10-Q
1
form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2021
or
[ ]
TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ___________to ____________.
Commission
File Number 0-7092
RELIABILITY
INCORPORATED
(Exact
name of registrant as specified in its charter)
TEXAS
75-0868913
(State
or other jurisdiction of
(I.R.S.
Employer
incorporation
or organization)
Identification
No.)
2505
Gateway Center Drive,
P.O.
Box 71,
Clarksburg,
Maryland
20871
(Address
of principal executive offices)
(Zip
Code)
(202)
965-1100
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last report)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading
Symbol(s)
Name
each exchange on which registered
Common
Stock, no par value
RLBY
OTC
Pink Sheets
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). [X] YES [ ] NO
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ]
Accelerated
filer [ ]
Non-accelerated
filer [ ]
Smaller
reporting company [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 any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [X]
NO
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 300,000,000
shares of Common Stock, no par value, as of March 23, 2021.
RELIABILITY
INCORPORATED
Quarterly Report on Form 10-Q
As of and For the Three Months Ended March 31, 2021
INDEX
PART I. FINANCIAL INFORMATION
3
Item
1.
Financial Statements
3
Unaudited Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020
3
Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020
4
Unaudited Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2021 and 2020
5
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020
6-7
Notes to Unaudited Consolidated Financial Statements
8-19
Item
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20-22
Item
3.
Quantitative and Qualitative Disclosures About Market Risk
23
Item
4.
Risk Controls and Procedures
23
PART II. OTHER INFORMATION
24
Item
1.
Legal Proceedings
24
Item
1a.
Risk Factors
25
Item
2.
Unregistered Sales of Equity Securities and Use of Proceeds
26
Item
3.
Defaults Upon Senior Securities
26
Item
4.
Mine Safety Disclosures
26
Item
5.
Other Information
26
Item
6.
Exhibits
26
Signatures
27
Exhibits
28
2
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
RELIABILITY
INC. AND SUBSIDIARY
UNAUDITED
CONSOLIDATED BALANCE SHEETS
(amounts
in thousands, except per share data)
March
31, December 31,
2021
2020
ASSETS
CURRENT
ASSETS
Cash
and cash equivalents
$ 58
$ 70
Trade
receivables, net of allowance for doubtful accounts
4,286
6,870
Notes
receivable from related parties
4,308
4,258
Prepaid
expenses and other current assets
238
289
Total
current assets
8,890
11,487
Property,
plant and equipment, net
69
76
Other
intangible assets, net
195
203
Goodwill
518
518
Total
assets
$ 9,672
12,284
LIABILITIES
AND SHAREHOLDER’S EQUITY
CURRENT
LIABILITIES
Factoring
$ 592
$ 2,999
Accounts
payable
533
936
Accrued
expenses
319
375
Accrued
payroll
1,041
691
Deferred
revenue
182
182
Income
taxes payable
249
292
Other
current liabilities
3
42
Total
current liabilities
2,919
5,517
PPP
loan payable
5,264
5,250
Total
liabilities
8,183
10,767
Commitment
and contingencies (Note 6)
Subsequent
events (Note 10)
SHAREHOLDER’S
EQUITY
Common stock,
without par value, 300,000,000 shares authorized, 300,000,000 issued and outstanding as of March 31, 2021 and as of December
31, 2020
-
-
Additional
paid-in capital
750
750
Retained
earnings
739
767
Total
shareholder’s equity
1,489
1,517
Total
liabilities and shareholder’s equity
$ 9,672
$ 12,284
The
accompanying notes are an integral part of these statements.
3
RELIABILITY
INC. AND SUBSIDIARY
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts
in thousands, except per share data)
For
the Three Months Ended March 31,
2021
2020
Revenue
earned
Service
revenue
$ 5,794
$ 8,801
Cost
of revenue
Cost
of revenue
5,047
7,769
Gross
profit
747
1,032
Selling,
general and administrative expenses
810
1,091
Operating
loss
(63 )
(59 )
Other
income (expense)
Interest
income
74
21
Interest
expense
(45 )
(138 )
Other
expense
-
(21 )
Loss
before income tax (expense) benefit
(34 )
(197 )
Income
tax (expense) benefit
6
(1 )
Consolidated
net loss
(28 )
(198 )
Less
net income attributable to noncontrolling interest in consolidated affiliates
-
(39 )
Net
loss attributable to Reliability Inc.
