“COJ”) related
to the Vivos Group that included MMG as a co-signer or guarantor at
some stage in the Vivos Group debt process from November 2016
through October 29, 2019, when Vivos Holdings LLC, owned
Maslow.
In
December 2019, the Company’s executive management learned that
prior to the Merger, in January 2018, one of the Company’s related
parties, on behalf of MMG, 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. MMG leased this space on market terms. This obligation
had not been disclosed by the Vivos Group to Reliability prior to
the Merger and consequently not included in MMG’s financial
statements.
On
March 3, 2022, MMG received a notice of default, acceleration, and
demand for payment in full, from FVCBank due to incurable events of
default on behalf of Borrower, Vivos Real Estate Holdings, LLC. Per
the default notice, “As of March 2, 2022, the total indebtedness
due and owing under the Loan (the ‘‘Debt’’) is $1,743 consisting of an unpaid
principal balance in the amount of $1,703 accrued and unpaid interest in
the amount of $7, deferred payments in the amount
of $20 and late
fees in the amount of $12 plus prepayment
penalties and attorneys’ fees, costs and expenses,” less setoff
fees of $16. MMG believes it has grounds to
contest it being a guarantor on the loan.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2022
(amounts
in thousands, except per share data)
On
July 12, 2022, MMG was advised that a foreclosure sale of the 22
Baltimore Road property was scheduled to take place on Thursday
August 4, 2022, at Montgomery County Circuit Court in Rockville,
Maryland. It was subsequently cancelled after VREH filed for
bankruptcy on August 2nd.
Maslow
has filed a Motion to Vacate Confessed Judgment entered against it
by FVC Bank in the Circuit Court for Fairfax County and has
requested that the matter be heard before the end of
2022.
On
October 9, 2018, Maslow Media Group, Inc. was named as a defendant
in an Affidavit of COJ filed in the Supreme Court of the State of
New York in relation to a case brought by Hop Capital against
members of the Vivos Group, which had collectively agreed to pay a
sum of $400 to HOP
Capital. Maslow Media Group, Inc. is named as one defendant among
six other defendants. The claim brought by HOP Capital against the
defendants in this case is in relation to a Merchant Agreement
dated October 4, 2018, to which Maslow Media Group, Inc. was not a
party. As such, MMG contends that being named in the Affidavit of
COJ as a defendant was made in error and is currently seeking to
have its name removed from the Affidavit of COJ as a defendant. As
of August 10, 2022, we have not been contacted again on this
matter, nor have we been notified on any developments.
On or
about May 6, 2020, the Vivos Debtors and other Vivos Group members,
specifically. Mr. Pathuri, Judos, and Igly responded to the Vivos
Default Claim with the “Vivos Default Counterclaim.” The Company
continues to believe that the Counterclaim has no merit and is
vigorously defending itself and its indemnified officers,
directors, and other parties as permitted by the Company’s
organizational documents, via a March 2022 arbitration hearing
which both parties agreed on September 7, 2021, to resolve their
disputes before a single arbitrator in Maryland. The hearing
portion began on March 21,2022 and has since concluded. A decision
is not anticipated until the third quarter 2022.
At
the present time, the Company is uncertain as to whether any of the
above items will have a material impact on their consolidated
financial statements.
NOTE
7. 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
8. RELATED PARTY
TRANSACTIONS
On
November 9, 2016, Vivos Holdings, LLC, the former owner of MMG,
acquired 100% of
MMG through a stock acquisition exchange for a purchase price of
$1,750, of which: (i) $1,400 was paid at
settlement with proceeds from MMG and (ii) a promissory note to pay
the remaining $350 (“Vivos/MMG Purchase Agreement”).
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 MMG on behalf of the Vivos Debtors. The
Vivos Debtors subsequently entered into a promissory note
receivable with MMG, described below, for the full stock purchase
price. No payment has ever been made against this note and between
2018 to present, there has been $2,503 in additional
borrowings.
