UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT |
| For the quarterly period ended September 30, | |
| or | |
| ☐ | TRANSITION REPORT |
| For the transition period from | |
RELIABILITY INCORPORATED
(Exact name of registrant as specified in its charter)
| 75-0868913 | ||
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) |
22505 Gateway Center Drive, P.O. Box 71, Clarksburg, Maryland | 20871 | |
| (Address of principal executive offices) | (Zip Code) |
| (202)965-1100 | ||
| ( | ||
| (Former name, former address and former fiscal year, if changed since last | ||
| 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 twelve12 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 ninety90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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“large accelerated filer," "accelerated filer", "smaller” “accelerated filer,” “smaller reporting company",company,” and "emerging“emerging growth company",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.):
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common equity,stock, as of the latest practicable date:
RELIABILITY INCORPORATED
Quarterly Report on Form 10-Q
As of and For the Three and Nine Months Ended September 30, 2017
INDEX
| PART I. FINANCIAL INFORMATION | 3 | |
| Item 1. | 3 | |
| 2021 | 3 | |
| 2021 | 4 | |
| 2021 | 5 | |
| 6 | ||
| Unaudited Consolidated Statement of Cash Flows for the Nine Months Ended September 30, | ||
| Item 2. | ||
| Item 3. | ||
| Item 4. | ||
| PART II. OTHER INFORMATION | 22 | |
| Item 1. | ||
| Item 1a. | ||
| Item 2. | ||
| Item 3. | ||
| Item 4. | ||
| Item 5. | ||
| Item 6. | ||
| Signatures | 26 | |
| Exhibits | 27 | |
| 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RELIABILITY INCORPORATED
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, 2017 | December 31, 2016 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 16,591 | $ | 30,479 | ||||
| Total current assets | 16,591 | 30,479 | ||||||
| Total Assets | $ | 16,591 | $ | 30,479 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 6,010 | $ | 9,955 | ||||
| Total current liabilities | 6,010 | 9,955 | ||||||
| Long term liabilities: | ||||||||
| Accrued interest on loans | 21,256 | 14,524 | ||||||
| Loans from shareholder and affiliate | 90,000 | 90,000 | ||||||
| Total long term liabilities | 111,256 | 104,524 | ||||||
| Total liabilities | 117,266 | 114,479 | ||||||
| Stockholders' equity (deficit): | ||||||||
| Preferred stock, without par value; 1,000,000 shares authorized, none issued and outstanding | - | - | ||||||
| Common stock, without par value; 300,000,000 shares authorized; 17,268,993 shares issued | 9,912,150 | 9,912,150 | ||||||
| Accumulated deficit | (8,918,308 | ) | (8,901,633 | ) | ||||
| Less treasury stock at cost, 354,300 shares | (1,094,517 | ) | (1,094,517 | ) | ||||
| Total stockholders' deficit | (100,675 | ) | (84,000 | ) | ||||
| Total liabilities and stockholders' deficit | $ | 16,591 | $ | 30,479 | ||||
(amounts in thousands, except per share data)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 1,127 | $ | 24 | ||||
| Trade receivables, net of allowance for doubtful accounts | 5,091 | 6,405 | ||||||
| Retention credit receivable | 1,174 | 2,494 | ||||||
| Notes receivable from related parties | 5,157 | 4,985 | ||||||
| Prepaid expenses and other current assets | 366 | 331 | ||||||
| Total current assets | 12,915 | 14,239 | ||||||
| Property, plant, and equipment, net | 27 | 49 | ||||||
| Total assets | $ | 12,942 | $ | 14,288 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Factoring liability | $ | 2,014 | $ | 946 | ||||
| Accounts payable | 378 | 1,205 | ||||||
| Accrued expenses | 344 | 404 | ||||||
| Accrued payroll | 1,002 | 1,629 | ||||||
| Deferred revenue | 176 | 176 | ||||||
| Income taxes payable | 276 | 517 | ||||||
| Other current liabilities | - | 1 | ||||||
| Total current liabilities | 4,190 | 4,878 | ||||||
| Total liabilities | 4,190 | 4,878 | ||||||
| Commitment and contingencies (Note 6) | - | - | ||||||
| Subsequent events (Note 10) | - | - | ||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common stock, without par value, shares authorized, issued and outstanding as of September 30, 2022, and as of December 31, 2021 | ||||||||
| Additional paid-in capital | 750 | 750 | ||||||
| Retained earnings | 8,002 | 8,660 | ||||||
| Total shareholders’ equity | 8,752 | 9,410 | ||||||
| Total liabilities and shareholders’ equity | $ | 12,942 | $ | 14,288 | ||||
The accompanying notes are an integral part of these statements.