$ (28 )
$ (237 )
Net income
per share:
Basic
$ 0.00
$ 0.00
Diluted
$ 0.00
$ 0.00
Share used
in per share computation:
Basic
300,000,000
300,000,000
Diluted
300,000,000
300,000,000
The
accompanying notes are an integral part of these statements.
4
RELIABILITY
INC. AND SUBSIDIARY
UNAUDITED
CONSOLIDATED STATEMENTS OF CHANGE IN EQUITY
For
the Three Months Ended March 31, 2021 and 2020
(amounts
in thousands, except per share data)
Controlling
Interest
Non-Controlling
Additional
Interest
in
Common
Stock
Paid-in
Retained
Consolidated
Total
Shares
Amount
Capital
Earnings
Total
Affiliates
Equity
Balance,
December 31, 2019
300,000,000
-
750
1,840
2,590
(313 )
2,277
Net
loss
-
-
-
(198 )
(198 )
(39 )
(237 )
VIE
consolidation
-
-
-
-
-
17
17
Balance,
March 31, 2020
300,000,000
-
750
1,642
2,392
(335 )
2,057
Balance, December
31, 2020
300,000,000
$ -
$ 750
$ 767
1,517
-
1,517
Net
loss
-
-
-
(28 )
(28 )
-
(28 )
Balance,
March 31, 2021
300,000,000
-
750
739
1,489
-
1,489
The
accompanying notes are an integral part of these statements.
5
RELIABILITY
INC. AND SUBSIDIARY
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts
in thousands)
For
the three months ended March 31,
2021
2020
Cash
flows from operating activities:
Net
loss
$ (28 )
(237 )
Adjustments
to reconcile net loss to net cash provided by operating activities:
Depreciation
and amortization
19
36
Accrued
interest
(60 )
3
Changes
in operating assets and liabilities:
Trade
receivables
2,584
1,385
Prepaid
expenses and other current assets
50
58
Accounts
payable
(402 )
(165 )
Accrued
payroll
351
87
Accrued
expenses
(56 )
(136 )
Deferred
revenue
-
(62 )
Other
liabilities
(1 )
17
Income
taxes payable
(44 )
(14 )
Net
cash provided by operating activities
$ 2,413
972
Cash
flows from investing activities:
Purchase
of fixed assets
(3 )
(21 )
Net
cash used in investing activities
$ (3 )
(21 )
Cash
flows from financing activities:
Net
borrowing/(repayment) of line-of-credit+
(2,408 )
(1,340 )
Repayment
of note payable
(38 )
(43 )
Borrowing
of note payable
278
Repayment
of notes receivable from related parties
24
Net
cash used in financing activities
$ (2,422 )
(1,105 )
Net
decrease in cash and cash equivalents
(12 )
(154 )
Cash
and cash equivalents, beginning of year
70
275
Cash
and cash equivalents, end of year
$ 58
121
The
accompanying notes are an integral part of these statements.
6
RELIABILITY
INC. AND SUBSIDIARY
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(amounts
in thousands)
For
the Three Months Ended March 31,
2021
2020
Supplemental
disclosures of cash flow information:
Cash
paid during the period for:
Interest
$ -
$ 158
Income
taxes
$ -
$ 20
The
accompanying notes are an integral part of these statements.
7
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(amounts
in thousands, except per share data)
NOTE
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature
of Operations
Reliability,
Inc. is a leading provider of employer of record and temporary media and information technology (“IT”) staffing services
that operates, along with its wholly owned subsidiary, The Maslow Media Group, Inc (“MMG”), (collectively, “Reliability”
or the “Company”), primarily within the United States of America in 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 and 77.6% of first quarter 2021 revenue. 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.
Reliability
was incorporated under the laws of the State of Texas in 1953, but the then principal business of the Company started in 1971
was closed down in 2007. The Company completed a reverse merger with MMG (the “Merger”) on October 29, 2019.
