10-K
1
form10-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
One)
[X]
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2020
[ ]
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the annual period from January-1-2020 to December-31-2020
Commission
File Number: 000-07092
RELIABILITY
INCORPORATED
(Exact
Name of Registrant as Specified in Its Charter)
Texas
75-0868913
(State
of Incorporation)
(I.R.S.
Employer Identification Number)
12124
Skylark Rd, Clarksburg, Maryland
20871
(Address
of Principal Executive Offices)
(Zip
Code)
Registrant’s
telephone number, including area code:
(202)
965-1100
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
Name
of Exchange on Which Registered
Common
Stock
No
par value
N/A
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes, [X] No
Indicate
by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes, [X]
No
Indicate
by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes, [ ] No
Indicate
by check mark whether the Registrant has submitted electronically and posted on its corporate Website, 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). [X] Yes, [ ]
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not
contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate
by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [ ]
Accelerated
filer
[ ]
Non-accelerated
filer [ ]
(Do
not check if a smaller reporting company)
Smaller
reporting company
[X]
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 new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes, [X] No
The
aggregate market value of the common stock held by non-affiliates of the Registrant as of December 31, 2020 was $21,300,000 (based
on the closing sale price of the Registrant’s common stock on December 31, 2020 as reported on OTC American).
As
of March 31, 2021, there were 300,000,000 shares of the Registrant’s common stock outstanding.
TABLE
OF CONTENTS
Page
No.
Forward-Looking Statements
3
PART I
Item
1
Business
4
Item
1A
Risk Factors
12
Item
1B
Unresolved Staff Comments
27
Item
2
Properties
27
Item
3
Legal Proceedings
28
Item
4
Mine Safety Disclosures
29
PART II
Item
5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
30
Item
6
Selected Financial Data
30
Item
7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item
7A
Quantitative and Qualitative Disclosures About Market Risk
43
Item
8
Financial Statements and Supplementary Data
44
Item
9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
72
Item
9A
Controls and Procedures
72
Item
9B
Other Information
72
PART III
Item
10
Directors, Executive Officers and Corporate Governance
73
Item
11
Executive Compensation
77
Item
12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
79
Item
13
Certain Relationships and Related Transactions, and Director Independence
81
Item
14
Principal Accountant Fees and Services
81
PART IV
Item
15
Exhibits and Financial Statement Schedules
82
Item
16
Form 10-K Summary
82
2
FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements. Forward-looking statements may include, but are not limited to,
statements with respect to our future financial or operating performance, future plans and objectives, competitive positioning,
requirements for additional capital, government regulation of operations and the timing and possible outcome of litigation and
regulatory matters. All statements other than statements of historical fact, included or incorporated by reference in this Annual
Report on Form 10-K that address activities, events or developments that we, or our subsidiaries, expect or anticipate may occur
in the future are forward-looking statements. Often, but not always, forward-looking statements can be identified by use of forward-looking
words such as “aim,” “potential,” “may,” “could,” “would,” “might,”
“likely,” “will,” “expect,” “intend,” “plan,” “budget,”
“scheduled,” “estimate,” “anticipate,” “believe,” “forecast,” “committed,”
“future” or “continue” or the negative thereof or similar variations. Forward-looking statements are based
on certain assumptions and analyses made by us, in light of our experience and perception of historical trends, current conditions
and expected future developments, as well as other factors we believe are appropriate in the circumstances. Although we believe
that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations
will prove to have been correct. Readers are cautioned not to put undue reliance on such forward-looking statements, which are
not a guarantee of performance and are subject to a number of uncertainties and known and unknown risks, many of which are outside
our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
Important factors which could cause actual results to differ materially from those expressed or implied by such forward-looking
statements include, among other things, general business, economic, competitive, political and social uncertainties, the actual
results of current operations, industry conditions, intellectual property and other proprietary rights, liabilities inherent in
our industry, accidents, labor disputes, delays in obtaining regulatory approvals or financing and general market factors, including
interest rates, equity markets, business competition, changes in government regulations. Additional risks and uncertainties include,
but are not limited to, those listed under “Item 1A. Risk Factors.”
In
December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus
spread to other countries, including the United States, and efforts to contain the spread of this coronavirus intensified. The
outbreak and any preventative or protective actions that governments or we may take in respect of this coronavirus may result
in a period of business disruption, reduced customer traffic and reduced operations. The Company expects that the impact of this
coronavirus will continue to be materially negative in the short term. The full financial impact cannot be reasonably estimated
at this time but may materially continue to affect our business, financial condition and results of operations. The extent to
which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus
or treat its impact, circumstances permitting people to return to work, among others. In reaction to the COVID-19 pandemic, federal
and state legislatures have been attempting to push through legislation, much of which affects the employee-employer relationship,
and these new laws may have a material impact on our operations, business, finances and prospects. Recently some states have
been reducing or eliminating restrictions instituted to contain the spread of the virus, while this may result in a trend toward
a more normalized environment, the restrictions may be reinstituted if circumstances warrant. No certainty can be provided as
to the future track of the COVID-19 pandemic or the governmental responses to it. Recent federal legislation has proposed significant
federal stimulus funds to address the economic impact of the pandemic, and while such legislation may be a positive factor for
the Company’s business, no assurance can be given that any such stimulus will ultimately be enacted or that such legislation
will in fact benefit the Company.
Although
we have attempted to identify important factors that could cause actual actions, events or results to differ materially from those
described in the forward-looking statements, there may be other factors, such as the impact of the COVID-19 pandemic, that cause
results to differ from those anticipated. Forward-looking statements contained in this Annual Report on Form 10-K are made as
of the date of the Annual Report on Form 10-K and we disclaim any obligation to update any forward-looking statements, whether
as a result of new information, future events, results or otherwise, except as required by applicable securities laws.
As
used in this Annual Report, the terms “we,” “us,” “our,” “Reliability,” “Maslow,”
“MMG” and the “Company” meaning Reliability, Inc. and its operational subsidiary, Maslow Media Group Inc.,
unless otherwise indicated. All dollar amounts in this Annual Report are expressed in thousands except for share and per share
values, unless otherwise indicated.
The
disclosures set forth in this report should be read in conjunction with our consolidated financial statements and notes thereto
for the year ended December 31, 2020. All dollars, except earnings per share, presented in this Form 10-K are in thousands ($000).
3
Part
I
ITEM
1. BUSINESS
OVERVIEW
AND HISTORY
Reliability
Incorporated (“Reliability” or the “Company”), headquartered in Clarksburg, Maryland, through its wholly
owned subsidiary, The Maslow Media Group, Inc. (“Maslow” or “MMG”), provides workforce solutions to its
clients consisting primarily of Employer of Record (“EOR”) services, recruiting and staffing, and video and multimedia
production. The Company focuses on domestic clients but provides services to these clients throughout the world. The Company’s
clients are in diverse industries including media, financial services, banking, medical devices, pharmaceuticals, telecommunications,
energy, healthcare, photography and chain restaurants.
Maslow
was founded in 1988 by Linda Maslow whose impetuous was recognizing the need for a single resource that could provide qualified
production crews to Washington, D.C.’s television, cable, and multimedia outlets. Maslow was later incorporated in Virginia
in 1992 and changed its name to our current legal name, The Maslow Media Group, Inc. Maslow’s initial business consisted
of providing “script to screen” services which consisted principally of providing production management and services
to television, cable, and multimedia outlets. Over time, Maslow expanded its product offerings, adding workforce management solutions,
such as EOR services, and recruiting and staffing services. As Maslow grew, it expanded its geographic footprint by acquiring
clients outside of the Washington D.C. metro area.
On November 9, 2016, Linda Maslow sold
the business to Vivos Holdings, LLC (“Vivos Holdings”) owned by Naveen Doki (“Mr. Doki”) and Silvija Valleru
(“Mrs. Valleru”).
In 2018, Vivos Holdings and several other
Vivos companies, (“Vivos Group”) engaged an investment banker who approached management of Reliability to discuss a potential
reverse merger transaction. The reverse merger was consummated on October 29, 2019. As a result of the Merger, Vivos Holdings
acquired approximately 86% of the issued and outstanding shares of Reliability which were distributed by Vivos Holdings;
two married couples through their direct ownership of shares as well as indirect ownership through entities controlled by them.
The
Company was incorporated under the laws of the State of Texas in 1953. From 1971 to 2007, the Company was principally engaged
in the design, manufacture, market, and support of high-performance equipment used to test and condition integrated circuits.
This business was shut down in 2007, and the Company was continued as a “shell company” as defined by the Exchange
Act, with no operating activities until October 29, 2019 when the Company acquired Maslow.
On
October 29, 2019, Maslow 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 Maslow being the surviving corporation (the “Merger”).
The Merger is more fully described in our Current Report on Form 8-K filed on October 30, 2019.
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 Maslow following the Merger. The acquisition of Maslow also resulted
in a “change in control” of Reliability.
Since
the Merger, Maslow expanded its staffing vertical footprint by acquiring the business assets of Intelligent Quality Solutions
Inc. (“IQS”), providing IT Staffing solutions in December 2019, which formerly operated in Plymouth, Minnesota.
On or about February
17, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings,
LLC, Vivos Real Estate Holdings, LLC and Mr. Doki (collectively “Vivos Debtors”), to enforce Maslow’s rights
under certain promissory notes and a personal guarantee made by the Mr. Doki. On or about May 6, 2020, the Defendants filed a
counterclaim and third-party complaint for Damages, declaratory and injunctive Relief and jury Demand (the “Counterclaim”).
Both cases are proceeding to go to trial scheduled to begin October 4, 2021. We refer to this dispute as the “Vivos Matter.”
Please see Item 3 under LEGAL PROCEEDINGS for more detail and context.
As
of March 15, 2021, there were 300,000,000 shares of the Company’s common stock, no par value per share (the “Company
Common Stock,” or “Common Stock”) outstanding.
4
EMPLOYEES
As of March 23, 2021, we had 22 team
members (staff employees) at our Clarksburg, MD corporate and remote locations. During the fiscal year ended 2020, we assigned
approximately 1,067 field talent workers and approximately 129 were working on average throughout the year.
As
of March 23, 2021, 648 active field talent workers had been employed over the past 6 months.
Approximately
10% of our field talent are represented by a labor union. We are not aware of any current labor efforts or plans to formalize
organize any of our other team members or field talent. To date we have not experienced any material labor disruptions.
Because of the sudden drop-in client requirements
due to the COVID-19 pandemic, in March 2020 the Company reduced the hours of contracted employees, reduced corporate salaries, and
furloughed six (6) general and administrative personnel. However, upon receipt of Payroll Protection Act (“PPP”) funds
totaling $5,215,605 in early May 2020, the Company was able to bring back those employees willing to return, plus commence
hiring in direct proportion to our client resource demands. The Company also returned those reduced corporate salaries back to normal
levels and paid back the previously suspended amounts. The Company also lowered a number of sales and recruiting employee
salaries as part of a compensation restructuring, moving more of their compensation to a performance-based commission.
PRODUCTS
Employer
of Record (“EOR”)
Maslow’s
EOR product is a unique outsourced managed workforce solution. The costs and compliance obligations relating to the employment
of contingent or permanent workers is borne by Maslow. These workers are Maslow employees, and the client is responsible for maintaining
its workplace, but all administrative roles and responsibilities are handled by Maslow as the employer of record. This arrangement
also obviates the need for our clients to hire freelance contractors for short-term or project-based hiring, who may later be
re-classified as “employees” by the Department of Labor, resulting in significant costs to the client.
The
EOR services offered by Maslow consist of the following principal activities;
● state
employment registration;
● employee
onboarding/offboarding;
● payroll
processing;
● benefits
offerings and administration;
● workers
compensation
claim management;
● employee
relations;
● regulatory
compliance;
● manage
State/County/City mandated employee benefits, such as paid safe and sick leave; and
○ Locality
mandated training administration
○ Unemployment
claims administration
● on
site workforce management
5
The
EOR solution is different than a professional employer organization (“PEO”). In the PEO model, the workers are employees
of the PEO’s client. EORs differ from PEOs in that the EOR;
●
i s
the employer of the customer’s worker;
●
assumes
all liabilities (i.e., U.S. Department of Labor classification,
worker’s compensation, etc.) and responsibilities for its workers provided to customers;
●
is
responsible for all compliance with federal and state regulations,
including healthcare mandates such as the Affordable Care Act;
●
customers
maintain a single service agreement with the EOR;
●
has
the ability to offer employee benefits to workers that may
not be provided on a cost-effective basis by the customer;
●
manage
all issues arising from employment contracts; and
●
provides
its own benefit plan to its employees, meaning clients could
enact a significant savings depending on generosity of their benefit package to their employees.
Recruiting/Staffing
Maslow
has been in the staffing business for over thirty years. During that time, Maslow has developed, and we continue to develop, a
large global network of multimedia and video production workers for our media clients, camera crews and other technical
and creative talent. Maslow uses this extensive network to rapidly respond to our clients’ needs for contingent staffing
and permanent placements.
In
December 2019, Maslow acquired the operational assets of Intelligent Quality Solutions, Inc. (“IQS”), a staffing firm
focused on information technology (“IT”) related industries and specializing in software testing. IQS formerly operated
out of Plymouth, Minnesota.
Our
temporary staffing services consist of on-demand or short-term staffing assignments, contract staffing, and on-site management
administration. Short-term staffing services assist employers in dealing with employee demands caused by such factors as seasonality,
fluctuations in demand for their products and services, vacations, illnesses, parental leave, and special projects, without incurring
the ongoing expense and administrative responsibilities associated with recruiting, hiring and retaining these employees. More
and more companies are focused on effectively managing variable costs and reducing fixed overhead. The use of short-term staffing
services allows companies to utilize a contingent staffing approach for their personnel needs, thereby converting a portion of
their fixed personnel costs to a variable expense.
Our
staffing services place workers with clients for assignments lasting from three months to an indefinite time period or the placement
of full-time equivalent employees on a contingency fee basis. We offer our clients several levels of staffing services
including providing just the managed service or more involved assignments consisting of staffing an entire department or providing
the workforce for a large project.
In
some cases, we place an experienced workforce manager on-site at our client’s place of business. This manager then has responsibility
of conducting all recruiting, employee screening, interviewing, drug testing, hiring and employee placement for employees
at the client’s place of business.
As
is common in the staffing industry, our engagements to provide temporary services to our client are generally of a non-exclusive,
short-term nature and subject to termination by our client with little or no notice.
6
Video/Multimedia
Production
Maslow continues to be a provider of multimedia
and video production solutions. Maslow provides script-to-screen production services for corporate, government and non-profit
clients.
We
use our large, pre-vetted network of worldwide freelancers with high-level technical and creative skills to respond quickly to
our clients’ needs. Our network includes directors of photography, audio engineers, make-up artists, field producers, gaffers
and grips, talent, teleprompter operators, and drone operators. Maslow provides video production services to our clients for the
purpose of branding videos, documentaries, Public Service Announcements, training modules, live events, webcasts, animation, projects,
and more. Our freelance video production teams and clients collaborate with our in-house, full-time Video Production Managers
who bring years of experience to every project, and who work side-by-side with the team to create the vision and story for the
project. In addition to human assets, Maslow sources the latest technical broadcast equipment for television, the internet and
social media. Our network includes freelance talent across the globe to allow us to provide local talent, resulting in cost
savings to our clients.
Maslow
provides, among others, the following production services;
●
pre-Production conceptualization
of final video deliverable;
●
project consultation
from scriptwriting to site scouting;
●
budget development
and management;
●
booking and managing
of logistics for field and studio teams;
●
broadcast level
HD camera crews and field support worldwide including makeup artists, AV support, field producers, and full equipment rental;
●
post-production
facilities and freelance support including non-linear editors, graphic artists, narrators and actors;
●
animation and graphic
design development, including whiteboard animation;
●
live transmission
services from satellite to streaming; and
●
management of fully
staffed client studios.
Intelligent
Quality Solutions (“IQS”)
The Company operates its IQS assets as an
IT staffing division within Maslow. Maslow provides quality assurance (“QA”) analysts, engineers, R&D, testers,
developers, business systems analysts and other resources to our customers in a myriad of industries including those manufacturing
and or providing medical devices, health care, energy technologies, mobile communications, and photography, as well as
restaurant chains.
We have significant experience with Software
Quality Management SQM, affording our clients sophisticated Independent Verification & Validation (“IV&V”)
and QA Consulting Solutions. Our clients can leverage our software testing experience to verify and validate the effectiveness
of the applications they deploy and thereby get the best value for their technology investments. We provide staff augmentation
and permanent placement from our technical resource pool comprised of top industry professionals. Our team members are typically
full-time IQS employees that have established themselves as leaders in their chosen field. We can augment your team with any of
the following skill sets:
7
●
architect
●
automation
Architect
●
devOps
Engineer
●
medical
Device Engineers (including Quality Engineers, R&D, Manufacturing and Electrical)
●
QA
Tester
●
program
Manager
●
project
Manager
●
QA
Analyst
●
quality
Engineer (“QE”) and
●
software
Developer.
IQS
is an innovative leader in information technology staffing and staff augmentation. As a partner, we provide expertise and technology
to help companies achieve their optimal growth and profitability by securing the right talent at the right time. We also offer integrated
workforce solutions as a managed service to give companies even more valuable resource options.
Our
teams support client projects with dedicated research, sourcing and recruiting specialists. IQS provides ongoing training for
our managed teams, keeping them abreast of industry trends, practices and technologies. Clients who have partnered for managed
Human Resource operations and services with IQS have discovered that they lower costs, reduce risk and streamline critical processes.
Our
dedicated recruiting project teams provide:
●
search/Recruiting
●
staffing/On-boarding
●
payroll
Administration
●
benefits
Administration (where applicable)
●
workers
Compensation Claims
●
contingent
Workforce Management
●
employee
Relations
●
labor
Law Requirements and
●
state
Employee Registration.
OUR
INDUSTRY
Maslow
operates within the workforce management industry. The services Maslow provides (managed services, employer of record, staffing,
recruiting, and video production services) generally fall within the broader category known as “workforce management”
services.
The
temporary staffing portion of the workforce management industry supplies workers to clients. These services offer client’s
the ability to rapidly match their workforce to changes in business conditions and needs. In some cases, clients can convert fixed
labor costs to variable costs. The demand for a flexible workforce continues to grow with competitive and economic pressures on
employers to reduce costs, manage payroll compliance risks and respond to changing market conditions.
Per
Staffing Industry Analysts 2019 North America Staffing Company Survey, the 2019 trend expected to have the most impact to staffing
businesses include: An increased role for technology/artificial intelligence (“AI”), expansion of gig work and staffing
convergence with human cloud, increased VMS/MSP use, a continuation of talent shortages, more legislative/regulatory involvement
in staffing, clients doing more in house recruiting, negative economic trends, and increased use of flexible/remote work.
8
The
temporary staffing industry is large and highly fragmented with thousands of competing companies. It is estimated that the 2021
U.S. temporary staffing market will be $136.4 billion, which is up from an estimated $119 billion in 2020. The market hit a high
in 2019 at $151.8 billion. Staffing companies compete both to recruit and retain a supply of field talent and to attract and retain
clients to use these workers. Client demand for temporary staffing services is dependent on the overall strength of the labor
market and trends toward greater workforce flexibility. The temporary staffing industry includes several markets focusing on business
needs that vary widely in duration of assignment and level of technical specialization.
The
temporary staffing market is subject to volatility based on overall economic conditions. Historically, in periods of economic
growth, the number of companies providing temporary staffing services has increased due to low barriers to entry. During recessionary
periods, the number of companies has decreased through consolidation, bankruptcies based on loss of key clients or material reductions
of usage by existing clients, or other events. Prior to the onset of the COVID-19 pandemic, we had been seeing that the temporary
staffing industry is experiencing increased demand in relation to total job growth as clients continue to seek a more flexible
workforce.
Each
state has their own set of employment laws and regulations. The complexity of keeping up with this regulatory compliance landscape,
particularly for smaller employers and companies requiring workers in multiple states, has focused more attention on EOR services.
For example, California adopted eleven new employment laws for 2020.
In
reaction to the COVID-19 pandemic, federal and state legislatures have proposed and enacted legislation affecting the employee-employer
relationship and these new and proposed laws may have a material impact on our operations, business, finances and prospects. For
instance, restrictions have been instituted in several states preventing large number of employees to return to the office. No
certainty can be provided as to the nature of these new regulations or their impact. Individual states continue to change their
pandemic related requirements to relax or remove restrictions on employers, but not assurance can be given as to the effect of
these changes or the potential that they may be reimposed if conditions warrant.
OUR
CLIENTS
A
large portion of our business comes from two clients, AT&T Services, Inc. (inclusive of its DirecTV division) (“AT&T”)
and Janssen Pharmaceuticals (which includes workforce partners Ortho McNeil and Johnson & Johnson). AT&T and Janssen Pharmaceuticals
accounted for 28.8% and 10.9% of the Company’s total revenues for 2020. In 2019 AT&T accounted for 37.5% of the Company’s
business while Janssen accounted for 11.3%. The combination of revenue from new accounts and a drop in revenue by AT&T by
25% due to COVID-19 stay at home orders resulted in a more egalitarian client mix.
AT&T
comprised of 48.5% and 50% of the accounts receivable balance as of December 31, 2020 and 2019, respectively. Janssen Pharmaceuticals
comprised of 18.4% and 19% of accounts receivable as of December 31, 2020 and 2019, respectively. No other client exceeded 10%
of revenues.
Other
significant customers include Morgan Stanley, Goldman Sachs, Abbott Labs, Kaiser Permanente, Discovery, WETA, Felix Lighting,
Liberty Mutual, US House of Representatives, and Strayer University. We additionally have a number of fast-growing tech and IT
government contracts which outsource organizations recruiting process to Maslow/IQS.
GROWTH
STRATEGY
Maslow
had developed its expertise in the EOR market principally in the media industry. We believe there is an opportunity to leverage
this expertise into other industries. The client acquisition challenge outside of media consists principally of educating prospective
clients of the merits of the EOR solution over other options, finding the unique opportunities in each industry or within a corporate
client that lend itself for an EOR solution, and competition from other providers of EOR services. The existing pandemic may make
EOR a more desirable solution to companies that are looking for more agile ways of changing the headcount and nature of portions
if not all of their workforce in an expeditious and low risk manner.
9
If the Vivos Matter (defined and
referenced in Overview section) is resolved, the Company plans to tap the capital markets to pursue an aggressive,
disciplined acquisition growth strategy, both in terms of raising capital and using our shares as currency to acquire additional
businesses. We believe that the staffing/EOR segment is fragmented and while there are several large players in the industry,
there are also a significant number of smaller businesses that would make acquisition targets. These businesses are often limited
in geographic scope or are specialized within an industry. In addition, we continue to emphasize organic growth specifically
directing resources to Sales with the hiring of an experienced Vice President of Sales in the first quarter of 2021.
Presently, the Company does not have any authorized
shares that are not issued. No shares are expected to become available to the Company until an amendment to the Company’s
Certificate of Formation to increase the number of authorized shares of Common Stock or a reverse-split of the outstanding shares
of Common Stock is approved. Such approval may not likely occur until the Vivos Matter is resolved. Following the Merger,
shareholders holding over 80 percent of the issued and outstanding shares of Common Stock notified the Company that acting
as a group they would not approve an amendment to the Company’s Certificate of Formation to increase the number of authorized,
but unissued, shares of Common Stock. As a result, the Company has not been able to execute on its business plan.
We
expect to achieve greater synergies and removal of redundant resources by acquiring EOR and specialized staffing firms in more
diverse locations and serving diversified industries such as healthcare, medical, biotech, pharmaceuticals, aeronautics, green
technologies, oil and gas, and a myriad of IT specialties. We believe that acquisitions would be not only directly accretive,
but also provide significant cross-selling opportunities. Moreover, we can see immediate returns on these acquisitions as we can
quickly consolidate back-office operations and realize significant savings.
We
will focus our organic growth on growing our EOR and staffing business and leveraging our experience to enter new industries,
particularly those that rely significantly on contractors and freelancers to perform limited time or project-based assignments
such as IT (i.e., software developers and testers), marketing, food services (i.e., cafeteria), and sales activities.
As stated above
under “Our Industry”, the trend for staffing expertise in the areas of AI, gig, cloud services, VMS/MSP, plus
the expected need in fields like biotech, and healthcare, are of interest to Maslow. We will continue to embrace this trend
and look to expand on our capabilities, which in turn we believe will open up new markets for us.
Additionally,
we will continue to invest in technology and process improvements, as necessary and resources allow, to ensure that we
operate at optimal productivity and performance and are able to quickly adapt if operations scale up.
COMPETITION
The
staffing services market is highly fractured and competitive with limited barriers to entry. We compete in national, regional
and local markets with full-service and specialized temporary staffing companies. Some of our competitors have significantly more
marketing and financial resources than we do. Price competition in the staffing industry is intense. We expect that the level
of competition will remain high.
The
principal competitive factors in attracting qualified candidates for temporary assignments are pay rates, availability of assignments,
duration of assignments and responsiveness to requests for placement. Because temporary employees often use more than one recruiter
for assignments, the speed at which we place prospective workers, and the availability of appropriate assignments are important
factors in our ability to complete assignments of qualified workers. In addition to having high quality workers to assign in a
timely manner, the principal competitive factors in obtaining and retaining potential workers in the temporary staffing industry
include properly assessing the clients’ specific job requirements, the appropriateness of the workers assigned to the client,
the price of services and the monitoring of client satisfaction. Although we believe we compete favorably with respect to these
factors, we expect competition to continue to increase.
The
workforce management industry is highly fragmented, so we experience competition from different competitors for different services.
Some direct competitors of Maslow for EOR services in the television and video production industry include, but are not limited
to, Entertainment Partners, Cast & Crew, PayReel, Inc., Innovative Employee Solutions. Competitors in the broader EOR space
include, Velocity Global, Easy Payroll Global, Elements Global Services, and Nexus Contingent Workforce. Direct competitors of
Maslow in the staffing space include, but are not limited to TeamPeople, a division of System One Inc., Randstad, Insperity, Group
Management Services, and Namely.com. Direct competitors of Maslow in the executive recruiting/permanent placement include, but
are not limited to, TeamPeople, a division of System One Inc., Creative Circle, The Lucas Group, Onward Search, and DHR International.
Some direct competitors of Maslow in the video production services space include, but are not limited to, PayReel, Inc., Crew
Connection Inc. and TeamPeople, a division of System One Inc.
10
In
addition to the above identified competitors, there are additional competitors that include any company that provides a similar
range of services as us, as well as companies that just provide some or one of the services Maslow provides. The direct competitors
listed above service the same industry that Maslow services and relies upon. The criteria for which these companies compete are
generally based on price and service levels.
