UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT |
| For the quarterly period ended | |
| 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 | |
| 2022 | 3 | |
| 2022 | 4 | |
| 2022 | 5 | |
| 2022 | ||
| Item 2. | ||
| Item 3. | ||
| Item 4. | ||
| PART II. OTHER INFORMATION | 20 | |
| Item 1. | ||
| Item 1a. | ||
| Item 2. | ||
| Item 3. | ||
| Item 4. | ||
| Item 5. | ||
| Item 6. | ||
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)
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 364 | $ | 227 | ||||
| Trade receivables, net of allowance for doubtful accounts | 3,582 | 6,337 | ||||||
| Retention credit receivable | 1,226 | 1,219 | ||||||
| 5,327 | 5,251 | |||||||
| Prepaid expenses and other current assets | 396 | 430 | ||||||
| Total current assets | 10,895 | 13,464 | ||||||
| Property, plant and equipment, net | 19 | 26 | ||||||
| Total assets | $ | 10,914 | $ | 13,490 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Factoring liability | $ | 924 | $ | 2,619 | ||||
| Accounts payable | 443 | 698 | ||||||
| Accrued expenses | 232 | 339 | ||||||
| Accrued payroll | 658 | 981 | ||||||
| Deferred revenue | 176 | 176 | ||||||
| Income taxes payable | 5 | 6 | ||||||
| Total current liabilities | 2,438 | 4,819 | ||||||
| Total liabilities | 2,438 | 4,819 | ||||||
| Commitment and contingencies (Note 6) | - | - | ||||||
| Subsequent events (Note 10) | - | |||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common stock, without par value, shares authorized, issued and outstanding as of March 31, 2023, and as of December 31, 2022 | ||||||||
| Additional paid-in capital | 750 | 750 | ||||||
| Retained earnings | 7,726 | 7,921 | ||||||
| Total shareholders’ equity | 8,476 | 8,671 | ||||||
| Total liabilities and shareholders’ equity | $ | 10,914 | $ | 13,490 | ||||
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)
| 2023 | 2022 | |||||||
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue earned | ||||||||
| Service revenue | $ | 5,199 | $ | 5,783 | ||||
| Cost of revenue | ||||||||
| Cost of revenue | 4,488 | 5,053 | ||||||
| Gross profit | 711 | 730 | ||||||
| Selling, general and administrative expenses | 933 | 1,305 | ||||||
| Operating loss | (222 | ) | (575 | ) | ||||
| Other income (expense) | ||||||||
| Interest income from related parties | 66 | - | ||||||
| Interest income | 8 | 54 | ||||||
| Interest expense | (44 | ) | (29 | ) | ||||
| Other (expense) | - | (2 | ) | |||||
| Loss before income tax expense | (192 | ) | (552 | ) | ||||
| Income tax expense | (3 | ) | (2 | ) | ||||
| Consolidated net loss | $ | (195 | ) | $ | (554 | ) | ||
| Net income per share: | ||||||||
| Basic | $ | 0.00 | $ | 0.00 | ||||
| Diluted | $ | 0.00 | $ | 0.00 | ||||
| Share 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 | ||||||
For the Three Months Ended March 31, 2023 and 2022
(amounts in thousands, except per share data)
| Shares | Amount | Capital | Earnings | Total Equity | ||||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-in | Retained | ||||||||||||||||||
| Shares | Amount | Capital | Earnings | Total Equity | ||||||||||||||||
| Balance, December 31, 2021 | 300,000,000 | $ | - | $ | 750 | $ | 8,660 | $ | 9,410 | |||||||||||
| Net Loss | - | - | - | (554 | ) | (554 | ) | |||||||||||||
| Balance, March 31, 2022 | 300,000,000 | $ | - | $ | 750 | $ | 8,106 | $ | 8,856 | |||||||||||
| Balance, December 31, 2022 | 300,000,000 | $ | - | $ | 750 | $ | 7,921 | $ | 8,671 | |||||||||||
| Balance | 300,000,000 | $ | - | 750 | 7,921 | 8,671 | ||||||||||||||
| Net Loss | - | - | - | (195 | ) | (195 | ) | |||||||||||||
| Balance, March 31, 2023 | 300,000,000 | $ | - | $ | 750 | $ | 7,726 | $ | 8,476 | |||||||||||
| Balance | 300,000,000 | - | 750 | 7,726 | 8,476 | |||||||||||||||
The accompanying notes are an integral part of these statements.