Vivos
Holdings LLC, the previous sole shareholder of MMG and their transferees who were issued shares of Reliability Common Stock include Naveen
Doki, Silvija Valleru, Shirisha Janumpally (through Judos Trust and Federal Systems), and Kalyan Pathuri (through Igly Trust) together
own approximately 84% of the issued and outstanding shares of Reliability Common Stock. Vivos Holdings, LLC and Vivos Real Estate
Holdings, LLC and Mr. Doki have outstanding notes with MMG that date back to acquisition of MMG in November 2016 (See Note 8) (collectively
“Vivos Debtors”).
Mrs.
Janumpally, Mr. Doki, and Mr. Pathuri also have common ownership combinations in a number of other entities [Vivos Holdings, LLC.
Vivos Real Estate Holdings, LLC (“VREH”), Vivos Holdings, Inc., Vivos Group, Vivos Acquisitions, LLC., and Federal Systems,
LLC], (collectively referred to herein as “Vivos Group”).
On or about February 17, 2020, the Company,
as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Debtors. (“Vivos Default Claim”)
See Note 6.
On or about May 6, 2020, the Vivos Debtors
and other Vivos Group members, specifically. Kaylan Pathuri (“Pathuri”), Judos Trust by Shrishsha Janumpally, its trustee
(“Judos”) and Igly Trust by Kaylan Pathuri, its trustee, (“Igly”) responded to the Vivos Default Claim with a
Counterclaim and Third-Party Complaint (the “Vivos Default Counterclaim”).
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 (the “Merger Arbitration”), 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 “Merger Respondents”). Although the Merger
Respondents filed a counterclaim, Merger Respondent’s have not to paid the AAA’s fees, 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 Merger Respondents in connection with the Merger.
On
December 23, 2020, after an evidentiary hearing before the Circuit Court for Montgomery County, Maryland, a judge denied a motion by
Vivos Holdings, LLC, VREH, Doki, Kaylan Pathuri (“Pathuri”), Judos Trust by Shrishsha Janumpally, its trustee (“Judos”)
and Igly Trust by Kaylan Pathuri, its trustee, (“Igly”) to compel a shareholder meeting based on the facts presented
at trial. The judge also commented that, based on the evidence presented, management was performing its fiduciary duties to protect the
Company despite adverse circumstances. This same judge has been assigned to preside over a full trial regarding Company’s
lawsuit to enforce the repayment of notes and the Vivos Group counterclaim, over a two-week period starting on October 4, 2021, absent
any COVID-19 disruptions that may affect scheduling.
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.
8
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(amounts
in thousands, except per share data)
Basis
of presentation
The
unaudited condensed consolidated interim financial statements include the accounts of the Company and all wholly owned divisions,
including its 100% owned subsidiary, MMG. All significant intercompany accounts and transactions have been eliminated in consolidation.
These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the U.S (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q. Operating results of
the interim periods are not necessarily indicative of financial results for the full year. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2020. In preparing these unaudited consolidated financial
statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities
as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. Significant estimates and assumptions included in the Company’s
consolidated financial statements relate 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.
For
further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on
Form 10-K for the year ended December 31, 2020.
Concentration
of Credit Risk
For
the quarter ended March 31, 2021, 24.6% of revenue came from AT&T Services, Inc. (inclusive of its DirecTV division) (“AT&T”),
15.4% from Goldman Sachs and 13.6% from Morgan Stanley. AT&T, Goldman Sachs and Morgan Stanley accounted for 32.8%, 7.7%,
and 5.6%, respectively, in revenue for the same time period ended March 31, 2020. No other client exceeded 10% of revenues.
NOTE
2. LIQUIDITY AND GOING CONCERN
Going
Concern
Management
considers on a regular basis, the Company’s ability to continue as a going concern. The factors which have put downward
pressure on the business and our liquidity are;
●
Operational
loss of approximately $789 for 2020;
●
Operational
loss of $28 in 1Q 2021
●
The
pandemic resulting decline in client demand for our services continuing through the present;
●
Difficulties
in raising cash via public market for organic and inorganic growth, due to lack of unissued authorized shares available for
Company use, despite having public company cost structure;
●
Inability
to realize approximately $4.3M in receivables from Vivos; and
●
Contingent
liabilities, described further in Note 6.