Notes Receivable
The
Company has notes receivable from Vivos Holdings, LLC and VREH, a
member of Vivos Group, both related party affiliates due to their
ownership percentage in the Company. In January 2021, MMG began
applying the legal minimum rate of interest which per Virginia
statute is 8.0% on two of
the three defaulted notes receivable below. Per the Code of
Virginia, the legal rate of interest shall be implied when there is
an obligation to pay interest and no express contract to pay
interest at a specified rate. However, it was determined that the
two notes had clauses capping the default interest at 4.5% and 5.5%, respectively. The rate
adjustment for the allowed periods were made using the eligible
agreement rates.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2022
(amounts
in thousands, except per share data)
In
connection with the Vivos/MMG Purchase Agreement, on November 15,
2016, MMG executed a promissory note receivable with Vivos
Holdings, LLC in the amount of $1,400. As defined
by the Vivos/MMG Purchase 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 would accrue monthly and a new loan in the
amount of $1,773 would 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, Inc. to the seller by MMG. These
payments, plus any other payments made by MMG on behalf of Vivos
Holdings, LLC, are added to the principal balance of the promissory
note receivable (“Vivos/MMG Purchase Agreement 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 June 30,
2022, the total outstanding balance on this note was $3,446 which includes accrued interest
for the period of $39.
On
November 15, 2017, MMG 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 September 30, 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 instalments and the principal balance plus accrued and
unpaid interest is due September 30, 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,
LLC. In addition, principal payments totaling $30 were made by the
Vivos Group. As of June 30, 2022, the total outstanding balance was
$835 which includes accrued interest
for period of $12.
On
June 12, 2019, MMG entered into a Personal Guaranty agreement with
Dr. Doki, pursuant to which Dr. Naveen Doki personally guaranteed
to MMG repayment of $3,000 of the balance of the
Promissory Note issued to Vivos Debtors 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
shareholder, pursuant to the personal guaranty agreement for
defaulting on the outstanding notes receivables.
On
September 5, 2019, MMG entered into a Secured Promissory Note
agreement with Vivos, pursuant to which MMG issued a secured
promissory note to the Vivos Group in the principal amount of
$750.
The note bears interest at
2.5% per year and requires the Vivos Group to make monthly
payments to MMG 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, MMG 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 Dr. Doki and Silvija Valleru personally guaranty the
repayment of the note by the Vivos Group. Dr. Doki and Silvija
Valleru were beneficial owners of Vivos and are also 5% or greater
beneficial owners of Company Common stock, which is qualified by
the Merger Arbitration complaint. On December 31, 2021, the total
outstanding balance was $790,
which includes interest for period of $5.
As of June 30, 2022, the total outstanding balance was $800,
which includes interest for period of $5.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2022
(amounts
in thousands, except per share data)
Additionally,
the Vivos Group had borrowings of $2,503
adding to the original notes; with $2,383
between 2018 through 2021. As of June 30, 2022 and December 31,
2021, the receivable totaled $5,094
and $4,985,
respectively.
Debt Settlement Agreements
On
July 21, 2021, MMG settled the obligation which Vivos Holdings, LLC
had obligated MMG to in July 2018, with Libertas Funding, LLC and
Kinetic for $475.
On
March 6, 2022, MMG received a notice of default, acceleration, and
demand for payment-in-full from FVC Bank due to incurable events of
default on behalf of Borrower Vivos Real Estate Holdings,
LLC.
Maslow
has filed a Motion to Vacate Confessed Judgment entered against it
by FVC Bank in the Circuit Court for Fairfax County and has
requested that the matter be heard before the end of
2022.
Related Party Relationships
On
October 29, 2019, prior to the Merger, pursuant to the Merger
Agreement, Dr. 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.
In
2019, the Company entered into transactions with two executive
officers, Nick Tsahalis and Mark Speck, of the Company, resulting
in the issuance of warrants to purchase 163,232
shares each of common stock.
The
term “warrant” herein refers to warrants issued by MMG and assumed
by the Company 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 the Company common stock shall be 120% of the average
sale price of the Company 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 Company 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”). The 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
September 7, 2021, the Company entered in Arbitration and Tolling
Agreements with alleged shareholder Dr. Doki, and his affiliates
and all other persons who were parties to the pending litigation
previously reported in the Texas, New York and Maryland courts and
before the American Arbitration Association. The Agreements call
for the stay or dismissal of the pending litigation, with the
parties agreeing to resolve their disputes before a single
arbitrator in Maryland. The parties also agreed to maintain the
status quo in corporate governance and related matters pending a
final non-appealable judgment confirming any award in arbitration.