| 3 |
RELIABILITY INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Operating expenses: | ||||||||
| General and administrative | $ | 3,623 | $ | 4,446 | ||||
| Interest expense | 2,281 | 1,913 | ||||||
| Total expenses | 5,904 | 6,359 | ||||||
| Operating loss | (5,904 | ) | (6,359 | ) | ||||
| Loss Before Income Taxes | (5,904 | ) | (6,359 | ) | ||||
| Income Taxes | - | 250 | ||||||
| Net loss | $ | (5,904 | ) | $ | (6,609 | ) | ||
| Basic and diluted loss per share | (0.00 | ) | (0.00 | ) | ||||
| Weighted average shares: | ||||||||
| Basic | 16,914,693 | 16,914,693 | ||||||
| Diluted | 16,914,693 | 16,914,693 | ||||||
(amounts in thousands, except per share data)
| 2022 | 2021 | |||||||
| For the Three Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue earned | ||||||||
| Service revenue | $ | 6,464 | $ | 6,941 | ||||
| Cost of revenue | ||||||||
| Cost of revenue | 5,573 | 6,138 | ||||||
| Gross profit | 891 | 803 | ||||||
| Selling, general, and administrative expenses | 941 | 866 | ||||||
| Operating loss | (50 | ) | (63 | ) | ||||
| Other income (expense) | ||||||||
| Interest income | 86 | 81 | ||||||
| Interest expense | (46 | ) | (15 | ) | ||||
| Other income (expense) | 210 | 1,813 | ||||||
| Income before income tax expense | 200 | 1,816 | ||||||
| Income tax expense | (91 | ) | (405 | ) | ||||
| Consolidated net income | 109 | 1,411 | ||||||
| Net income per share: | ||||||||
| Basic | $ | 0.00 | $ | 0.01 | ||||
| Diluted | $ | 0.00 | $ | 0.01 | ||||
| Shares used in per share computation: | ||||||||
| Basic | 300,000,000 | 300,000,000 | ||||||
| Diluted | 300,000,000 | 300,000,000 | ||||||
The accompanying notes are an integral part of these statements.
| 4 |
RELIABILITY INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Operating expenses: | ||||||||
| General and administrative | $ | 9,693 | $ | 12,448 | ||||
| Interest expense | 6,732 | 4,399 | ||||||
| Total expenses | 16,425 | 16,847 | ||||||
| Loss before income taxes | (16,425 | ) | (16,847 | ) | ||||
| Income taxes | 250 | 250 | ||||||
| Net loss | $ | (16,675 | ) | $ | (17,097 | ) | ||
| Basic and diluted loss per share | (0.00 | ) | (0.00 | ) | ||||
| Weighted average shares: | ||||||||
| Basic | 16,914,693 | 16,914,693 | ||||||
| Diluted | 16,914,693 | 16,914,693 | ||||||
(amounts in thousands, except per share data)
| 2022 | 2021 | |||||||
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue earned | ||||||||
| Service revenue | $ | 18,729 | $ | 17,809 | ||||
| Cost of revenue | ||||||||
| Cost of revenue | 16,222 | 15,542 | ||||||
| Gross profit | 2,507 | 2,267 | ||||||
| Selling, general, and administrative expenses | 3,343 | 2,554 | ||||||
| Operating loss | (836 | ) | (287 | ) | ||||
| Other income (expense) | ||||||||
| Interest income | 196 | 235 | ||||||
| Interest expense | (111 | ) | (78 | ) | ||||
| Other income | 210 | 9,855 | ||||||
| Income (loss) before income tax expense | (541 | ) | 9,725 | |||||
| Income tax expense | (117 | ) | (1,075 | ) | ||||
| Consolidated net income (loss) | (658 | ) | 8,650 | |||||
| Net income per share: | - | |||||||
| Basic | $ | 0.00 | $ | 0.03 | ||||
| Diluted | $ | 0.00 | $ | 0.03 | ||||
| Shares used in per share computation: | ||||||||
| Basic | 300,000,000 | 300,000,000 | ||||||
| Diluted | 300,000,000 | 300,000,000 | ||||||
The accompanying notes are an integral part of these statements.
| 5 |
RELIABILITY INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2017 AND 2016
Nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (16,675 | ) | $ | (17,097 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Accrued interest on loans from stockholder and affiliate | 6,732 | 4,399 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts payable and accrued liabilities | (3,945 | ) | (709 | ) | ||||
| Net cash used in operating activities | (13,888 | ) | (13,407 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Loans from shareholder and affiliate | -- | 40,000 | ||||||
| Net cash provided by financing activities | -- | 40,000 | ||||||
| Net (decrease) increase in cash and cash equivalents | (13,888 | ) | 26,593 | |||||
| Cash and cash equivalents: | ||||||||
| Beginning of period | 30,479 | 11,924 | ||||||
| End of period | $ | 16,591 | $ | 38,517 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | - | $ | - | ||||
| Income taxes | $ | 250 | $ | 250 | ||||
(amounts in thousands, except per share data)
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-in | Retained | Total | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance, December 31, 2020 | 300,000,000 | $ | - | $ | 750 | $ | 767 | $ | 1,517 | |||||||||||
| Net Income | - | - | - | 8,650 | 8,650 | |||||||||||||||
| Balance, September 30, 2021 | 300,000,000 | - | 750 | 9,417 | 10,167 | |||||||||||||||
| Balance, December 31, 2021 | 300,000,000 | - | 750 | 8,660 | 9,410 | |||||||||||||||
| Balance | 300,000,000 | - | 750 | 8,660 | 9,410 | |||||||||||||||
| Net Loss | - | - | - | (658 | ) | (658 | ) | |||||||||||||
| Net Income (Loss) | - | - | - | (658 | ) | (658 | ) | |||||||||||||
| Balance, September 30, 2022 | 300,000,000 | $ | - | $ | 750 | $ | 8,002 | $ | 8,752 | |||||||||||
| Balance | 300,000,000 | $ | - | $ | 750 | $ | 8,002 | $ | 8,752 | |||||||||||
The accompanying notes are an integral part of these statements.