All
these conditions noted above, most notably the adverse impact of COVID 19 on sales and a scenario where the presumption is all
debts come due with an inability to raise cash through equity given the unavailability of unissued authorized shares, 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
9
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(amounts
in thousands, except per share data)
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 result from the possible inability of the Company to continue
as a going concern.
The
Company’s ongoing liquidity position is facing pressures due to the loss of business resulting from the COVID-19 pandemic as well
as increased pressure to make cash payments pursuant to the Settlement Agreements (filed as exhibits 10.4, 10.5 and 10.6 the Company’s
Current Report on Form 8-K filed on October 30, 2019) prior to the Company’s anticipated liquidation of the shares of Company Common
Stock pledged pursuant to the Agreement for the Contingent Liquidation of the Common Stock of Reliability Incorporated (as successor
in interest to MMG Media Group, Inc.), dated October 28, 2019 (the “Liquidation Agreement”) (filed as exhibit 10.30
to the Company’s Current Report on Form 8-K filed on October 30, 2019). The Vivos Group that are the counterparties to the Liquidation
Agreement are not cooperating with the Company to liquidate the shares subject thereto as contemplated thereby. No assurance can be given
that the Company will return to its pre-pandemic revenue levels, how long it will take to enforce the requirements of the Liquidation
Agreement, and the actual amount of PPP Loan forgiven. As a result, the Company face hurdles to maintaining sufficient liquidity to continue
to operate, in which case the Company might be forced to liquidate or seek to reorganize under applicable bankruptcy statutes.
The
Company is quoted on the OTC Marketplace under the symbol “RLBY”.
NOTE
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted
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.
10
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(amounts
in thousands, except per share data)
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.
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 did not have a material
impact on the Company’s 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
did not have a material impact on the Company’s 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
11
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(amounts
in thousands, except per share data)
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.
NOTE
4. DEBT
As
of March 31, 2021, the Company had long term debt from Paycheck Protection Program loans, totaling $5,264. The Company on March
4, 2021 sought full loan forgiveness, based on the satisfaction of applicable criteria and guidelines. Although the Company expects full
forgiveness, no assurance can be provided that forgiveness of any portion of the PPP Loans will be obtained. Short term debt only consists
of $253 in federal income tax explained further below.
Convertible
Debt
The
Company had notes payable in the amount of $890 as of December 31, 2019, pursuant to a convertible debt offering that MMG commenced
June 13, 2019. Pursuant to this agreement, MMG 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 no conversion occurred, 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 within 5 years of note issuance.
Tax
Liabilities
When
MMG was initially acquired by Vivos Holdings, LLC in December 2016, MMG’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 four
years, that MMG is working with the IRS to pay. As of March 31, 2021, the tax liability was $249 compared to $292 as of
December 31, 2020. The $249 tax liability includes tax liabilities for 2018 and 2019 from completed tax returns and loss carryback
provisions for 2020.
Factoring
Facilities
Triumph
Business Capital
On
November 4, 2016, the MMG entered into a factoring and security agreement with Triumph Business Capital (“Triumph”).
Pursuant to the agreement, MMG 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. MMG continues to be obligated to meet certain financial covenants in respect to invoicing and reserve account
balance.
12
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(amounts
in thousands, except per share data)
In
accordance with the agreement, a reserve amount is required for the total unpaid balance of all purchased accounts multiplied by a percentage
equal to the difference between one hundred percent and the advanced rate percentage. As of March 31, 2021, the required amount was 10%.
Any excess of the reserve amount is paid to MMG on a weekly basis, as requested. If a reserve shortfall exists for a period
of ten-days, MMG is required to make payment to the financial institution for the shortage.
Accounts
receivable were sold with full recourse. Proceeds from the sale of receivables were $1,332 for the three months ended March 31,
2021. The total outstanding balance under the recourse contract was $592 on March 31, 2021 and $2,999 as of December 31, 2020.
In
February 2020, MMG took out a $250 loan from Triumph at 10% APR, in order to meet our cash obligations. In early February 2021,
MMG met our obligation by making the final principal and interest payment to Triumph.
The
Factoring Facilities are collateralized by substantially all the assets of MMG. In the event of a default, the Factor may demand
that the Company repurchase the receivable or debit the reserve account. Total finance line fees for the three months ended March 31,
2021 and 2020 totaled $32 and $84, respectively.