The parties also signed a Tolling Agreement to toll the statute of
limitations following the dismissal of a pending
litigation.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2022
(amounts
in thousands, except per share data)
NOTE
9. BUSINESS
SEGMENTS
The
Company operates within
four industry segments: EOR, Recruiting and Staffing,
Permanent (Direct) Placements, and Video Production. The EOR
segment provides freelance 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. Permanent Placements was
added as a segment in the second quarter 2021 as the Company began
to take on clients who desired the Company source candidates for
permanent hire on a regular basis. The Video and Multimedia
Production segment provides Script to Screen services for
corporate, government, and non-profit clients, globally.
The
following tables provides a reconciliation of revenue by reportable
segment to consolidated results for the three and six months ended
June 30, 2022 and 2021, respectively:
For
the three months ended June 30:
SCHEDULE OF RECONCILIATION OF REVENUE AND
OPERATING INCOME BY REPORTABLE SEGMENT TO CONSOLIDATED
RESULTS
|
|
2022 |
|
|
2021 |
|
Revenue: |
|
|
|
|
|
|
|
|
EOR |
|
$ |
5,515 |
|
|
|
3,981 |
|
Recruiting and Staffing |
|
|
898 |
|
|
|
812 |
|
Permanent Placement |
|
|
- |
|
|
|
30 |
|
Video and
Multimedia Production |
|
|
68 |
|
|
|
251 |
|
Total |
|
$ |
6,481 |
|
|
|
5,074 |
|
For
the six months ended June 30:
|
|
2022 |
|
|
2021 |
|
Revenue: |
|
|
|
|
|
|
|
|
EOR |
|
$ |
10,288 |
|
|
|
8,478 |
|
Recruiting and Staffing |
|
|
1,822 |
|
|
|
1,696 |
|
Permanent Placement |
|
|
39 |
|
|
|
30 |
|
Video and
Multimedia Production |
|
|
115 |
|
|
|
664 |
|
Total |
|
$ |
12,264 |
|
|
|
10,868 |
|
NOTE
10. SUBSEQUENT
EVENTS
The
Company has evaluated subsequent events through August 15, 2022,
the date on which the unaudited 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 unaudited condensed consolidated financial statements,
except as follows:
Maslow
has filed a Motion to Vacate Confessed Judgment entered against it
by FVC Bank in the Circuit Court for Fairfax County and has
requested that the matter be heard before the end of
2022.
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING
STATEMENTS
The
following discussion and analysis of our results of operations and
financial condition should be read in conjunction with our
unaudited consolidated financial statements and related notes
appearing elsewhere in this Quarterly Report on Form 10-Q. This
section includes several forward-looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995,
that reflect our current views with respect to future events and
financial performance. All statements that address expectations or
projections about the future, including, but not limited to,
statements about our plans, strategies, adequacy of resources and
future financial results (such as revenue, gross profit, operating
profit, cash flow), are forward-looking statements. Some of the
forward-looking statements can be identified by words like
“anticipates,” “believes,” “expects,” “may,” “will,” “can,”
“could,” “should,” “intends,” “project,” “predict,” “plans,”
“estimates,” “goal,” “target,” “possible,” “potential,” “would,”
“seek,” and similar references to future periods. These statements
are not a guarantee of future performance and involve a number of
risks, uncertainties and assumptions that are difficult to predict.