| 6 |
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
| 2022 | 2021 | |||||||
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | (658 | ) | 8,650 | ||||
| Adjustments to reconcile net (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 23 | 16 | ||||||
| Accrued interest | (172 | ) | (246 | ) | ||||
| (Gain)/loss on disposal of property and equipment | 38 | |||||||
| Gain on forgiveness of PPP loan payable | (5,216 | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Trade receivables | 2,634 | (1,441 | ) | |||||
| Prepaid expenses and other current assets | (35 | ) | 48 | |||||
| Accounts payable | (828 | ) | (260 | ) | ||||
| Accrued payroll | (627 | ) | 350 | |||||
| Accrued expenses | (59 | ) | (59 | ) | ||||
| Deferred revenue | - | 2 | ||||||
| Other liabilities | (1 | ) | (2 | ) | ||||
| Income taxes payable | (241 | ) | 738 | |||||
| Net cash provided by (used in) operating activities | $ | 36 | 2,618 | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of fixed assets | (1 | ) | (6 | ) | ||||
| Net cash provided by (used in) investing activities | $ | (1 | ) | (6 | ) | |||
| Cash flows from financing activities: | ||||||||
| Net borrowing/(repayment) of factoring liability | - | (2,061 | ) | |||||
| Borrowing of note payable | 1,068 | (37 | ) | |||||
| Advances to Related Parties | - | (480 | ) | |||||
| Net cash provided by (used in) financing activities | $ | 1,068 | (2,578 | ) | ||||
| Net increase in cash and cash equivalents | 1,103 | 34 | ||||||
| Cash and cash equivalents, beginning of year | 24 | 70 | ||||||
| Cash and cash equivalents, end of year | $ | 1,127 | 104 | |||||
The accompanying notes are an integral part of these statements.
| 7 |
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(amounts in thousands)
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 111 | $ | 78 | ||||
| Income taxes | $ | 735 | $ | 344 | ||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| The Company received forgiveness from the SBA of its PPP loan payable | $ | - | $ | 5,216 | ||||
| 8 |
RELIABILITY INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(amounts in thousands, except per share data)
NOTE 1.NATURE OF OPERATIONS AND SUMMARYBASIS OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Reliability, Incorporated (the "Company"is a leading provider of Workforce Management & Staffing Solutions, 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, Direct Placements, and Video and Multimedia Production Services. Our Staffing segment provides skilled field talent on a nationwide basis for Media, Video Production, IT, and Finance and Accounting client partner projects. Our Staffing segment occasionally receives requests for direct placements. 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 and was closed down in 2007. The Company has no further operating activitiescompleted a reverse merger with MMG (the “Merger”) on October 29, 2019.
Company Background
Linda Maslow founded Maslow Group initially in 1988 and is nowincorporated 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 shell company.
These individuals, included but were not limited to Dr. Doki, Mrs. Janumpally, Mr. Pathuri, and Mrs. Valleru, Igly Trust, and Judos Trust also have been prepared assumingcommon 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 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.
Upon purchasing MMG and thereafter, Vivos Holdings, LLC and their affiliates (collectively the “Vivos Group”) began borrowing monies from MMG starting with $1,400 in 2016 and by the end of 2019 the balance had reached $3,418 which included a $3,000 guarantee from Dr. Naveen Doki. (See Note 8 for more details).
On or about February 25, 2020, the Company, will continue as plaintiff, filed a going concern.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.
| 9 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(amounts in thousands, except per share data)
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”).
We refer below to the disputes between Reliability and the Vivos Group as the “Vivos Matter.”
On March 21, 2022, the Company began agreed upon arbitration proceedings against the Vivos Group. Among several claims, MMG sought remedy on three notes, plus a guarantee totaling approximately $5,039 when the arbitration hearing began.
On August 2, 2022, VREH filed for Chapter 11 Bankruptcy Protection in the District Court of Maryland. This action prevented the Arbitrator from providing any ruling relating to Note II in the arbitration case at the time of his award.
On August 24, 2022, the Company filed a motion to stay the VREH Bankruptcy filing to allow the Arbitrator to rule on the claims against VREH. The motion to lift the stay was granted by the court on September 16, 2022, after the initial award by the Arbitrator.