NOTE
5. 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 MMG, executed a guarantee of obligations of Vivos Real Estate Holdings, LLC (“VREH”),
under a mortgage loan for the purchase of the property at 22 Baltimore Rd., Rockville, Maryland. MMG leased this space on market
terms. MMG contends it being a guarantor on the building.
Although
the Company has 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 as it was considered the primary beneficiary of the VIE. As a result of the
Company terminating the lease on April 30, 2020, VREH was no longer to be considered a VIE after April 30, 2020.
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 $1,760 as of December 31, 2020, with $126 due in 2021. VREH is currently a few months behind on payments. To
date, the Company has not been called on for any loan repayment guarantee. The Company believes the building valuation is at or near
the current mortgage amount, with adequate equity in the property.
NOTE
6. COMMITMENTS AND CONTINGENCIES
The
Company is engaged from time to time in legal matters and proceedings arising out of its normal course of business, and currently
also is involved in litigation outside of the 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.
13
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(amounts
in thousands, except per share data)
On
September 28, 2018, Credit Cash filed a complaint against MMG, Vivos Holdings LLC, Vivos Acquisitions, LLC, Dr. Doki, Dr.
Valleru (the “Credit Cash Defendants”) and other defendants in the United States Circuit Court of Montgomery County,
Maryland for the District of New Jersey for, among other things, breach of contract of the MMG and HCRN Credit Facilities and
their respective guaranties in relation to the November 15, 2017 agreement (the “Credit Cash Complaint”). 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 Credit Cash Defendants, and other defendants (“NY State Action”). On December 10, 2018, the Credit
Cash Defendants entered into a settlement agreement for the purpose of settling certain claims related to the Credit Cash Complaint
only. Pursuant to the settlement agreement, certain repayment terms were agreed upon between Credit Cash and the Credit Cash Defendants,
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 Credit Cash Defendants in relation to the November 15, 2017 agreement. Naveen Doki, Kalyan Pathuri, Shirisha Janumpally,
and Federal Systems, LLC, (“Credit Cash Vivos Group”) executed and delivered to MMG that certain Agreement for
the Contingent Liquidation of the Common Stock of MMG , dated as of October 28, 2019 (the “Liquidation Agreement”),
pursuant to which the Credit Cash Vivos Group pledged to MMG the shares of Company Common Stock they received in the Merger
to provide the capital required to satisfy the Credit Cash Defendants’ obligations under the Settlement Agreements. Members
of the Credit Cash Vivos Group misrepresented upon the execution of the Liquidation Agreement the status of its obligations under
the Settlement Agreement, which were, in fact, then in default. To date the Credit Cash Vivos Group have not cooperated with the
Company to monetize those shares as contemplated by the Liquidation Agreement. The Company will take appropriate action to enforce its
rights under the Liquidation Agreement, which actions will be dictated in part by the outcome of the Merger Arbitration wherein
relinquishment of shares for certain claims may be an applied remedy. On or about March 16, 2020, Credit Cash entered its New Jersey
confession of judgment with the Circuit Court of Montgomery County, Maryland.
On
October 9, 2018, MMG was named as a defendant along with six other defendants, all of which are entities related to the Vivos
Group, in an Affidavit of Confession of Judgment (COJ) filed in the Supreme Court of the State of New York in relation to a case
brought by Hop Capital, wherein the defendants collectively agree to pay a sum of $400 to Hop Capital. 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 MMG
was not a party. As such, MMG contends that being named in the COJ as a defendant was made in error and is currently
seeking to have its name removed from the COJ. 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 (“Vivos Debtors”), to enforce MMG’s
rights under certain promissory notes and a personal guarantee made by the Vivos Debtors (“Vivos Default Claim”)The
case is proceeding. Although there are no certainties or guarantees, the Company believes that it will be granted a judgment in its favor
as it vigorously pursues this litigation.
On February 28, 2020,
Healthcare Resource Network, LLC (“HCRN”) filed a complaint against MMG in the Circuit Court of Montgomery County,
Maryland alleging that Maslow participated with members of the Vivos Group to financially harm the plaintiff. The plaintiff has
not specified any alleged damage caused by MMG and the Company believes any claims are without merit. The Company will defend
itself from this case.