While recognizing the need to continue implementation
and awareness in human cloud services as referenced, we believe our competitive advantage is underpinned by human relationships
and interactions, and that online staffing will never replace relationships built on a personal touch. This plays into
MMG’s strength as our underlying client business relies on these personal relationships such to be successful, leading
us to continue to hire career professionals who are able to parlay the emotional intelligence needed with ever evolving modern
technology. We see this hybrid of technology and client centricity to be our competitive advantage.
SEASONALITY
The
staffing industry has historically been cyclical, often acting as an indicator of both economic downturns and upswings. Staffing
clients tend to use temporary staffing to supplement their existing workforces and generally hire direct workers when long-term
demand is expected to increase. Consequently, our revenues tend to increase quickly when the economy begins to grow and, conversely,
our revenues may decrease quickly when the economy begins to weaken. Other factors include the timing of recurring annual client
events or sporting seasons which last a defined period of time throughout the year.
REGULATION
We
are subject to regulation by numerous federal, state and local regulatory agencies, including but not limited to the U.S. Department
of Labor, which sets employment practice standards for workers, and similar state and local agencies. We are subject to the laws
and regulations of the jurisdictions within which we operate. While the specific laws and regulations vary among these jurisdictions,
some require some form of licensing and often have statutory requirements for workplace safety and notice of change in obligation
of workers’ compensation coverage in the event of contract termination. Although compliance with these requirements imposes
some additional financial risk on us, particularly with respect to clients who breach their payment obligation to us, such compliance
has not had a material adverse effect on our business to date. Additional government regulation of the employer-employee relationship
could result in additional clients seeking our services. Conversely, increased government regulation of the workplace or of the
employer-employee relationship, or judicial or administrative proceedings related to such regulation, could also materially harm
our business.
Because of the sudden drop-in client
requirements during this pandemic as clients have elected to delay productions for safety, the Company was forced to reduce the
hours of contracted employees, furlough 6 general and administrative personnel and institute pay-cuts across the board with executives
taking a larger temporary cut.
AVAILABLE
INFORMATION
We
file electronically with the SEC, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. Our website
address is www.maslowmedia.com. The information included on our website is not included as a part of, or incorporated by reference
into, this Annual Report on Form 10-K. We will make available free of charge through our website our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we have filed or furnished such material to the SEC.
You may read and copy any materials we file with the SEC at the SEC’s Public Reference room at 100 F Street, NW, Washington,
DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet site that contains reports, proxy and formation statements, and other information regarding
issuers that file electronically with the SEC at www.sec.gov. Furthermore, we will provide electronic or paper copies of filings
free of charge upon written request to our Chief Financial Officer.
11
ITEM
1A. RISK FACTORS
There
are numerous and varied risks that may prevent us from achieving our goals, including those described below. You should carefully
consider the risks described below and the other information included in this Annual Report on Form 10-K, including our consolidated
financial statements and related notes. Our business, financial condition, and or results of operations, could be harmed by any
of the following risks. If any of the events or circumstances described below were to occur, our business, the financial condition
and the results of operations could be materially adversely affected. As a result, the trading price of Company Common Stock could
decline, and investors could lose part or all of their investment. The risks below are not the only risks we face. Additional
risks not currently known to us or that we currently deem to be immaterial may also adversely affect our business, financial condition
or results of operations.
An
investment in our common stock should be considered high risk .
An
investment in RLBY should be considered high risk and requires a long-term commitment, with no certainty of return.
Impact
of COVID-19 Pandemic
In
December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus
spread to other countries, including the United States, and efforts to contain the spread of this coronavirus intensified. The
outbreak and any preventative or protective actions that governments or we may take in respect of this coronavirus may result
in a period of business disruption, reduced customer traffic and reduced operations.
We
have maintained our focus on the health and safety of our employees, contractors, customers, and suppliers, working with each
stakeholder on precautions to keep everyone safe from the virus. We have worked closely with our clients whom we contract staffing
to implement health and safety protocols and develop plans for safely reestablishing or continuing operations during this pandemic.
The
demand for staffing services has been and will be significantly affected by general economic conditions. Uncertainties related
to the duration of the COVID-19 pandemic have had and are expected to have an adverse impact on the staffing industry and the
Company’s ability to forecast its financial performance. As such, any resulting financial impact cannot be reasonably estimated
at this time but may materially affect our business, financial condition and results of operations. The extent to which the coronavirus
impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information
which may emerge concerning the severity of the coronavirus, rollout of vaccines, and federal, state and local government and
client actions to contain the coronavirus or treat its impact, among others. Our executive management team continues to track
COVID-19 news and developments, including the deployment of vaccines.
RISKS
RELATED TO OUR COMPANY
Disputes between Reliability and the Vivos
Group have put our growth plans on hold as Reliability cannot tap the public markets for capital.
Approximately 84.4% of common stock is owned by two (2) groups of related
parties (“Vivos Group”);
Name
Directly Owned
Shares of
Common
Stock
Percentage
Beneficial
ownership
of Common Stock
Percentage
Naveen Doki,
10,138,882
3.4 %
202,634,728 (1)
67.5 %
Silvija Valleru
4,972,644
1.7 %
50,667,482 (2)
16.9 %
Shirisha Janumpally
192,495,846
64.2 %
202,634,728 (3)
67.5 %
Kalyan Pathuri
45,684,838
15.2 %
50,657,482 (4)
16.9 %
Totals
253,292,210
84.4 %
1) 10,138,882
shares held by Mr. Doki; (ii) 20,661,816 shares held by Federal Systems, a company owned
and controlled by Mrs. Janumpally, which Mr. Doki may be deemed to indirectly beneficially
own as the husband of Mrs. Janumpally; (iii) 161,503,122 shares held by Judos Trust,
a trust in which Mrs. Janumpally is the sole trustee and beneficiary, and of which Mr.
Doki may be deemed to indirectly beneficially own as the husband of Mrs. Janumpally;
and (iv) 10,330,908 shares held directly by Mrs. Janumpally which Mr. Doki may be deemed
to indirectly beneficially own as the husband of Mrs. Janumpally.
2) Represents
(i) 4,972,644 shares held by Mrs. Valleru; and (ii) 40,520,200 shares held by Igly Trust
of which Mrs. Valleru may be deemed to indirectly beneficially own as the wife of Kalyan
Pathuri, who is the sole trustee and beneficiary of the Igly Trust; and (iii) 5,164,638
shares held by Mr. Pathuri, which Mrs. Valleru may be deemed to indirectly beneficially
own as the wife of Mr. Pathuri.
3) Represents
(i) 10,330,908 shares that Mrs. Janumpally may be deemed to indirectly beneficially own
as the wife of Mr. Doki; (ii) 20,661,816 shares held by Federal Systems, a company owned
and controlled by Mrs. Janumpally; (iii) 161,503,122 shares held by Judos Trust, a trust
in which Mrs. Janumpally is the sole trustee and beneficiary, and (iv) and 10,330,908
shares Mrs. Janumpally owns directly.
4) Represents
(i) 5,164,638 shares held by Mr. Pathuri; (ii) 40,520,200 shares held by Igly Trust of
which Mr. Pathuri is the sole trustee and beneficiary; and (iii) 4,972,644 shares held
by Mrs. Valleru of which Mr. Pathuri may be deemed to indirectly beneficially own as
the husband of Mrs. Valleru.
On June 5, 2020, Reliability commenced an
arbitration seeking to address purported merger violations before the American Arbitration Association (“AAA”)
in New York, New York, as permitted by the Merger Agreement against Mr. Doki; Mrs. Valleru; Mrs. Janumpally (individually and
in her capacity as trustee of Judos Trust); Mr. Pathuri (individually in his capacity as trustee of Igly Trust) and Federal Systems
(the “Respondents”).as The Respondents filed a counterclaim, but changed their mind, refused to pay the AAA’s
fee, and ultimately refused to participate in the arbitration. Thereafter, Reliability petitioned the state court in New York
to compel arbitration, but this action was removed to federal court, where it has been pending for several months awaiting
court action. 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.
12
The Vivos Group will likely continue
to control virtually all matters submitted to shareholders for a vote; may elect all of our directors upon the end of the term
of the current directors; and, as a result, may control our management, policies, and operations. Our other shareholders will
not have voting control over our actions, including the determination of other industries and markets that we may enter and the
entities we acquire, which may be affiliated with Vivos. The various actions taken by the Company against the Vivos Group
are motivated by ensuring that either Vivos no longer controls the vote of the shareholders or, in the alternative, that no
Vivos Group votes or actions can harm the Company or the minority shareholders. No assurance can be given that the Company
will be successful in these actions, however on December 23, 2020 at a hearing in the Maryland District Court, a
motion by Vivos to compel a shareholder meeting was summarily dismissed. The judge agreed that permitting Vivos Group to
vote their shares at a meeting of shareholders could materially harm the interests of the Company as a whole, its employees and
minority shareholders. This judge will be presiding over a full trial on the merits shortly. While our dispute with Vivos continues,
we will be unable to execute our busines plan. The Company’s business plan contemplates issuing additional shares of Common
Stock to raise capital and to use as currency for our acquisition growth strategy. Presently, the Company does not have any authorized
shares that are not issued. No shares are expected to become available to the Company until this matter is resolved. The Company
will suffer a material adverse effect if the Company continues to have no shares of Common Stock available for issuance.
Related
Party Indebtedness; Default.
Prior to the Merger, shareholders of Vivos,
(“Vivos Debtors”) directly and through affiliated entities, borrowed amounts from Maslow (the “Related
Party Debt”) that reached an aggregate outstanding balance (including principal and interest) as of December 31, 2019 of
approximately $4,169. The Related Party Debt is evidenced by several promissory notes and a personal guaranty of Mr. Naveen
Doki, also a Majority Shareholder. The Related Party Debt is currently in default and as of December 31, 2020 had a balance of
$4,258. In February 2020, Maslow brought an action in the District Court of Montgomery County, Maryland, to enforce the promissory
notes and guaranty. Failure of the Company to recover the Related Party Debt could have a material adverse effect on the Company.
The case is currently pending with a trial date set to begin on October 4, 2021, barring any delays that more likely would be
the result of the COVID-19 pandemic.
In
addition, prior to the Merger, some of the Vivos Group incurred obligations at a number of other businesses they own and
caused Maslow to become obligated thereon as co-obligor or guarantor, and pledged assets of Maslow to secure certain of these
obligations. During the five months prior to the consummation of the Merger, Maslow paid approximately $450 in satisfaction of
these obligations. Maslow continues to be a contingent obligor on certain of these debts. If the direct obligors fail to satisfy
these debts, the creditors may bring action against Maslow, which, if determined adversely, could have a material adverse effect
on the Company.
The
existence of these obligations could significantly affect our liquidity, as well as our ability to obtain loans in the future.
Certain members of Vivos Group entered into that certain Agreement for the Contingent Liquidation of the Common Stock of
Maslow Media Group, Inc., dated as of October 28, 2019 (the “Liquidation Agreement”), pursuant to which those Vivos
Group thereto pledged their shares of Company Common Stock to be sold or granted to the applicable creditors in satisfaction
of the debts owed to the creditors and terminate any guarantees, liens and obligations affecting Maslow. The sale of the shares
subject to the Liquidation Agreement could adversely impact the value of the Common Stock. In addition, the value of the shares
of Company Common Stock may be insufficient to pay off all outstanding obligations. The Company may have to resort to the courts
to enforce the terms of the Liquidation Agreement, and the sale of these shares may need to be registered under applicable securities
laws, which would distract management and increase expenses.
13
The
Company could be subject to unknown liabilities incurred by its previous sole shareholder, Vivos Holdings LLC .
Maslow was previously a wholly owned subsidiary
of Vivos Holdings, LLC (“Vivos Holdings”). Vivos is owned and controlled by the seven parties that we are currently
in dispute. Vivos Holdings had caused Maslow to be a guarantor or direct obligor for loans, advances, or other liabilities
for the benefit of Vivos related entities other than Maslow. These obligations were often incurred by Vivos Holdings on
behalf of Maslow without the knowledge of Maslow’s senior management. There may be additional obligations of other Vivos
Group entities for which Maslow may have liability as a result of these arrangements that are not known to the management
of Maslow. These liabilities could have a material adverse effect on the Company and the value of the Common Stock. Reliability
runs periodic lien checks, the latest as late as January 2021 and have not seen any new uncommunicated pre-existing liabilities.
The
success of our business depends on our ability to attract and retain qualified employees that possess the skills demanded by clients
and intense competition may limit the ability to attract and retain such qualified employees .
For
the Company’s staffing, executive recruiting, and video production services, the success of the Company depends on the ability
to attract and retain qualified employees who possess the skills and experience necessary to meet the requirements of clients
or to successfully bid for new client projects. The ability to attract and retain qualified employees could be impaired by improvement
in economic conditions resulting in lower unemployment, increases in compensation, or increased competition. During periods of
economic growth, the Company faces increasing competition from other staffing companies for retaining and recruiting qualified
temporary and permanent employees, which in turn leads to greater advertising and recruiting costs and increased salary expenses.
These problems can be exacerbated by the fact that the Company often must attract and retain employees with skills specific to
the video production industry, which narrows the pool of available, qualified employees that the Company may draw upon. If the
Company cannot attract and retain qualified temporary and permanent employees, the quality of its services may deteriorate and
the financial condition, business, and results of operations may be materially adversely affected.
Our
success depends to a large degree on growth in market acceptance of human resources outsourcing and related services we provide .
Because
the majority of our revenues currently comes from EOR services, a large portion of our success depends on the willingness of clients
to outsource their human resources (“HR”) function to a third-party service provider. Many companies have invested
substantial personnel, infrastructure and financial resources in their own internal HR organizations and therefore may be reluctant
to switch to our solution. Companies may not engage us for other reasons, including a desire to maintain control over all aspects
of their HR activities, a belief that they manage their HR activities more effectively using their internal administrative organizations,
perceptions about the expenses associated with our services, perceptions about whether our services comply with laws and regulations
applicable to them or their businesses, or other considerations that may not always be evident. Additional concerns or considerations
may also emerge in the future. We must address our potential clients’ concerns and explain the benefits of our approach
in order to convince them to change the way that they manage their HR activities, particularly in parts of the United States where
our Company and solution are less well-known. If we are not successful in addressing potential clients’ concerns and convincing
companies that our solution can fulfill their HR needs, then the market for our solution may not develop as we anticipate thus
our business may not grow.
Any
significant or prolonged economic downturn could result in clients using fewer staffing and executive recruiting services offered
by the Company, terminating their relationship with the Company, or becoming unable to pay for services on a timely basis, or
at all.
Because
demand for the types of services our Company offers is sensitive to changes in the level of economic activity, the Company’s
business has in the past and may in the future suffer during economic downturns. Demand for the services we provide are highly
correlated to changes in the level of economic activity and employment. Consequently, as economic activity begins to slow down,
it has been the Company’s experience that companies tend to reduce their use of our services, resulting in decreased revenues
and profit levels. In addition, the Company may experience pricing pressure during economic downturns which could have a negative
impact on the results of operations. Further, many of our clients are corporate media departments and broadcast networks. As a
result, any industry downturn that affects these kinds of companies could have a major effect on our business.
14
The
deterioration of the financial condition and business prospects of clients could reduce their need for the staffing and executive
recruiting services we provide and could result in a significant decrease in the Company’s revenues and earnings derived
from these clients. In addition, during economic downturns, companies may slow the rate at which they pay their vendors, seek
more flexible payment terms or become unable to pay their debts as they become due.
State
unemployment insurance expense is a direct cost of doing business in the staffing industry. State unemployment tax rates are established
based on a company’s specific experience rate of unemployment claims and a state’s required funding formula on covered
payroll. Economic downturns have in the past, and may in the future, result in a higher occurrence of unemployment claims resulting
in higher state unemployment tax rates. This would result in higher direct costs to us. In addition, many state unemployment funds
have been depleted during the recent economic downturn and many states have borrowed from the federal government under the Title
XII loan program. Employers in all states receive a credit against their federal unemployment tax liability if the employer’s
federal unemployment tax payments are current and the applicable participating state is also current with its Title XII loan program.
If a state fails to repay such loans within a specific time period, employers in such states may lose a portion of their tax credit.
The
Company is exposed to employment-related claims and costs as well as periodic litigation that could materially adversely affect
the Company’s financial condition, business, and results of operations .
Our
business often entails employing individuals and placing such individuals in our clients’ workplaces. The Company’s
ability to control the workplace environment of clients is limited. As the employer of record of these employees, the Company
incurs a risk of liability to its employees and clients for various workplace events, including:
●
claims
of misconduct or negligence on the part of employees;
●
discrimination
or harassment claims against employees, or claims by employees of discrimination or harassment by clients or the Company;
●
immigration-related
claims;
●
claims
relating to violations of wage, hour, and other workplace regulations;
●
claims
related to wrongful termination or denial of employment;
●
violation
of employment rights related to employment screening or privacy issues;
●
claims
relating to employee benefits, entitlements to employee benefits, or errors in the calculation or administration of such benefits;
and
●
possible
claims relating to misuse of clients’ confidential information, misappropriation of assets, or other similar claims.
The
Company may incur fines and other losses and negative publicity with respect to any of these situations. Some of the claims may
result in litigation, which is expensive and distracts attention from the operation of ongoing business.
The
Company assumes the obligation to make wage, tax, and regulatory payments for our employees, and, as a result, is exposed to client
credit risks.
The
Company generally assumes responsibility for and manages the risks associated with employees’ payroll obligations, including
liability for payment of salaries, wages, and certain taxes. These obligations are fixed, whether clients make payments as required
by service contracts with the Company, which exposes the Company to credit risks of clients. As a result of the broad economic
impact of the COVID-19 pandemic, our clients may be more likely to breach their payment obligations.
15
Workers’
compensation costs for employees may rise and reduce our margins and require more liquidity.
The
Company is responsible for, and pays, workers’ compensation costs for individuals employed by the Company – both regular
staff and client employees for which the Company is the employer of record. At times, these costs have risen substantially as
a result of increased claims and claim trends, general economic conditions, changes in business mix, increases in healthcare costs,
and government regulations. Although the Company carries insurance, unexpected changes in claim trends, including the severity
and frequency of claims, actuarial estimates, and medical cost inflation could result in costs that are significantly different
than initially reported. If future claims-related liabilities increase due to unforeseen circumstances, or if new laws, rules,
or regulations are passed, costs could increase significantly. There can be no assurance that the Company will be able to increase
the fees charged to clients in a timely manner and in a sufficient amount to cover increased costs as a result of any changes
in claims-related liabilities.
We
currently depend on two customers for a material portion of our net revenue. The loss of or a substantial reduction in business
of either customer would significantly reduce our net revenue and adversely impact our operating results.
AT&T
(AT&T and DirectTV combined) and Janssen Pharmaceuticals (which includes workforce partners Johnson & Johnson) accounted
for approximately 49% and 38% of our total revenues for the years ended December 31, 2020 and 2019, respectively. In addition,
AT&T comprised 49% of the accounts receivable balance in both December 31, 2020 and 2019. Janssen Pharmaceuticals comprised
of 18% and 19% of accounts receivable as of December 31, 2020 and 2019, respectively. No other client exceeded 10% of revenues.
The loss of, or a substantial reduction in business from, either of these customers would have a significant negative impact on
our business and our operating results. We may not be successful in finding a client or clients that could replace the loss of
either of these customers, and as such, it could have a negative impact on our revenue and results of operations for a prolonged
period.
Improper
disclosure of employee and client data could result in liability and harm to the reputation of the Company.
The
business of the Company involves the use, storage, and transmission of information about employees and clients. It is possible
that security controls over personal and other data and practices that the Company follows may not prevent the improper access
to, or disclosure of, personally identifiable or otherwise confidential information. Our security controls may be inadequate,
or hackers or other malicious groups or organizations may attempt to interfere with our data through different means, including
but not limited to malware attacks, denial of service attacks, consensus-based attacks. Any event that results in a disclosure
of our clients’ and employees’ data could harm the reputation of the Company and subject the Company to liability
under contracts and the laws that protect personal data and confidential information, resulting in increased costs or loss of
revenue. Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various
jurisdictions in which the Company provides services. The failure to adhere to or successfully implement processes in response
to changing regulatory requirements in this area could result in legal liability or impairment to the reputation of the Company
in the marketplace.
16
The
Company could face disruption and increased costs from outsourcing and offshoring various aspects of its business.
The
Company may outsource aspects of its business to lower cost of employment areas in the United States and potentially to places
such as India. This outsourcing solution would focus predominantly on shared service activities which traditionally consist of
back-office functions such as “hire to retire”, “procure to pay” and “order to cash”
processes. Although a goal of outsourcing our operations is to reduce the operational costs of our business, it is possible that
we will not realize any benefit from outsourcing such aspects of our business, or even increase our overhead expenses. A transition
may create risk of errors and omissions or technical disruptions that could negatively impact our clients, and in turn damage
our reputation resulting in a loss of customers of our business.
The
Company is obligated to pay certain fees and expenses .
The
Company will pay various fees and expenses related to its ongoing operations regardless of whether or not the Company’s
activities are profitable. These fees and expenses will require dependence on third-party relationships. The Company is generally
dependent on relationships with its strategic partners and vendors, and the Company may enter into similar agreements with future
potential strategic partners and alliances. The Company must be successful in securing and maintaining its third-party relationships
to be successful. There can be no assurance that such third parties may regard their relationship with the Company as important
to their own business and operations, that they will not reassess their commitment to the business at any time in the future,
or that they will not develop their own competitive services, either during their relationship with the Company or after their
relations with the Company expire. Accordingly, there can be no assurance that the Company’s existing relationships or future
relationships will result in sustained business partnerships, successful service offerings, or significant revenues for the Company.
The
Company depends on its management team to manage its business effectively .
The
Company’s future success is dependent in large part upon its ability to understand, develop, and execute the business plan
and to attract and retain highly skilled management, operational and executive personnel. Thus, the Company is highly dependent
on its officers to provide the necessary skills, experience and background to execute the Company’s business plan. Additionally,
the employer of record business is a specialty service which requires a full understanding of the service and its merits to be
able to educate clients and potential clients to win business and operate optimally. The loss of any officer’s services
with this knowledge could stifle the Company’s growth for 4-9 months, and could impede, particularly initially as the Company
builds a record and reputation, its ability to develop and execute on its objectives, and as such would negatively impact the
Company’s possible overall development.
Government
regulation could negatively impact the business .
The
Company’s business is subject to various government regulations in the jurisdictions in which it operates. Currently, the
Company has clients and places employees in all 50 U.S. states and in numerous foreign countries. Due to the wide scope of the
Company’s operations, the Company could be subject to regulation by various political and regulatory entities, including
various local and municipal agencies and government sub-divisions. The Company may incur increased costs necessary to comply with
existing and newly adopted laws and regulations or penalties for any failure to comply. The Company’s operations could be
adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry, such
as the imposition of additional licensing or tax requirements. Failure to comply with the legal regulations in places we do business,
or the regulatory prohibition or restriction of employment services, could lead to financial liability and regulatory action against
the Company, which could significantly harm our development as a business.
17
The
Company may face significant competition from companies that serve its industries .
The
Company may face competition from other companies that offer similar solutions. Some of these potential competitors may have longer
operating histories, greater brand recognition, larger client bases and significantly greater financial, technical and marketing
resources than the Company possesses. These advantages may enable such competitors to respond more quickly to new or emerging
trends and changes in customer preferences. These advantages may also allow them to engage in more extensive market research and
development, undertake extensive far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive
offers to potential customers, employees and strategic partners. Increased competition may result in price reductions, reduced
gross margin and loss of market share. The Company may not be able to compete successfully, and competitive pressures may adversely
affect its business, results of operations and financial condition.
The
staffing industry is highly competitive with low barriers to entry which could limit the Company’s ability to maintain or
increase our market share or profitability.
The
staffing services industry is highly competitive with limited barriers to entry. Although we specialize in EOR and providing staffing
services specifically for video production, where the market is not yet saturated by competitors, we still face significant competition
on a national, regional and a local scale with full-service and specialized temporary staffing companies. We expect that the level
of competition will remain high, which could limit our ability to maintain or increase our market share or profitability.
Several
of our existing or potential competitors have substantially greater financial, technical and marketing resources than we do, which
may enable them to:
●
Invest
in new technologies;
●
Be
more competitive in cash and price paid for acquisitions;
●
Devote
greater resources to marketing;
●
Aggressively
price products and services below market rates; and
●
Offer
better benefit packages that we may not be able to match.
The
Company is subject to the potential factors of market and customer changes, which could result in our inability to timely respond
to the needs of our clients.
The
business of the Company is susceptible to rapidly changing preferences of the marketplace and its customers. The needs of customers
are subject to constant change. Although the Company intends to continue to develop and improve its services to meet changing
customer needs of the marketplace, there can be no assurance that funds for such expenditures will be available or that the Company’s
competition will not develop similar or superior capabilities or that the Company will be successful in its internal efforts.
The future success of the Company will depend in part on its ability to respond effectively to rapidly changing trends, industry
standards and customer requirements by adapting and improving the features and functions of its services. In the Company’s
industry, failure by a business to adapt to the changing needs and demands of customers is likely to render the business obsolete.
Negative
publicity could adversely affect our business and operating results .
Negative
publicity about our industry or our Company, including the utility of our services, even if inaccurate, could adversely affect
our reputation and the confidence in, and the use of, our services, which could harm our business and operating results. Harm
to our reputation can arise from many sources, including poor performance or misconduct by the workers we supply and recruit for
our clients, misconduct by our partners, outsourced service providers or other counterparties, and failure by us to meet
minimum standards of service expected by clients in our industry.
18
The
Company has generated revenues, but limited profits, to date .
The
business model of the Company involves significant costs of services, resulting in a low gross and net margins on revenues. Coupling
this fact with the required operating expenses incurred by the Company, the Company has only generated approximately $1,500 in
total profits in any one year, and specifically $195 in 2019 and $386 in 2018. In 2020, with the Company taking on the added expense
of being a public company, additional expenses of approximately $900 for management compensation, administrative costs, insurance,
consulting, and legal fees for reporting and regulatory compliance, had the most impact on our incurring a net loss of $826. The
Company hopes and expects that as its business expands, it will enjoy economies of scale resulting in higher operating and net
margins and improved cash flows, but there is no guarantee this will occur.
The
Company may suffer from lack of availability of additional funds .
We
have ongoing needs for working capital in order to fund operations, pay costs associated with being a public company, and to continue
to expand our operations. To that end, we will be required to raise additional funds through equity or debt financing. However,
there can be no assurance that we will be successful in securing additional capital on favorable terms, if at all. There is a
potential that we will continue to lack shares of Company Common Stock available for an equity financing. If additional debt is
incurred, the Company may fail to comply with the terms of such financing, which could result in significant liability for our
Company. If we are unsuccessful, we may need to (a) initiate cost reductions; (b) forego business development opportunities; (c)
seek extensions of time to fund liabilities, or (d) seek protection from creditors. In addition, any future sale of our equity
securities would dilute the ownership and control of your shares and could be at prices substantially below prices at which our
shares currently trade. Our inability to raise capital could require us to significantly curtail or terminate our operations.