| 5 |
RELIABILITY INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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)
| 2023 | 2022 | |||||||
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (195 | ) | $ | (554 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 7 | 9 | ||||||
| Accrued interest | (66 | ) | (54 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Trade receivables | 2,755 | 1,361 | ||||||
| Retention credit receivable | (7 | ) | - | |||||
| Prepaid expenses and other current assets | 34 | 82 | ||||||
| Accounts payable | (255 | ) | (358 | ) | ||||
| Accrued payroll | (323 | ) | (1,116 | ) | ||||
| Accrued expenses | (107 | ) | (138 | ) | ||||
| Other liabilities | - | (1 | ) | |||||
| Income taxes payable | (1 | ) | 171 | |||||
| Net cash provided by (used in) operating activities | $ | 1,842 | $ | (598 | ) | |||
| Cash flows from investing activities: | ||||||||
| Purchase of fixed assets | - | (1 | ) | |||||
| Net cash used in investing activities | $ | - | $ | (1 | ) | |||
| Cash flows from financing activities: | ||||||||
| Net borrowing/(repayment) of line-of-credit | (1,695 | ) | 644 | |||||
| Advances to related parties | (10 | ) | - | |||||
| Net cash provided by (used in) financing activities | $ | (1,705 | ) | $ | 644 | |||
| Net increase (decrease) in cash and cash equivalents | 137 | 45 | ||||||
| Cash and cash equivalents, beginning of year | 227 | 24 | ||||||
| Cash and cash equivalents, end of year | $ | 364 | $ | 69 | ||||
The accompanying notes are an integral part of these statements.
| 6 |
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(amounts in thousands)
| For the Three Months Ended March 31, | ||||||||
| Supplemental disclosures of cash flow information: | 2023 | 2022 | ||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | 44 | $ | 29 | ||||
| Income taxes | $ | 4 | $ | 6 | ||||
| 7 |
RELIABILITY INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(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"Inc. is a leading provider of employer of record and temporary media and information technology (“IT”) staffing services that operates, along with its wholly owned subsidiary, The Maslow Media Group, Inc (“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 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. 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.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 individuals, included but were not limited to Dr. Doki, Mrs. Janumpally, Mr. Pathuri, and Mrs. Valleru, Igly Trust, and Judos Trust 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 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.
| 8 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(amounts in thousands, except per share data)
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).
The accompanying financial statements have been prepared assumingattempted collection of the guarantee and debt from the Vivos Group set off a chain of legal events culminating in an arbitration hearing and award in 2022. (See below and Item 3 for complete summary). We refer below to the disputes between Reliability and the Vivos Group as the “Vivos Matter.”
A series of legal actions and hearings took place starting in March of 2020 through September of 2021. At that time, Arbitration was agreed by both the Vivos Group and MMG, The proceedings began in February 2022 and were completed in March 2022.
On August 31, 2022, the Arbitrator issued an award (the “Award”) with the Company will continue as a going concern.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, 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, 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 $, 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.
| 9 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(amounts in thousands, except per share data)
The parties submitted material for clarification of the Award on March 7, 2023, and March 20, 2023, which included proposed language for an award to be entered against Vivos Real Estate Holdings, LLC (“VREH”), in light of the bankruptcy court order lifting the stay that pertains to VREH, which filed a petition in bankruptcy court. The date of a final award has not yet been determined. The Company, is quoted onthrough counsel, has reached out to the OTC Marketplace underArbitrator to inquire about when a final award may be expected.