Because these forward-looking statements are based on estimates and
assumptions that are subject to significant business, economic and
competitive uncertainties, many of which are beyond our control or
are subject to change, actual outcomes and results may differ
materially from what is expressed or forecasted in these
forward-looking statements. Important factors that could cause
actual results to differ materially from these forward-looking
statements include, but are not limited to: the impact of the
COVID-19 pandemic on us and our clients; our ability to access the
capital markets by pursuing additional debt and equity financing to
fund our business plan and expenses on terms acceptable to the
Vivos Group or at all; negative outcome of pending and future
claims and litigation and our ability to comply with our
contractual covenants, including in respect of our debt; potential
loss of clients and possible rejection of our business model and/or
sales methods; weakness in general economic conditions and levels
of capital spending by customers in the industries we serve;
weakness or volatility in the financial and capital markets, which
may result in the postponement or cancellation of our customers’
projects or the inability of our customers to pay our fees; delays
or reductions in U.S. government spending; credit risks associated
with our customers; competitive market pressures; the availability
and cost of qualified labor; our level of success in attracting,
training and retaining qualified management personnel and other
staff employees; changes in tax laws and other government
regulations, including the impact of health care reform laws and
regulations; the possibility of incurring liability for our
business activities, including, but not limited to, the activities
of our temporary employees; our performance on customer contracts;
and government policies, legislation or judicial decisions adverse
to our businesses. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as
of the date hereof. We assume no obligation to update such
statements, whether as a result of new information, future events
or otherwise, except as required by law. We recommend readers to
carefully review the entirety of this Quarterly Report, the “Risk
Factors” in Item 1A of the Company’s Annual Report on Form 10-K for
the year ended December 31, 2021, and the other reports and
documents we file from time to time with the Securities and
Exchange Commission (“SEC”), particularly our Quarterly Reports on
Form 10-Q and our Current Reports on Form 8-K.
The
following discussion and analysis of our financial condition and
results of operations, our expectations regarding the future
performance of our business and the other non-historical statements
in the discussion and analysis are forward-looking statements.
These forward-looking statements are subject to risks,
uncertainties and other factors including those described in “Item
1A. Risk Factors” of the Company’s Annual Report on Form 10-K for
the year ended December 31, 2021, with the SEC. Our actual results
may differ materially from those contained in any forward-looking
statements. You should read the following discussion together with
our financial statements and related notes thereto and other
financial information included in this Quarterly Report on Form
10-Q.
CRITICAL
ACCOUNTING POLICIES AND COMMENTS RELATED TO
OPERATIONS
This
discussion and analysis of our financial condition and results of
operations are based upon our unaudited consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of these unaudited consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses based on historical
experience and various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or
conditions.
There
have been no material changes or developments in the Company’s
evaluation of the accounting estimates and the underlying
assumptions or methodologies that it believes to be Critical
Accounting Policies and Estimates as disclosed in its Form 10-K for
the year ended December 31, 2021.
Management’s
Discussion included in the Form 10-K for the year ended December
31, 2021, includes discussion of various factors and items related
to the Company’s results of operations and liquidity. There have
been no other significant changes in most of the factors discussed
in the Form 10-K and many of the items discussed in the Form 10-K
are relevant to 2022 operations; thus, the reader of this report
should read Management’s Discussion included in Form 10-K for the
year ended December 31, 2021.
RESULTS
OF OPERATIONS
Revenues
Revenues
for the three months ended June 30, 2022, was $6,481, which was
$1,407 or 27.7% greater than for the same period in 2021 with
second quarter revenue at $5,074. EOR grew by $1,534 or 38.5% to
$5,515, which represented 85.1% of second quarter
revenue.
Staffing
grew $86 to $898 in the second quarter of 2022, but approximately
$106 of this total was based on two reassignments of specific US
government projects from Video Production to Media
Staffing.
Media
Staffing, a subset of Staffing, grew beyond benefitting for $106 in
reclassed Video Production project revenue from a year ago, with
second quarterly revenues of $824 compared to $676 a year ago, an
increase of $148. The reclass was merely taking recurring non
project revenue previously classified as Video Production and
reassigning it appropriately to Media Staffing. The impact in 2022
was $106 in the second quarter. IT Staffing, the other subset,
declined comparatively in the second quarter 2022 to 2021 by $62,
garnering $74 in 2022.
Video
Production would have had a decline in revenue outside the $106
deemed not be staffing work, had remained, as that segment produced
$68 in revenue compared to $250 in the second quarter
2021.
Permanent
Placement failed to post revenue in the quarter ending June 30,
2022.
For
the six months ended June 30, 2022, revenue totaled $12,264
compared to $10,868 in the same period a year ago, resulting in
$1,396 in incremental revenue comparably.
EOR
revenues produced an even larger comparative gain in the first half
of 2022 compared to 2021, with $10,288 for the six months ended
June 30, 2022, compared to $8,478 a year ago. This is an increase
of $1,810 or 21.3%, which represented 83.9% of the Company’s total
year to date (YTD) revenue through June 30.
Staffing
increased as well when comparing six-month performance ending June
30, 2022, to same period in 2021, by $126 to a total of $1,822.