Our plan is to increase our cash reserves through the sale of additional equity or debt securities. The sale of convertible debt
securities or additional equity securities could result in additional and potentially substantial dilution to our shareholders.
The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing
covenants that would restrict our operations and liquidity. In addition, our ability to obtain additional capital on acceptable
terms is subject to a variety of uncertainties.
In
addition, if we are unable to generate adequate cash from operations, and if we are unable to find sources of funding, it may
be necessary for us to sell all or a portion of our assets, enter into a business combination, or reduce or eliminate operations.
These possibilities, to the extent available, may be on terms that result in significant dilution to our shareholders or that
result in our shareholders losing all of their investment in our Company.
Our
acquisition strategy creates risks for our business .
We
expect that we will pursue acquisitions of other businesses, assets or technologies to grow our business. We may fail to identify
attractive acquisition candidates, or we may be unable to reach acceptable terms for future acquisitions. We might not be able
to raise enough cash to compete for attractive acquisition targets. If we are unable to complete acquisitions in the future, our
ability to grow our business at our anticipated rate will be impaired.
We
may pay for acquisitions by issuing additional shares of Common Stock, if such shares become available, which would dilute our
shareholders, or by issuing debt, which could include terms that restrict our ability to operate our business or pursue other
opportunities and subject us to meaningful debt service obligations. We may also use significant amounts of cash to complete acquisitions.
Most acquisitions will include “Earn Out” provisions which ensure adequate generation of revenue and profits, but
cash required to pay Earn Outs likely will exceed that total or incremental cash flow generated by the acquired business. To the
extent that we complete acquisitions in the future, we likely will incur future depreciation and amortization expenses associated
with the acquired assets. We may also record significant amounts of intangible assets, including goodwill, which could become
impaired in the future. Acquisitions involve numerous other risks, including:
●
difficulties
integrating the operations, technologies, services and personnel of the acquired companies;
●
challenges
maintaining our internal standards, controls, procedures and policies;
●
diversion
of management’s attention from other business concerns;
●
over-valuation
by us of acquired companies;
●
litigation
resulting from activities of the acquired company, including claims from terminated employees, customers, former shareholders
and other third parties;
19
●
insufficient
revenues to offset increased expenses associated with the acquisitions and unanticipated liabilities of the acquired companies;
●
insufficient
indemnification or security from the selling parties for legal liabilities that we may assume in connection with our acquisitions;
●
entering
markets in which we have no prior experience and may not succeed;
●
risks
associated with foreign acquisitions, such as communication and integration problems resulting from geographic dispersion
and language and cultural differences, compliance with foreign laws and regulations and general economic or political conditions
in other countries or regions;
●
potential
loss of key employees of the acquired companies; and
●
impairment
of relationships with clients and employees of the acquired companies or our clients and employees as a result of the integration
of acquired operations and new management personnel.
The
Company may suffer from a lack of liquidity .
By
incurring indebtedness, the Company subjects itself to increased debt service obligations which could result in operating and
financing covenants that would restrict our operations and liquidity. This would impair our ability to hire the necessary senior
and support personnel required for our business, as well carry out its acquisition strategy and other business objectives.
The
Company lacks some of the technology necessary to manage its planned staffing operations, payroll, and sales activities .
The
Company relies heavily on its software providers to manage payroll, recruitment, onboarding, benefits administration, scheduling,
year-end reporting, and other related human resources issues. Currently, we rely on software provided by Paycom to help manage
these operations. In 2020, we added Intaact finance and accounting suite, SalesForce.Com, and advanced search B2B sales facilitator
Zoom Info; all which have made our business more efficient and effective. However, this segmented technology is not an integrated
ERP and will not handle the growing complexity of our needs as we evolve our operations through mergers and acquisitions of other
businesses. This could hamper our ability to successfully reduce the general and administrative costs of businesses that we acquire,
as contemplated by our acquisition strategy, which would ultimately impair our ability to generate a healthy profit.
The
Company is currently party to Factoring Facilities that are eroding its profit margins and may impair our ability to secure additional
financing.
The
Company has a factoring and security agreements (collectively, the “Factoring Facilities”) with Triumph Business Capital
(“Triumph”) who is sometimes referred to herein as a “Factor” or “Factoring Company”. Pursuant
to the Factoring Facilities, the Company sells its accounts receivable (i.e., invoices) at a discount so that the Company
can meet its immediate cash needs, at which point the value of those invoices become a debt of the Company that must be paid to
the Factoring Company. This type of facility is common for companies in the EOR and staffing industries as a great deal of cash
is advanced to make payroll and pay contractors. We may use a substantial portion of our cash flow from operations to make debt
service payments on these Factoring Facilities, which reduces the funds available to us for other purposes such as working capital,
capital expenditures and acquisitions. In addition, because our largest asset (our accounts receivable) is encumbered pursuant
to these Factoring Facilities, our ability to obtain lines of credit or other financings for other purposes such as growth initiatives
and acquisitions is limited. Additionally, we are exposed to fluctuations in interest rates because our Factoring Facilities have
variable rates of interest tied to the prime interest rate. The reduction of cash flow as a result of these Factoring Facilities
may put us at a competitive disadvantage and reduce our flexibility in planning for, or responding to, changing conditions in
our industry, including increased competition, and makes us more vulnerable to general economic downturns and adverse developments
in our business.
20
No
formal market survey has been conducted .
No
independent marketing survey has been undertaken to determine the potential demand for the Company’s services over the longer
term. The Company has conducted no marketing studies regarding whether its business would continue to be marketable. No assurances
can be given that upon marketing, sufficient customer markets and business can be developed to sustain the Company’s operations
on a continued basis.
The
Company services numerous geographic areas, and therefore may be subject to risks such as natural disasters and travel-related
disruptions, which may materially adversely affect our business, financial condition and results of operations.
We
operate in all U.S. states and in numerous countries around the world. To do so, we often send workers to locations that could
be affected by various factors beyond our control that could adversely affect our ability to service our clients. These factors
could also affect our employees, vendors, insurance carriers and other contractual counterparties. Such factors include:
●
war,
terrorist activities or threats and heightened travel security measures instituted in response to these events;
●
outbreaks
of pandemic or contagious diseases or consumers’ concerns relating to potential exposure to contagious diseases;
●
natural
disasters, such as hurricanes, fires, earthquakes, tsunamis, tornados, floods and volcanic eruptions and man-made disasters;
●
bad
weather and even forecasts of bad weather, including abnormally hot, cold and/or wet weather;
●
oil
prices and travel costs and the financial condition of the airline, automotive and other transportation-related industries,
any travel-related disruptions or incidents and their impact on travel; and
●
actions
or statements by U.S. and foreign governmental officials related to travel and corporate travel-related activities (including
changes to the U.S. visa rules) and the resulting public perception of such travel and activities.
Any
one or more of these factors could adversely affect our ability to offer services to clients, which could materially adversely
affect our business, financial condition and results of operations.
A
downturn of the U.S. or global economy could result in our clients using fewer workforce solutions or becoming unable to pay us
for our services on a timely basis or at all, which would materially adversely impact our business.
Because
demand for workforce solutions and services, particularly staffing services, is sensitive to changes in the level of economic
activity, our business may suffer during an economic downturn resulting from among other things the COVID-19 pandemic. During
periods of weak economic growth or economic contraction, the demand for staffing services typically declines. When demand drops,
our operating profit is typically impacted unfavorably as we experience a deleveraging of our selling and administrative expense
base as expenses may not decline as quickly as revenues. In periods of decline, we can only reduce selling and administrative
expenses to a certain level without negatively impacting our long-term prospects. Additionally, during economic downturns companies
may slow the rate at which they pay their vendors, or they may become unable to pay their obligations. If our clients become unable
to pay amounts owed to us, or pay us more slowly, then our cash flow and profitability may suffer.
21
Client
services may be terminated on short notice, leaving us vulnerable to a significant loss in revenue
Client
staffing needs can change and as a result we could lose staffing or EOR headcount rather quickly. In late 2019, this was the case when
AT&T announced the cancellation of two (2) live anchor multiple hour DirecTV sports programs, which had an estimated $4,000
revenue impact on the Company. A reduction in such needs and resulting loss of clients or placements at clients could result in
a significant decrease in revenue within a short period of time that would be difficult to quickly replace.
Inability
to retain or attract new clients.
Growth
and profitability of our business is dependent upon our ability to retain and capture new clients. Our ability to achieve success
in both areas is reliant on our sales and service organization. If we are unable to execute effectively, or our selected business
development efforts falter, we may not be able to attract a significant number of new clients and our existing client base could
shrink, resulting in an adverse impact on our revenues and profitability.
We
could be required to write-off goodwill and intangible assets.
In
accordance with generally accepted accounting principles, we are required to review our goodwill and intangible assets for impairment
at least annually. Our goodwill and intangibles assets were $721 at the end of 2020. An unfavorable evaluation could cause us
to write-off these assets in future periods. Any future write-offs could have a material adverse impact on our operational results
or Operating Income Before Interest, Taxes, Depreciation, and Amortization (“OIBITDA”). OIBITDA is a non-GAAP metric
we use to better reflect the operating results of the Company.
Our
business is subject to federal, state and local labor and employment laws and a failure to comply could materially harm our business.
We
are subject to regulation by a host of federal, state and local regulatory agencies in the jurisdictions within which we operate
including but not limited to the U.S. Department of Labor. There are local agencies which have similar state and city regulations
as well with specific laws and regulations varying among these jurisdictions. This acts both as an opportunity for the Company
since we manage these risks as a matter of course for our EOR service, and a risk as compliance with these requirements imposes
some additional burden on us. However, in the past challenges complying with these local, state and federal regulations has not
resulted in a material adverse event on Maslow’s business. Any inability or failure to comply with government regulation
could however materially harm our business. Increased government regulation of the workplace or of the employer-employee relationship,
or judicial or administrative proceedings related to such regulation, could create additional business for the Company, but could
also materially harm our business
In
reaction to the COVID-19 pandemic, federal and state legislatures have been attempting to push through legislation, much of which
affects the employee-employer relationship, and these new laws may have a material impact on our operations, business,
finances and prospects. No certainty can be provided as to the nature of these new regulations or their impact.
Concentration
Risk of Customers
Workforce
clients AT&T and DirecTV (under a single AT&T agreement) and Janssen Pharmaceuticals (which includes workforce partners
Johnson & Johnson) made up approximately 29% and 11% of our 2020 revenues, respectively. In addition, these two customers
account for approximately 49% and 18% of our accounts receivables as of December 31, 2020, respectively. Our business relies on
relationships with several large customers, to generate a large portion of our revenue. This revenue concentration in a relatively
small number of customers (5 clients make up 65% of revenue) makes us particularly dependent on factors affecting those companies.
22
RISKS
RELATED TO OWNERSHIP OF COMMON STOCK
Our
stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for our shareholders .
The
market price of Common Stock has been, and is likely to continue to be, volatile for the foreseeable future. The market price
of Common Stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including the
factors listed below:
●
actual
or anticipated fluctuations in our results of operations;
●
any
financial projections we provide to the public, any changes in these projections or our failure to meet these projections;
●
lack
of securities analyst coverage;
●
effect
of applicable “penny stock” rules and FINRA Rule 2111;
●
failure
of securities analysts to initiate or maintain coverage of our Company, changes in financial estimates by any securities analysts
who follow our Company, or our failure to meet these estimates or the expectations of investors;
●
ratings
changes by any securities analysts who follow our Company;
●
announcements
by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
●
changes
in operating performance and stock market valuations of other business services companies generally, or those in our industry
in particular;
●
price
and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
●
changes
in our board of directors or management;
●
sales
of large blocks of Company Common Stock, including sales by our executive officers, directors and significant shareholders;
●
lawsuits
threatened or filed against us;
●
short
sales, hedging and other derivative transactions involving our capital stock;
●
general
economic conditions in the United States and abroad; and
●
other
events or factors, including those resulting from war, incidents of terrorism or responses to these events.
In
addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market
prices of equity securities of many business services companies. Stock prices of many business services companies have fluctuated
in a manner unrelated or disproportionate to the operating performance of those companies. In the past, shareholders have instituted
securities class action litigation following periods of market volatility. If we were to become involved in securities litigation,
it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect
our business, results of operations and financial condition.
23
Common
Stock is subject to risks arising from restrictions on reliance on Rule 144 by shell companies or former shell companies.
Under
a regulation of the SEC known as “Rule 144,” a person who beneficially owns restricted securities of an issuer and
who is not an affiliate of that issuer may sell them without registration under the Securities Act provided that certain conditions
have been met. One of these conditions is that such person has held the restricted securities for a prescribed period, which will
be 6 months for Common Stock. However, Rule 144 is unavailable for the resale of securities issued by an issuer that is a shell
company (other than a business combination related shell company) or, unless certain conditions are met, that has been at any
time previously a shell company.
The
SEC defines a shell company as a company that has (a) no or nominal operations and (b) either (i) no or nominal assets, (ii) assets
consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal
other assets.
As
a result of the Merger described in Item 1.01, the Company ceased being a shell company as such term is defined in Rule 12b-2
under the Exchange Act.
While
we believe that as a result of the Merger, Reliability ceased to be a shell company, the SEC and others whose approval is required
for shares to be sold under Rule 144 might take a different view.
Rule
144 is available for the resale of securities of former shell companies if and for as long as the following conditions are met:
(i)
the
issuer of the securities that was formerly a shell company has ceased to be a shell company;
(ii)
the
issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;
(iii)
the
issuer of the securities has filed all Exchange Act reports and materials required to be filed, as applicable, during the
preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Current
Reports on Form 8-K; and
(iv)
at
least one year has elapsed from the time that the issuer filed current comprehensive disclosure with the SEC reflecting its
status as an entity that is not a shell company known as “Form 10 Information.”
Although
the Company has filed Form 10 Information with the SEC on its Current Report on Form 8-K filed October 29, 2019, shareholders
who receive the Company’s restricted securities will not be able to sell them pursuant to Rule 144 without registration
until the Company has met the other conditions to this exception and then for only as long as the Company continues to meet the
condition described in subparagraph (iii), above, and is not a shell company. No assurance can be given that the Company will
meet these conditions or that, if it has met them, it will continue to do so, or that it will not again be a shell company.
The
issuance of the additional shares of Common Stock could cause the value of Common Stock to decline.
The
sale or issuance of a substantial number of shares of Common Stock, or anticipation of such sales, could make it more difficult
for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish. Further,
if we do sell or issue more Common Stock, any investors’ investment in the Company will be diluted. Moreover, the Company
has outstanding warrants. The conversion or exercise of the warrants for shares of Company Common Stock would dilute the common
shareholders. If significant dilution occurs, any investment in Common Stock could significantly decline in value.
The
application of the “penny stock” rules could adversely affect the market price of Common Stock and increase transaction
costs to sell those shares. This can be exacerbated by the current low float of the stock in relation to the shares outstanding.
24
The
SEC has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:
●
that
a broker or dealer approve a person’s account for transactions in penny stocks, and
●
the
broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity
of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
●
obtain
financial information and investment experience objectives of the person, and
●
make
a reasonable determination that the transactions in penny stocks are suitable for that person and the person has enough knowledge
and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form:
●
sets
forth the basis on which the broker or dealer made the suitability determination, and that the broker or dealer received a
signed written agreement from the investor prior to the transaction.
Generally,
brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make
it more difficult for investors to dispose of Common Stock and cause a decline in the market value of Common Stock.
Financial
Industry Regulatory Authority (“FINRA”) sales practice requirements may also limit a stockholder’s ability to
buy and sell our stock.
In
addition to the “penny stock” rules described above, FINRA has adopted Rule 2111 that requires a broker-dealer to
have reasonable grounds for believing that an investment is suitable for a customer before recommending the investment. Prior
to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts
to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under
interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not
be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their
customers buy Common Stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for
our shares.
We
do not intend to pay dividends for the foreseeable future .
We
have never declared or paid any cash dividends on our stock and do not intend to pay any cash dividends in the foreseeable future.
We anticipate that we will retain all our future earnings for use in the development of our business and for general corporate
purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors.
RISKS
RELATED TO OUR PREVIOUS STATUS AS A SHELL COMPANY
We
may have contingent liabilities related to our operations prior to the Merger of which we are not aware and for which we have
not adequately provided for.
We
identified as a shell company with no operating activities prior to the Merger. Upon completion of the Merger, we acquired all
of the operations of The Maslow Media Group, Inc. Prior to the consummation of the Merger, Reliability Incorporated was engaged
from 1971 to 2007 in the design, manufacture, market, and support of high-performance equipment used to test and condition integrated
circuits. This business was closed in 2007. We cannot assure you that there are no material claims outstanding, or other circumstances
of which we are not aware, that would give rise to a material liability relating to those prior operations, even though we do
not record any provisions in our financial statements related to any such potential liability. If we are subject to past claims
or material obligations relating to our operations prior to the consummation of the Merger, such claims could materially adversely
affect our business, financial condition and results of operations.
25
RISK
RELATED TO THE MERGER AND OWNERSHIP OF COMMON STOCK
Costs
of being a public company and risks associated with having been a shell.
We
are now incurring increased costs with demands upon management and accounting and finance resources as a result of complying with
the laws and regulations affecting public companies; any failure to establish and maintain adequate internal control over financial
reporting or to recruit, train and retain necessary accounting and finance personnel could have an adverse effect on our ability
to accurately and timely prepare our consolidated financial statements.
We
identified as a shell company with no recent operating activities prior to the Merger. Upon completion of the Merger, we acquired
all the operations of The Maslow Media Group. Inc. As a public operating company, we are now incurring significant administrative,
legal, accounting and other burdens and expenses beyond those of a private company, including those associated with corporate
governance requirements and public company reporting obligations. We have already enhanced and supplemented our internal accounting
resources with additional accounting and finance personnel with the requisite technical and public company experience and expertise,
as well as refined our quarterly and annual financial statement closing process, to enable us to satisfy such reporting obligations.
However, even with perceived success in doing so, there can be no assurance that our finance and accounting organization will
be able to adequately meet the increased demands that result from being a public company.
Furthermore,
we are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. In order to satisfy the requirements of Section
404 of the Sarbanes-Oxley Act of 2002, we are required to document and test our internal control procedures and prepare annual
management assessments of the effectiveness of our internal control over financial reporting. These assessments will need to include
disclosure of identified material weaknesses in our internal control over financial reporting. Testing and maintaining internal
control over financial reporting will involve significant costs and could divert management’s attention from other matters
that are important to our business. Additionally, we cannot provide any assurances that we will be successful in remediating any
deficiencies that may be identified. If we are unable to remediate any such deficiencies or otherwise fail to establish and maintain
adequate accounting systems and internal control over financial reporting, or we are unable to recruit, train and retain necessary
accounting and finance personnel, we may not be able to accurately and timely prepare our consolidated financial statements and
otherwise satisfy our public reporting obligations. Any inaccuracies in our consolidated financial statements or other public
disclosures (in particular if resulting in the need to restate previously filed financial statements), or delays in our making
required SEC filings, could have a material adverse effect on the confidence in our financial reporting, our credibility in the
marketplace and the trading price of Common Stock.
In
addition, our management team will also have to adapt to other requirements of being a public company. We will need to devote
significant resources to address these public company-associated requirements, including compliance programs and investor relations,
as well as our financial reporting obligations. Complying with these rules and regulations will substantially increase our legal
and financial compliance costs and make some activities more time-consuming and costly.
26
Common
Stock may not be eligible for listing on a national securities exchange .
Common
Stock is not currently listed on a national securities exchange, and we do not currently meet the initial quantitative listing
standards of a national securities exchange. We cannot assure you that we will be able to meet the initial listing standards of
any national securities exchange, or, if we do meet such initial qualitative listing standards, that we will be able to maintain
any such listing. Common Stock is currently quoted on the pink sheets OTCQB of the OTC Marketplace under the symbol of “RLBY”,
and, unless and until Common Stock is listed on a national securities exchange, we expect that it will continue to be eligible
and quoted on the “pink sheets,” to which time we are eligible to apply to the OTCQB or OTCQX. However, in order to
qualify for the OTCQB for instance, we would need our float to be a minimum of 5% of outstanding shares to even apply for an exception.
Currently our float is under 3% of outstanding. Until outstanding shares are increased, or sufficient number of shares registered
and eligible for trade we will be unable to apply for an exception to move to the OTCQB or OTCQX. In those venues, however, an
investor may find it difficult to obtain accurate quotations as to the market value of Common Stock. In addition, if we continue
to fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who
sell our securities to persons other than established customers and accredited investors. Consequently, such regulations normally
deter broker-dealers from recommending or selling Common Stock, which may further affect its liquidity. This would also make it
more difficult for us to raise additional capital.
We
cannot predict whether there will be an active trading market for our common stock and the market price of our common stock may
remain volatile.
Given
our low float of approximately 11,675,503 shares and the absence of an active trading market shareholders may have difficulty
buying and selling our common stock at all or at the price you consider reasonable. Market visibility for shares of our common
stock may be limited, which may have a depressive effect on the market price for shares of our common stock and on our ability
to raise capital or make acquisitions by issuing our common stock.
Our
compliance with regulations concerning corporate governance and public disclosure has resulted and may in the future result in
additional expenses.
Evolving
disclosure, governance and compliance laws, regulations and standards relating to corporate governance and public disclosure,
including the Sarbanes-Oxley Act of 2002 (“SOX”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act.
New or changing laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity,
and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies,
which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to
disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards of a public
company are likely to continue to result in increased general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
The
Company’s headquarters and operations were moved from Rockville, Maryland to Clarksburg, Maryland effective April 30, 2020
as the Company terminated its lease. As of December 31, 2020, Clarksburg, Maryland became our sole location, as the Company terminated
its lease for its office in Plymouth, Minnesota effective December 31, 2020.
27
ITEM
3. LEGAL PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties and an adverse result in these, or other matters may arise from
time to time that may harm our business. Except as set forth below, we are not aware of any such legal proceedings or claims against
the Company.
On
September 28, 2018, Credit Cash filed a complaint against Maslow, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Mr. Doki,
Mr. Valleru (the “Parties”) and other defendants in the United States District Court for the District of New
Jersey. Credit Cash alleged, among other things, that the Parties breached the Maslow and HCRN Credit Facilities and their respective
guaranties in relation to the November 15, 2017 agreement (the “DNJ Action”).
On
October 9, 2018, Maslow Media Group, Inc. was named as a defendant in an Affidavit of Confession of Judgment filed in the Supreme
Court of the State of New York in relation to a case brought by Hop Capital, which the defendants collectively agree to pay a
sum of $400 to Hop Capital. Maslow Media Group, Inc. is named as one defendant among six other defendants, all of which are entities
related to the Vivos Group. The claim brought by Hop Capital against the defendants in this case is in relation
to a Merchant Agreement dated October 4, 2018; an agreement to which Maslow Media Group, Inc. was not a party. As such, Maslow
Media Group, Inc. contends that being named in the Affidavit of Confession of Judgment as a defendant was made in error and is
currently seeking to have its name removed from Affidavit of Confession of Judgment as a defendant.
On
October 30, 2018, Credit Cash filed a motion to intervene in an action pending in New York State, Monroe County, filed by HCRN
and LE Finance, LLC against the Parties and other defendants (“NY State Action”).
On
December 10, 2018, the Parties entered into a settlement agreement for the purpose of settling certain claims related to the DNJ
Action only. Pursuant to the settlement agreement, certain repayment terms were agreed upon between Credit Cash and the Parties,
but Credit Cash did not relinquish the right to pursue any claims related to the NY State Action, nor to pursue any remedies against
any of the parties in relation to the November 15, 2017 agreement.
Because
the Parties acknowledged and agreed, that the Credit Cash relationship benefitted Parties other than Maslow, certain of the Parties
and their related parties, executed and delivered to the Company that certain Agreement for the Contingent Liquidation of the
Common Stock of Maslow Media Group, Inc., dated as of October 28, 2019 (the “Liquidation Agreement”). Pursuant to
the Liquidation Agreement the parties thereto pledged shares of Company Common Stock to Maslow to be used to obtain releases from
the Lenders defined therein, including Credit Cash and its affiliates. The Liquidation Agreement permits Maslow to either transfer
the shares to the Lenders in satisfaction of the outstanding obligations or to arrange for the sale of the shares and using the
cash to satisfy such obligations.
On
or about February 17, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland
against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and Mr. Naveen Doki, to enforce Maslow’s rights under
certain promissory notes and a personal guarantee made by the defendants. The case is proceeding. The Company believes that it
will be granted a judgment in its favor. Maslow intends to continue to vigorously pursue this litigation.
On
February 28, 2020, Healthcare Resource Network, LLC filed a complaint against Maslow in the Circuit Court of Montgomery County,
Maryland alleging that Maslow participated with the Vivos Group to financially harm the plaintiff. The plaintiff
has not specified any alleged damage caused by Maslow and the Company believes any claims are without merit. The Company will
defend itself from this case.
On March
16th, 2020, CC Business Solutions, a division of Credit Cash NJ, LLC domesticated a foreign judgement in the Montgomery County
Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions,
LLC, Naveen Doki and Silvija Valleru. This foreign judgement relates to Vivos Holdings adding Maslow Media Group as a guarantor
on a loan made to Health Care Resources Network which is in default by HCRN and Vivos Holdings. Foreign judgement total
is $820. This judgement relates to the default on the settlement agreement dated December 10, 2018 referenced above.
On May
5th, 2020, Libertas Funding, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care
Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Vivos IT, LLC, Vivos Global Services,
LLC, Alliance Micro, Inc. and Naveen Doki. This foreign judgement from the State of New York relates to loans the Vivos
Group took out by adding Maslow Media Group additional collateral. This loan is currently in default. Foreign Judgement
total is $229.
On May
5th, 2020, Kinetic Direct Funding domesticated a foreign judgement in the Montgomery County Circuit Court system again Health
Care Resources Network (HCRN), Maslow Media Group, US IT Solutions Inc., 360 IT Professionals, Alliance Micro, Inc. and Naveen
Doki. This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding Maslow Media
Group as additional collateral. This loan is currently in default. Foreign Judgement total is $579.
On May
5th, 2020, Libertas Funding, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care
Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Vivos IT, LLC, Vivos Global Services,
LLC, Alliance Micro, Inc. and Silvija Valleru. This foreign judgement from the State of New York relates to loans the Vivos
Group took out by adding Maslow Media Group additional collateral. This loan is currently in default. Foreign Judgement
total is $229.