Upon a final resolution as to the symbol "RLBY"underlying ownership and rights of certain shareholders, the Company intends to hold an annual meeting of shareholders within a reasonable time thereafter.
As of March 31, 2023, the Vivos Debtor (“Vivos Debtor”) balance was $.
Basis of presentation
The unaudited condensed 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 herein 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 inCredit Risk
For the United States requires that management make estimatesthree months ended March 31, 2023, 25.2% of revenue came from one customer, and assumptions that affect12.6% from a second customer. Combined, this totals 37.8% of revenue. Last year these two companies plus a third, accounted for 46.7% of revenue for the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amountssame period ended March 31, 2022. No other client has exceeded 10% of revenues and expenses duringfor the reporting period. Actual results may differ from those estimates.
NOTE 2. MANAGEMENT’S PLAN
Although the Company considers all highly liquid cash investments that mature in three months or less when purchased,continues to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value.
| ● | Cash flow forecasts showing sufficient cash and working capital 52 weeks from April 23, 2023; | |
| ● | The prospect of receiving the amounts awarded in the arbitration hearing in 2023, which include the $ in notes receivable from related parties, plus awards for fraud totaling $4,327, contract damages of $1,000, and additional interest, and legal fees, after the receiver is selected; | |
| ● | The anticipated reduction in legal fees; | |
| ● | Addition of a new Vice President of Sales recently hired with experience and success in managing contingent and direct hire staffing organizations; and | |
| ● | The Company has additional availability to use its factoring line to extend borrowings of up to 93% of unfactored invoices which as of May 1, 2023, was $2,041. |
| 10 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(amounts in thousands, except per share data)
As a result of the foregoing, the Company believes that it has sufficient cash to meet its financial obligations for the next 12 months and beyond as they become due.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Adopted Accounting Pronouncements
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 4. ACCOUNTS RECEIVABLE
Accounts receivable can be broken down as follows:
SCHEDULE OF ACCOUNTS RECEIVABLE
| March 31, 2023 | December 31, 2022 | |||||||
| Accounts receivable, Unfactored | $ | 2,300 | 3,131 | |||||
| Unbilled receivables | 358 | 587 | ||||||
| Accounts receivable, factored | 924 | 2,619 | ||||||
| Total Accounts Receivable | 3,582 | 6,337 | ||||||
NOTE 5. DEBT
Tax Liabilities
As of March 31, 2023, the Company’s overall tax liability was $5 compared to $688 at end of same period in 2022 and $6 as of December 31, 2022.
Factoring Facility
The Company is in a factoring and security agreement with Gulf Coast Bank and Trust (“Gulf”) which enables the Company to receive advances on its accounts receivable (i.e., invoices) through Gulf to fund growth and operations. The proceeds of this agreement are most frequently used to pay operating costs of the business which include employee salaries, vendor payments and overhead expenses.
Our arrangement calls for interest at prime plus 2% and includes an advance rate of 18 basis points. The amount of an invoice eligible for sale to Gulf is 93%. This agreement is month to month. The Company continues to be obligated to meet certain financial covenants in respect to invoicing and reserve account balance.
| 11 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(amounts in thousands, except per share data)
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 May 1, 2023, the required amount was 10%. Any excess of the reserve amount is paid to the Company as requested. If a reserve shortfall exists for a period of ten days, the Company is required to make payment to Gulf for the shortage.
Accounts receivables were sold with full recourse. Proceeds from the sale of receivables were $2,971 for the three-month period ending March 31, 2023, compared to $2,811 for the same period ending on March 31, 2022. The total outstanding balance under the recourse contract was $924 on March 31, 2023, compared to $2,619 as of December 31, 2022, and $1,590 on March 31, 2022.
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 March 31, 2023, and 2022 totaled $44 and $29, respectively.