On August 31, 2022, the Arbitrator issued an award (the “Award”) with the Company and MMG prevailing on their claims. The Company has concluded that it should lookand MMG were awarded the following:
| ● | an award in favor of MMG against Vivos Holdings LLC under Note I (as defined in the Award) in the amount of $3,458,377, with interest thereon from June 30, 2022, at the rate of 4.5% per year; | |
| ● | no award as to Note II (as defined in the Award) until and at such time as the automatic stay imposed by the United States Bankruptcy Court as a result of the filing of a petition in bankruptcy by VREH is lifted or the bankruptcy proceeding is terminated; | |
| ● | an award in favor of MMG against Vivos Holdings, LLC under Note III (as defined in the Award) in the amount of $800,448, with interest thereon from June 30, 2022, at the rate of 2.5% per year, plus collection costs, including reasonable attorneys’ fees, incurred in the effort to collect Note III; | |
| ● | an award in favor of MMG against Naveen under the Personal Guaranty (as defined in the Award) in the amount of $, plus interest thereon at the rate of per year from the date of the Award; | |
| ● | an award in favor of the Company against Naveen, Valleru, Janumpally, individually and as Trustee of Judos Trust, and Pathuri, as Trustee of Igly Trust, jointly and severally, for contract damages of $, to be satisfied by the transfer of their shares of the Company common stock to the Company equal in value to $1,000,000, valued as of the date of the Award, in accordance with the provisions of Section 9.06(d) of the Merger Agreement; | |
| ● | an award in favor of the Company against Naveen, Valleru, Janumpally, individually and as Trustee of Judos Trust, and Pathuri, as Trustee of Igly Trust, jointly and severally, for fraud damages in the amount of $, plus interest thereon at the rate of per year from the date of the Award, together with any out-of-pocket fees and expenses, including attorneys’ and accountants’ fees; | |
| ● | an award appointing a rehabilitative receiver for the Company under the deadlock situation provisions of Section 11.404(a)(1)(B) of the Texas Business Organizations Code, the primary function of which is to collect the contract and fraud damages, including costs, expenses and fees provided in the Award, due to the Company, with matters regarding such receivership to be set forth in a supplemental award; and | |
| ● | declaratory relief in favor of the Company and its officers and directors. |
Section 11.404(a)(1)(B) of the Texas Business Organizations Code provides for acquisitionsthe appointment of a rehabilitative receiver when “the governing persons of the entity are deadlocked in the management of the entity’s affairs, the owners or identify a merger partnermembers of the entity are unable to break the deadlock, and irreparable injury to the entity is actively in discussions with interested parties. There can be no assurances thatbeing suffered or is threatened because of the Company will be successful in completing such a transactiondeadlock.” With respect to the receivership, the owners or be able to maintain sufficient liquidity over a periodholders of time that will allow it to carry out these actions, in which caseall of the Company might be forced to liquidate or seek protection under the Federal bankruptcy statutes, or both.
| 10 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(amounts in thousands, except per share data)
The parties to the Arbitration had until September 19, 2022 to submit their requests related to the Supplemental Award to be filed by the Arbitrator relating to the assignment of a Receiver. An extension was granted until October 6, 2022 at which point all parties submitted their requests to the Arbitrator. The parties now have until November 23, 2022 to respond to the submissions received by the Arbitrator on October 6, 2022. The Company is quoted ondoes not have a definitive date by which it will receive the OTC Marketplace undersupplemental award identified in the symbol "RLBY".
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 for interim financial information and with instructions to Form 10-Q. Accordingly they do not include allthe rules of the informationSEC and footnotes required by accounting principles generally acceptedshould be read in conjunction with the United States for completeaudited financial statements.statements and notes thereto contained in our Form 10-K. In the opinion of management, all adjustments, consideredconsisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented have been included. Operatingreflected herein. The results of operations for the interim periods ended September 30, 2017presented are not necessarily indicative of the results that mayto be expected for the year ending December 31, 2017.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company'sCompany’s annual report on Form 10-K for the year ended December 31, 2016.
Concentration of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
For the purposes nine months ended September 30, 2022, 20.3% of revenue came from Goldman Sachs, 13.5% from AT&T Services Inc (“AT&T”), and 12.2% from Janssen Pharmaceuticals (which includes workforce partner Johnson & Johnson) and 10.8% from DirecTV. Combined, this totals 56.7% of revenue. AT&T, Goldman Sachs, Janssen, Morgan Stanley and DirectTV accounted for 18.1%, 15.7%, 13.8%, 11%, and 8.6% respectively, 67.1% in aggregate revenue for the statementssame period ended September 30, 2021. No other client has exceeded 10% of cash flows, the Companyrevenues in 2022 or 2021.
NOTE 2. LIQUIDITY AND GOING CONCERN
Going Concern
Management considers all highly liquid cash investments that mature in three months or less when purchased, to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value.
| ● | uncertainty of the timing or form of recovery of the of the arbitration award., with some of the award being collected in in the form of shares | |
| ● | operating losses in ten of the last eleven quarters starting with the first quarter of 2020 through the third quarter of 2022 ending September 30, 2022, totaling in aggregate $2,131 | |
| ● | 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; | |
| ● | Commitments and Contingencies, described further in Note 6. |
All these conditions noted and factored above, and if the $5,157 in notes receivable is not realized in full, part, or all, create substantial doubt about the Company’s ability to provide related footnote disclosures. continue as a going concern.
| 11 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(amounts in thousands, except per share data)
Additionally, from an operational view the underlying business has yet to fully recover from COVID-19 with current quarterly comparative revenue levels down 36% 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.”
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable are broken down as follows
SCHEDULE OF ACCOUNTS RECEIVABLE
| September 30, 2022 | December 31, 2021 | |||||||
| Accounts Receivable | ||||||||
| Trade receivables | $ | 4,581 | 5,592 | |||||
| Unbilled receivables | 510 | 813 | ||||||
| Less allowance for doubtful accounts | - | - | ||||||
| Total trade accounts receivable | 5,091 | 6,405 | ||||||
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Adopted Accounting Pronouncements
In doing so,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 reduce diversityperform 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 timingfinancial 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 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 September 30, 2022, the Company no longer has a federal tax liability related to tax periods prior to 2020.