On or about May
6, 2020, the Defendants filed with the Circuit Court of Montgomery County, Maryland a Counterclaim and Third-Party Complaint for
Damages, Declaratory and Injunctive Relief and Jury Demand (the “Counterclaim”), The Company believes that the Counterclaim
has no merit. The Company will vigorously defend itself and its indemnified officers, directors and other parties as permitted
by the Company’s organizational documents. The Company and the other Counterclaim defendants have moved to have the Debt
Collection Suit and the Counterclaim stayed pending the outcome of the Arbitration described below. Trial on this matter is scheduled
for March 2021.
28
On
or about June 5, 2020, the Company submitted a Claimant’s Notice of Intention to Arbitrate and Demand for Arbitration
(the “Arbitration”) with the American Arbitration Association in New York, and to the Respondents thereto: Naveen
Doki; Silvija Valleru; Shirisha Janumpally (individually and in her capacity as trustee of Judos Trust); Kalyan Pathuri (individually
in his capacity as trustee of Igly Trust) and Federal Systems (the “Respondents”). The Arbitration alleges that the
Respondents breached the Merger Agreement in a number of significant respects and committed fraud in connection with the Merger.
The Company is seeking damages which if granted will likely be the remedy set forth within the Merger Agreement which is in whole
or in part shares of Company Common Stock received by the Respondents in connection with the Merger. The Company has brought a
motion to compel the Arbitration which is currently being decided by the Federal Courts in New York. The Company believes a strong
basis for the motion exists, but no assurance can be given that it will be granted. Regardless, the Company intends to pursue
claims under the Merger Agreement in whatever venue is required.
On
June 12, 2020, Igly Trust, a Vivos Group entity, asked the Texas court for an injunction requiring the Company to provide
a shareholder list and to hold a shareholder meeting. On October 20, 2020, the Texas court denied the injunction but, incongruously,
dismissed all the Vivos Group plaintiffs for lack of personal jurisdiction. The Company appealed the dismissal because
the court had jurisdiction over Igly Trust once it made affirmative claims in Texas and because the Court’s order denying
the injunction is an important precedent for establishing that the directors under Texas law retain control of shareholder lists
and determining the timing of shareholder meetings.
On December 23, 2020,
at a hearing in the Maryland District Court, a motion by the Vivos Group to compel a shareholder meeting was summarily
dismissed. The judge agreed with the Company that permitting the Vivos Group to vote their shares at a meeting of
shareholders could materially harm the interests of the Company as a whole, its employees and minority shareholders. This judge
will be presiding over a full trial regarding these matters over a two-week period starting on October 4, 2021, absent any COVID-19
disruptions that could affect scheduling.
ITEM
4. MINE SAFETY DISCLOSURE
Not
applicable.
29
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERS’ MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET
INFORMATION AND HOLDERS
The
Company’s common stock trades in the over-the-counter market under the symbol RLBY. The high and low sale prices for 2020
and 2019 are set forth below. High and Low price is based on last trading day of quarter.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2020
High
$ .2500
$ .1690
$ .1980
$ .0990
Low
$ .0831
$ .0600
$ .0550
$ .0336
2019
High
$ .0600
$ .0900
$ .1850
$ .6900
Low
$ .0300
$ .0360
$ .0360
$ .1600
The
Company paid no cash dividends in 2019 or 2020.
As
of March 16, 2021, the last reported sales price for Company Common Stock was $ .061 per share.
As
of March 16, 2021, there were 565 holders of record of Company Common Stock.
EQUITY
COMPENSATION PLANS
None
RECENT
SALES OF UNREGISTERED SECURITIES
None
SHARE
REPURCHASES
None
ITEM
6. SELECTED FINANCIAL DATA
The
following tables set forth our summary consolidated historical financial data. You should read the information set forth below
in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and our consolidated historical financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
The statement of operations data for the fiscal years ended 2020 and 2019 and the balance sheet data as of December 31, 2020 and
2019 set forth below are derived from our audited consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.
30
December 31
Balance Sheet Data:
2020
2019
Working capital
$ 5,970
$ 784
Total assets
$ 12,284
$ 14,276
Total outstanding borrowings, net
$ 8,287
$ 8,188
Total other long-term liabilities
$ -
$ 1,745
Stockholders’ equity
$ 1,517
$ 2,227
December 31
Statement of Operation Data:
2020
2019
Revenues
$ 29,202
$ 38,444
Gross profit
$ 3,474
$ 4,069
Selling, general and administrative expenses
$ 4,462
$ 2,985
Operating income (loss)
$ (988 )
$ 1,084
Interest income
$ 8
$ -
Interest Income from related parties
112
68
Interest expense
$ (281 )
$ (438 )
Other expense
$ (1 )
$ (206 )
Income (loss) before income taxes
$ (1,150 )
$ 508
Income tax benefit (expense)
$ 230
$ (156 )
Consolidated net income
$ (920 )
$ 352
Non-consolidated interest in consolidated affiliates
$ 131
$ (157 )
Net income (loss)
$ (789 )
$ 195
December 31
Net Income (Loss) Per Share:
2020
2019
Net income (loss) per share – basic
$ -
$ -
Net income (loss) per share - diluted
$ -
$ -
Weighted average shares outstanding – basic
300,000,000
300,000,000
Weighted average shares outstanding – diluted
300,000,000
300,000,000
December 31
Other Financial Data:
2020
2019
OIBITDA (1)
$ 658
$ 1,348
(1)
We present OIBITDA as a measure that is not in accordance with generally accepted accounting principles (“non-GAAP”),
in this Annual Report on Form 10-K to provide investors with a supplemental measure of our operating performance. We believe that
OIBITDA is a useful performance measure and is employed by us to facilitate comparisons of our operating performance on a consistent
basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our core business
than measures under generally accepted accounting principles (“GAAP”) can provide alone. Our board and management
also use OIBITDA as some of the primary methods for planning and forecasting overall expected performance and for evaluating on
a quarterly and annual basis actual result against such expectations, and as a performance evaluation metric in determining
achievement of certain compensation programs and plans for our management and organization.
31
We
define OIBITDA as operational earnings before interest expense, related party interest, income taxes, depreciation and amortization
expense, loss on early extinguishment of debt and related party debt, transaction fees and costs related to our corporate overhead
which consist mainly of costs associated with being a public company. Omitting interest, taxes and the other items provides a
financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures.
Since the levels of indebtedness and tax structures that other companies have are different from ours, we omit these amounts to
facilitate investors’ ability to make like comparisons. Similarly, we omit depreciation and amortization because many other
companies likely employ a greater amount of property and intangible assets. We omit corporate or non-operating costs as they are
meant to be allocated against a larger operational base which our business plan outlines. As we grow our operations organically
and through M&A activities these corporate costs are absorbed more equitably, we will use Earnings Before Interest, Taxes,
Depreciation and Amortization (“EBITDA”) as our means of measuring comparable operational performance to other companies
in our industry. We also believe that investors, analysts and other interested parties view our ability to generate OIBITDA as
an important measure of our operating performance and that of other companies in our industry. OIBITDA should not be considered
as an alternative to net income (loss) for the periods indicated as a measure of our performance.
The
use of OIBITDA has limitations as analytical tools, and you should not consider these performance measures in isolation from,
or as an alternative to, GAAP measures such as net income (loss). OIBITDA is not a measure of liquidity under GAAP or otherwise
and is not an alternative to cash flow from continuing operating activities. Our presentation of OIBITDA should not be construed
as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring
items. The limitations of OIBITDA include: (i) it does not reflect our corporate expenditures or future requirements for capital
expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs;
(iii) it does not reflect income tax payments we may be required to make; and (iv) it does not reflect the cash requirements necessary
to service interest or principal payments associated with indebtedness.
To
properly and prudently evaluate our business, we encourage you to review our consolidated financial statements included elsewhere
in this Annual Report on Form 10-K and the reconciliation to OIBITDA from net income (loss), the most directly comparable financial
measure presented in accordance with GAAP, set forth in the following table. All the items included in the reconciliation from
net income (loss) to OIBITDA are either (i) corporate costs or (ii) items that management does not consider in assessing our on-going
operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance,
management believes that investors may find it useful to assess our operating performance if the measures are presented without
these items because their financial impact may not reflect on-going operating performance.
OIBITDA
calculation comparison for the years ended December 31, 2020 and 2019 is as follows:
December 31
2020
2019
Operating income (loss)
$ (988 )
$ 1,084
Depreciation and amortization
79
25
Corporate, general and administrative
1,567
239
$ 658
$ 1,348
32
Operational
performance comparison for the years ended December 31, 2020 and 2019 is as follows:
December 31
2020
2019
Revenue
$ 29,202
$ 38,444
Gross profit
$ 3,474
$ 4,069
OIBITDA
$ 658
$ 1,348
Net income (loss)
$ (789 )
$ 195
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our results of operations and financial condition should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This section includes
several forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect our
current views with respect to future events and financial performance. All statements that address expectations or projections
about the future, including, but not limited to, statements about our plans, strategies, adequacy of resources and future financial
results (such as revenue, gross profit, operating profit, cash flow), are forward-looking statements. Some of the forward-looking
statements can be identified by words like “anticipates,” “believes,” “expects,” “may,”
“will,” “can,” “could,” “should,” “intends,” “project,”
“predict,” “plans,” “estimates,” “goal,” “target,” “possible,”
“potential,” “would,” “seek,” and similar references to future periods. These statements are
not a guarantee of future performance and involve a number of risks, uncertainties and assumptions that are difficult to predict.
Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic
and competitive uncertainties, many of which are beyond our control or are subject to change, actual outcomes and results may
differ materially from what is expressed or forecasted in these forward-looking statements. Important factors that could cause
actual results to differ materially from these forward-looking statements include, but are not limited to: the impact of the COVID-19
pandemic on us and our clients; our ability to access the capital markets by pursuing additional debt and equity financing to
fund our business plan and expenses; our continued inability to issue additional shares of equity securities; negative outcome
of pending and future claims and litigation and our ability to comply with our contractual covenants, including in respect of
our debt; potential loss of clients and possible rejection of our business model and/or sales methods; weakness in general economic
conditions and levels of capital spending by customers in the industries we serve; weakness or volatility in the financial and
capital markets, which may result in the postponement or cancellation of our customers’ projects or the inability of our
customers to pay our fees; delays or reductions in U.S. government spending; credit risks associated with our customers; competitive
market pressures; the availability and cost of qualified labor; our level of success in attracting, training and retaining qualified
management personnel and other staff employees; changes in tax laws and other government regulations, including the impact of
health care reform laws and regulations; the possibility of incurring liability for our business activities, including, but not
limited to, the activities of our temporary employees; our performance on customer contracts; and government policies, legislation
or judicial decisions adverse to our businesses. Readers are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. We assume no obligation to update such statements, whether as a result of new information,
future events or otherwise, except as required by law. We recommend readers to carefully review the entirety of this Annual Report,
including the “Risk Factors” in Item 1A of this Annual Report and the other reports and documents we file from time
to time with the Securities and Exchange Commission (“SEC”), particularly our Quarterly Reports on Form 10-Q and our
reports on Form 8-K.
33
The
following discussion and analysis of our financial condition and results of operations, our expectations regarding the future
performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements.
These forward-looking statements are subject to risks, uncertainties and other factors including those described in “Item
1A. Risk Factors” of this Annual Report on Form 10-K. Our actual results may differ materially from those contained in any
forward-looking statements. You should read the following discussion together with our audited consolidated financial statements
and related notes thereto and other financial information included in this Annual Report on Form 10-K.
Our
financial information may not be indicative of our future performance.
EXECUTIVE
OVERVIEW
Demand
for Maslow EOR services and field talent is dependent upon general economic conditions and labor trends. The United States economic
backdrop during the first quarter 2020 was positive until the rise in COVID 19 cases changed the business landscape profoundly.
Before the pandemic, the United States marked a 50-year unemployment low in February 2020, with just 3.5% of Americans
unemployed. Starting the week of March 9, 2020, numerous U.S. state and federal governments began urging or requiring residents
to stay home and banning large gatherings and restricted travel. Schools were closed and all sporting events across the United
States were either cancelled or postponed indefinitely. Many companies mandated that their employees work from home and discontinued
use of many workers who could not perform their type of work from home (e.g., video, sound, lighting crew, makeup-artists).
Maslow began seeing the effects the week of March 16, 2020 as its contracted employee and freelance payroll hours dropped as much
as 49% during the second quarter. This was because a large portion of Maslow employees were assigned to field, location, or studio
filming projects for our clients that require close contact with others. These projects were placed on indefinite hold and these
employees who saw their hours dramatically reduced. Those who could continue to work from their homes for our clients, have continued
to log hours. Not surprisingly the months of April and May 2020 saw the largest drop in comparative 2020 revenue to 2019 at 49%
($3,379 from $6,673). Second quarter 2020 revenue of $5,197 was 46% off the pace of 2019’s $9,617 comparative. In the third
quarter of 2020, that loss dwindled to approximately 38%, as the Company generated $6,201 in third quarter revenues vs. $10,089
in the same period in 2019.
However,
our fourth quarter revenue of $9,003 was only 13.7% less than the fourth quarter in 2019 when it was $10,438. This was due to
our clients increasing their payrolls as COVID-19 restrictions by state began to wane, and seasonal fall business activities such
as the U.S. elections were held, and the 17-week regular season of the National Football League (“NFL”) season commenced
and proceeded.
We
are hopeful that the dissemination of vaccines will result in resumption of a normally functioning economy which will continue
to enable our clients to return their payrolls to normal levels that in turn, will continue ours and an overall economic rebound.
However, no assurance can be given on if and when this will happen or what impact it will have on our business.
As
far as cash is concerned, in 2020 although COVID-19 exacerbated our already precarious cash position as explained more thoroughly
below (see Liquidity and Capital Resources), we received a $250 short term loan from Triumph at 10% annual percentage rate (“APR”),
in February,2020 and then in May 2020, $5,215 in Payroll Protection Plan (PPP) funds which assisted us in weathering the storm,
especially through the lean months from May through August 2020. By the end of August 2020, we had exhausted our use of PPP funds,
but our working capital remained strong at $5,693.
Because
our larger clients scaled back media related activities in 2020 due to COVID-19, our revenue became more diverse as reliance on
our top 2 clients dropped from 49% in 2019 to 39% in 2020. Four clients with revenues greater than $500 actually increased revenue
in 2020 by $2,111.
Our working capital
though has assumed repayment of Vivos Holdings debt which as of December 31, 2020 was $5,970. We had expected repayment
in early 2020 after Vivos Holdings defaulted on two of their notes at the end of December 2019.
34
From
a technology perspective, we updated our finance and accounting system from Sage 50 which was a client server version, to Sage
Intaact, a cloud-based application. We also bolstered our automated sales and marketing capabilities by adding SaaS applications
Salesforce.com and ZoomInfo. So, although we still do not possess an integrated ERP, we improved our business intelligence, CRM,
Finance and Accounting capabilities.
On February 17, 2020,
after several attempts to negotiate a payment plan with Suresh Venkat Doki (brother of Mr. Doki) and Mr. Doki, Maslow,
as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Mr. Doki and other Vivos Debtors.
In February 2020,
the shortage of cash at this juncture resulted from, among other things, the Company being unable to finance IQS invoices through
Triumph because a lien was discovered to exist on IQS assets delaying utilization of Maslow’s much more favorable factoring
relationship with Triumph. As for the lien, it was not disclosed to Maslow by Vivos Holdings, the seller, before or after
the transaction closed. This is when Maslow sought $250 from Triumph and later made a payment to buy its way out of the unfavorable
factoring arrangement and take on other actions to move IQS financing to Triumph.
The
Company’s executives and its board of directors worked together on managing costs and implementing measures to facilitate
the rapid ramp-up of operations once the governmental restrictions began being lifted in June 2020. But we did not see our clients
return to better than 60% of their customary levels of demand until September 2020.
Cash
and working capital began stabilizing in late September 2020 after the PPP funds had been exhausted for their intended purpose,
payroll only in our case, and we began utilizing our factoring facility again, but not the 93% level we have over the past 2 years.
2021
and Beyond
The
continued impact of this pandemic cannot be precisely predicted. We believe that the short to mid-term impacts on how our clients
conduct work will continue to be aligned with our strategic path.
As
a result, we have continued to move forward with our diversified offerings and future specialization staffing strategy, updating
our already expert operating model and organizing our business to more easily acquire and maintain client accounts.
We
believe given the changing nature in specialized staffing due to the pandemic that there likes a greater opportunity to expand
our EOR business as it offers businesses of all types and industries, more flexibility in on and off boarding employees as well
as managing 1099 risk. As far as staffing, media staffing, we believe it will grow but there are also opportunities to get into
staffing specialties which represent areas where we see the most rebound for a robust demand. We will continue to focus on growing
the contingent staffing side of our business. Our IT Staffing brand, Intelligent Quality Solutions, will be a primary focus moving
forward. Bringing on new segments whether organically or through M&A reflect our desire to shift our portfolio toward a higher
margin, higher value proposition.
COMPANY
OVERVIEW
Maslow
is a national provider of employer of record, recruiting and staffing services, consisting of media and IT resources. We provide
services to client primarily within the United States of America.
Our
services consist of:
●
Employer
of Record (“EOR”): A unique workforce solution for any organization who seeks efficiency in employee administrative
management including payroll and benefits, labor risk associated with compliance with federal-state and local regulations
including Fair Labor Standards Act (“FLSA”), in onboarding and offboarding employees, and in managing benefit
costs.
●
Recruiting
and Staffing: Staffing covering a wide variety of specialties. Currently Media and Information Technology (“IT”)
encompass most of our placements.
●
Video
and Multimedia Production: With 32 years of experience, the Company’s subsidiary, Maslow, offer script to screen expertise
including producers, audio engineers, editors, broadcasters, makeup artists, camera crews, Gaffers and grips, drone operators
and more.
35
The
Company’s subsidiary, The Maslow Media Group, Inc. (“Maslow”) is currently the only earning entity for the business.
After our Merger in October 2019, non-operational expenses (e.g., public company fees, D&O insurance, investor relations,
etc.) were assigned at the corporate level. This enables a more pristine focused view of the operational side of the business
we refer to as Operational Income Before Depreciation, Interest, and Amortization.
RESULTS
OF OPERATIONS
Maslow
had revenues totaling $29,202 in 2020, which was a 24% decrease over $38,444 in 2019. IQS, our IT Staffing business segment,
which was acquired on December 1, 2019, accounted for $2,571, or 8.8%. The COVID-19 impact to revenue was undoubtedly profound
but difficult to measure given there is no way to know what level of growth existing clients may have had or revenue potential
of new clients.
Overall,
Maslow lost $7,611 to accounts with declining revenues => $500, but conversely added $2,111 from new or growing accounts that
had at least $500 more in revenue in 2020 from 2019. AT&T’s DirecTV cancelled Sirius-XM programming in February 2020
that we believe had a negative impact of $3,400 on revenue. Overall DirecTV year over year revenue declined by $4,759.
If
we assume that those clients who had revenues in 2019 and zero in 2020 and include those with steep declines > $500 and 2020
revenues < $10, the total in attrition is approximately $3,874. This attrition may not be permanent as many clients hire Maslow
for special events. The decision to leave Maslow or not use Maslow services in 2020 by these three clients was not attributable
to Maslow’s pricing, service, or performance.
Overall,
the top 10 clients represented $24,242 which is 82% of 2020 revenues, which was a decrease by approximately $7,249 to 2019’s
top 10 at approximately $31,491. $24 in rebates were issued in December 2020 which was $24 less than a year ago when they were
$48 in 2019.
The
following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage
of revenues, and have been derived from our consolidated financial statements.
December 31
2020
2019
Revenue
$ 29,202
$ 38,444
Cost of services
25,728
34,375
Gross profit
3,474
4,069
Selling, general and administrative expenses
4,462
2,985
Operating income (loss)
(988 )
1,084
Interest income
8
-
Interest income from related parties
112
68
Interest expense
(281 )
(438 )
Other expense
(1 )
(206 )
Income/(loss) before taxes
(1,150 )
508
Income tax benefit (expense)
230
(156 )
Non-controlling interest in consolidated affiliates
131
(157 )
Net income (loss)
$ (789 )
$ 195
The
2019 consolidated statement of income includes only 1 month of IQS operations versus 12 months in 2020.
36
Revenues:
By Segment
2020
%
of Revenue
2019
%
of Revenue
EOR
$ 23,564
80.7 %
$ 34,452
89.6 %
Recruiting and Staffing
4,478
15.3 %
2,190
5.7 %
Video and Multimedia Production
1,125
3.9 %
1,641
4.3 %
Other
35
.1 %
161
0.4 %
Total Revenue
$ 29,202
100 %
$ 38,444
100.0 %
Employer
of Record (EOR) Revenues : EOR represented 80.7% of our revenue in 2020 as opposed to 89.6% in 2019. This can be attributed
to this business segment being hit the hardest by COVID-19 as our large corporate clients curtailed non-essential media activities
and AT&T announced the cancellation of two (2) live anchor multiple hour DirecTV sports programs, which we estimate reduced
revenue by $4,000. Additionally, our IT staffing business which we enjoyed for its first full year, contributed 8% of revenue,
thus also reducing EOR concentration.
Recruiting
and Staffing Revenues : Staffing revenues buoyed by having a full year of IT Staffing capabilities increased revenue by
$2,288, or 104%. The IT Staffing (IQS) contributing the vast majority, but Media Staffing despite COVID-19 headwinds, managed
to eke out a slight increase in 2020 of $17 over 2019, finishing year with $1,904 in revenue.
IQS,
our IT Staffing division although contributing $2,571 in revenue and $784 in gross profit (30.5%) in 2020, saw a decline in business
from its 2019 full year levels (including pre-acquisition as it was acquired December 2019) of $3,206 in revenue and $908 in gross
profit. These are declines at levels of $723 or 28% and $131 or 17% in revenue and gross profit, respectively. The decline in
IQS business was most poignant in Q4 with revenue coming in at $478 compared to $751 in Q4 2019; a drop of 36.4%. When IQS Q4
2020 revenue is compared to Q1 2020, the decline is comparative at 39.5%. The drop in revenue began in April 2020 due to COVID-19
as the next 6 months saw an approximate decline of 27% compared to same period a year ago. The decline however was not as steep
as the EOR, Video Production and Media Staffing comparative declines because a few clients had essential business exceptions and
accommodations to keep their IT projects active. The reason there was no bounce back for this business segment in Q4 was a combination
of losing 7 staffing positions to permanent offers and what we believe is the temporary loss of two clients, Inspire Brands and
Accruent who both began implementing temporary hiring freezes in early 2020. This resulted in a $745 revenue loss in 2020. Conversely,
Abbott Labs through vendor management firm Tapfin, had a 57% increase in revenues going from $691 in 2019 to $1,083 in 2020.
Video
and Multimedia Production Revenues : Video Production by nature of the freelance work our clients undertake, did see a
decline in revenue by $516 or 31.4%, from $1,641 in 2019 to revenues of $1,125 in 2020.
Gross
Profit: Gross profit represents revenues from services less cost of services expenses, which consist of payroll, payroll
taxes, benefits, payroll-related insurance, union benefits, field talent and reimbursable costs for out-of-pocket items.
Overall,
our gross profit declined $595, or 14.6% to $3,474 from $4,069 in 2019; but the decline was not proportionate and as steep as
our revenue’s decline by 24%. This was due primarily to an increase in higher margin activities such as IT staffing which
garnered 30.5% as it represented 8.8% of the overall revenue. This coupled with a reduction in the low margin EOR business at
9.2%and increase in Media Staffing at 22.8% drove an overall margin of 11.9% which was 1.3% higher than 2019’s margin of
10.6%.
Selling,
General and Administrative Expenses (“SG&A”) : SG&A expenses increased $1,477, or 49.5%,
to $4,462, $1,567 of which were related to non-operational corporate costs, with $1,109 of which were public company based and
$446 were for outside legal fees associated with our Vivos Group dispute. Otherwise, our operational SG&A increase
in 2020 over 2019 was only $63.
37
Operational
SG&A increases were in salary of $381 in 2020 over 2019, which can be attributed to having IQS IT Staffing unit for full year
which added approximately $453 to 2020’s salary demonstrating that when comparing MMG pre IQS salaries from 2020 to 2019,
there was actually a savings of $72. The savings in salaries was attained despite adding business development personnel.
IQS
salaries were trimmed to be in line with reduction in revenue, which included a change in senior management. For the first
8 months of 2020, SG&A salary, payroll tax and benefits averaged $40 a month, in contrast to the last 5 months of 2020 where
salaries averaged $28, without a loss in productivity. This staff realignment was implemented to position this division for success
and growth moving forward.
Non-operational
corporate costs for 2020 totaled $1,567, which are not comparable to 2019 as these costs only were classified as such after the
Company went public via the reverse merger in October 2019. The 2020 cost drivers were salary, payroll tax, and benefits at $738
and D&O insurance totaling $115. The former consists of our general counsel and allocated executive and senior management
loaded salaries.
Depreciation
and Amortization: Depreciation and amortization charges were $79 compared to $25 in 2019, with the increase coming from
capitalized software and IQS brand name and client relationships amortization.
Interest
Income : Interest income from related parties increased from $68 to $120, as a result of the Vivos Holdings 2019
tax note accruing interest for a full year.
Other
Expense: Other expenses decreased by $205 from $206 to $1 primarily due to elimination of these non- essential, non-operational
costs the Company had incurred in 2019.
Interest
Expense: Interest expense, decreased by $157 from $438 to $281 as reliance on factoring was minimized as a benefit of
having PPP loan proceeds, managing expenses downward and business picking up in Q4. Additionally, interest accrual at 12% on $890
in convertible notes began subsiding as notes were repaid from July through September 2020. Conversely PPP loan interest was carried
at 1% starting in May 2020 through end of the year, and interest of 10% on a $250 loan from Triumph Capital.
Income
Taxes: Income tax expense improved from $156 in income tax expense to an income tax benefit of $230 due to the net loss
recorded in 2020.
LIQUIDITY
AND CAPITAL RESOURCES
Our
working capital requirements are driven predominantly by EOR field talent payments, SG&A salaries, public company costs, interest
associated with factoring, and client accounts receivable receipts. Since receipts from client payments are on average 70 days
behind payments to field talent, working capital requirements can be periodically challenged. We have a Factoring Facility with
Triumph Business Capital (TBC). TBC 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%. As a result of the impact of the COVID-19 pandemic, our clients may be
more likely to be delinquent in their payments. As of December 31, 2020, 63% of our $6,629 were current, 26% 1 to 30 days past
due, 8% between 31 and 60 days past due and 3% ($202) greater than 60 days.