NOTE 6. COMMITMENTS AND CONTINGENCIES
There are a number of debts and confessions of judgement (“COJ”) related footnote disclosures. In doing so,to the amendments should reduce diversityVivos Group that included Maslow as a co-signer or guarantor at some stage in the timingVivos Group debt process from November 2016 through October 29, 2019, when Vivos Holdings LLC owned Maslow. All known debts disclosed to Maslow management and contentReliability prior to the Merger were addressed by various safeguards such as the Liquidation Agreement, and the Naveen Doki personal guarantee described in Item 1. However, there were certain non-disclosures by Vivos Holdings, LLC that are included below which are completely covered in Note 8 and Item 3 Legal Proceedings.
In December 2019, the Company’s executive management learned that prior to the Merger, in January 2018, one of footnote disclosures.the Company’s related parties, on behalf of Maslow, executed a guarantee of obligations of Vivos Real Estate Holdings, LLC (“VREH”), under a mortgage loan for the purchase of the property at 22 Baltimore Rd., Rockville, Maryland. Maslow leased this space on market terms. This obligation had not been included in Maslow’s consolidated financial statements and was not separately disclosed prior to the Merger.
On March 3, 2022, Maslow received a notice of default, acceleration, and demand for payment-in-full from FVCBank due to incurable events of default on behalf of Borrower, VREH. 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. Maslow may have 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 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.
Maslow filed a Motion to Vacate Confessed Judgment entered against it by FVC Bank in the Circuit Court for Fairfax County.
On November 17, 2022, FVC Bank and VREH entered into a Stipulation and Consent Order through the bankruptcy court that provides VREH to pay back taxes and interest, hire a new property manager and make repairs to the building, and work on a plan to refinance or sell the building. This automatic stay to the bankruptcy proceeding provides VREH until April 15th, 2023, to either refinance or sell the building to prevent FVC Bank from foreclosing on the property and commencing action to sell the property.
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(amounts in thousands, except per share data)
In April 2023, VREH and FVC Bank negotiated through the bankruptcy court a revised Stipulation and Consent Order. VREH has so far met the requirements of the new order which included paying down the liability owed to FVC Bank by $350,000. VREH is working towards obtaining a commitment letter from a lender so that one of their affiliated entities can purchase the building by June 1st, 2023. The ASUCompany continues to dispute its placement as a guarantor on the mortgage associated with FVC Bank and is effectiveworking to mitigate any liability associated with VREH’s default on the mortgage.
In September 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. SWC 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. The Company filed a motion in January 2023 to include all original parties to the SWC Agreement. The court has not yet issued its ruling on the motion filed.
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 no par value. All authorized shares of Company Common Stock are issued and outstanding.
NOTE 8. RELATED PARTY TRANSACTIONS
Stock Purchase Agreement
On November 9, 2016, Vivos Holdings, LLC, the former owner of MMG, acquired 100% of MMG through a stock acquisition exchange for all entitiesa 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 MMG on behalf of the Vivos Debtors. The Vivos Debtors subsequently entered into a promissory note receivable with MMG, described below, for annualthe 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 March 31, 2023, and December 31, 2022, the receivable totaled $ and $, respectively. This is not inclusive of the additional amounts awarded in the arbitration.
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. Per 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 in 2021 that the two notes had clauses capping the default interest at 4.5% and 5.5% respectively. The rate adjustment for the allowed periods ending after Decemberwas made using the eligible agreement rates.
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(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 consisted of two periods, whereby in the first period no principal or interest payments were required. During the second loan period, interest was supposed to have been paid in 20 equal consecutive payments, quarterly. Principal plus any unpaid interest is due September 20, 2023. As of December 31, 2022, the total outstanding balance was $3,585 which includes accrued interest receivable of $168.
On November 15, 2017, MMG executed an intercompany promissory note receivable with VREH in the amount of $772. There were two loan periods defined. During the first loan period, interest accrued monthly and interim periodsa new loan amount of $781 was subject to a second loan period. As of March 31, 2023, the total outstanding balance was $868 which includes accrued interest receivable of $14 for the period ending March 31, 2023.