This represented a 7.4% increase over 2021’s Staffing Revenue of
$1,696 through the six months ending June 30, 2021.
Media
Staffing grew $397 to $1,683 with $206 attributable to the
reassignment of two client projects previously credited to Video
Production.
Video
Production revenue compared unfavorably to the same period in 2021,
with revenues of $115 compared to $661 in 2021, a $546 drop. If
adjusted for the reclassification of work credited to it in 2021,
Video Production would have dropped by $340.
Cost
of Revenue / Gross Profit
Gross
profit for the three-month period ending June 30, 2022, was $887
representing 13.7% of revenues, which is a $169 improvement over
the $718 in gross profit MMG earned in 2021’s second quarter when
the gross margin reached 14.1%.
The
quarter over quarter gross margin (“GM”) percentage drop can be
partially attributed to the strength of the aforementioned EOR
revenue increase of $1,534, which resulted in EOR dominating the
four business segments by accounting for 85.1% of the business
versus 78.5% in the second quarter 2021; as EOR business GM
percentage was 11.7% to the rest which totaled 22.7%, the over
quarterly average slipped from a year ago.
However,
EOR’s 11.7%, margin was strong compared with 10.4% in the first
quarter 2022, 10.1% in the second quarter a year ago and a 9.8%
average for all of 2021. This improvement can be attributed to some
pricing changes negotiated with several key clients, and the client
mix being favorable as clients with slightly higher margins
contributed more heavily to the quarter. This is not expected to be
the case throughout 2022.
MMG’s
Staffing gross profit grew modestly by $6 to $191, as volume had
more to do with the growth than gross margin percentage as Staffing
margins declined by 80 basis points to 20.7%. IT Staffing dropped
approximately 1% in gross margin percentage to 27.8%.
Year
to date 2022, the Company’s gross profit improved by $153 or 10.5%
to $1,616 compared to 2021.
Gross
margin percentage fell slightly to 13.2% from 13.5%.
EOR
experienced a margin boost year to date to 11.1% compared to 10.1%
through June 30, 2021. Video Production’s YTD GM % also improved to
24.9% from 20.9% a year ago. Media Staffing GM % has slipped to
21.9% versus 24.5% in the six months ended June 30, 2021. Gross
Profit in Media Staffing for the nine months ending June 30,
however rose to $368 from $314 as volumes increased.
General and Administrative (“G&A”)
General
and administrative (“G&A”) expenses for the three months ended
June 30, 2022, were $1,097, as compared to $878 in the comparable
period in 2021, representing a $220 or 25.1% increase. This
increase was predominantly the result of having an estimated $107
in arbitration related costs, employee salaries and benefits
ratcheting up by $64 or 9.4% from the second quarter 2021, and
contracted labor and recruiting costs increasing by $33
comparatively from a year ago.
For
the six months ending June 30, 2022, G&A was $2,402 compared
with $1,688 a year ago, an increase of $714 or 29.7%. However, the
legal and consulting costs associated with our arbitration (See
Note 1) represented $506 in totality, a $419 increase in like costs
associated with the Vivos Matter from a year ago. MMG salaries and
benefits increased $201 with sales and client services department
non incentive based compensation increasing $127, as we increased
our investment in these two vital groups. The other areas of spend
increase were commissions to drive sales and recruiting totaling
$33; bonus accrued at $72 as we move to tie more compensation to
performance-based measures; commercial legal $19; recruiting
software $15; and travel $11.
Interest Expense
The
Company incurred $66 in interest charges for financing (factoring)
its invoices in the first six months of 2022 compared with $63 in
the same period a year ago, In the second quarter MMG incurred $36
in interest changes compared to $18 in the same period a year ago
as MMG increased its average position under finance from $1.3M a
year ago to $2.5M in the second quarter 2022.
Other Income (Expense)
MMG
benefitted from $1 in corporate credit card rebate in the second
quarter 2022. For the six months ended June 3, 2021, MMG had $0 in
other income compared to a year ago when MMG earned $8,042 in other
income courtesy of $5,273 in the PPP Forgiveness which included the
recovery of accrued interest, and $2,769 In Employee Retention
Credits (ERC).