Our
primary sources of liquidity are cash generated from operations via accounts receivable and borrowings under our Factoring
Facility with Triumph enabling access to the 7% unfactored portion. Because certain large clients have changed their payment
practices announcing 60- and 90-day terms amounting to a unilateral extension to contractual terms by 30-60 days, we
can be adversely impacted since Triumph no longer provides 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 on a consistent schedule;
our cash inflows do not typically align with these required payments, resulting in temporary cash challenges, which is why in
the past we have employed factoring.
38
Vivos
Debtors as of December 31, 2020, had notes receivable totaling $4,258 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 Naveen Doki and the Vivos Holdings for nonpayment.
It was also anticipated that following the
Merger, the Company would both access the capital markets by selling additional shares of Company Common Stock and use shares
of Company Common Stock as currency to acquire other business revenues. However, all 300 million authorized shares
of Company Common Stock were issued in connection with the Merger. No shares are expected to become available to the
Company until the legal dispute with the Vivos Debtors and Vivos Group is resolved. At that point the Company can
decide whether to amend the Company’s Certificate of Formation to increase the number of authorized shares of Company Common
Stock or approve a reverse-split of the outstanding shares of Company Common Stock to provide additional shares for these purposes.
No assurance can be given as to when this might take place.
On
May 5, 2020, Maslow received $5,216 loan through the Paycheck Protection Program (the “PPP”) with a term of two (2)
years and an interest rate of 1% per annum. The PPP provides that the Company may apply for forgiveness of this loan if the loan
proceeds were used for payroll and certain other specified operating expenses while maintaining specified headcount requirements.
The accrued interest on the PPP loan as of December 31, 2020 was $34.
On
June 5, 2020, The Paycheck Protection Program Flexibility Act (the “PPPF Act”) went into effect providing more flexibility
to participants in the PPP which included extending the time to begin repayment of the PPP loan until the amount of forgiveness,
if any, is determined, which could be as late as December 31, 2020. The Company may apply for forgiveness earlier if they determine
that doing so will maximize the amount of loan forgiveness.
On
December 22, 2020, the United States Congress passed an omnibus spending bill (the December relief bill) that included significant
revisions and additions to the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief and Economic Security
Act (CARES Act), and previously amended by the Paycheck Protection Program Flexibility Act (PPP Flexibility Act). President Trump
signed the bill on December 27, 2020. The December relief bill permits expenses paid with PPP loan funds to be deductible.
On
December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues ‎Act (the “PPP2 Act”)
contained in the Consolidated Appropriations Act, 2021 (“2021 Appropriations Act”) ‎was enacted. The PPP2 Act
and 2021 Appropriations Act included several changes to the forgiveness ‎deadline process and deadlines allowing PPP borrowers
up to 10 months to apply for loan forgiveness after the covered period ends.
The
Company utilized PPP funds for their intended purpose, in this case for payroll only following guidelines for wage earners >
$100.
The
funds bolstered our working capital and enabled us to bring back employees and continue to serve our clients even though their
requirements had lessened.
As
of December 31, 2020, our working capital was $5,970, compared to $784 a year ago as the PPP funds enabled the Company to build
A/R reserves since PPP funds were employed to pay salaries of both outsourced and SG&A employees, while approximately 58%
of 2019 revenue was still attained and collectible during the covered 24-week period between May and October 2020.
We
anticipate approximately $300 in additional SG&A costs in 2021, when compared with 2020 relating to increase in sales and
marketing head count to meet growth objectives.
39
A
summary of our operating, investing and financing activities are shown in the following table:
December 31
2020
2019
Net cash provided by (used in) operating activities
$ (2,070 )
$ 1
Net cash used in investing activities
(50 )
(39 )
Net cash provided by financing activities
1,915
284
Net change in cash and cash equivalents
$ (205 )
$ 246
Operating
Activities
Cash
employed by operating activities consists of net income (loss), adjusted for non-cash items, including depreciation and amortization,
and the effect of working capital changes. The primary drivers of cash inflows and outflows are factoring, accounts receivable
and accrued payroll and expenses.
During
2020, net cash used in operating activities was ($2,070), a decrease of $2,071 compared with $1 for 2019. This decrease is primarily
attributable to our net loss of ($789), and changes in income tax payable by ($525), accrued payroll ($455), and accounts payable
($401).
Investing
Activities
Cash
used in investing activities consists primarily of cash paid for capital expenditures.
Financing
Activities
Cash
provided by financing activities in 2020 was $1,915 as compared to cash used for same purpose totaling $284 in 2019. The increase
was due to the Company receiving $5,216 in PPP offset by $853 in repayments from the issuance of convertible notes starting in
June of 2019 and return of cash flows from short-term borrowing via our factoring vehicle.
OFF-BALANCE
SHEET ARRANGEMENTS
We
had no material off-balance sheet arrangements that have, or are likely to have, a current or future material effect on our operations.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
We
have identified the policies listed below as critical to our business and the understanding of our results of operations. For
a detailed discussion of the application of these and other accounting policies, see Note 3 in the Notes to the Consolidated Financial
Statements of this Annual Report on Form 10-K. The preparation of consolidated financial statements in conformity with GAAP, requires
management to 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 consolidated financial statements, and the reported amounts of revenues and expenses
during the reporting periods.
On
an ongoing basis, management evaluates its estimates, including those related to revenue recognition, collectability of accounts
receivable, impairment of goodwill and intangible assets, contingencies, litigation, income taxes, stock option expense, and other
liabilities. Management based its estimates and judgments on historical experiences and on various other factors believed to be
reasonable under the circumstances. Actual results under circumstances and conditions different than those assumed could result
in differences from the estimated amounts in the consolidated financial statements.
40
REVENUE
RECOGNITION
On
January 1, 2019 the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers, for all
open contracts and related amendments as of December 31, 2019 using the modified retrospective method. The adoption had no impact
to the reported results.
The
Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria
must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligation(s)
in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligation(s) in the contract;
and (5) recognize revenue when or as the Company satisfies a performance obligation.
The
Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the
parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client
and the services offered.
We
derive our revenues from three segments: EOR, Recruiting and Staffing, and Video and Multimedia Production. We provide temporary
staffing and permanent placement services. Revenues are recognized when promised services are delivered to client, in an amount
that reflects the consideration we expect to be entitled to in exchange for those services. Revenues as presented on the consolidated
statements of operations represent services rendered to client less variable consideration, such as sales adjustments and allowances.
Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and equivalent amounts of reimbursable
expenses are included in cost of services.
We
record revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses.
We have concluded that gross reporting is appropriate because we (i) have the risk of identifying and hiring qualified workers,
(ii) have the discretion to select the workers and establish their price and duties and (iii) we bear the risk for services that
are not fully paid for by client.
Temporary
staffing revenues is accounted for as a single performance obligation satisfied over time because the customer simultaneously
receives and consumes the benefits of the Company’s performance on an hourly basis. The contracts stipulate weekly billing,
and the Company has elected the “as invoiced” practical expedient to recognize revenue based on the hours incurred
at the contractual rate as we have the right to payment in an amount that corresponds directly with the value of performance completed
to date.
Permanent
placement revenue is recognized on the date the candidate’s full-time employment with the customer has commenced. The customer
is invoiced on the start date, and the contract stipulates payment due under varying terms, typically 90 days. The contract with
the customer stipulates a guarantee period whereby the Company will replace the candidate for free of charge if the employee is
terminated within that 90-day period. As such, the Company’s performance obligations are satisfied upon commencement of
the employment, at which point control has transferred to the customer.
Allowances,
recorded as a liability, are established to estimate these losses. Fees to client are generally calculated as a percentage of
the new worker’s annual compensation. No fees for permanent placement services are charged to employment candidates.
Video
and Multimedia Production revenues from contracts with client are recognized in the amount to which we have a right to invoice
when the services are rendered by our field talent.
41
INTANGIBLE
ASSETS
The
Company holds intangible assets with finite lives. Intangible assets with finite useful lives are amortized over their respective
estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible
asset is realized.
Identifiable
intangible assets recognized in conjunction with acquisitions are recorded at fair value. Significant unobservable inputs are
used to determine the fair value of the identifiable intangible assets based on the income approach valuation model whereby the
present worth and anticipated future benefits of the identifiable intangible assets were discounted back to their net present
value.
The
Company evaluates the recoverability of intangible assets whenever events or changes in circumstances indicate that an intangible
asset’s carrying amount may not be recoverable. The Company annually evaluates the remaining useful lives of all intangible
assets to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company determined
that there were no impairment indicators for these assets during the year ended December 31, 2020.
GOODWILL
Goodwill
represents the difference between the enterprise value/cash paid less the fair value of all recognized net asset fair values including
identifiable intangible asset values in a business combination. The Company reviews goodwill for impairment annually during the
fourth quarter or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.
Based on annual testing, the Company has determined that there was no goodwill impairment during the year ended December 31, 2020.
The
Company first evaluates qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than
50 percent) that the fair value of the reporting unit is less than its carrying amount, including goodwill. If after qualitatively
assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value
of the reporting unit is less than its carrying amount, then further testing is unnecessary. If after assessing the totality of
events or circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit is less
than its carrying amount, the Company then estimates the fair value of the reporting unit and compares the fair value of the reporting
unit with its carrying amount, including goodwill, as discussed below.
In
assessing whether it is more likely than not that an indefinite-lived intangible asset is impaired, the Company assesses relevant
events and circumstances that could affect the significant inputs used to determine the fair value.
The
quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset
with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, the Company shall recognize an
impairment loss in an amount equal to that excess.
The
quantitative goodwill impairment test involves a two-step process. In the first step, the Company compares the fair value of each
reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired,
and no further testing is required. If the fair value of the reporting unit is less than the carrying value, The Company must
perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit’s
fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets,
in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was
being acquired in a business combination. If the implied fair value of the reporting unit’s goodwill is less than the carrying
value, the difference is recorded as an impairment loss.
42
RECENT
ACCOUNTING PRONOUCEMENTS
For
a discussion of recent accounting pronouncements and their potential effect on our results of operations and financial condition,
refer to Note 3 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
are exposed to certain market risks from transactions we enter in the normal course of business. Our primary market risk exposure
relates to interest rate risk, which currently is tied to the Prime Interest rate.
INTEREST
RATES
Our
Factoring Facility is priced at a variable interest rate of prime plus 2% with a 15-basis point advance rate with a floor
of 4%. Accordingly, future interest rate increases could potentially put us at risk for an adverse impact on future earnings and
cash flows.
43
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Registered Public Accounting Firms
45
Audited
Consolidated Financial Statements of Reliability, Inc.
Consolidated Balance Sheets as of December 31, 2020 and 2019
46
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019
47
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020 and 2019
48
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
49
Notes to Consolidated Financial Statements
51
44
18012
Sky Park Circle, Suite 200
Irvine,
California 92614
tel
949-852-1600
fax
949-852-1606
www.rjicpas.com
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders and Board of Directors
Reliability
Incorporated:
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of Reliability Incorporated and Subsidiary (the “Company”)
as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity, and cash
flows for the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the
“consolidated financial statements”).
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered
with Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Security and
Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Going
Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in note 2 to the consolidated financial statements, the Company has experienced cash constraints and extended payment
terms from its customers, has been unable to negotiate payments due on its related party receivables which are currently in default,
is currently unable to access the capital markets, and believes the impact of the COVID 19 pandemic will continue to have a material
impact on its business, operations and cash flows. These factors raise substantial doubt about its ability to continue as a going
concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Critical
Audit Matters
The
critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that were communicated or required to be communicated to the Audit Committee of the Board of Directors and that: (1) relate to
accounts or disclosures that are material to the consolidated financial statements and (2) involved challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on
the critical audit matter or on the accounts or disclosures to which they relate.
Related
Party Transactions and Recoverability of Notes Receivable from Related Parties
As
discussed in Notes 12 and 14 to the consolidated financial statements, the Company has significant related party transactions
and arrangements with the majority owners of the Company and other companies owned by the majority owners. In addition to holding
several receivable agreements, including notes receivable with these related parties, the Company is currently involved in a lawsuit
against one of the majority owners and other companies owned by the majority owner.
We
identified the evaluation of the identification of related parties, related party transactions and collectability of notes receivable
from related parties as a critical audit matter. Auditor judgement was involved in assessing the sufficiency of the procedures
performed to identify related parties, identify related party transactions and assess the collectability of the notes receivable
from related parties.
The
following are the primary procedures we performed to address this critical audit matter. We performed the following procedures
to evaluate the identification of related parties, related party transactions and the collectability of the notes receivable from
related parties by the Company:
●
Reviewed new agreements and contracts between the Company and its related parties;
●
Queried the accounts payable system for transactions with its related parties;
●
Inspected director and officer questionnaires from the Company’s directors and officers;
●
Evaluated the Company’s reconciliation of its applicable accounts to the related parties’ records of transactions
and balances;
●
Read the Company’s minutes from meetings of the Board of Directors and related committees;
●
Inquired with executive officers and key members of management;
●
Reviewed public filings, external news, and research sources for information related to transactions between the Company and related
parties; and
●
Confirmed with the Company’s legal counsel, management, and its outside counsel as to the status of the lawsuits and the
collectability of the notes receivable from related parties.
We
have served as the Company’s auditor since 2009.
Irvine,
California
March
31, 2021
45
RELIABILITY
INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(amounts
in thousands, except per share data)
December 31
2020
2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$ 70
$ 275
Trade receivables, net of allowance for doubtful accounts
6,870
7,029
Notes receivable from related parties
4,258
3,418
Prepaid expenses and other current assets
289
316
Total current assets
11,487
11,038
Property, plant and equipment, net
76
2,483
Other intangible assets, net
203
237
Goodwill
518
518
Total assets
$ 12,284
14,276
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES
Factoring liability
$ 2,999
$ 5,508
Accounts payable
936
1,087
Accrued expenses
375
548
Accrued payroll
691
907
Deferred revenue
182
347
Income taxes payable
292
817
Note payable
-
890
Current portion of mortgage loan payable
-
45
Other current liabilities
42
105
Total current liabilities
5,517
10,254
Mortgage loan payable, net of current portion
1,745
PPP loan payable
5,250
-
Total liabilities
10,767
11,999
Commitment and contingencies (Note 12)
Subsequent events (Note 17)
STOCKHOLDER’S EQUITY
Common stock, without par value, 300,000,000 shares authorized, 300,000,000 issued and outstanding as of December 31, 2020 and 2019
-
-
Additional paid-in capital
750
750
Retained earnings
767
1,840
Total stockholder’s equity attributable to Reliability Inc.
1,517
2,590
Noncontrolling interest in consolidated affiliates
-
(313 )
Total equity
1,517
2,277
Total liabilities and stockholder’s equity
$ 12,284
$ 14,276
The
accompanying notes to consolidated financial statements are an integral part of these financial statements.
46
RELIABILITY
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(amounts
in thousands, except per share data)
For the Years Ended December 31
2020
2019
Revenue earned
Service revenue
$ 29,202
$ 38,444
Cost of revenue
Cost of revenue
25,728
34,375
Gross profit
3,474
4,069
Selling, general and administrative expenses
4,462
2,985
Operating income (loss)
(988 )
1,084
Other income (expense)
Interest income from related parties
112
68
Interest income
8
-
Interest expense
(281 )
(438 )
Other expense
(1 )
(206 )
Income (loss) before income tax benefit / (expense)
(1,150 )
508
Income tax benefit/(expense)
230
(156 )
Consolidated net income (loss)
(920 )
352
Less net (income) loss attributable to noncontrolling interest in consolidated affiliates
131
(157 )
Net income (loss) attributable to Reliability Inc.
$ (789 )
$ 195
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 to consolidated financial statements are an integral part of these financial statements.
47
RELIABILITY
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGE IN STOCKHOLDERS’ EQUITY
For
the year ended December 31, 2020 and 2019
(amounts
in thousands, except per share data)
Controlling Interest
Add-
Non - Controlling
itional
Interest in
Common Stock
Paid-in
Retained
Consolidated
Total
Shares
Amount
Capital
Earnings
Total
Affiliates
Equity
Balance, January 1, 2019
282,000,000
-
-
1,472
1,472
1,472
Net income (loss)
352
352
(157 )
195
Recapitalization
18,000,000
16
16
16
Note receivable from shareholder for tax debt
750
750
750
VIE consolidation
(156 )
(156
)
Balance, December 31, 2019
300,000,000
750
1,840
2,590
(313 )
2,277
Net income (loss)
(971 )
(971 )
182
(789
)
VIE disposal
(102 )
(102 )
131
29
Balance, December 31, 2020
300,000,000
750
767
1,517
-
1,517
The
accompanying notes to consolidated financial statements are an integral part of these financial statements.
48
RELIABILITY
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(amounts
in thousands)
For the Years Ended December
31,
2020
2019
Cash flows from operating
activities:
Net income
(loss)
$ (789 )
$ 195
Adjustments to reconcile
net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
79
25
(Gain)/loss on disposal of property
and equipment
(176 )
3
Deferred income taxes
-
(344 )
Accrued interest
(68 )
(25 )
Changes in operating
assets and liabilities:
Trade receivables
159
(548 )
Prepaid expenses and other current assets
27
(68 )
Accounts payable
(151 )
250
Accrued payroll
(217 )
238
Accrued expenses
(142 )
(62 )
Deferred revenue
(166 )
112
Other liabilities
(101 )
72
Income taxes payable/tax paid
(525 )
153
Net cash provided
by operating activities
(2,070 )
1
Cash flows from investing
activities:
Cash from merger
-
2
Purchase of fixed assets
(50 )
(41 )
Net cash used in
investing activities
(50 )
(39 )
Cash flows from financing
activities:
Net borrowing/(repayment) of line-of-credit+
(2,509 )
916
Proceeds from issuing short-term debt
-
850
Net borrowing/(payment) of long-term
debt
5,216
(794 )
Advances to related parties
61
(688 )
Repayment of long-term debt
(853 )
-
Net cash provided
by financing activities
1,915
284
Net increase (decrease)
in cash and cash equivalents
(205 )
246
Cash and cash equivalents,
beginning of year
275
29
Cash and cash equivalents,
end of year
$ 70
$ 275
The
accompanying notes to consolidated financial statements are an integral part of these financial statements.
49
RELIABILITY
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CASH FLOWS, continued
(amounts
in thousands)
For the years ended December 31,
Supplemental disclosures of cash flow information:
2020
2019
Cash paid during the year for:
Interest
$ 275
$ 364
Income taxes
$ 301
$ 389
Supplemental disclosures of non-cash investing and financing activities:
Net tangible assets acquired in acquisition of IQS
$ -
$ 623
Net intangible assets acquired in acquisition of IQS
$ -
$ 758
Liabilities assumed during acquisition of IQS
$ -
$ 735
Reduction in notes receivable from related parties for acquisition of IQS
$ -
$ 646
ASC 842 leases added to property, plant and equipment
$ -
$ 30
Leases placed in other current liabilities
$ -
$ 30
Non-cash impact of recapitalization from merger
Liabilities assumed in merger
$ -
$ 7
Conversion of shareholder loan to equity in merger
$ -
$ 162
VIE net asset consolidated (unconsolidated)
$ (1,790 )
$ 1,631
VIE liabilities consolidated (unconsolidated)
$ (1,790 )
$ 1,790
VIE reduction in equity
$ -
$ 160
The
accompanying notes to consolidated financial statements are an integral part of these financial statements.
50
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
1 - NATURE OF OPERATIONS
Reliability,
Inc. is a leading provider of employer of record and temporary media and information technology (“IT”) staffing services
that operates, along with its wholly owned subsidiary, The Maslow Media Group, Inc., (collectively, “Reliability”
or the “Company”), primarily within the United States of America in three industry segments: Employer of Record (“EOR”),
Recruiting and Staffing and Video and Multimedia Production which provides script to screen media talent. EOR which is a unique
workforce management solution, represented 80.7% of the revenue in 2020. Our Staffing segment provides skilled field talent on
a nationwide basis for IT and finance and accounting client partner projects. Our Staffing includes revenue derived from permanent
placement. Video Production involves assembling and providing crews for special projects that can last anywhere from a week to
6 months.
On
October 29, 2019, Maslow Media Group (“Maslow” or “MMG”) became a wholly owned subsidiary of Reliability
via a reverse merger (the “Merger”).
On
December 1, 2019, the Company acquired the customer contracts and trade receivables and assumed certain liabilities of Intelligent
Quality Solutions, Inc. (“IQS”). IQS operates as a division of MMG.
NOTE
2 - LIQUIDITY AND GOING CONCERN
In
December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus
spread to other countries, including the United States, and efforts to contain the spread of this coronavirus intensified. This
outbreak continued throughout 2020 and into 2021. The outbreak and any preventative or protective actions that governments or
we may take in respect of this coronavirus may result in a period of business disruption, reduced customer traffic and reduced
operations. The impact of this coronavirus has had a material negative in the short term. The full financial impact cannot be
reasonably estimated at this time, but may materially affect our business, financial condition and results of operations . The
impact of the COVID-19 pandemic on the Company and its clients continues to evolve and is expected to adversely impact the Company’s
profitability, cash, assumptions and projections.
Even
before the state and U.S. governments’ reaction to COVID-19 forced employees to work from their homes starting around March
12, 2020, the Company had begun to experience cash constraints due to the following factors:
1.
Approximately
$4,300 of outstanding debt owed to the Company had not been paid and is in default.
2.
The
utilization of cash used in financing Vivos Group affiliated activities of $688
in 2019.
3.
The
inability to access capital markets due to not having any available shares of common stock.
Executive
management took swift action on March 16, 2020 by reducing hours of employees who worked on clients significantly impacted by
the COVID-19 virus concerns. Six (6) administrative employees were subsequently furloughed as of March 20, 2020, and a temporary
across the board reduction in pay was instituted across the remaining administrative staff members with executives taking a 50%
larger cut in salary. We also began having employees work from their homes making full use of our cloud-based infrastructure,
and subsequently terminated the lease effective April 30, 2020 in Rockville, MD which saved the Company approximately $246 a year.
On May 5, 2020 (the “Effective Date”), MMG received the proceeds of a loan pursuant to into a promissory note (the
“Note”) under the Paycheck Protection Program with TBK Bank, SSB (“Lender”), in the amount of $5,216 (the
“PPP Loan”). The Paycheck Protection Program (“PPP”) was established under the recently enacted Coronavirus
Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration
(“SBA”). These funds were utilized entirely for payroll
during the 24-week covered period which commenced in May 2020 and ended in October 2020. Maslow exhausted use of the funds for
payroll by the end of August 2020.
51
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
The
PPP Loan enabled MMG to return furloughed employees who were still available to work and hire additional staff for purposes of
vital sales, marketing and general and administrative projects. Salaries were returned to normal levels and amounts that were
previously suspended were returned to most corporate employees. Those employees who accepted permanent reductions in pay were
given incentives to achieve at those levels and beyond. No employee was reduced below the 25% threshold that the PPP Loan mandated.
Even
after receiving PPP funds, we continued to look for ways to streamline our business by re-structuring IQS, eliminating occupancy
of office in Plymouth, MN, and trimming many non-essential SG&A expenses.
The
Company applied for PPP loan forgiveness on March 3, 2020 for the entire amount borrowed in accordance with the PPP rules and
guidance. The Company believes that the entire $5,216 of the PPP Loan will be forgiven. However, no assurance can be given that
all or any of the PPP Loan will, in fact, be forgiven. Our consolidated financial statements do not include any adjustments to
reflect the possible future effects on the forgiveness of the PPP Loan.
Additionally,
the Company is pursuing CARES Act Paycheck Protection Program round 2 for which we believe we qualify.
During
the year ended December 31, 2020, we incurred a net loss in the amount of $789 and utilized cash from operating activities in
the amount of $2,070. Our revenues decreased by $9,242 or 24% when compared to 2019, largely due to the COVID-19 pandemic. We
also incurred an operating loss of $988 in 2020 compared to operating income of $1,084 in 2019.
All
these conditions noted above, most notably the adverse impact of sales by COVID 19and presumption that all debts coming due
without ability to raise cash from Vivos Holdings receivable, raise substantial doubt about the Company’s ability to
continue as a going concern. There can be no assurances that the Company will be successful in managing the impact of the foregoing
or its ability to maintain sufficient liquidity over a period of time that will allow it to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liability that may results from the possible inability of the
Company to continue as a going concern.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
Company’s consolidated financial statements reflect the financial position and operating results of Reliability, Inc. including
its wholly owned subsidiary, Maslow. All intercompany transactions and balances have been eliminated in consolidation.
Fiscal
Year
The
Company’s fiscal year is from January 1 st through December 31 st .
Management
Estimates
The
consolidated financial statements and related disclosures are prepared in conformity with United States (“U.S.”) generally
accepted accounting principles (“GAAP”). The Company must make estimates and judgments that affect the amounts reported
in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to revenue recognition,
allowances for doubtful accounts, recoverability of notes receivable, useful lives for
depreciation and amortization, loss contingencies, allocation of purchase price in connection with business combinations, valuation
allowances for deferred income taxes, and the assumptions used for web site development cost classifications. Actual results may
be materially different from those estimated. In making its estimates, the Company considers the current economic and legislative
environment.
52
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of 90-days or less to be cash equivalents.
Concentration
of Credit Risk
For
the year ended December 31, 2020, the Company’s top 10 clients generated over 82% of the revenue. A large portion of our
business comes from two clients, AT&T Services, Inc. (inclusive of its DirecTV division) (“AT&T”) and Janssen
Pharmaceuticals (which includes workforce partners Johnson & Johnson). AT&T accounted for 29% and 38% of revenue in 2020
and 2019, respectively. AT&T comprised approximately 49% and 50% of the accounts receivable balance as of December 31, 2020
and 2019, respectively. Janssen Pharmaceuticals (which includes workforce partners Johnson & Johnson) accounted for approximately
11% of our total revenues for the years ended December 31, 2020 and 2019. Janssen Pharmaceuticals comprised approximately18% and
19% of accounts receivable as of December 31, 2020 and 2019, respectively. No other client exceeded 10% of revenues.
Financial
instruments, which potentially subject the Company to concentrations of credit risk, are primarily cash and accounts receivable.
The Company performs continuing credit evaluations of its customers and does not require collateral. The Company has not experienced
significant losses related to receivables.
Accounts
Receivable, Contract Assets, and Contract Liabilities (Deferred Revenue)
Receivables
represent both trade receivables from customers in relation to fees for the Company’s services and unpaid amounts for benefit
services provided by third-party vendors, such as healthcare providers for which the Company records a receivable for funding
until the payment is received from the customer and a corresponding customer obligations liability until the Company disburses
the balances to the vendors.
The
Company provides for an allowance for doubtful accounts by specifically identifying accounts with a risk of collectability and
providing an estimate of the loss exposure. Management considers all contract receivables as of December 31, 2020 and 2019 to
be fully collectible, therefore an allowance for doubtful accounts is not provided for.