On
March 16, 2020, CC Business Solutions, a division of Credit Cash NJ, LLC domesticated a foreign judgement in the Montgomery County Circuit
Court system against Health Care Resources Network (“HCRN”), MMG, 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 in the Credit Cash Complaint.
14
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(amounts
in thousands, except per share data)
On
May 5, 2020, Libertas Funding, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system against HCRN, MMG,
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 MMG additional collateral. This
loan is currently in default. Foreign Judgement total is $229.
On
May 5, 2020, Kinetic Direct Funding domesticated a foreign judgement in the Montgomery County Circuit Court system against HCRN, MMG,
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 MMG as additional collateral. This loan is currently in default. Foreign Judgement
total is $579.
On or about May 6, 2020, the Vivos Debtors and
other Vivos Group members, specifically. Kaylan Pathuri (“Pathuri”), Judos Trust by Shrishsha Janumpally, its trustee (“Judos”)
and Igly Trust by Kaylan Pathuri, its trustee, (“Igly”) responded to the Vivos Default Claim with a Counterclaim and Third-Party
Complaint (the “Vivos Default Counterclaim”). The Company believes that the Counterclaim has no merit. The Company continues
to vigorously defend itself and its indemnified officers, directors and other parties as permitted by the Company’s organizational
documents. Trial on this matter is scheduled to begin on October 4, 2021.
On
or about June 5, 2020, the Company submitted a Claimant’s Notice of Intention to Arbitrate and Demand for Arbitration (the “Merger
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 “Merger Respondents”). The Merger Arbitration alleges that the Merger
Respondents breached the Merger Agreement in a number of significant respects and may have 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 Merger 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 Circuit Court of Montgomery County, Maryland, a motion by the Vivos Group to compel a
shareholder meeting was summarily dismissed. This same judge is scheduled to preside over a full trial on the Vivos Default
Claim and Vivos Default Counterclaim in October 2021, absent any disruptions that could affect scheduling. On January 20,
2021, Defendants and Counter/Third-Party Plaintiffs, Vivos Holdings, LLC (“Vivos”), Vivos Real Estate Holdings, LLC (“VREH”),
Dr. Naveen Doki (“Doki”), Kaylan Pathuri (“Pathuri”), Igly Trust (“Igly”), Judos Trust (“Judos”),
by counsel, filed a Notice of Appeal on the dismissal.
NOTE
7. EQUITY
The
Company’s authorized capital stock consists of 300,000,000 shares of common stock, with no par value. All authorized shares
of Company Common Stock are issued and outstanding.
15
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(amounts
in thousands, except per share data)
NOTE
8. RELATED PARTY TRANSACTIONS
Stock
Purchase Agreement
On November 9, 2016, Vivos Holdings LLC,
the former owner of MMG, acquired 100% of MMG through a stock acquisition exchange for a purchase price of $1,750,
of which: (i) $1,400 was paid at settlement with proceeds from MMG and (ii) a promissory note to pay the remaining
$350 (“Vivos/MMG Purchase Agreement”). The promissory note was to be paid in twenty-four equal installments, including
interest at 4.5%, in the amount of approximately $15, commencing six months after closing, with the last payment on March 1,
2019. These payments were paid by the MMG on behalf of the Vivos. Vivos subsequently entered into a promissory note receivable
with the MMG, described below, for the full stock purchase price. No payment has ever been made against this note.
Notes
Receivable
The
Company has notes receivable from Vivos Holdings LLC and VREH, a member of Vivos Group, both related party affiliates due
to their ownership percentage in the Company. In January 2021, MMG began applying the legal rate of interest which per Virginia statute
is 8.0% on two of the three defaulted notes receivable below, which were so eligible.