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(amounts in thousands, except per share data)
Factoring Facility
Gulf Coast Bank and contentTrust
On August 24, 2022, we were notified by our factoring company Triumph Business Capital (“TBC”) that our factoring arrangement had been sold to Gulf Coast Bank and Trust (“Gulf”), as TBC had decided to sell its non-transportation portfolio. The transition took place between August 26th and 28th with new financing coming from Gulf. However, until all open accounts receivable (“A/R”) managed by TBC is collected, a portion of footnote disclosures.those funds plus non factored receivables continue to come to MMG from TBC. The ASUCompany 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 effectiverequired for the total unpaid balance of all entitiespurchased accounts multiplied by a percentage equal to the difference between one hundred percent and the advanced rate percentage. As of September 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 $3,429 for the three-month period ending September 30, 2022, compared to $1,756 for the same period ending on September 30, 2021, and $10,388 compared to $2,453 for the nine months ended September 30, 2022 and 2021, respectively. The total outstanding balance under the recourse contract was $2,014 on September 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 September 30, 2022, and 2021 totaled $46 and $15, respectively, and $111 and $78 for the nine months ended September 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 through April 30, 2020. 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, “[a]s 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.
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 2, 2022.
On August 2, 2022, VREH filed for Chapter 11 bankruptcy in the District Court of Maryland.
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(amounts in thousands, except per share data)
Maslow has filed a Motion to Vacate Confessed Judgment entered against it by FVC Bank in the Circuit Court for Fairfax County. A hearing date is set for December 9, 2022.
On October 20, 2022, FVC bank filed a Motion to Dismiss Chapter 11 Case for Cause with respect to this pending proceeding filed by VREH. A hearing date is set for November 16, 2022.
On November 2, 2022, Maslow filed a “Response” to the Bank’s Motion to Dismiss, which in essence is a separate Motion for court to dismiss VREH’s Chapter 11 protection filing.
In October 2022, MMG learned that Vivos IT, LLC filed a lawsuit against Second Wind Consultants (“SWC”) in May 2019 included MMG as a plaintiff. The lawsuit included claims of fraud in inducement and unjust enrichment against SWC. The Five parties suing SWC, included Vivos LLC, The Maslow Media Group, Suresh Venkat Doki, Naveen Doki and Silvija Valleru. The lawsuit related to a debt restructuring services agreement secured by Suresh Doki, Naveen Doki and Silvija Valleru to assist the following then owned Vivos entities: Maslow Media Group, Inc., Health Care Resources Network, Inc., Mettler & Michael, Inc., 360 IT Professionals, Inc. and US IT Solutions, Inc. Second Wind countersued all plaintiffs on September 30th, 2019, seeking to collect the balance of $402,500 not paid by the Vivos Group. These suits were not disclosed to Maslow Management or to Reliability before the merger closed on October 29, 2019. MMG is weighing its legal options at this time.
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 shares of common stock, with 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.
As of September 30, 2022, and December 31, 2021, the receivable totaled $5,157 and $4,985, respectively. This is not inclusive of the additional amounts awarded in the arbitration.
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.
On October 20, 2022, FVC bank filed a Motion to Dismiss Chapter 11 Case for Cause with respect to this pending proceeding filed by VREH. A hearing date is set for November 16, 2022.
On November 2, 2022, Maslow filed a “Response” to the Bank’s Motion to Dismiss, which in essence is a separate Motion for court to dismiss VREH’s Chapter 11 protection filing.
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(amounts in thousands, except per share data)
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 and shares of RLBY common stock, respectively, equal to 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 periods ending after December 15, 2016,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 interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted.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 adoptionwarrants were not valued and included as liability on balance sheet because of ASU No. 2014-15 diduncertainty 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.
On August 31, 2022, the Arbitrator issued an award (the “Award”) with the Company with MMG prevailing on their claims. (See Note 1) for more details.
The parties to the Arbitration had until September 19, 2022, to submit their requests related to the Supplemental Award to be filed by the Arbitrator relating to the assignment of a Receiver. An extension was granted until October 6, 2022, at which point all parties submitted their requests to the Arbitrator. The parties now have until November 23, 2022, to respond to the submissions received by the Arbitrator on October 6, 2022. The Company does not have a significant impactdefinitive date by which it will receive the supplemental award identified in the Arbitration Award dated August 31, 2022, but hopes it will be received before the end of the year.
NOTE 9. BUSINESS SEGMENTS
The Company operates within four industry segments: EOR, Recruiting and Staffing, 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. Direct Placements was added as a segment in the Company'ssecond quarter 2021 as the Company began to take on clients who desired the Company source candidates for direct hire needs on a regular basis. The Video and Multimedia Production segment provides crewing and Script to Screen services for corporate, government, and non-profit clients, globally.