LIQUIDITY
AND CAPITAL RESOURCES
Our
working capital requirements are driven primarily by EOR field
talent payments, G&A salaries, public company costs, interest
associated with factoring, and client accounts receivable receipts.
Since receipts from client payments are on average 70 days behind
payments to field talent, working capital requirements can be
periodically challenged. We have a Factoring Facility with Triumph,
whereas Triumph advances 93% of our eligible receivables at an
advance rate of 15 basis points, an interest rate of prime plus
2%., and our prime floor rate at 4%. Our Days Outstanding (DSO) for
the trailing 12 months ending June 30, 2022, is at 64 comparable to
62 DSO for the trailing twelve months ending June 30,
2021.
In
2021, a few of our large clients began demanding 90-day terms.
Delays in receipt of purchase orders also has had an adverse impact
on our DSO since 2019. Despite these challenges, our DSO in the
second quarter ending June 30, 2022, improved to 65 from 80 in the
first three months of 2022.
When
looking at A/R aging in relation to due date, as of June 30, 2022,
77.4% or $3,620 of our $4,668 in total trade receivables were <
31 days aged, compared to 97.6% a year ago. This has much to do
with extended payment terms to our larger clients as well as delays
of up to 30 days on receiving purchase orders after the invoice has
been prepared. MMG management is working on ways to speed back up
the cash conversion process outside of financing.
Our
Federal and state tax liability has a balance of $92 at the end of
the second quarter 2022, mainly because we deposited $725 for our
2021 expected tax liability.
Our
primary sources of liquidity are cash generated from operations via
accounts receivable and borrowings under our Factoring Facility
with Triumph enabling access to the 7% unfactored portion. Because
certain large clients have changed their payment practices
announcing 60- and 90-day terms amounting to a unilateral extension
to contractual terms by 30-60 days, we can experience an adverse
cash flow impact since Triumph does not provide credit if an
account obligor pays more than 120 days after the invoice
date.
Our
primary uses of cash are for payments to field talent, corporate,
and staff employees, related payroll liabilities, operating
expenses, public company costs, including but not limited to,
general and professional liability and directors’ and officers’
liability insurance premiums, legal fees, filing fees, auditor and
accounting fees, stock transfer services, and board compensation;
followed by cash factoring and other borrowing interest; cash
taxes; and debt payments.
Since
we are an EOR with the majority of contracted talent paid as W-2
employees who are paid known amounts on a consistent schedule; our
cash inflows do not typically align with these required payments,
resulting in temporary cash challenges, which is why we employ
factoring.
Vivos
Debtors as of June 30, 2022, had notes receivable totaling $5,094
including default on a $3,000 promissory note and on a $750 tax
obligation in December 2019. After numerous failed collection
attempts, on February 17, 2020, the Company initiated an action in
the Circuit Court of Montgomery County Maryland against Dr. Doki
and the Vivos Holdings for non-payment.
It
was also anticipated that following the Merger, the Company would
both access the capital markets by selling additional shares of
Company common stock and use shares of Company common stock as
currency to acquire other business revenues. However, all 300
million authorized shares of Company common stock were issued in
connection with the Merger. No shares are expected to become
available to the Company until the legal dispute with the Vivos
Debtors and Vivos Group is resolved. At that point, the Company can
decide whether to amend the Company’s Certificate of Formation to
increase the number of authorized shares of Company common stock or
approve a reverse-split of the outstanding shares of Company common
stock to provide additional shares for these purposes. No assurance
can be given as to when this might take place.
On
May 5, 2020, MMG received 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 provided that the Company be
eligible for forgiveness if the loan proceeds were used for payroll
and certain other specified operating expenses while maintaining
specified headcount requirements. On June 10, 2021, the Company was
informed by the SBA that it had met the requirements and that both
the $5,216 and of accrued interest totaling $57 were
forgiven.
Because our first three-quarter revenues in 2021 were 80% or less
than they were in 2019, the Company was eligible for the Employee
Retention Credit. Consequently, MMG received $155 in direct payroll
credits from the IRS via its payroll provider Paycom in the late
2nd quarter and $1,086 in the third quarter. MMG
returned $842 to the IRS for payroll credits received in the
4th quarter once the program ended retroactively in
mid-November 2021.This payment was made to the IRS through Paycom,
the Company’s payroll provider in January 2022.