In
connection with the Vivos/MMG Purchase Agreement, on November 15, 2016, MMG executed a promissory note receivable with
Vivos Holdings LLC in the amount of $1,400. As defined by the Vivos/MMG Purchase Agreement, the loan consists of two periods,
whereby the first period from November 15, 2016 until September 30, 2018, no principal or interest payments were required. Interest would
accrue monthly and a new loan in the amount of $1,773 would be subject to a second loan period. During the second loan period,
interest shall be paid in 20 equal consecutive payments, quarterly. Principal plus any unpaid interest is due September 20, 2023. Interest
during both loan periods accrues at a rate of 2.5%. Additionally, monthly payments of $15 are made on behalf of Vivos Holdings, Inc.
to the seller by MMG. These payments, plus any other payments made by MMG on behalf of Vivos Holdings, Inc,
are added to the principal balance of the promissory note receivable (“Vivos/MMG Purchase Agreement Note Receivable”).
In 2018, all quarterly interest payments to be made in phase 2 were offset by the management fees due to Vivos Holdings.
In
January 2021, MMG began applying the legal rate of interest which per Virginia statute is 8.0% on two of the three defaulted notes receivable,
which were eligible. Only the $750 September 5, 2019 note is not eligible for a default rate of interest but is eligible for recovery
of legal fees. As of March 31, 2021 the total outstanding balance was $2,767 which includes accrued interest receivable No for
Q1 2021 of $55. The actual funds (additional eligible interest and legal fees) sought may be greater than what is represented herein
per GAAP.
On
November 15, 2017, MMG executed an intercompany promissory note receivable with VREH in the amount of $772. As defined by the
agreement, the loan consists of two periods, whereby the first period from November 15, 2017 until 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 LLC. In addition, principal payments
totaling $30 were made by the Vivos Group. As of March 31, 2021 the total outstanding balance was $774. which includes
accrued interest receivable for Q1 2021 of $15.
On
June 12, 2019, MMG entered into a Personal Guaranty agreement with Dr. Doki, pursuant to which Dr. Naveen Doki personally guaranteed
to MMG repayment of $3,000 of the balance of the Promissory Note issued to Vivos on November 15, 2017 within the 2019 calendar
year via cash, stock, or other business assets acceptable to the Company. Dr. Doki is a 5% or greater beneficial holder of Company Common
Stock, and therefore is a related party.
16
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(amounts
in thousands, except per share data)
As
of February 2020, the Company filed a lawsuit against the majority shareholder, pursuant to the personal guaranty agreement for
defaulting on the outstanding notes receivables.
In
summary, the Vivos Holdings receivable totaled $4,258 on December 31, 2020 which included $2,007 of additional borrowings over
the period between November 2016 and December 31, 2109. As of March 31, 2021, the receivable totaled $4,308.
On
September 5, 2019, MMG entered into a Secured Promissory Note agreement with Vivos, pursuant to which MMG 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 to make monthly
payments to MMG of $10 beginning December 1, 2019, with balance due and payable on November 1, 2026. Upon an event of default,
which occurs upon failure of Vivos to make any monthly payment due under the terms of the note, MMG has the right to declare the
entire unpaid balance of the note due and payable. The note is secured by 30,000,000 shares of Company Common Stock, which is due and
payable upon a default by Vivos, which occurs upon failure of Vivos to make any monthly payment due under the terms of the note. In addition,
both Naveen Doki and Silvija Valleru personally guaranty the repayment of the note by Vivos. Naveen Doki and Silvija Valleru were
beneficial owners of Vivos and are also 5% or greater beneficial owners of Company Common Stock, which is qualified by
the Merger Arbitration complaint. As of March 31, 2021 the total outstanding balance was $780.which includes interest of $12 for
Q1 2021. In January 2021, MMG began charging the Maryland minimum interest rate by law allowed for defaulted totals as this note is in
default and we are pursuing collection via the Vivos Default Claim.
Debt
Settlement Agreements
On
August 10, 2017, the Vivos Group executed a receivable advance agreement with Argus Capital Funding. MMG received a net advance
of $487 in exchange for $705 of MMG’s accounts receivable. Included in this loan is a fee of $218. The agreement was refinanced
on November 15, 2017, when Vivos, and Vivos Acquisitions, LLC, via Dr. Naveen Doki and Dr. 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”).
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 MMG, 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.
17
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(amounts
in thousands, except per share data)
MMG is facing pressure to make cash payments
pursuant to the Settlement Agreements prior to the Company’s anticipated liquidation of the shares of Company Common Stock pledged
pursuant to the Liquidation Agreement. The Vivos Group that are the counterparties to the Liquidation Agreement are not cooperating with
the Company to liquidate the shares subject thereto as contemplated thereby. No assurance can be given how long it will take to enforce
the requirements of the Liquidation Agreement. The resulting time gap may present a liquidity issue for the Company.