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(amounts in thousands, except per share data)
The following tables provides a reconciliation of revenue by reportable segment to consolidated results for the three and nine months ended September 30, 2022, and 2021, respectively:
For the three months ended September 30:
SCHEDULE OF RECONCILIATION OF REVENUE AND OPERATING INCOME BY REPORTABLE SEGMENT TO CONSOLIDATED RESULTS
| 2022 | 2021 | |||||||
| Revenue: | ||||||||
| EOR | $ | 5,494 | 5,705 | |||||
| Recruiting and Staffing | 848 | 962 | ||||||
| Direct Placement | 60 | 38 | ||||||
| Video and Multimedia Production | 62 | 236 | ||||||
| Total | $ | 6,464 | 6,941 | |||||
For the nine months ended September 30:
| 2022 | 2021 | |||||||
| Revenue: | ||||||||
| EOR | $ | 15,783 | 14,186 | |||||
| Recruiting and Staffing | 2,671 | 2,658 | ||||||
| Direct Placement | 99 | 68 | ||||||
| Video and Multimedia Production | 176 | 897 | ||||||
| Total | $ | 18,729 | 17,809 | |||||
NOTE 10. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through November 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. A hearing has been scheduled for December 9, 2022.
On October 20, 2022, FVC bank filed a Motion to Dismiss Chapter 11 Case for Cause with respect to this pending proceeding filed by Vivos Real Estate Holdings, LLC (VREH). A hearing date is set for November 16, 2022.
On November 2, 2022, Maslow filed a “Response” to the Bank’s Motion to Dismiss, which in essence is a separate Motion for court to dismiss VREH’s Chapter 11 protection filing.
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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 disclosures.
The following discussion and analysis of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, developmentour financial condition and results of operations, our expectations regarding the Company'sfuture performance of our business include, but are not limited to, its ability to maintain sufficient working capital, adverse changesand the other non-historical statements in the economy,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 ability to attract and maintain key personnel, its ability to identify or complete an acceptable merger or acquisition, and future results related to acquisition, merger or investment activities. The Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2021, with the SEC. Our actual results couldmay differ materially from those anticipatedcontained in theseany forward-looking statements. You should read the following discussion together with our financial statements including those set forth elsewhereand related notes thereto and other financial information included in this report. The Company assumes no obligation to update any such forward-looking statements.
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.
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There have been no material changes or developments in the Company'sCompany’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, 2016.
Management’s Discussion included in the Form 10-K for the year ended December 31, 20162021, includes discussion of various factors and items related to the Company'sCompany’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 20172022 operations; thus, the reader of this report should read Management'sManagement’s Discussion included in Form 10-K for the year ended December 31, 2016.
RESULTS OF OPERATIONS
Revenues
Revenues for the three and nine months ended September 30, 2017 were zero, since all operations were discontinued as of September 30, 2007.
Staffing declined by $114 in the comparable periodsthird quarter of 2022, or 11.9% to $848. This consisted of Media Staffing, which declined $99 and IT staffing which was $15 off the mark of the third quarter comparative in 2016. The decrease over the nine month period is due to lower legal expenses2021.
Video Production had a decline in 2017 asrevenue of $174, but Direct Placements garnered $60 compared to 2016.
For the nine months ended September 30, 2017 was $13,8882022, revenue totaled $18,729 compared to $13,407$17,809 year to date for the same period a year ago, resulting in $920 in incremental revenue comparably.
EOR revenues through nine months ended September 30, 2022, have produced an even larger comparative gain compared to 2021, with $15,783 compared to $14,186 a year ago. This is an increase of $1,597 or 11.3%, which represented 84.3% of the comparable periodCompany’s total year to date (YTD) revenue through September 30.
Staffing is $13 ahead of 2016. The changelast year’s pace through the nine months ending September 30, 2021, with $2,671 in revenue compared with $2,658 comparatively in 2021.
Media Staffing has grown $216 to $2,464 but this was attributablealmost completely offset by IT Staff’s $203 decline to a decrease$207 from $410 in accounts payable and accrued liabilities during the nine months ended September 30, 2017 alonga year ago.
Video Production revenue has compared unfavorably to the same period in 2021, declining $721 with revenues of $176 compared to $897 in 2021. This decline was the result of three clients curtailing projects they had with us in 2021, the loss of one client which changed its bid requirements, and tour reclassifying certain work with clients as Media Staffing given its nature.
Our Direct Placement business through nine months in 2022 has $99 in revenue compared to $68 over the same period in 2021, a lower net loss.
Cost of Revenue / Gross Profit
Gross profit for the three-month period ending September 30, 2022, was $891 representing 13.8% of revenues, which is an $88 improvement over the $803 in gross profit MMG earned in 2021’s third quarter when the gross margin reached 11.6%.
The overall quarterly gross margin (“GM”) percentage improvement can be attributed to the strength of the EOR margin reaching 12.4% in the third quarter 2022 and compared to 9.1% a year ago.
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The two catalysts for EOR margin lift are price increases, and heavier use of W2 resources vs. 1099 labor based on client mix. For example, lower revenues for one large EOR client in ‘22 are highly weighted towards 1099s over W2. GP would be approximately 20 basis points lower if those revenues still existed.
W2 workers in EOR represented 82% of labor compared to 74% in the third quarter in 2021. On average in 2022, margins are 9%, 1.1% higher for EOR W2 labor than 1099.
MMG’s Staffing gross profit margin slid from 20.1% to 16.7%, due to client mix, however while overall non EOR total margin, including Video Production and Direct Placements were at 21.9% in the 3 months ending September 30, 2022, compared to 22.8% in the same period in 2021.
Year to date 2022, the Company’s gross profit improved by $240 or 10.6% to $2,507 compared to $2,267 over the first nine months in 2021.
Gross margin percentage rose from 12.7% in 2021 to 13.4% when comparing the nine months ending September 30, 2022, to same period in 2021.