Overall,
these programs bolstered our working capital and enabled us to
bring back employees and continue to serve our clients.
As of
June 30, 2022, our working capital was $8,608 compared to $9,361 on
December 31, 2021, and compared to $9,361 on December 31, 2021. Our
adjusted working capital at the end of June 2022, excluding the
notes receivable related to the Vivos Debtors totals $3,514
compared to $3,605 a year earlier.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Not
applicable.
Item
4. Risk Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures. The President
and Chief Financial Officer evaluated the effectiveness of the
disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the President and
Chief Financial Officer concluded that the disclosure controls and
procedures as of the end of the period covered by this report were
effective such that the information required to be disclosed in
reports filed under the Securities Exchange Act of 1934 is (i)
recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and (ii) accumulated
and communicated to the President and Chief Financial Officer to
allow timely decisions regarding disclosure. A controls system
cannot provide absolute assurance, however, that the objectives of
the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of
fraud, if any, within a company have been detected.
(b)
Changes in Internal Control over Financial Reporting. There
were no changes in the Company’s internal controls over financial
reporting, known to the President and Chief Financial Officer that
occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
RELIABILITY
INC.
OTHER
INFORMATION
June
30, 2022
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
On or
about February 25, 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
Dr. 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. MMG intends to continue to vigorously pursue this
litigation.
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 which began March 21, 2022, described
below.
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: Dr. 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.
On August 4, 2021, the US
District Court, Southern District of New York, denied the
Respondents motion to dismiss.
On
June 12, 2020, Igly Trust, a Vivos Group 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 Group 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. This
matter has since been moved into a single binding arbitration
proceeding in Maryland.
After an extension was granted to Reliability’s “reply brief,” on
June 2, 2021, Reliability Incorporated, MMG Media Group, Inc, Nick
Tsahalis and Mark Speck filed an appellant’s brief in the
Fourteenth District of Texas, Houston Texas to challenge the
court’s prior ruling granting a special appearance to Igly Trust
and to the Doki Shareholders. A response to the filed appellant
brief has not yet been received. This matter has since been moved
into a single binding arbitration proceeding in
Maryland.
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. The judge also commented that, based on
the evidence presented, management was performing its fiduciary
duties to protect the Company despite adverse circumstances. A full
trial to address the Company’s lawsuit to enforce the repayment of
notes and the Vivos Group counterclaim, was scheduled to commence
in early October 2021 but was pre-empted by an agreement by both
sides to go to arbitration in March 2022.
On
January 20, 2021, Defendants and Counter/Third-Party Plaintiffs,
Vivos Holdings, LLC (“Vivos”), Vivos Real Estate Holdings, LLC
(“VREH”), Dr. Doki, Mr. Pathuri, Igly Trust (“Igly”), Judos Trust
(“Judos”), by counsel, filed a Notice of Appeal with the Circuit
Court for Montgomery County, Maryland denying their Motion for
Preliminary Injunction signed on December 23, 2020. However, the
deadline to pursue the appeal lapsed absent additional filings by
the Vivos Group.
On
August 9, 2021, Reliability filed an additional claim in the Debt
Collection Suit and Vivos Default Counterclaim in the Circuit Court
of Montgomery County, Maryland against Dr. Doki, Valleru, Mr.
Pathuri, Mrs. Janumpally, Igly, and Judos, that the Respondents
breached the Merger Agreement in a number of significant respects
and committed fraud in connection with the Merger.
On September 7, 2021, the Company entered in Arbitration and
Tolling Agreements with alleged shareholder Dr. Doki. and his
affiliates and all other persons who were parties to the pending
litigation previously reported in the Texas, New York and Maryland
courts and before the American Arbitration Association. The
Agreements call for the stay or dismissal of the pending
litigation, with the parties agreeing to resolve their disputes
before a single arbitrator in Maryland. The parties also agreed to
maintain the status quo in corporate governance and related matters
pending a final non-appealable judgment confirming any award in
arbitration. The parties also signed a Tolling Agreement to toll
the statute of limitations following the dismissal of a pending
litigation. The
hearing portion of the
binding Arbitration formally began on March 21, 2022, and has since
concluded. A decision is anticipated in the third quarter
2022.