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 $ of the balance of the Promissory Note issued to Vivos Debtors on November 15, 2017, within annual periods beginning after December 15, 2016. Early adoptionthe 2019 calendar year via cash, stock, or other business assets acceptable to the Company. Dr. Doki is permitted. The adoptiona or greater beneficial holder of ASU No. 2014-15 did not haveCompany Common Stock, and therefore is a significant impactrelated party.
As of February 2020, the Company filed a lawsuit against the majority shareholder, pursuant to the personal guaranty agreement for defaulting on the Company'soutstanding notes receivable.
Over the period between November 2016 and March 31, 2023, the Vivos Group borrowed an additional $2,547. which is included in the note receivable totaling $3,643.
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 has occurred, MMG has the right to declare the entire unpaid balance of the note due and payable. The note was secured by shares of Company Common Stock, was due and payable upon a default by Vivos. In addition, both Naveen Doki and Silvija Valleru personally guaranteed the repayment of the note by the Vivos Group. Naveen 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. As of March 31, 2023, the total outstanding balance was $869, which includes 2023 interest of $12.
Debt Settlement Agreements
On July 21, 2022, Maslow settled the obligation which Vivos Holdings, LLC had obligated Maslow to in July 2018, with Libertas Funding, LLC and Kinetic for $475. (See Section 1A). The $475 is included in the additional borrowing cited above.
Related Party Relationships
On October 29, 2019, prior to the Merger, pursuant to the Merger Agreement, Naveen Doki and Silvija Valleru became beneficial owners of 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’s arbitration award thus far includes relinquishment of shares of the Company common stock equal in value to $1,000, valued as of the date of the Award, in accordance with the provisions of Section 9.06(d) of the Merger Agreement (see Note 1).
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(amounts in thousands, except per share data)
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”). Convertible note warrants were not valued and included as liability on balance sheet because of uncertainty around their pricing, value and low probability at this juncture in receiving the $5,000 trigger.
NOTE 9. BUSINESS SEGMENTS
The Company operates within four industry segments: EOR, Recruiting and Staffing, Direct Hire, and Video Production. The EOR segment provides media field talent to a host of large corporate customers in all 50 states. The Recruiting and Staffing segment provides skilled Media and IT field talent on a nationwide basis for customers in a myriad of industries. Direct Hire fulfils direct placement requests by MMG clients for a wide variety of posts, including administrative, media and IT professionals. The Video and Multimedia Production segment provides Script to Screen services for corporate, government and non-profit clients, globally.
The following table provides a reconciliation of revenue by reportable segment to consolidated results for the three months ended March 31, 2023, and 2022, respectively:
For the three months ended March 31:
SCHEDULE OF RECONCILIATION OF REVENUE AND OPERATING INCOME BY REPORTABLE SEGMENT TO CONSOLIDATED RESULTS
| 2023 | 2022 | |||||||
| Revenue: | ||||||||
| EOR | $ | 4,273 | $ | 4,773 | ||||
| Recruiting and Staffing | 765 | 923 | ||||||
| Direct Hire | 30 | 39 | ||||||
| Video and Multimedia Production | 131 | 48 | ||||||
| Total | $ | 5,199 | $ | 5,783 | ||||
| Revenue | $ | 5,199 | $ | 5,783 | ||||
NOTE 10. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through May 10, 2023, the date on which the unaudited condensed 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:
On April 29, 2023, the Company received a check from the IRS for $ covering its second quarter ERC claim which at the end of March 31, 2023, was posted as receivable (Item 1) for $1,226 including accrued interest.
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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, 2022, 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, 20162022, 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 20172023 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, 2017March 31, 2023, were zero,$5,199 which was $584 or 10.1% less than for the same period in 2022 with revenue at $5,783. The EOR segment had the greatest negative impact, falling $500 to $2,273 from $4,773 in year over year quarterly revenue. One reason for the dip was that a year ago one client had a creative project that employed a significant number of freelance workers we provided. It was a project carried over from 2021 that ended in January 2022. Another reason was one client converted 7 of our employees from our payroll to theirs.