EOR experienced a year-to-date margin boost to 11.7% compared to 9.5% through September 30, 2021. Thirty basis points were spurred by resources moved from billable to indirect overhead. Increased use of W2 client mix and pricing changes led to the additional spur in EOR margins. Media Staffing margins year to date have held steady to where they were a year ago at declined to 19.9% compared to 20.8% through three quarters in 2021, while Video Production’s nine-month gross profit margin has risen to 24.3% compared to 20.6% in nine months ending September 30, 2022. However, the overall Video Production impact on overall gross profit margin is nominal given it represents 1% of the business revenue and 1.7% of gross profit.
General and Administrative (“G&A”)
General and administrative (“G&A”) expenses for the three months ended September 30, 2022, were $941, as compared to $866 in the comparable period in 2021, representing a $75 or 8.7% increase. This increase was predominantly the result of having increases in the following areas; $53 in legal, $37 in contract services, $24 in employee health insurance related costs, and $21 in commissions. Of the $53 in legal fees, $34 were arbitration related costs, as were $9 of the $37 in contract services, for the three months ended September 30, 2022.
Arbitration related costs represented $43, an increase of $35 comparatively from a year ago.
For the nine months ending September 30, 2022, G&A was $3,343 compared with $2,554 a year ago, an increase of $789 or 30.9%. However, the legal and consulting costs associated with our arbitration (See Note 1) represents $543 in totality, a $525 increase in like costs associated with the Vivos Matter from a year ago. MMG salaries and benefits increased $190, $69 of which are wages and payroll taxes, $54 commissions, and $39 health insurance benefits for employees. $50 of the $69 in wage and payroll tax proliferation is attributed to a need to move certain billable resources from EOR clients to overhead as described above in the Gross Profit section. Departmentally, our Client Services group, which includes recruiters, has developed, resulting in increase of $60 of the $190.
Interest Expense
The Company incurred $111 in interest charges for financing (factoring) its invoices in the first nine months of 2022 compared with $78 in the same period a year ago. In the third quarter MMG incurred $46 in interest changes compared to $15 in the same period a year ago as MMG increased its average position under finance from $1,088 a year ago to $2,276 in the third quarter 2022. The cost of financing increased from a year ago when the prime rate was 3.25% in the third quarter 2021 with two increases in the third quarter 2022, ending at 6.25%. Thus, our borrowing rates were 6% in the third quarter 2021 and ranged from 7.5% to 8.25% in the third quarter 2022.
Other Income (Expense)
For the nine months ended September 30, 2022, MMG received $210 in other income by way of ERC funds compared to a year ago when MMG earned $9,855 in other income courtesy of $5,273 in the PPP Forgiveness which included the recovery of accrued interest, and $4,582 In Employee Retention Credits (ERC). The $210 was thought to be ineligible portion of 2021’s first quarter ERC, but it was deemed to be based on our payrolls, eligible per the IRS.
Income Tax
The Company has taken a tax loss of $117 over the nine months ending September 30, 2022, to record discrete tax items and true up of prior year returns.
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LIQUIDITY AND CAPITAL RESOURCES
Our working capital requirements are driven primarily by EOR field talent payments, G&A salaries, public company costs, attorney fees associated with the protracted Vivos Matter, 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 Gulf Coast Bank (“Gulf”), whereas Gulf 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 September 30, 2022, is at 66 comparable to 62 DSO for the trailing twelve months ending September 30, 2021. 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.
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. Thus, trailing twelve-month DSO ending September 30, 2022, was 66 from 62 in the first nine months of 2021. This has more to do with revenue mix to clients with whom have 60 and 90 day payment terms than delinquent accounts. However, our over 60 days past due represented 8.7% or $398 of our total A/R compared to 1% in the same nine-month period ending September 30, 2021.By October 31, $308 of the $398 had been collected.
When looking at A/R aging in relation to due date, as of September 30, 2022, 73.6% or $3,370 of our $4,581 in total trade receivables were < 31 days aged, compared to 96.5% a year ago.
Our over 60 days past due represented 8.7% or $398 of our total A/R compared to 1% in the same nine-month period ending September 30, 2021. By October 31, $308 of the $398 has been collected.
Our Federal and state tax liability has a balance of $276 at the end of the third quarter 2022, this is mainly for state income taxes because we deposited $725 of our 2021 expected federal tax liability in the first quarter.
Our primary sources of liquidity are cash generated from operations via accounts receivable and borrowings under our Factoring Facility with Gulf 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 Gulf 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 outlays, which is why we employ factoring.
Vivos Debtors as of September 30, 2022, had notes receivable totaling $5,157 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. The Vivos Matter moved to arbitration where on August 31,2022 the Arbitrator issued an award (the “Award”) with the Company and MMG prevailing on their claims. This is not inclusive of the additional amounts awarded in the arbitration.
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.
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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 September 30, 2022, our working capital was $8,725 compared to $9,417 a year ago and $9,361 on December 31, 2021. Our adjusted working capital at the end of September 2022, excluding the notes receivable related to the Vivos Debtors totals $3,568 compared to $4,468 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 Principal Executive OfficerPresident and PrincipalChief 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 Principal Executive OfficerPresident and PrincipalChief 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'sSEC’s rules and forms and (ii) accumulated and communicated to the Principal Executive OfficerPresident and PrincipalChief 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| 21 |
RELIABILITY INCORPORATED
OTHER INFORMATION
September 30, 2017
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.