The
Company records accounts receivable when its right to consideration becomes unconditional. Contract assets primarily relate to
the Company rights to consideration for services provided that they are conditional on satisfaction of future performance obligations.
The
Company holds customer deposits of certain customers related to its EOR business to minimize cash flow impact and reduces risks
of uncollectible trade receivables.
The
Company records contract liabilities (deferred revenue) when payments are made or due prior to the related performance obligations
being satisfied. The current portion of the Company contract liabilities is included in accrued liabilities in its consolidated
balance sheets. The Company does not have any material contract assets or long-term contract liabilities.
As
of December 31, 2020, and 2019, the Company’s deferred revenue totaled $182 and $347 respectively.
53
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Fair
Value Measurements
The
Company measures fair value based on the price that the Company would receive upon selling an asset or pay to transfer a liability
in an orderly transaction between market participants at the measurement date. Various inputs are used in determining the fair
value of assets or liabilities. Inputs are classified into a three-tier hierarchy, summarized as follows:
●
Level
1 – Quoted prices in active markets for identical assets or liabilities;
●
Level
2 – Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the assets
or liabilities;
●
Level
3 – Significant unobservable inputs for the assets or liabilities.
When
Level 1 inputs are not available, the Company measures fair value using valuation techniques that maximize the use of relevant
observable inputs (Level 2) and minimizes the use of unobservable inputs (Level 3).The carrying amounts reported as of December
31, 2020 and 2019 for cash and cash equivalents, trade receivables, prepaid expenses and other current assets, accounts payable
and accrued expenses, factoring liability, notes and mortgages payable approximate their fair values due to the short-term nature
of these instruments or are based on interest rates available to the Company that are comparable to current market rates. The
estimated fair value of the Company’s PPP loan payable approximates its carrying value as the rate on this debt is determined
by the U.S. government which was offered to all participating companies under the CARES Act. It is not practicable to estimate
the fair value of the notes receivable from related parties due to their related party nature.
Property
and Equipment
Property
and equipment are stated at cost and are depreciated using primarily the straight-line method over the following estimated useful
lives: furniture, fixtures, and computer equipment — three to seven years; leasehold improvements — over the shorter
of the estimated useful life of asset or the lease term. The estimated useful life of building was thirty-nine years. Expenditures
for renewals and betterments are capitalized whereas expenditures for repairs and maintenance are charged to income as incurred.
Upon sale or disposition of property and equipment, the difference between the unamortized cost and the proceeds is recorded as
either a gain or a loss. Depreciation and amortization expense for the years ended December 31, 2020 and 2019 totaled $46 and
$23, respectively.
Long-Lived
Assets
The
Company reviews its long-lived assets, primarily fixed assets, intangible assets and goodwill, for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to
the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. There were no impairments
recorded during the years ended December 31, 2020 and 2019.
Intangible
Assets
The
Company holds intangible assets with finite lives. Intangible assets with finite useful lives are amortized over their respective
estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible
asset is realized. For the years ended December 31, 2020 and 2019, amortization expense was $33 and $3, respectively.
54
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Identifiable
intangible assets recognized in conjunction with acquisitions are recorded at fair value. Significant unobservable inputs are
used to determine the fair value of the identifiable intangible assets based on the income approach valuation model whereby the
present worth and anticipated future benefits of the identifiable intangible assets were discounted back to their net present
value.
The
Company evaluates the recoverability of intangible assets whenever events or changes in circumstances indicate that an intangible
asset’s carrying amount may not be recoverable. The Company annually evaluates the remaining useful lives of all intangible
assets to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company determined
that there was no impairment needed for these assets during the year ended December 31, 2020.
Goodwill
Goodwill
represents the difference between the enterprise value/cash paid less the fair value of all recognized net asset fair values including
identifiable intangible asset values in a business combination. The Company reviews goodwill for impairment annually during the
fourth quarter or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.
Based on annual testing, the Company has determined that there was no goodwill impairment during the year ended December 31, 2020.
The
Company first evaluates qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than
50 percent) that the fair value of the reporting unit is less than it’s carrying amount, including goodwill. If after qualitatively
assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value
of the reporting unit is less than it’s carrying amount, then further testing is unnecessary. If after assessing the totality
of events or circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit is
less than its carrying amount, the Company then estimates the fair value of the reporting unit and compares the fair value of
the reporting unit with its carrying amount, including goodwill, as discussed below.
In
assessing whether it is more likely than not that an indefinite-lived intangible asset is impaired, the Company assesses relevant
events and circumstances that could affect the significant inputs used to determine the fair value.
The
quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset
with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, the Company shall recognize an
impairment loss in an amount equal to that excess.
The
quantitative goodwill impairment test involves a two-step process. In the first step, the Company compares the fair value of each
reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired,
and no further testing is required. If the fair value of the reporting unit is less than the carrying value, The Company must
perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit’s
fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets,
in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was
being acquired in a business combination.
55
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
If
the implied fair value of the reporting unit’s goodwill is less than the carrying value, the difference is recorded as an
impairment loss. The Company determined that there was no impairment needed for the year ended December 31, 2020.
Revenue
Recognition
The
Company derives its revenues from three segments: EOR, Recruiting and Staffing, and Video and Multimedia Production. The Company
provides temporary staffing and permanent placement services. Revenues are recognized when promised services are delivered to
client, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues
as presented on the consolidated statements of operations represent services rendered to clients, less sales adjustments and allowances.
Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and the related amounts of reimbursable
expenses are included in cost of services.
Temporary
staffing revenues - Field talent revenues from contracts with clients are recognized in the amount to which the Company has a
right to invoice when the services are rendered by the Company’s field talent.
Permanent
placement staffing revenues - Permanent placement staffing revenues are recognized when employment candidates start their permanent
employment. The Company estimates the effect of permanent placement candidates who do not remain with its client through the guarantee
period (generally 90 days) based on historical experience. Allowances, recorded as a liability, are established to estimate these
losses. Fees to client are generally calculated as a percentage of the new worker’s annual compensation. No fees for permanent
placement services are charged to employment candidates.
Refer
to Note 16 for disaggregated revenues by segment.
Payment
terms in our contracts vary by the type and location of our client partner and the services offered. The term between invoicing and
when payment is due is not significant. There were no unsatisfied performance obligations as of December 31, 2020. There were no
revenues recognized during years ended December 31, 2020 and 2019 related to performance obligations satisfied or partially
satisfied in previous periods. There are no contract costs capitalized. The Company did not recognize any contract impairments
during the years ended December 31, 2020 and 2019.
Advertising
The
Company recognizes advertising expense in selling, general and administrative expenses as the services are incurred. Total advertising
expense for the years ended December 31, 2020 and 2019 was $24 and $43, respectively.
Earnings
(Loss) Per Share
Basic
earnings (loss) per common share are computed by dividing net income (loss) by the weighted average number of common shares outstanding
during the year.
Diluted
earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of
the Company.
Income
Taxes
The
Company accounts for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities
are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax basis, and net operating loss and tax credit carryforwards, using enacted tax rates and laws that are expected
to be in effect when the differences reverse.
56
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
A
valuation allowance is recorded against deferred tax assets in these cases when management does not believe that the realization
is more likely than not. While management believes that its judgements and estimates regarding deferred tax assets and liabilities
are appropriate, significant differences in actual results may materially affect the Company’s future financial results.
The
Company recognizes any uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon
audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood
of being sustained. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income
tax expense. As of December 31, 2020, and 2019, the Company did not record any accruals for interest and penalties. The Company
does not foresee material changes to its uncertain tax positions within the next twelve months. The Company’s tax years
are subject to examination for 2017 and forward for U.S. Federal tax purposes and for 2016 and forward for state tax purposes.
Recently
Issued Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , to replace the incurred
loss methodology with an expected credit loss model that requires consideration of a broader range of information to estimate
credit losses over the lifetime of the asset, including current conditions and reasonable and supportable forecasts in addition
to historical loss information, to determine expected credit losses. Pooling of assets with similar risk characteristics and the
use of a loss model are also required. Also, in April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic
326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging , and Topic 825, Financial Instruments ,
to clarify the inclusion of recoveries of trade receivables previously written off when estimating an allowance for credit losses.
The amendments in this update were required to be applied using the modified retrospective method with an adjustment to retained
earnings and were effective for us beginning with fiscal year 2020, including interim periods. The adoption of the amendments
in this update as of January 1, 2020 did not have a material impact on our accounts receivable, retained earnings, as well as
our results of operations for the year ended December 31, 2020.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the
Disclosure Requirements for Fair Value Measurement , to improve the fair value measurement reporting of financial instruments.
The amendments in this update require, among other things, added disclosure of the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements. The amendments in this update eliminate, among other things, disclosure
of the reasons for and amounts of transfers between Level 1 and Level 2 for assets and liabilities that are measured at fair value
on a recurring basis and an entity’s valuation processes for Level 3 fair value measurements. The amendments in this update
were effective for us beginning with fiscal year 2020. Retrospective application is required for all amendments in this update
except the added disclosures, which should be applied prospectively. The adoption of the amendments in this update did not have
a material impact on our consolidated financial position and results of operations as of and for the year ended December 31, 2020.
In
August 2018, the FASB issued ASU No. 2018-15, Intangibles–Goodwill and Other—Internal-Use Software (Subtopic
350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service
Contract , to provide additional guidance on the accounting for costs of implementing cloud computing arrangements that
are service contracts. The amendments in this update require the capitalization of implementation costs during the
application development stage of such hosting arrangements and amortization of the expense over the term of the arrangement,
including any option to extend reasonably certain to be exercised or option to terminate reasonably certain not to be
exercised. Capitalized implementation costs and amortization thereof are also required to be classified in the same line item
in the statements of financial position, operations and cash flows associated with the hosting service fees. The amendments
in this update were effective for us beginning with fiscal year 2020. Entities may select retrospective or prospective
application to all implementation costs incurred after the adoption
date. We selected prospective application to all implementation costs incurred after the adoption date. The adoption of the amendments
in this update did not have a material impact on our property and equipment, net and results of operations as of and for the year
ended December 31, 2020.
57
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
In
March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference
Rate Reform on Financial Reporting , that provides optional relief to applying reference rate reform to contracts, hedging
relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR), which will be discontinued by
the end of 2021. Also, in January 2021, the FASB issued ASU No. 2021-01 Reference Rate Reform (Topic 848)—Scope ,
to clarify that cash flow hedges are eligible for certain optional expedients and exceptions for the application of subsequent
assessment methods to assume perfect effectiveness as previously presented in ASU 2020-04. The amendments in this update are effective
for us immediately and may be applied through December 31, 2022. The adoption of this update is not expected to have a material
impact on our consolidated financial position and results of operations.
In
December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes ,
to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect
the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes
the enactment date. The amendments in this update will be effective for us beginning with fiscal year 2021, with early adoption
permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must
be applied on a retrospective or modified retrospective basis. The adoption of the amendments in this update is not expected to
have a material impact on our consolidated financial position and results of operations.
In
October 2020, the FASB issued ASU No. 2020-10 Codification Improvements , to make incremental improvements to U.S. GAAP
and address stakeholder suggestions, including, among other things, clarifying that the requirement to provide comparative information
in the financial statements extends to the corresponding disclosures section. The amendments in this update will be effective
for the Company beginning with fiscal year 2021, with early adoption permitted. The amendments in this update should be applied
retrospectively and at the beginning of the period that includes the adoption date. The adoption of the amendments in this update
is not expected to have a material impact on our consolidated financial position and results of operations.
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment , to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An
entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value
of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination.
Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit
with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform
Step 2 of the goodwill impairment test. The amendments in this update will be effective for the Company beginning with fiscal
year 2023, with early adoption permitted. The adoption of the amendments in this update is not expected to have a material impact
on our consolidated financial position and results of operations.
The
Company does not believe any other recently issued but not yet effective accounting pronouncement, if adopted, would have a material
effect on its present or future consolidated financial statements.
58
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
4 - ACQUISITION
Intelligent
Quality Solutions (“IQS”)
On
December 1, 2019, the Company acquired the customer contracts and trade receivables and assumed certain liabilities of Intelligent
Quality Solutions, Inc. IQS in exchange for a reduction of approximately $691 of the notes receivable from relates parties (Vivos
Group).
The
assets acquired in the IQS asset purchase agreement were acquired by Maslow. The acquisition of IQS allows the Company to strengthen
and expand its IT operations throughout the Midwest U.S. region and expand to markets across the country with talent and software
quality assurance services.
The
consolidated statement of operations for the year ended December 31, 2019 includes one month of IQS operations, which was approximately
$245 of revenue and $6 of net operating loss. The purchase price has been allocated to the assets acquired and liabilities assumed
as of the date of acquisition. All amounts recorded to goodwill are expected to be deductible for tax purposes. The allocation
is as follows:
2019
Accounts receivable
$ 529
Prepaid expenses and other assets
119
Intangible assets
240
Goodwill
451
Liabilities assumed
759
Total net assets acquired
$ 580
Cash
$ 44
Working capital adjustment
67
Total fair value of consideration transferred for acquired business
$ 691
The
allocation of the intangible assets is as follows:
Estimated Fair Value
Estimated
Useful Lives
Customer relationships
$ 41
3 years
Trade name
199
10 years
Total
$ 240
The
Company incurred costs of $6 related to the IQS acquisition. These costs were expensed as incurred in selling, general and administrative
expenses in 2019.
The
following unaudited pro forma financial information includes the results of operations of the Company and is presented as if IQS
had been acquired as of January 1, 2019. The unaudited pro forma information has been provided for illustrative purposes only.
The unaudited proforma information does not purport to be indicative of the actual results that would have been achieved by the
combined companies for the periods presented, or the results that may be achieved by the combined companies in the future. Future
results may vary significantly from the results reflected in the following unaudited pro forma financial information because of
future events and transactions, as well as other factors, many of which are beyond the control of the Company. Net profit was
calculated using an assumed blended tax rate of approximately 28%.
59
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Proforma (unaudited)
2019
Revenues
$ 41,441
Operating Income
1,218
Net Profit
248
NOTE
5 – TRADE RECEIVABLES
Contract receivables consist of the following as of:
2020
2019
Billed receivables
$ 3,630
$ 1,312
Unbilled receivables
241
209
Accounts receivable, factored
2,999
5,508
Total
$ 6,870
$ 7,029
All
of the net trade receivables are pledged as collateral on a loan agreement.
NOTE
6 – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment as of December 31, 2020 and 2019 consists of the following:
2020
2019
Building
$ -
$ 1,856
Land
-
510
Office equipment
63
248
Computer software
107
61
Leasehold improvements
-
6
Operating lease asset
18
18
188
2,699
Accumulated depreciation
(112 )
(216 )
Property, plant and equipment, net
$ 76
$ 2,483
60
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
7 – GOODWILL AND OTHER INTANGIBLE ASSETS
The
Company acquired intangible assets as part of the IQS acquisition during the year ended December 31, 2019 as discussed in Note
4. The Company recorded $518 of goodwill from this acquisition.
Information
regarding purchased intangible assets as of December 31, 2020 is as follows:
Gross Value
Accumulated Amortization
Net Carrying Value
Trade name
$ 199
$ 22
$ 177
Customer relationships
41
15
26
Total
$ 240
$ 37
$ 203
Information
regarding purchased intangible assets as of December 31, 2019 is as follows:
Gross Value
Accumulated Amortization
Net Carrying Value
Trade name
$ 199
$ 2
$ 197
Customer relationships
41
1
40
Total
$ 240
$ 3
$ 237
Trade
name and customer relationships are amortized over 10 and 3 years, respectively. Amortization expense relating to purchased intangible
assets was $33 and $3, for the years ended December 31, 2020 and 2019, respectively.
Estimated
future amortization expense for the next five years and thereafter is as follows:
Years Ending December 31:
2021
$ 34
2022
32
2023
20
2024
20
2025
20
Thereafter
77
Total
$ 203
NOTE
8 - ACCRUED EXPENSES
Accrued
expenses consist of the following as follows:
December 31,
2020
2019
Accrued vendor costs
$ 166
229
Financed insurance payable
133
258
Other
76
61
Accrued expenses
$ 375
$ 548
61
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
9 - INCOME TAXES
Income
tax expense (benefit) for the years ended December 31, 2020 and 2019 are comprised of the following:
2020
2019
Current federal income tax
$ (276 )
$ 246
Current state income tax
46
254
Deferred income tax (benefit)
-
(344 )
Income tax expense (benefit)
$ (230 )
156
Significant
components of the Company’s deferred income tax assets (liabilities) are as follows at:
December 31
2020
2019
Deferred tax assets (liabilities):
Employee accruals
$ 70
$ 74
Cash to accrual
(15 )
(31 )
Accrued workers’ compensation and other
26
33
State deduction
-
7
Acquisition fees
-
14
Sec. 163(j) interest limitation
38
-
Federal and State net operating loss carryforwards
79
-
Deferred tax liabilities:
Intangibles
(5 )
-
Fixed assets
(19 )
(13 )
Deferred income taxes, net
173
85
Valuation allowance
(173 )
(85 )
Deferred tax assets (liabilities)
$ -
$ -
The
income tax provision, reconciled to the tax computed at the statutory federal rate, is as follows:
December 31
2020
2019
Tax expense at federal statutory rate
$ (214 )
21 %
$ 74
21 %
State income taxes, net
(54 )
5.3 %
20
5.7 %
Meals and entertainment
1
-0.1 %
2
0.7 %
Penalties
-
-
5
1.3 %
Nondeductible acquisition costs
-
-
16
4.6 %
Valuation allowance
88
-8.7 %
85
16.7 %
Other, net
(51 )
6.2 %
(46 )
13.3 %
Income tax expense
$ (230 )
22.58 %
$ 156
21.3 %
62
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
10 - DEBT
Convertible
Debt
The
Company had notes payable in the amount of $890 as of December 31, 2019, pursuant to a convertible debt offering that commenced
June 13, 2019. The offering was conducted pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and the rules
promulgated thereunder. Pursuant to this agreement, the Company issued to each individual a warrant for 0.5 shares of Company
Common Stock and a convertible promissory note of same date in the initial principal amount of $50, in exchange for $50. The notes
bore interest at 12% per year with the balance becoming due within 1 year from the issuance date unless earlier converted into
shares of Company Common Stock upon the issuance by Reliability of Company Common Stock for gross proceeds of at least $5,000.
Since this did not happen and the Company did not have Common Stock available to convert into these, notes were paid in full as
they became due over a 3-month period between June 2020 and September 2020.
Warrants
can only be redeemable if the proceeds of $5,000 are secured.
Tax
Liabilities
When
MMG was initially acquired by Vivos Holdings, LLC in December 2016, the Company’s corporate status was changed from an S
Corp to a C Corp due to its new ownership structure. This triggered an accelerated tax event, a $215 estimated annual impact per
year for 4 years which was accounted for in subsequent tax returns through 2019. As of December 31, 2020, the Company’s
overall tax liability was $292 which include tax liabilities for 2018, 2019 from completed tax returns and loss carryback provisions
for 2020.
Factoring
Facility
Triumph
Business Capital
On
November 4, 2016, the Company entered into a factoring and security agreement with Triumph Business Capital (“Triumph”).
Pursuant to the agreement, the Company received advances on its accounts receivable (i.e., invoices) through Triumph to
fund growth and operations. The proceeds of this agreement were used to pay operating costs of the business which include employee
salaries, vendor payments and overhead expenses. On January 5, 2018, the agreement was amended to lower the factoring fee and
interest rate for a term of one year. The agreement was amended again on January 19, 2018, to increase the maximum advance rate
to $5,500. In January 2020, a new agreement was negotiated with Triumph lowering advance rate from 18 basis points to 15 and the
interest rate from prime plus 2.5% to prime plus 2%. The amount of an invoice eligible for sale to Triumph went from 90% to 93%.
The agreement which previously renewed annually, is now month to month. The Company continues to be obligated to meet certain
financial covenants in respect to invoicing and reserve account balance.
In
accordance with the agreement, a reserve amount is required for the total unpaid balance of all purchased accounts multiplied
by a percentage equal to the difference between one hundred percent and the advanced rate percentage. As of December 31, 2020,
the required amount was 10%. Any excess of the reserve amount is paid to the Company on a weekly basis, as requested. If a reserve
shortfall exists for a period of ten-days, the Company is required to make payment to the financial institution for the shortage.
Wilco
Capital Management
In
order to be able to factor IQS invoices after the IQS asset acquisition as discussed in Note 4, the Company took on a factoring
relationship with Wilco Capital Management (formerly known as First Avenue Funding, LLC) (“Wilco”). The original agreement
was signed on January 7, 2019 with a minimum monthly volume of $125 with a maximum advance of $500 for a term of one year. The
advanced rate was 90% of eligible accounts receivable (as defined by the agreement) and a finance rate of 1.275% per month and
adjusted with any increase to the prime rate. As of December 31,
2019, the outstanding balance was $479. This relationship ended on March 31, 2020, when Triumph bought out this factoring relationship.
63
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Accounts
receivable were sold with full recourse. Proceeds from the sale of receivables were $13,787 and $29,367 for the years ended December
31, 2020 and 2019, respectively. The total outstanding balance under the recourse contract was $2,999 and $5,508 as of December
31, 2020 and 2019, respectively.
The
Factoring Facility is collateralized by substantially all the assets of the Company. In the event of a default, the Factor may
demand that the Company repurchase the receivable or debit the reserve account. Total finance line fees for the years ended December
31, 2020 and 2019 totaled $65.
PPP
Loan Payable
On
April 29, 2020, MMG was approved for a $5,216 loan through the Paycheck protection Program (the “PPP”) with a term
of two (2) years and an interest rate of 1% per annum. The PPP provides that the Company may apply for forgiveness of this loan
if the loan proceeds were used for payroll and certain other specified operating expenses while maintaining specified headcount
requirements. The accrued interest on the PPP loan as of December 31, 2020 was $34.
On
June 5, 2020, the Paycheck Protection Program Flexibility Act (the “PPPF Act”) went into effect providing more flexibility
to participants in the PPP which included extending the time to begin repayment of the PPP loan until the amount of forgiveness,
if any, is determined, which could be as late as December 31, 2020. The Company may apply for forgiveness earlier if they determine
that doing so will maximize the amount of loan forgiveness (see Note 17).
Other
Debt
In
February 2020, the Company took out a $250 6-month term loan from Triumph at 10% per annum, in order to meet the Company’s
cash obligations (“Triumph Term Loan”). On April 7, 2020, in the face of the COVID 19 lockdown, Triumph offered a
2-month payment holiday and to extend the note payment, which ultimately was agreed to end in February 2021. As of December 31,
2020, $37 was outstanding under the Triumph Term Loan Arrangement.
NOTE
11 – VARIABLE INTEREST ENTITY (VIE)
In
December 2019, the Company’s executive management learned that prior to the Merger, in January 2017, one of the Company’s
related parties, on behalf of Maslow, executed a guarantee of obligations of Vivos Real Estate Holdings, LLC (“VREH”),
under a mortgage loan for the purchase of the property at 22 Baltimore Rd., Rockville, Maryland. Maslow leased this space on market
terms. This obligation had not been included in Maslow’s financial statements and were not separately disclosed prior to
the Merger.
U.S.
GAAP requires the Company to assess whether VREH is a variable interest entity (“VIE”) because Maslow (i) share common
shareholders who may or may not have significant influence or control, (ii) is a guarantor of the mortgage loan, (iii) is the
sole lessee under a lease where the landlord is an affiliate of the Company, and (iv) has no other business in VREH.
A
VIE is a legal business structure (such as a corporation, partnership, or trust) that:
●
does
not provide equity investors with voting rights; or
●
the
equity investors do not have sufficient financial resources to meet the ongoing operating needs of the business. This is referred
to as a thinly capitalized structure.
64
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Although
the Company had neither any decision-making authority over VREH, nor financial interest in the operations of VREH, the Company
was required to consolidate its financial statements with those of VREH for the reasons mentioned above, as it was considered
the primary beneficiary of the VIE.
Due
to a lack of cooperation from VREH, the Company had not been able to acquire financial information about this entity for consolidation
purposes prior to 2019. As a result, the Company has consolidated this entity for 2019.
The
assets and liability of the consolidated VIE were comprised of the following:
2019
Building
$ 1,856
Office equipment
185
Land
510
Accumulated depreciation
148
Liabilities assumed
1,790
Total net assets consolidated
$ 613
In
addition, the related party note receivable with the VIE in the amount of $772 was eliminated in 2019.
The
potential financial exposure to loss as a guarantor could equal all the book value of the related party mortgage loan payable,
a total of approximately $1,745 as of December 31, 2020, with $126 due within the next year. VREH is currently three months behind
on payments. To date, the Company has not been called on for any loan repayment guarantee. The Company believes there is adequate
equity in the property should the bank decide to foreclose, and the Company decides not to make past due payments.
The
Company terminated the lease of the property at 22 Baltimore Road effective April 30, 2020. As a result, VREH was considered a
VIE for only four months of the 2020 fiscal year.
See
Note 14 for details on the related party notes receivable.
NOTE
12 – COMMITMENTS AND CONTINGENCIES
The
Company is engaged from time to time in legal matters and proceedings arising out of its normal course of business. The Company
establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company
has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably
possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss,
or include a statement that no estimate of the loss can be made.
65
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
On
September 28, 2018, Credit Cash filed a complaint against Maslow, Vivos Holdings, Vivos Acquisitions, LLC, Mr. Doki,
Mrs. Valleru (the “Parties”) and other defendants in the United States District Court for the District of New
Jersey for, among other things, breach of contract of the Maslow and HRCN Credit Facilities and their respective guaranties in
relation to the November 15, 2017 agreement (the “DNJ Action”). On October 30, 2018, Credit Cash filed a motion to
intervene in an action pending in New York State, Monroe County, filed by HCRN and LE Finance, LLC against the Parties and other
defendants (“NY State Action”). On December 10, 2018, the Parties entered into a settlement agreement for the purpose
of settling certain claims related to the DNJ Action only. Pursuant to the settlement agreement, certain repayment terms were
agreed upon between Credit Cash and the Parties, but Credit Cash did not relinquish the right to pursue any claims related to
the NY State Action, nor to pursue any remedies against any of the parties in relation to the November 15, 2017 agreement. Because
the Parties acknowledged and agreed, that the Credit Cash relationship benefitted Parties other than Maslow, certain of the Parties
and their related parties, executed and delivered to the Company that certain Agreement for the Contingent Liquidation of the
Common Stock of Maslow Media Group, Inc., dated as of October 28, 2019 (the “Liquidation Agreement”). Pursuant to
the Liquidation Agreement the parties thereto pledged shares of Company Common Stock to Maslow to be used to obtain releases from
the Lenders defined therein, including Credit Cash and its affiliates. The Liquidation Agreement permits Maslow to either transfer
the shares to the Lenders in satisfaction of the outstanding obligations or to arrange for the sale of the shares and using the
cash to satisfy such obligations.