The
following legal proceedings where Vivos Group borrowings impacting
MMG:
On
September 28, 2018, Credit Cash filed a complaint against MMG,
Vivos, Vivos Acquisitions, LLC, Dr. Doki, Dr. Valleru (the
“Parties”) and other defendants in the United States Circuit Court
of Montgomery County, Maryland for the District of New Jersey for,
among other things, breach of contract of the MMG and HCRN 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. Certain of the Vivos Group executed and delivered to MMG
that certain Agreement for the Contingent Liquidation of the common
stock of MMG, dated as of October 28, 2019 (the “Liquidation
Agreement”), pursuant to which such Vivos Group pledged to MMG the
shares of Company common stock they received in the Merger to
provide the capital required to satisfy the Parties’ obligations
under the Settlement Agreements. Vivos Group misrepresented upon
the execution of the Liquidation Agreement to MMG the status of its
obligations under the Settlement Agreement, which were, in fact,
then in default. To date these Vivos Group have not cooperated with
the Company to monetize those shares as contemplated by the
Liquidation Agreement. The Company took appropriate actions to
enforce its rights under the Liquidation Agreement, which will be
dictated in part by the outcome of the Arbitration. On or about
March 16, 2020, Credit Cash entered its New Jersey confession of
judgment with the Circuit Court of Montgomery County, Maryland. MMG
needs to confirm whether this matter has been settled and if so
whether MCA lenders and HCRN remitted payments to Credit Cash, and
if so, which liens have been removed.
Healthcare
Resource Network Complaint: On or about February 25, 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 Dr. Doki, to enforce MMG’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. MMG intends to continue to
vigorously pursue this litigation. On September 3, 2020, MMG and
HCRN entered into a Tolling Agreement pursuant to which HCRN
dismissed MMG from this litigation without prejudice and agreed to
forebear filing a new complaint or initiating any lawsuit or other
legal proceeding against MMG until January 31, 2022.
On or
about May 5, 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 Dr.
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. There was a settlement reached on October
1,2021 with both parties releasing each other of any and all claims
with no assets changing hands. MMG needs to determine which lien
releases have been filed.
On
July 21, 2021, MMG came to an agreement with Kinetic and Libertas
for $475 to release MMG from being obligated to this Vivos Group
debt. The intended shield to protect MMG from having to pay Vivos
Group’s debt was the aforementioned Liquidation Agreement which
Vivos Debtors refuse to comply with.
Item
1a. Risk Factors
In
addition to the other information set forth in this Quarterly
Report, shareholders should carefully consider the factors
discussed in Item 1A, Risk Factors, of our Annual Report on Form
10-K for the year ended December 31, 2021, which could materially
affect our business, financial condition or future results. The
risks described in our Annual Report on Form 10-K are not the only
risks facing the Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial
also may materially adversely affect our business, financial
condition and/or operating results.
We are currently engaged in substantial and complex litigation and
arbitration with the Vivos Group, the outcome of which could
materially harm our business and financial
results.
As
more fully described in Note 6 (Commitments and Contingencies) of
the Notes to Unaudited Consolidated Financial Statements, we are
currently engaged in litigation and arbitration with the Vivos
Group. The litigation includes multiple complaints and
counterclaims by us and the Vivos Group in venues in Maryland and
Texas. The arbitration was brought by the Company to enforce its
rights under the Merger Agreement.
The
litigation and arbitration are substantial and complex, and they
have caused and could continue to cause us to incur significant
costs, as well as distract our management over an extended period.
The litigation and arbitration may substantially disrupt our
business and we cannot assure you that we will be able to resolve
the litigation on terms favorable to us or that we will be
successful in the arbitration.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not
applicable.
Item
5. Other Information
None.
Item
6. Exhibits:
The
following exhibits are filed as part of this report:
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
RELIABILITY
INCORPORATED
(Registrant)
|
|
|
August
15, 2022 |
/s/
Nick Tsahalis |
|
Reliability
President and Chief Executive Officer |
|
|
|
/s/
Mark Speck |
|
Secretary
and Chief Financial Officer |
Index
to Exhibits
**
XBRL (Extensible Business Reporting Language) information is
furnished and not filed or a part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act
of 1933, as amended, is deemed not filed for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, and otherwise
is not subject to liability under these sections
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