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.
On August 2, 2022, VREH filed for Chapter 11 Bankruptcy Protection in the District Court of Maryland. This action prevented the Arbitrator from providing any ruling relating to Note II in the arbitration case at the time of his award.
On August 24, 2022, the Company filed a motion to stay the VREH Bankruptcy filing to allow the Arbitrator to rule on the claims against VREH. The motion to lift the stay was granted by the court on September 16, 2022, after the initial award by the Arbitrator.
On August 31, 2022, the Arbitrator issued an award (the “Award”) with the Company with MMG prevailing on their claims. The Company and MMG were awarded the following:
| ● | an award in favor of MMG against Vivos Holdings, LLC under Note I (as defined in the Award) in the amount of $3,458,377, with interest thereon from June 30, 2022, at the rate of 4.5% per year; | |
| ● | no award as to Note II (as defined in the Award) until and at such time as the automatic stay imposed by the United States Bankruptcy Court as a result of the filing of a petition in bankruptcy by VREH is lifted or the bankruptcy proceeding is terminated; | |
| ● | an award in favor of MMG against Vivos Holdings, LLC under Note III (as defined in the Award) in the amount of $800,448, with interest thereon from June 30, 2022, at the rate of 2.5% per year, plus collection costs, including reasonable attorneys’ fees, incurred in the effort to collect Note III; | |
| ● | an award in favor of MMG against Naveen under the Personal Guaranty (as defined in the Award) in the amount of $2,309,449, plus interest thereon at the rate of 6% per year from the date of the Award; | |
| ● | an award in favor of the Company against Naveen, Valleru, Janumpally, individually and as Trustee of Judos Trust, and Pathuri, as Trustee of Igly Trust, jointly and severally, for contract damages of $1,000,000, to be satisfied by the transfer of their shares of the Company common stock to the Company equal in value to $1,000,000, valued as of the date of the Award, in accordance with the provisions of Section 9.06(d) of the Merger Agreement; | |
| ● | an award in favor of the Company against Naveen, Valleru, Janumpally, individually and as Trustee of Judos Trust, and Pathuri, as Trustee of Igly Trust, jointly and severally, for fraud damages in the amount of $4,327,127, plus interest thereon at the rate of 6% per year from the date of the Award, together with any out-of-pocket fees and expenses, including attorneys’ and accountants’ fees; |
| ● | an award appointing a rehabilitative receiver for the Company under the deadlock situation provisions of Section 11.404(a)(1)(B) of the Texas Business Organizations Code, the primary function of which is to collect the contract and fraud damages, including costs, expenses and fees provided in the Award, due to the Company, with matters regarding such receivership to be set forth in a supplemental award; and | |
| ● | declaratory relief in favor of the Company and its officers and directors. |
Section 11.404(a)(1)(B) of the Texas Business Organizations Code provides for the appointment of a rehabilitative receiver when “the governing persons of the entity are deadlocked in the management of the entity’s affairs, the owners or members of the entity are unable to break the deadlock, and irreparable injury to the entity is being suffered or is threatened because of the deadlock.” With respect to the receivership, the owners or holders of all of the shares of common stock of the Company received as a result of the conversion of 1,600 shares of common stock of MMG owed by Naveen and Valleru under the Merger Agreement shall not be entitled to vote any of those shares at any annual or special meeting of the shareholders of the Company during the period of the receivership. Upon the completion of the receiver’s primary function of collecting damages due to the Company, the receivership shall terminate and the restrictions on the rights of the shareholders of the Company imposed by the Award shall be lifted.
The parties to the Arbitration had until September 19, 2022 to submit their requests related to the Supplemental Award to be filed by the Arbitrator relating to the assignment of a Receiver. An extension was granted until October 6, 2022 at which point all parties submitted their requests to the Arbitrator. The parties now have until November 23, 2022 to respond to the submissions received by the Arbitrator on October 6, 2022. The Company does not have a definitive date by which it will receive the supplemental award identified in the Arbitration Award dated August 31, 2022, but hopes it will be received before the end of the year.
The following legal proceedings where Vivos Group borrowings impacting MMG:
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.
On August 2, 2022, VREH filed for Chapter 11 Bankruptcy Protection in the District Court of Maryland. This action prevented the Arbitrator from providing any ruling relating to Note II in the arbitration case at the time of his award
On August 24, 2022, the company filed a motion to stay the VREH Bankruptcy filing to allow the Arbitrator to rule on the claims against VREH. The motion to lift the stay was granted by the court on September 16, 2022, after the initial award by the Arbitrator
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Item 1a. Risk Factors
In addition to the other information set forth in this Quarterly Report, stockholdersshareholders 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, 2016,2021, 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 Notes 1 and 6 of the Notes to Unaudited Consolidated Financial Statements, we are currently engaged in litigation and arbitration with the Vivos Group and received an award judgement on August 31, 2022. 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 and other loan documents.
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:
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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) | ||
| November | /s/ Nick Tsahalis | |
| Reliability President and Chief Executive Officer | ||
| Secretary and Chief Financial Officer |
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Index to Exhibits
| Exhibit No. | ||
| 31.1 | CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | |
| 31.2 | CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | |
| 32.1 | CEO | |
| and CFO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL). | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
** 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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