Recruiting and Staffing revenues dipped by $158 from $923 in the period ending March 31, 2022, to $765 comparatively in 2023, while Direct Hire revenues were off the first quarter pace set in 2022 by $9 landing on $30 versus $39 a year ago.
Video Production grew, however, delivering $131 in the first quarter 2023 versus $48 in the first quarter ending March 31, 2022, which was a $83 or 173% increase. It was the highest quarterly revenue total for Video Production since all operationsthe quarter ending December 31, 2021, which this business segment then garnered $263 in revenue.
Cost of Revenue / Gross Profit
Gross profit for the three-month period ending March 31, 2023, was $711 representing 13.7% of revenues, which was $19 lower than the $730 in gross profit MMG earned in 2022’s first quarter when the gross margin was at 12.6%.
The catalyst for the 110-basis point quarter over quarter jump was EOR, as first quarter margins increased from 10.4% in 2022 to 11.9% in 2023. Otherwise, comparatively, first quarter 2023 to 2022: Direct Hire margins were discontinuedat 77.1% as opposed to 89.6%, as recruiting resources were required for a longer term than a year ago; IT Staffing was 22.6% vs. 19.4% in 2022; Media Staffing at 19.7% vs. 22.9%; and Video Production at 18.7% vs. a negative margin due to a cost overrun a year ago.
EOR margins tend to be lower at the beginning of September 30, 2007.
General and Administrative
General and administrative expenses for the three and nine months ended September 30, 2017March 31, 2023, were $3,623 and $
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We expect increases in payroll as certain roles have been contracted and sales and sales support had headcount changes in mid-March.
Interest Expense The Company Other Income (Expense) Other Income in the first quarter was under $1 compared LIQUIDITY AND CAPITAL RESOURCES Our working capital requirements are driven predominantly 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 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 March 31, 2023, is at 66 comparable to 61 DSO for the trailing twelve months ending March 31, 2022. This is because 53% of our revenue is from clients that over the past 3 years began demanding 90-day terms. Delays in receipt of purchase orders also has had an adverse impact on DSO. Alternatively, we have had an increase over the past 12 months in client advances which now average approximately $260 a month vs. $60 prior in 2022. When looking at A/R aging in relation to payments to due date, as of March 31, 2023, 74.9% of our $3,224 in total trade A/R was current and 91.4% was < 31 days aged, compared to 68.5% and 88.2% a year ago, respectively. Our > 60 days aged invoices represent $48 or 1.5% of our total A/R. Our Federal and state tax liability is $5 compared to $688 a year ago, and $6 as of December 31, 2022. 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 be adversely impacted 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 officer’s 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, but on inconsistent schedules; 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 March 31, 2023, had notes receivable totaling $5,327 including default on a $3,000 promissory note and It was also anticipated that following the Over the Overall, these programs bolstered our working capital and enabled us to bring back employees and continue to As of Item 3. Quantitative and Not applicable. Item 4. Risk Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures (b) Changes in Internal Control over Financial Reportingrecognizedincurred $44 in interest expensecharges for financing (factoring) its invoices in the amountfirst quarter 2023 compared with $29 in the same period a year ago, as the prime interest rate soared from 3.5% at the end of $2,281 and $6,732 during the three and nine months ended September 30, 2017, respectively,first quarter 2022 to 8% by end of the first quarter 2023. Our interest rate is 2 points greater than prime, meaning comparatively our costs went from approximately 5.5% to 10%.to $1,913 and $4,399, respectively, duringwith $3 in the prior year periods. The increase is due to the $40,000 note from affiliate issued in August 2016.18 The Company has undertaken steps to reduce its expensesimproveon a $750 tax obligation in December 2019.Company's liquidity, including the previous sale and discontinuance of all operations.The accompanying financial statements have been prepared assumingMerger, the Company will continuewould both access the capital markets by selling additional shares of Company Common Stock and use shares of Company Common Stock as a going concern.