On
October 9, 2018, Maslow Media Group, Inc. was named as a defendant in an Affidavit of Confession of Judgment filed in the Supreme
Court of the State of New York in relation to a case brought by Hop Capital, which the defendants collectively agree to pay a
sum of $400 to Hop Capital. Maslow Media Group, Inc. is named as one defendant among six other defendants, all of which are entities
related to the Vivos Group. The claim brought by Hop Capital against the defendants in this case is in relation
to a Merchant Agreement dated October 4, 2018; an agreement to which Maslow Media Group, Inc. was not a party. As such, Maslow
Media Group, Inc. contends that being named in the Affidavit of Confession of Judgment as a defendant was made in error and is
currently seeking to have its name removed from Affidavit of Confession of Judgment as a defendant. As of March 2021, we have
not been contacted again on this matter, nor have we been notified on any developments The Company will defend itself from this
case.
On
or about February 17, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland
against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and Naveen Doki, to enforce Maslow’s rights under certain promissory
notes and a personal guarantee made by the defendants. The case is proceeding. The Company believes that it will be granted a
judgment in its favor. The Company intends to continue to vigorously prosecute this litigation.
On February 28,
2020, Healthcare Resource Network, LLC filed a complaint against Maslow in the Circuit Court of Montgomery County, Maryland alleging
that Maslow participated with the Vivos Group to financially harm the plaintiff. The plaintiff has not specified any alleged damage
caused by Maslow and the Company believes any claims are without merit. The Company will defend itself from this case.
On March
16th, 2020, CC Business Solutions, a division of Credit Cash NJ, LLC domesticated a foreign judgement in the Montgomery County
Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions,
LLC, Naveen Doki and Silvija Valleru. This foreign judgement relates to Vivos Holdings adding Maslow Media Group as a guarantor
on a loan made to Health Care Resources Network which is in default by HCRN and Vivos Holdings. Foreign judgement total
is $820. This judgement relates to the default on the settlement agreement dated December 10, 2018 referenced above.
On May
5th, 2020, Libertas Funding, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care
Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Vivos IT, LLC, Vivos Global Services,
LLC, Alliance Micro, Inc. and Naveen Doki. This foreign judgement from the State of New York relates to loans the Vivos
Group took out by adding Maslow Media Group additional collateral. This loan is currently in default. Foreign Judgement
total is $229.
On May
5th, 2020, Kinetic Direct Funding domesticated a foreign judgement in the Montgomery County Circuit Court system again Health
Care Resources Network (HCRN), Maslow Media Group, US IT Solutions Inc., 360 IT Professionals, Alliance Micro, Inc. and Naveen
Doki. This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding Maslow Media
Group as additional collateral. This loan is currently in default. Foreign Judgement total is $579.
On May
5th, 2020, Libertas Funding, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care
Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Vivos IT, LLC, Vivos Global Services,
LLC, Alliance Micro, Inc. and Silvija Valleru. This foreign judgement from the State of New York relates to loans the Vivos
Group took out by adding Maslow Media Group additional collateral. This loan is currently in default. Foreign Judgement
total is $229.
On
or about May 6, 2020, the Defendants filed with the Circuit Court of Montgomery County, Maryland a Counterclaim and Third-Party
Complaint for Damages, Declaratory and Injunctive Relief and Jury Demand (the “Counterclaim”), The Company believes
that the Counterclaim has no merit. The Company will vigorously defend itself and its indemnified officers, directors and other
parties as permitted by the Company’s organizational documents. The Company and the other Counterclaim defendants have moved
to have the Debt Collection Suit and the Counterclaim stayed pending the outcome of the Arbitration described below. Trial on
this matter is scheduled for March 2021.
On
or about June 5, 2020, the Company submitted a Claimant’s Notice of Intention to Arbitrate and Demand for Arbitration
(the “Arbitration”) with the American Arbitration Association in New York, and to the Respondents thereto: Naveen
Doki; Silvija Valleru; Shirisha Janumpally (individually and in her capacity as trustee of Judos Trust); Kalyan Pathuri (individually
in his capacity as trustee of Igly Trust) and Federal Systems (the “Respondents”). The Arbitration alleges that the
Respondents breached the Merger Agreement in a number of significant respects and committed fraud in connection with the Merger.
The Company is seeking damages which if granted will likely be the remedy set forth within the Merger Agreement which is in whole
or in part shares of Company Common Stock received by the Respondents in connection with the Merger. The Company has brought a
motion to compel the Arbitration which is currently being decided by the Federal Courts in New York. The Company believes a strong
basis for the motion exists, but no assurance can be given that it will be granted. Regardless, the Company intends to pursue
claims under the Merger Agreement in whatever venue is required.
On
June 12, 2020, Igly Trust, a Vivos entity, asked the Texas court for an injunction requiring the Company to provide a shareholder
list and to hold a shareholder meeting. On October 20, 2020, the Texas court denied the injunction but, incongruously, dismissed
all the Vivos plaintiffs for lack of personal jurisdiction. The Company appealed the dismissal because the court had jurisdiction
over Igly Trust once it made affirmative claims in Texas and because the Court’s order denying the injunction is an important
precedent for establishing that the directors under Texas law retain control of shareholder lists and determining the timing of
shareholder meetings.
On
December 23, 2020, at a hearing in the Maryland District Court, a motion by the Vivos Group to compel a shareholder
meeting was summarily dismissed. The judge agreed with the Company that permitting the Vivos Group to vote their
shares at a meeting of shareholders could materially harm the interests of the Company as a whole, its employees and minority
shareholders. This judge will be presiding over a full trial regarding these matters over a two-week period starting on October
4, 2021, absent any COVID-19 disruptions that could affect scheduling.
NOTE
13 - EQUITY
The
Company’s authorized capital stock consists of 300,000,000 shares of common stock, with no par value. All authorized shares
of Company Common Stock are issued and outstanding.
NOTE
14 - RELATED PARTY TRANSACTIONS
Stock
Purchase Agreement
On
November 9, 2016, Vivos Holdings LLC ( “ Vivos ” ), a related party affiliate and former owner
of Maslow Media Group, acquired 100% of the Company through a stock acquisition exchange for a purchase price of $1,750. $1,400
was paid at settlement with proceeds from the Company and also entered into a promissory note to pay the remaining $350. The promissory
note was to be paid in twenty-four equal installments, including interest at 4.5%, in the amount of approximately $15, commencing
six months after closing with the last payment on March 1, 2019; these payments were paid by the Company on behalf of the Vivos
Holdings. Vivos Holdings subsequently entered into a promissory note receivable with the Company, described below,
for the full stock purchase price.
66
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
Notes
Receivable
The Company has notes receivable from Vivos
Holdings and VREH, a member of the Vivos Group, both related party affiliates.
In connection with the stock purchase agreement
noted above, on November 15, 2016, the Company executed a promissory note receivable with Vivos Holdings in the amount
of $1,400. As defined by the agreement, the loan consists of two periods, whereby the first period from November 15, 2016 until
September 30, 2018, no principal or interest payments were required. Interest will accrue monthly and a new loan in the amount
of $1,773 will be subject to a second loan period. During the second loan period, interest shall be paid in 20 equal consecutive
payments, quarterly. Principal plus any unpaid interest is due September 20, 2023. Interest during both loan periods accrues at
a rate of 2.5%. Additionally, monthly payments of $15 are made on behalf of Vivos Holdings to the seller by the Company.
These payments, plus any other payments made by the Company on behalf of Vivos Holdings, are added to the principal balance
of the promissory note receivable. In 2018, all quarterly interest payments to be made in phase 2 were offset by the management
fees due to Vivos Holdings. As of December 31, 2020, and 2019, the total outstanding balances were $2,736 and $2,666,
which includes accrued interest receivable of $229 and $162, respectively.
On November 15, 2017, the Company executed
an intercompany promissory note receivable with VREH in the amount of $772. As defined by the agreement, the loan consists of
two periods, whereby the first period from November 15, 2017 until March 31, 2018, no principal or interest payments are required.
During the first loan period, interest accrued monthly and a new loan amount of $781 will be subject to a second loan period.
During the second period, interest is payable in 20 equal consecutive installments and the principal balance plus accrued and
unpaid interest is due March 31, 2023. Interest during both periods accrues at a rate of 3.5% annually. In 2018, all quarterly
interest payments to be made in Phase 2 were offset by the management fees due to Vivos Holdings. In addition, principal
payments totaling $30 were made by Vivos Holdings. As of December 31, 2020, and 2019, the total outstanding balance was
$753 and $772, respectively.
On June 12, 2019, Maslow entered into
a Personal Guaranty agreement with Mr. Doki, pursuant to which Mr. Naveen Doki personally guaranteed to Maslow the repayment of
$3,000 of the balance of the Promissory Note issued to Vivos on November 15, 2017 within the 2019 calendar year via cash, stock,
or other business assets acceptable to the Company. Mr. Doki is a 5% or greater beneficial holder of Company Common Stock, and
therefore is a related party. As of February 2020, the Company filed a lawsuit against the majority stockholder, pursuant to the
personal guaranty agreement for defaulting on the outstanding notes receivables.
In summary the Vivos Holdings receivable
totaled $4,169 on December 31, 2019 which included $2,007 of additional borrowings over the period between November 2016 and December
31, 2109. As of December 31, 2020, the receivable totaled $4,258.
67
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
On
September 5, 2019, Maslow entered into a Secured Promissory Note agreement with Vivos Holdings, pursuant to which Maslow
issued a secured promissory note to Vivos in the principal amount of $750. The note bears interest at 2.5% per year and requires
Vivos Holdings to make monthly payments to Maslow of $10 beginning December 1, 2019, with balance due and payable on November
1, 2026. Upon an event of default, which occurs upon failure of Vivos Holdings to make any monthly payment due under the
terms of the note, Maslow has the right to declare the entire unpaid balance of the note due and payable. The note is secured
by 30,000,000 shares of Company Common Stock, which is due and payable upon a default by Vivos, which occurs upon failure of Vivos
to make any monthly payment due under the terms of the note. In addition, both Naveen Doki and Silvija Valleru personally guaranty
the repayment of the note by Vivos Holdings. Naveen Doki and Silvija Valleru are beneficial owners of Vivos Holdings
and are also 5% or greater beneficial owners of Company Common Stock. As of December 31, 2020, and 2019, the total
outstanding balance was $769 and $752, respectively which includes interest of $19 and $2 respectively.
Debt
Settlement Agreements
On July 10, 2018, Vivos Holdings
executed a receivable financing agreement with a financial institution and agreed to remit $670 of accounts receivable over a
six-month period through daily remittances of $5 in exchange for $485. The agreement is guaranteed by Vivos Holdings, both
shareholders and Maslow. In October 2018, Vivos defaulted on the agreement and on October 25, 2018, executed a settlement agreement
whereby Maslow was to pay the outstanding balance over eleven installments with the final amount due August 31, 2019. The total
outstanding balance as of December 31, 2018 was $212. As of December 31, 2020, and 2019, there was no outstanding balance
due.
On July 5, 2018, Vivos Holdings executed
a receivable financing agreement with a financial institution whereby Vivos Holdings agreed to remit $556 of accounts receivable
over a six-month period through daily remittances of $4 in exchange for $400. The agreement was guaranteed by Vivos Holdings,
it’s shareholders and the Company. In October of 2018, Vivos Holdings defaulted on the agreement and on January
24, 2019, executed a settlement agreement whereby the Company is to pay the outstanding balance over eight installments with the
final amount due August 31, 2019. On July 10, 2018, the Company (as a “merchant”) and Vivos Holdings (as a
“owner/guarantor”) entered into a receivable financing agreement with Kinetic Direct Funding LLC pursuant to which
the Company and Vivos Holdings agreed to remit $670 of the Company’s accounts receivable over a six-month period
through daily remittances of $5 in exchange for $485 (the “Kinetic Financing Agreement”). The agreement is guaranteed
by Vivos Holdings as well as Naveen Doki in his individual capacity, and an owner of Vivos Holdings. In October
of 2018, there was a default under the Kinetic Financing Agreement by Vivos Holdings. On October 25, 2018, the Company,
Naveen Doki, Silvija Valleru, and Vivos Holdings (among other entities) entered into a settlement agreement with Kinetic
Direct Funders LLC in relation to default of the Kinetic Financing Agreement whereby the Company is to pay the outstanding balance
over eleven installments with the final amount due August 31, 2019. On April 10, 2019, the settlement agreement was amended extending
the remaining payment term to July 15, 2020. The Company has a binding and enforceable agreement with certain shareholders permitting
the Company to liquidate up to the full amount of the Company’s equity held by such shareholders in order to satisfy the
shareholders’ obligations under the Settlement Agreements. As of October 31, 2019, the Company has paid its portion of the
outstanding balance due under the settlement agreement in full.
On August 10, 2017, Vivos Holdings executed
a receivable advance agreement with Argus Capital Funding. The Company received a net advance of $487 in exchange for $705 of the Company’s
accounts receivable. Included in this loan is a fee of $218. The agreement was refinanced on November 15, 2017, when Vivos Holdings,
and Vivos Acquisitions, LLC, via Mr. Naveen Doki and Mrs. Silvija Valleru entered into an agreement with CC Business
Solutions, a division of Credit Cash NJ, LLC (“Credit Cash”) pursuant to which Credit Cash advanced to the Company $600 in
exchange for $780 of the Company’s accounts receivable, to be repaid fully by approximately May 20, 2019 (the “Maslow Credit
Facility”).
68
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
In
addition, pursuant to the same agreement, Credit Cash advanced to Healthcare Resource Network, a company owned by the Vivos Group
(“HCRN”) a credit facility in the principal amount of $1,005 (“HCRN Credit Facility”). Each of Maslow, Vivos
Holdings, Vivos Acquisitions, LLC, Mr. Naveen Doki and Mrs. Silvija Valleru guaranteed the HCRN Credit Facility.
To secure repayment of their guarantee obligations, the Company and Vivos Holdings granted to Credit Cash a security interest
in all their assets. On September 14, 2018, the Company defaulted on the Maslow Credit Facility. In addition, on same date, the HCRN
Credit Facility went into default. As a result, repayment on both facilities was accelerated, with the full balance for each becoming
immediately due and payable. On December 10, 2018, the Company, Vivos Holdings, Vivos Acquisitions, LLC, Mr. Doki, and
Mrs. Valleru and Credit Cash entered into a settlement agreement in connection the November 15, 2017 agreement to govern the terms
of the repayment of the HCRN Credit Facility and Maslow Credit Facility. Pursuant to the settlement agreement, the Company agreed to
pay $10 per week until the entire balance of the Maslow Credit Facility was paid off. Pursuant to a subsequent agreement dated May 17,
2019 not involving the Company, Vivos Holdings and Vivos Acquisitions, LLC agreed to fully repay the HCRN Credit Facility via
quarterly payments beginning June 30, 2019. The HCRN Credit Facility is still being repaid by Vivos Holdings, and as of October
29, 2019, has an outstanding balance of approximately $635. The Company has a binding and enforceable agreement with certain shareholders
permitting Maslow to liquidate up to the full amount of Maslow equity held by such shareholders in order to satisfy the shareholders’
obligations under the Settlement Agreements. As of December 31, 2019, the Company had repaid the outstanding balance due for the Maslow
Credit Facility under the settlement agreement in full.
Related
Party Relationships and Transactions
On
October 29, 2019, prior to the Merger, pursuant to the Merger Agreement, Naveen Doki and Silvija Valleru became beneficial owners of
206,606,528 and 51,652,908 shares of RLBY Common Stock, respectively, equal to 68.9% and 17.2% of the total
number of shares of RLBY Common Stock outstanding after giving effect to the Merger, respectively. The Company is seeking damages
which if granted will likely be the remedy set forth within the merger agreement which is primarily the relinquishment in whole or in
part shares of Company Common Stock received by the Respondents in connection with the Merger.
On
June 27, 2019, prior to the Merger, Maslow entered into a Securities Purchase Agreement with Hawkeye Enterprises, Inc., a company
owned and controlled by Mark Speck, an officer and then director of the Company. Pursuant to this agreement, Maslow issued to
Hawkeye Enterprises 16,323 (on a post-Merger basis) shares of Company Common Stock, a warrant (as defined below) for 81,616 (on
a post-Merger basis) shares of Company Common Stock and a convertible promissory note of same date in the initial principal amount
of $50, in exchange for $50. The note bore interest at 12% per year, with the balance of $56 paid in full on June 26, 2020.
On
July 31, 2019, prior to the Merger, the Company entered into a Securities Purchase Agreement with the same officer and then director
discussed above. Pursuant to this agreement, the Company issued to this individual a Warrant for 81,616 (on a post-Merger basis)
shares of Company Common Stock and a convertible promissory note of same date in the initial principal amount of $50, in exchange
for $50. The note bore interest at 12% per year, with balance of $56 paid in full on August 4, 2020.
69
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
On
July 31, 2019, prior to the Merger, the Company entered into a Securities Purchase Agreement with Nick Tsahalis, an executive
officer and director of the Company. Pursuant to this agreement, the Company issued to this individual 32,646 (on a post-Merger
basis) shares of RLBY Common Stock, and a Warrant to purchase 16,323 (on a post-Merger basis) shares of the RLBY Common Stock,
and a Convertible Promissory Note of same date in the initial principal amount of $100, in exchange for $100. The note bore interest
at 12% per year, with balance of $112 becoming due and paid on July 31, 2020.
On
September 18, 2019, in anticipation of the closing of the Merger and intending that it be assumed by Maslow after the closing
of the Merger, Hawkeye entered into a letter of intent (the “LOI”) regarding the potential acquisition of a complementary
business. Maslow was then prohibited from entering into the LOI directly. In connection with the LOI, Hawkeye paid a non-refundable
deposit of $75 with the understanding that after the closing of the Merger, the LOI would be assigned to the Company and the Company
would reimburse Hawkeye for the deposit. On October 17, 2019, Hawkeye assigned, and Maslow agreed to assume the LOI and reimbursed
Hawkeye for the deposit. The reimbursement took place on May 8, 2020 and totaled $83.
The
term “warrant” herein refers to warrants issued by Maslow and assumed by RLBY as a result of the Merger. The terms
of all Warrants are the same other than as to the number of shares covered thereby. The Warrant may be exercised at any time or
from time to time during the period commencing at 10:00 a.m. Eastern time on first business day following the completion of the
Qualified Financing (as defined below) and expiring at 5:00 p.m. Eastern time on the fifth annual anniversary thereof (the “Exercise
Period”). For purposes herein, a “Qualified Financing” means the issuance by the Company, other than certain
excluded issuances of shares of Common Stock, in one transaction or series of related transactions, which transaction(s) result
in aggregate gross proceeds actually received by the Company of at least $5,000. The exercise price per full share of RLBY Common
Stock shall be 120% of the average sale price of the RLBY Common Stock across all transactions constituting a part of the Qualified
Financing, with equitable adjustments being made for any splits, combinations or dividends relating to the RLBY Common Stock,
or combinations, recapitalization, reclassifications, extraordinary distributions and similar events, that occur following one
transaction constituting a part of the Qualified Financing and prior to one or more other transactions constituting a part of
the Qualified Financing (the “Exercise Price”).
Convertible
note warrants were not valued and included as liability on balance sheet because of uncertainty around their pricing, value and
low probability at this juncture in receiving the $5,000 trigger.
NOTE
15 - EMPLOYEE BENEFIT PLAN
The
Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible full-time employees.
The 401(k) Plan allows employees to make contributions subject to applicable statutory limitations. The Company currently does
not match employee contributions.
70
RELIABILITY,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands)
NOTE
16 - BUSINESS SEGMENTS
The
Company operates within three industry segments: EOR, Recruiting and Staffing, and Video and Multimedia Production. The EOR segment
provides media field talent to a host of large corporate customers in all 50 states. The Recruiting and Staffing segment provides
skilled Media and IT field talent on a nationwide basis for customers in a myriad of industries. The Video and Multimedia Production
segment provides Script to Screen services for corporate, government and non-profit clients, globally.
Segment
operating income includes revenue and cost of services only. Currently, the Company is not allocating sales, general and administrative
costs at the segment level.
The
following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results for the
periods indicated:
December 31
2020
2019
Revenue:
EOR
$ 23,564
$ 34,452
Recruiting and Staffing
4,478
2,190
Video and Multimedia Production
1,125
1,641
Other
35
161
Total
$ 29,202
$ 38,444
NOTE
17- SUBSEQUENT EVENTS
The
Company has evaluated subsequent events after the balance sheet date of December 31, 2020 through March 16, 2020, the date on
which the consolidated financial statements were available to be issued. Based upon this evaluation, management has determined
that no material subsequent events have occurred that would require recognition in or disclosures in the accompanying consolidated
financial statements, except as follows:
On
March 4, 2021, Maslow Media Group submitted an application with the SBA for 100% forgiveness of its PPP loan payable.
71
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
Principal Executive Officer and Principal 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 Officer and Principal Financial
Officer concluded that the disclosure controls and procedures as of the end of the period covered by this report were effective
such that the information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and
communicated to the Principal Executive Officer and Principal 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.
Management’s
Annual Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance
with accounting principles generally accepted in the United States.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
The
Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2020. Based on this evaluation, the Principal Executive Officer and Principal Financial
Officer concluded that, as of December 31, 2020, internal control over financial reporting was effective.
The
consolidated financial statements of the Company for 2020 have been audited by the independent registered public accounting firm
of Ramirez Jimenez International CPAs who were given unrestricted access to all financial records and related data, including
minutes of all meetings of stockholders and the Board of Directors. This annual report does not include an attestation report
from the independent registered public accounting firm regarding internal control over financial reporting. Management’s
report was not subject to attestation by the independent registered public accounting firm pursuant to rules of the Securities
and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes
in Internal Control Over Financial Reporting
There
have not been any changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) promulgated under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
ITEM
9B. OTHER INFORMATION.
None.
72
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Board
Composition
Our
board of directors consists of four directors. Our board of directors has determined that the following directors are “independent”
as defined under the rules of the OTC American: Hannah Bible, Louis Parks, and John Chanaud. On November 13, 2019, Hannah Bible
was nominated and assumed the role of Chairperson. The authorized number of directors may be changed by resolution of our board
of directors amending the applicable by-law provision. Vacancies on our board of directors can be filled by resolution of our
board of directors.
Board
Leadership and Role in Risk Oversight
Meetings
of our board of directors are presided over by our chairperson of the board, Hannah Bible. Our board of directors believes that
Hannah Bible is currently best situated to preside over meetings of our board of directors because of her familiarity with SEC
regulations, board protocols, our staffing business and ability to effectively identify strategic priorities and lead the discussion
and execution of our strategy.
Our
board of directors oversees the risk management activities designed and implemented by our management and executes its oversight
responsibility for risk management directly. The full board of directors also considers specific risk topics, including risks
associated with our strategic plan, business operations and capital structure. In addition, our board of directors receives detailed
regular reports from members of our executive management who are also board members that include assessments of risk, exposures,
and plans for mitigation.
Our
other board of directors’ committees also consider and address risk as they perform their respective committee responsibilities.
All committees report to the full board of directors as appropriate, including when a matter rises to the level of a material
or enterprise level risk.
Committees
of the Board of Directors
The
standing committees of our board of directors consist of an Audit Committee and a Compensation Committee. Each of the committees
reports to our board of directors as they deem appropriate and as our board may request. The composition, duties and responsibilities
of these committees are set forth below.
73
Audit
Committee
The
Audit Committee is responsible for, among other matters: (1) appointing, retaining and evaluating our independent registered public
accounting firm and approving all services to be performed by them; (2) overseeing our independent registered public accounting
firm’s qualifications, independence and performance; (3) overseeing the financial reporting process and discussing with
management and our independent registered public accounting firm the interim and annual financial statements that we file with
the SEC; (4) reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls and compliance
with legal and regulatory requirements; (5) establishing procedures for the confidential anonymous submission of concerns regarding
questionable accounting, internal controls or auditing matters; (6) reviewing and approving related person transactions; and (7)
overseeing the risk management process.
Our
Audit Committee consists of John Chanaud (Chairman), Hannah Bible and Louis Parks. We believe that each qualifies as independent directors
according to the rules and regulations of the SEC and OTC American with respect to audit committee membership. We also believe that Mr.
Chanaud qualifies as our “audit committee financial expert,” as such term is defined in Item 407(d)(5)(ii) of Regulation
S-K. Our board of directors has adopted a written charter for the Audit Committee, which is available on our corporate website under
the investor relations tab at www.maslowmedia.com. The information on our website is not part of this Annual Report on Form 10-K.
Compensation
Committee
The
Compensation Committee is responsible for, among other matters: (1) reviewing key team members compensation goals, policies, plans
and programs; (2) reviewing and approving the compensation of our directors and executive officers; and (3) reviewing and approving
employment agreements and other similar arrangements between us and our executive officers. The Committee shall have the authority
to delegate any of its responsibilities, along with the authority to act in relation to such responsibilities, to one or more
subcommittees as the committee may deem appropriate in its sole discretion. The Compensation Committee may invite such members
of management to its meetings as it deems appropriate. However, the Compensation Committee meets regularly without such members
present, and in all cases no officer may be present at meetings at which such officer’s compensation or performance is discussed
or determined. The Committee has the authority, in its sole discretion, to select, retain and obtain the advice of a compensation
consultant as necessary to assist with the execution of its duties and responsibilities. Neither the Compensation Committee nor
management engaged a compensation consultant with respect to Fiscal 2020.
Our
Compensation Committee consists of Hannah Bible, Louis Parks and John Chanaud. Our board of directors has adopted a written charter
for the Compensation Committee.
Nominating
and Corporate Governance Committee
The
Nominating and Corporate Governance Committee is charged with the responsibility of ensuring a corporate governance framework
is in place and provides oversight and guidance thereof, while also attracting and securing top talent for leadership positions.
The
Committee is responsible for the following Nomination activities; (1) review our policies and ensure they are equipped with clear
selection criteria; (2) determine criteria for director and executive officer qualifications (3) recommend to the Board candidates
for election by the Board to fill vacancies occurring on the Board or corporate officers; (4) Consider stockholders’ nominees
in accordance with applicable rules and regulations and develop procedures regarding the nomination process as required by the
federal securities laws and the rules and regulations of the SEC and Nasdaq; (5) Make recommendations to the Board concerning
the selection criteria to be used by the Nominating and Corporate Governance Committee in seeking nominees for election to the
Board; and (6) Assist in attracting qualified candidates to serve on the Board and interview and otherwise assist in the screening
of such candidates
The
Committee is responsible for the following Corporate Governance Matters:(1) Develop and recommend to the Board corporate governance
guidelines applicable to the Company; (2) Review board size, composition and structure; (3) oversee areas of authority, segregation
of duties; checks and balances; political spending, diversity, corporate social responsibility, communications, proxy filings
and other stakeholder areas. (4) Review any issues relating to conflicts of interests and (in conjunction with the Audit Committee
of the Board as necessary or appropriate) all related party transactions in accordance with SEC and Nasdaq requirements, and report
the same to the Board; and (5) perform annual board evaluations;
Other
Committees
Our
board of directors may establish other committees, including a Strategic Advisory Committee, as it deems necessary or appropriate
from time to time.