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 currently has no operating activities. Thereuntil 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 no assurances thatgiven as to when this might take place.Company will be ablepast three years MMG received eligible forgiven PPP Loan totaling $5,216, ERC cash of $3,501 out of eligible $4,676, which has bolstered working capital enabling us to successfully completeinvest in software, build A/R reserves, and hire needed resources for operations. On April 29, 2023, we received a merger or acquisition or be ablecheck from the IRS for $1,203 to maintain sufficient liquiditypay for our second quarter 2021’s eligible ERC 941X submission.seek a merger or acquisition, in which case the Company might be forced to liquidate or seek protection under the Federal bankruptcy statutes, or both.The Company is in preliminary active discussions with interested parties as to possible acquisitions and or mergers, for which the impactserve our clients.a successful transaction would be significant, but for which there is currently a low probability of execution.Net cash used by operating activities during the nine months ended September 30, 2017March 31, 2023, our working capital was $13,888$8,457, compared to $13,407$8,815 at the end of March 2022. This includes the $1,174 in ERC principal and additional interest received on April 28, 2023. Our adjusted working capital at the comparable periodend of 2016. The change was attributableMarch 2023, excluding the notes receivable related to the Vivos Debtors totals $3,130 compared to 3,776 a decrease in accounts payableyear earlier.accrued liabilities during the nine months ended September 30, 2017 along with a lower net loss.Item 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Risk Controls and ProceduresPrincipalChief Executive Officer 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 PrincipalChief Executive Officer 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.Company'sCompany’s internal controls over financial reporting, known to the PrincipalChief Executive Officer and PrincipalChief Financial Officerthat occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
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RELIABILITY INCORPORATED
OTHER INFORMATION
March 31, 2023
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 Doki, Valleru, Pathuri, 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 Naveen Doki, M.D., 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 under Note I (as defined in the Award) in the amount of $3,458, 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 under Note III (as defined in the Award) in the amount of $800, 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, 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, to be satisfied by the transfer of their shares of the Company common stock to the Company equal in value to $1,000, 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, 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. |
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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 filed their requests related to the Supplemental Award and the assignment of a Receiver to the Arbitrator on November 23, 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 second quarter 2023.
The following legal proceedings where Vivos Group borrowings impacting MMG:
On August 2, 2022, VREH filed for Chapter 11 Bankruptcy in the U.S. Bankruptcy Court for the District of Maryland. The Automatic stay imposed by bankruptcy law 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 modify the automatic stay in the VREH Bankruptcy case filing to allow the Arbitrator to rule on the Company’s claims against VREH. The Court granted the motion to modify the stay on September 16, 2022, after the initial award by the Arbitrator. The parties submitted material for clarification of the Award on March 7, 2023, and March 20, 2023, which included proposed language for an award to be entered against VREH, in light of the bankruptcy court order lifting the stay.
In September 2022 MMG learned that Vivos IT, LLC lawsuit against Second Wind Consultants (“SWC”) in May 2019 included MMG as a plaintiff. The lawsuit brought claims of Fraud in the inducement, unjust enrichment and other monetary claims against SWC. The 5 parties suing SWC, included Vivos IT, LLC, 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., SWC countersued all plaintiffs on September 30th, 2019 seeking to collect the balance of $403 not paid by the Vivos Group. This was not disclosed to Maslow Management or to Reliability before the Merger closed on October 29, 2019.
Maslow has retained Counsel and has filed a motion to include all original parties to the SWC agreement, as two of the original parties were not in the original filings (HCRN & Media Solutions). Counsel for SWC requested an extension to the deadline to respond to this motion but has failed to respond before the extension deadline received. The motion is currently being considered by the court.
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, 2016,2022, 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.
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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 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 continue to substantially disrupt our business and we cannot assure you that we will be able to resolve the litigation on terms favorable to us in any definitive time frame.
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) | ||
/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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