Family
Relationships
There
are no family relationships among any of our executive officers or any of our directors.
74
Directors
Hannah
Bible
Independent
Director and Chairwoman,
Age:
40
Director
Since: 2014
Committees
Served: Compensation Committee (Chair), Audit Committee, Nominating and Corporate Governance Committee
Hannah
M. Bible is a Director of the Company and has served in such capacity since April 25, 2014. Ms. Bible is Vice President of Legal
at Digirad Corporation (“DRAD”) since October 2019. She has also served the subsidiaries of DRAD as Chief Financial
Officer and in-house counsel to Lone Star Value Management, LLC (“Lone Star Value Mgmt.”), and VP-Finance to ATRM
Holdings, Inc. since April 2019. Ms. Bible has over 15 years of combined legal and accounting experience across a variety of industries.
From May 2016 through August 2017 Ms. Bible served on the board of Crossroads Systems, Inc. (NASDAQ: CRDS, now OTC: CRSS), a data
storage company. Prior to joining Lone Star Value Mgmt. in June 2014, Ms. Bible was the Director of Finance/CFO at Trinity Church
in Greenwich, CT. From October 2011 to December 2012, Ms. Bible served as a legal advisor to RRMS Advisors, a company providing
advisory and due diligence services to banking and other institutions with high-risk assets. From June 2009 to December
2013, Ms. Bible advised family fund and institutional clients of International Consulting Group, Inc., and its affiliates within
the Middle East on matters of security, corporate governance, and U.S. legal compliance. From 2006 to 2008, Ms. Bible served within
the U.N. General Assembly as a diplomatic advisor to the Asian-African Legal Consultative Organization, a permanent observer mission
to the United Nations. Ms. Bible has also taught as an Adjunct Professor at Thomas Jefferson School of Law, within the International
Tax and Financial Services program. Prior to this Ms. Bible held various accounting positions with Samaritan’s Purse, a
large $300MM+ 501(c)(3) organization dedicated to emergency relief and serving the poor worldwide. Previously, Ms. Bible served
as a director of AMRH Holdings, Inc. (formerly Spatializer Audio Laboratories). Ms. Bible earned an LLM in Tax from New York University
School of Law, a JD with honors from St. Thomas University School of Law, and a BBA in Accounting from Middle Tennessee State
University.
Louis
Parks
Independent
Director
Age: 60
Director Since: 2020
Committees Served: Audit Committee, Nominating and Corporate Governance Committee (Chair)
Louis
A. Parks is Managing Member at Tyro Capital Management LLC, a New York City-based equity hedge fund, serving as the firm’s
COO and CFO. Mr. Parks has spent over 30 years on Wall Street in various capacities of senior management. His responsibilities
have included overseeing large work forces, managing risk, equity trading, implementing compliance and ethics protocols, client
interface, marketing and revenue production. In addition, he is an investor who focuses on deploying capital and providing expertise
to small companies both independently and through his partnership stake in Metropolitan Business Funding, LLC. Mr. Parks was previously
Senior Managing Director, Head of Equities at CL King & Associates as well as Senior Managing Director, Head of Equity Trading
at Raymond James Financial. Mr. Parks began his career as an institutional equity sales trader covering both domestic and international
accounts for Morgan Stanley & Company, Sanford C. Bernstein & Company and Merrill Lynch & Company.
Mr.
Parks holds Master of Business Administration and Master of Arts degrees from Columbia University, as well as Bachelor of Arts
degrees from Columbia University, magna cum laude, Phi Beta Kappa and New York University, cum laude. In 2000, he established
the Louis A. Parks Fellowship in Classics at the Graduate School of Arts & Sciences at Columbia University to provide scholarship
funding to graduate students studying ancient Greek & Roman history, language and culture.
75
Mr.
Parks serves on several for-profit and not-for-profit boards including Reliability, Inc., Ensconce Capital Advisors, Atlas Health
Holdings, the League Education & Treatment Center (a school for autistic children and adults), Friends of the Bronxville Public
Library (past treasurer and president), the Graduate School of Arts & Sciences Alumni Board at Columbia University (past fundraising
chair and president), the Columbia University Alumni Trustee Nominating Committee (past chair) and The East 86th Street Association.
He
was a recipient of Columbia University’s 2018 Alumni Medal as well as a recipient of the Dean’s Distinguished Alumni
Award in 2010.
John
Chanaud
Independent
Director
Age: 58
Director Since: 2020
Committees Served: Audit Committee (Chair), Compensation Committee, Nominating and Corp Governance Committee
Mr.
Chanaud is Vice President and Chief Financial Officer of The Bernstein Companies an 85-year-old Washington, DC based real estate
development, management and investment firm where his primary responsibility is financial oversight and planning for the
Company, its subsidiaries, and operating divisions. The Bernstein Companies invests in, develops, and operates multi-family properties,
office buildings, hotels and mixed-use projects, as well as operates a structured finance division managing tax credit investments
across the country. During his time as VP & CFO the Company has had direct ownership interest in projects totaling over $3B,
both through institutional investment funds and its own private portfolio. In addition, TBC’s structured finance division
has directed another $2B+ in investments nationwide. Prior to joining Bernstein in 1997, Mr. Chanaud served for over 10 years
as a Certified Public Accountant with a regional CPA firm. Mr. Chanaud is a member of the American Institute of Certified
Public Accountant’s and the Maryland Association of CPA’s. He is a 1986 graduate of Towson University with
a BS degree in Accounting.
76
Nick
Tsahalis
Age:
43
Director Since: 2019
Committees Served: Nominating and Corp Governance Committee
Nick
Tsahalis began serving as President and Chief Executive Officer of Maslow Media Group Inc. in December 2016, after serving as
CFO starting in October 2015. Mr. Tsahalis was instrumental in leading Maslow Media to the finish line to close on the Reverse
Merger with Reliability, being named Director and President of Reliability upon conclusion of reverse merger on October 29, 2019.
Prior to joining Maslow Media Group, Mr. Tsahalis was the CFO of Recycled Green Industries, a wholesale organics recycling company
that procured materials through its commercial and residential land clearing division and through contracts with local government
yard waste recycling facilities. Recycled Green was positioned for sale to Harvest Garden Pro, a national consumer products business
that sold similar organic materials through relationships with national home retailers, Lowe’s and Home Depot. Prior Mr.
Tsahalis was the CFO of Atlantic Video, a video production company that produced multiple shows for ESPN in both Washington, D.C.
and New York City. Additional experiences include the creative staffing industry, hotel industry and waste management. He has
over 22 years of experience as an operational leader, covering accounting and finance, IT, Human Resources and business development.
Executive
Officers
Our
board of directors appoints our executive officers and updates the executive officer positions as needed throughout the fiscal
year. Each executive officer serves at the behest of our board of directors and until their successors are appointed, or until
the earlier of their death, resignation or removal.
The
following table sets forth certain information with respect to our executive officers as of the date of this Annual Report:
Name
Age
Position
Nick
Tsahalis
43
President
and Chief Executive Officer
Mark
Speck
60
Chief
Financial Officer and Secretary
Code
of Ethics
The
Company is establishing a Code of Business Ethics and Corporate Conduct (the “Code of Conduct”) and expects to have
the Code of Conduct approved in April 2021. Upon approval, the Company will file a Current Report on Form 8-K containing the Code
of Conduct and it will also make the Code of Conduct available on our website at www.maslowmedia.com. If we amend or grant a waiver
of one or more of the provisions of our Code of Business Ethics and Corporate Conduct, we intend to satisfy the requirements under
Item 5.05 of Item 8-K regarding the disclosure of amendments to or waivers from provisions of our Code of Conduct that apply to
our principal executive, financial and accounting officers by posting the required information on our website at the above address.
Our website is not part of this Annual Report on Form 10-K.
ITEM
11. EXECUTIVE COMPENSATION
Named
Executive Officers
Our
named executive officers for Fiscal 2020 are:
●
Nick
Tsahalis, our President and Chief Executive Officer
●
Mark
Speck, our Chief Financial Officer and Secretary
77
Throughout
this section, the term “named executive officer” is intended to refer to the individuals identified above. During
Fiscal 2020, we had only two named executive officers, each of whom is set forth above.
Summary
Compensation Table
The
following table presents compensation information for our named executive officers with respect to Fiscal 2020 and 2019. These
structures are based on Maslow agreements with Vivos Holdings when Vivos Holdings owned Maslow before the Merger.
Name and
Principal Position
Year
Salary ($)
Bonus ($) *
Stock
Awards ($)
Option
Awards ($)
Non-equity
incentive plan
compensation ($)
Non-qualified
deferred
compensation
earnings ($)
All Other
Compensation
($) **
Total ($)
Nick Tsahalis President and Chief
2020
$ 260
$ 78
$ 30
$ 368
Executive Officer
2019
$ 260
$ 113
$ 14
$ 387
Mark Speck Chief Financial Officer and
2020
$ 250
$ 75
$ 30
$ 355
Secretary
2019
$ 250
$ 90
$ 14
$ 354
(*)
Bonus
amounts for 2020 have been deferred. Compensation Committee has authority to pay a discretionary
portion up to 50% of the executive officer’s base salary.
(**)
Represents car allowance and premium subsidy for medical benefits.
Name
Board Member
($)
Audit Committee ($)
Compensation Committee ($)
Nominating & Governance Committee ($)
Chairperson of the Board ($)
Total
($)
Hannah Bible
$ 20
$ 20
Louis Parks
$ 20
$ 20
John Chanaud
$ 20
$ 20
Agreements
with Executive Officers
The
President and Chief Executive Officer and the Chief Financial Officer of the Company have employment agreements with Maslow.
Director
Compensation
Set
forth below is a summary of the components of compensation payable to our non-management directors.
Cash
Compensation
We
reimburse each non-management member of our board of directors for all reasonable out-of-pocket expenses incurred in connection
with their attendance at meetings of our board of directors and any committees thereof, including, without limitation, reasonable
travel, lodging and meal expenses. Each director who is not also an officer of Reliability is also entitled to quarterly payments
of $5 for their service on our board of directors which remain unpaid to date. Currently there is no additional compensation for
committee’s chaired or for presiding as chairperson of the board, due to cash constraints and unavailability of equity compensation.
78
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth information regarding the beneficial ownership of Company Common Stock as of March 17, 2021 by:
●
each
person, or group of affiliated persons, known by us to be the beneficial owner of more than 5% of our outstanding shares of Company
Common Stock;
●
each
of our named executive officers and directors; and
●
all
our executive officers and directors as a group.
Each
stockholder’s percentage ownership is based on 300,000,000 shares of Company Common Stock outstanding as of March 17, 2021.
Beneficial
ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities.
Except as otherwise indicated, each person or entity named in the table has sole voting and investment power with respect to all shares
of our capital shown as beneficially owned, subject to applicable community property laws.
The
number and percentage of shares beneficially owned by a person includes shares that may be acquired by such person within 60 days of
March 16, 2021 through the exercise of vested options or warrants, while these shares are not counted as outstanding for computing the
percentage ownership of any other person.
Except
as otherwise set forth below, the address of the persons below is c/o Reliability, 22505 Gateway Center Drive, P.O. Box 71 Clarksburg,
MD 20871.
Name
Directly Owned
Shares of
Common
Stock
Percentage
Beneficial
ownership
of Common Stock
Percentage
Officers and Directors
Mark Speck, 22505 Gateway Center Drive, P.O. Box 71, Clarksburg, MD 20871
3,014,882
1.0 %
3,276,052 (1)
1.1 %
Nick Tsahalis, 22505 Gateway Center Drive, P.O. Box 71, Clarksburg, MD 20871
3,276,052
1.1 %
3,276,052
1.1 %
All directors and executive officers as a group (2 persons)
6,290,934
2.1 %
6,552,104
2.2 %
5% Holders (6)
Naveen Doki,
10,138,882
3.4 %
202,634,728 (2)
67.5 %
Silvija Valleru
4,972,644
1.7 %
50,667,482 (3)
16.9 %
Shirisha Janumpally
192,495,846
64.2 %
202,634,728 (4)
67.5 %
Kalyan Pathuri
45,684,838
15.2 %
50,657,482 (5)
16.9 %
5% Holders Totals
253,292,210
84.4 %
(1) Represents
(i) 3,014,882 shares held by Mr. Speck; (ii) 261,170 shares held by Hawkeye Enterprises
Inc, a company owned and controlled by Mr. Speck.
(2) Represents
(i) 10,138,882 shares held by Mr. Doki; (ii) 20,661,816 shares held by Federal Systems,
a company owned and controlled by Mrs. Janumpally, which Mr. Doki may be deemed to indirectly
beneficially own as the husband of Mrs. Janumpally; (iii) 161,503,122 shares held by
Judos Trust, a trust in which Mrs. Janumpally is the sole trustee and beneficiary, and
of which Mr. Doki may be deemed to indirectly beneficially own as the husband of Mrs.
Janumpally; and (iv) 10,330,908 shares held directly by Mrs. Janumpally which Mr. Doki
may be deemed to indirectly beneficially own as the husband of Mrs. Janumpally.
79
(3) Represents
(i) 4,972,644 shares held by Mrs. Valleru; and (ii) 40,520,200 shares held by Igly Trust
of which Mrs. Valleru may be deemed to indirectly beneficially own as the wife of Kalyan
Pathuri, who is the sole trustee and beneficiary of the Igly Trust; and (iii) 5,164,638
shares held by Mr. Pathuri, which Mrs. Valleru may be deemed to indirectly beneficially
own as the wife of Mr. Pathuri.
(4) Represents
(i) 10,138,882 shares that Mrs. Janumpally may be deemed to indirectly beneficially own
as the wife of Mr. Doki; (ii) 20,661,816 shares held by Federal Systems, a company owned
and controlled by Mrs. Janumpally; (iii) 161,503,122 shares held by Judos Trust, a trust
in which Mrs. Janumpally is the sole trustee and beneficiary, and (iv) and 10,330,908
shares Mrs. Janumpally owns directly.
(5) Represents
(i) 5,164,638 shares held by Mr. Pathuri; (ii) 40,520,200 shares held by Igly Trust of
which Mr. Pathuri is the sole trustee and beneficiary; and (iii) 4,972,644 shares held
by Mrs. Valleru of which Mr. Pathuri may be deemed to indirectly beneficially own as
the husband of Mrs. Valleru.
(6) On
or about June 5, 2020, the Company submitted a Claimant’s Notice of Intention to
Arbitrate and Demand for Arbitration to the Respondents: Mr. Doki; Mrs. Valleru; Mrs.
Janumpally (individually and in her capacity as trustee of Judos Trust); Kalyan Pathuri
(individually in his capacity as trustee of Igly Trust) and Federal Systems (the “Respondents”).
The Arbitration alleges that certain of the Respondents breached the Merger Agreement
providing for the Merger of MMG into a subsidiary of Reliability, in a number of significant
respects and potentially committed fraud in connection with the Merger. The Company is
seeking damages which if granted will likely be the remedy set forth within the merger
agreement which is primarily the relinquishment in whole or in part shares of Company
Common Stock received by the Respondents in connection with the Merger. The Company has
brought a motion to compel the Arbitration in accordance with the Merger Agreement which
is currently being decided by the Federal Courts in New York. The Company believes a
strong basis for the motion exists, but no assurance can be given that it will be granted.
Regardless, the Company intends to pursue claims under the Merger Agreement in whatever
venue is required.
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
The 5%
holders listed above, although considered affiliates, currently do not actively participate in the management and policies of the Company.
Directors,
Executive Officers, Promoters, and Control Persons
The
following table sets forth the name and position of our current executive officers and directors.
Name
Age
Position(s)
Nick
Tsahalis (1)
43
President
and Director
Mark
Speck (2), (6)
60
Chief
Financial Officer, Secretary
Hannah
Bible (3), (4)
40
Chairwoman
of the Board, Director
Louis
Parks (5)
60
Director
John
Chanaud (7)
58
Director
(1)
On
October 29, 2019, Nick Tsahalis was appointed as President of the Company. On October 30, 2019, Mr. Tsahalis was appointed
as a director of the Company.
(2)
On
October 29, 2019, Mark Speck was appointed as Chief Financial Officer, Secretary, and as a director of the Company.
(3)
On
April 25, 2014, Hannah Bible was appointed as a director of the Company.
(4)
On
November 13, 2019, Hannah Bible, was appointed Chairwoman of the board.
(5)
On
August 10, 2020, Louis Parks was appointed director of the Company.
(6)
On
October 7, 2020, Mark Speck voluntarily resigned as Director
(7)
On
October 7, 2020, John Chanaud was appointed director of the Company
Equity
Compensation Plans
None
at this time.
80
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Policy
on Review and Approval of Transactions with Related Persons
Our
board of directors is currently primarily responsible for developing and implementing processes and controls to obtain information
from our directors, executive officers and significant stockholders regarding related-person transactions and then determining,
based on the facts and circumstances, whether we or a related person has a direct or indirect material interest in these transactions.
Our Audit Committee is responsible for the review, approval and ratification of “related-person transactions” between
us and any related person. Under SEC rules, a related person is a director, executive officer, nominee for director or beneficial
holder of more than of 5% of any class of our voting securities or an immediate family member of any of the foregoing. In the
course of its review and approval or ratification of a related-person transaction, the Audit Committee will consider:
●
the
nature of the related person’s interest in the transaction;
●
the
material terms of the transaction, including the amount involved and type of transaction;
●
the
importance of the transaction to the related person and to the Company;
●
whether
the transaction would impair the judgment of a director or executive officer to act in our best interest and the best interest
of our stockholders; and
●
any
other matters the Audit Committee deems appropriate.
Any
member of the Audit Committee who is a related person with respect to a transaction under review will not be able to participate
in the deliberations or vote on the approval or ratification of the transaction. However, such a director may be counted in determining
the presence of a quorum at a meeting of the committee that considers the transaction.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Through
December 31, 2020, the Company’s principal independent registered accountant was RJI International CPAs (“RJI”).
Aggregate
fees billed or incurred related to the following years for fiscal 2020 and 2019 by RJI is set forth below.
2020
2019
Audit Fees (1)
$ 94
$ 62
Audit-Related Fees (2)
Tax Fees
$ 25
$ 1
All Other Fees
Total
$ 119
$ 63
(1)
Audit
fees consist principally of fees for the audit of our consolidated financial statements, review of our interim consolidated
financial statements and audit services related to our acquisitions.
(2)
These
fees consist principally of fees related to the preparation of SEC registration statements, acquisition due diligence, and
U.S. Department of Labor filings.
Selection
The
Audit Committee appointed RJI as our independent registered public accounting firm for Fiscal 2020 and RJI has served in this
capacity since 2009.
81
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial
Statements
The
following consolidated financial statements of Reliability and the reports of the Independent Registered Public Accounting Firms
are contained in Item 8 of Part II of this Annual Report on Form 10-K as indicated:
Page
Report of Independent Registered Public Accounting Firms
45
Consolidated Balance Sheets
46
Consolidated Statements of Operations
47
Consolidated Statements of Changes in Stockholders’ Equity
48
Consolidated Statements of Cash Flows
49
Notes to Consolidated Financial Statements
51
Financial
Statement Schedules
Financial
statement schedules are omitted because they are not applicable, or not required, or because the required information is included
in the consolidated financial statements or notes thereto.
Exhibits
See
the list of exhibits in the Index to Exhibits to this Annual Report on Form 10-K, which is incorporated herein by reference.
ITEM
16. FORM 10-K SUMMARY
None.
82
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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 on March 31, 2021.
RELIABILITY
INCORPORATED
By:
/s/
Nick Tsahalis
Name:
Nick
Tsahalis
Title:
President
and Chief Executive Officer
By:
/s/
Mark Speck
Name:
Mark
Speck
Title:
Chief
Financial Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated on March 31, 2021.
By:
/s/
Nick Tsahalis
Name:
Nick
Tsahalis
Title:
President
and Chief Executive Officer
By:
/s/
Louis Parks
Name:
Louis
Parks
Title:
Director
By:
/s/
Hannah Bible
Name:
Hannah
Bible
Title:
Chairperson
of the Board
By:
/s/
John Chanaud
Name:
John
Chanaud
Title:
Director
83
EXHIBIT
INDEX
(d)
The
following Exhibits are filed with this Annual Report on Form 10-K:
Exhibit
No.
Description
2.1
Merger Agreement, by and among Reliability, R-M Merger Sub, Inc., Jeffrey Eberwein, The Maslow Media Group, Inc., and Naveen Doki, and Silvija Valleru (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 23, 2019).
2.2
Statement of Merger as filed with the Secretary of State of the State of Virginia on October 29, 2019 (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
3.1
Restated Articles of Incorporation (with amendment) (incorporated by reference to Exhibit 3 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 11, 1995).
3.2
Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 5.03 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2016).
3.3
Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 5.03 of the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2014).
3.4
Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 5.03 of the Company’s Current Report on Form 8-K filed with the SEC on May 1, 2014).
3.5
Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.03 of the Company’s Current Report on Form 8-K filed with the SEC on October 3, 2013).
3.6
Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the SEC on March 17, 2004).
3.7
Amended Bylaws (incorporated by reference to Exhibit 3.01 of the Company’s Current Report on Form 8-K filed with the SEC on April 6, 2007).
10.1
Intercompany Promissory Note dated November 15, 2016 between Maslow (as Lender) and Vivos Holdings, LLC (as Borrower) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.2
Intercompany Promissory Note dated November 15, 2017 between Maslow (as Lender) and Vivos Real Estate, LLC (as Borrower) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.3
Settlement Agreement dated October 25, 2018 between Maslow, Vivos Holdings, Silvija Valleru Naveen Doki in relation to default of Future Receivables Sales Agreement with Kinetic Direct Funders (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.4
Amendment to Settlement Agreement dated April 10, 2019 between Maslow, Vivos Holdings, Silvija Valleru Naveen Doki in relation to default of Future Receivables Sales Agreement with Kinetic Direct Funding LLC (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.5
Settlement Agreement dated December 10, 2018 by and among Maslow, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Naveen Doki, Silvija Valleru, and CC Business Solutions, a division of Credit Cash NJ, LLC, in relation to Accounts Receivable Advance Agreement (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.6
Settlement Agreement dated January 24, 2019 between Maslow, Vivos Holdings, LLC, and Advantage Capital Funding in relation to default of July 5, 2018 Purchase and Sale of Future Receipts Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.7
Factoring and Security Agreement dated November 4, 2016 between Maslow and Advance Business Capital LLC (d/b/a Triumph Business Capital) (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.8
First Amendment to Factoring and Security Agreement dated January 5th, 2018 between Maslow and Advance Business Capital LLC (d/b/a Triumph Business Capital) (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.9
Second Amendment to Factoring and Security Agreement dated March 30th, 2018 between Maslow and Advance Business Capital LLC (d/b/a Triumph Business Capital) (incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.10
Securities Purchase Agreement dated June 27, 2019 between Maslow and Hawkeye Enterprises, Inc. (incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.11
Convertible Promissory Note dated June 27, 2019 between Maslow and Hawkeye Enterprises, Inc. (incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.12
Warrant Agreement dated June dated June 27, 2019 between Maslow and Hawkeye Enterprises, Inc. (incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.13
Securities Purchase Agreement dated June 31, 2019 between Maslow and Mark Speck (incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.14
Convertible Promissory Note dated June 31, 2019 between Maslow and Mark Speck (incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.15
Warrant Agreement dated June dated June 31, 2019 between Maslow and Mark Speck (incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
84
10.16
Securities Purchase Agreement dated July 31, 2019 between Maslow and Nick Tsahalis (incorporated by reference to Exhibit 10.16 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.17
Convertible Promissory Note dated July 31, 2019 between Maslow and Nick Tsahalis (incorporated by reference to Exhibit 10.17 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.18
Warrant Agreement dated June dated July 31, 2019 between Maslow and Nick Tsahalis (incorporated by reference to Exhibit 10.18 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.19
Professional Services Agreement dated May 11, 2017 between Maslow and AT&T Services, Inc. (incorporated by reference to Exhibit 10.19 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.20
Commercial Lease Agreement dated December 19, 2017 between Maslow and Vivos Real Estate, LLC (incorporated by reference to Exhibit 10.20 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.21
Personal Guaranty dated June 12, 2019 between Maslow and Naveen Doki (incorporated by reference to Exhibit 10.21 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.22
Debt Conversion Agreement by and among Reliability Incorporated and Lone Star Value Investors, LP (incorporated by reference to Exhibit 10.22 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.23
Debt Conversion Agreement by and among Reliability Incorporated and Lone Star Value Co-Invest I, LP (incorporated by reference to Exhibit 10.23 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.24
Form of Piggyback Registration Rights Agreement by and among Reliability and certain Investors (incorporated by reference to Exhibit 10.24 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.25
Form of Lock Up Agreement by and between Reliability and certain Holders (incorporated by reference to Exhibit 10.25 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.26
Secured Promissory Note dated September 5, 2019 between Maslow (as Noteholder) and Vivos Holdings, LLC (as Debtor) (incorporated by reference to Exhibit 10.26 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.27
Igly Trust Joinder to Merger Agreement dated October 22, 2019 (incorporated by reference to Exhibit 10.27 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.28
Judos Trust Joinder to Merger Agreement dated October 22, 2019 (incorporated by reference to Exhibit 10.28 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.29
Shirisha Janumpally Joinder to Merger Agreement dated October 22, 2019 (incorporated by reference to Exhibit 10.29 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
10.30
Agreement for the Contingent Liquidation of the Common Stock of Maslow Media Group, Inc., dated October 28, 2019, by and among Maslow Media Group, Inc., Naveen Doki, Silvija Valleru, Shirisha Janumpally, Kalyan Pathuri and Federal Systems (incorporated by reference to Exhibit 10.30 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2019).
21.1
Subsidiaries of the Registrant.*
31.1
Certification of CEO pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.*
31.2
Certification of CFO pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.*
32.1
Certifications of CEO and CFO pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS*
XBRL
Instance Document
101.SCH*
XBRL
Taxonomy Extension Schema Document
101.CAL*
XBRL
Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL
Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL
Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL
Taxonomy Extension Presentation Linkbase Document
*
Filed
herewith.
**
Management
contract or compensatory plan or arrangement.
†
This
certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange
Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into
any filing under the Securities Act of 1933, as amended, or the Exchange Act.
85
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.