Related
Party Relationships
On
October 29, 2019, prior to the Merger, pursuant to the Merger Agreement, Naveen Doki and Silvija Valleru became beneficial owners
of 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, MMG entered into a Securities Purchase Agreement with Hawkeye Enterprises, Inc., a company
owned and controlled by Mark Speck (“Mr. Speck”), an officer and then director of Maslow.
Pursuant
to this agreement, MMG 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, MMG entered into a Securities Purchase Agreement with Mr. Speck, the Company issued to this
individual a Warrant for 81,616 (on a post-Merger basis) shares of MMG 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.
On
July 31, 2019, prior to the Merger, MMG entered into a Securities Purchase Agreement with Nick Tsahalis, an executive officer
and director of MMG. Pursuant to this agreement, the Company issued to this individual 32,646 (on a post-Merger basis) shares
of MMG Common Stock, and a Warrant to purchase 16,323 (on a post-Merger basis) shares of the MMG 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 in full on July 31, 2020.
On
September 18, 2019, in anticipation of the closing of the Merger and intending that it be assumed by MMG after the closing of
the Merger, Hawkeye entered into a letter of intent (the “LOI”) regarding the potential acquisition of a complementary business.
MMG 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 MMG agreed to assume the LOI and reimbursed Hawkeye for the
deposit. The reimbursement took place on May 8, 2020 and totaled $83.
18
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(amounts
in thousands, except per share data)
The
term “warrant” herein refers to warrants issued by MMG 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.
In
prior filings, when referencing these related party notes, we have defined the issuer as the Company, when we could have been more specific
and referenced MMG or Reliability. For clarification purposes, any of the related party transactions entered into prior to the
Merger on October 29, 2019, should refer to MMG and not Reliability.
NOTE
9. 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.
The
following table provides a reconciliation of revenue by reportable segment to consolidated results for the three months ended
March 31, 2021 and 2020, respectively:
2021
2020
Revenue:
EOR
$ 4,497
$ 7,149
Recruiting and Staffing
884
1,293
Video and Multimedia Production
411
340
Other
2
19
Total
$ 5,794
$ 8,801
NOTE
10. SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through May 12, 2021 the date on which the unaudited condensed consolidated financial
statements were available to be issued. Based upon this evaluation, management has determined that no material subsequent events
have occurred that would require recognition in or disclosures in the accompanying unaudited condensed consolidated financial
statements, except as follows:
On
April 28, 2021, MMG realized its eligibility and filed for the Cares Act Employee Retention Credit for a total of $1,486. This
was filed on the Company’s Employer’s Quarterly Federal Tax Return for the first quarter 2021.
19
Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING
STATEMENTS
The
following discussion and analysis of our results of operations and financial condition should be read in conjunction with our
unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This
section includes several forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995,
that reflect our current views with respect to future events and financial performance. All statements that address expectations
or projections about the future, including, but not limited to, statements about our plans, strategies, adequacy of resources
and future financial results (such as revenue, gross profit, operating profit, cash flow), are forward-looking statements. Some
of the forward-looking statements can be identified by words like “anticipates,” “believes,” “expects,”
“may,” “will,” “can,” “could,” “should,” “intends,” “project,”
“predict,” “plans,” “estimates,” “goal,” “target,” “possible,”
“potential,” “would,” “seek,” and similar references to future periods. These statements are
not a guarantee of future performance and involve a number of risks, uncertainties and assumptions that are difficult to predict.
Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic
and competitive uncertainties, many of which are beyond our control or are subject to change, actual outcomes and results may
differ materially from what is expressed or forecasted in these forward-looking statements. Important factors that could cause
actual results to differ materially from these forward-looking statements include, but are not limited to: the impact of the COVID-19
pandemic on us and our clients; our ability to access the capital markets by pursuing additional debt and equity financing to
fund our business plan and expenses on terms acceptable to the Vivos Group or at all; negative outcome of pending and future claims
and litigation and our ability to comply with our contractual covenants, including in respect of our debt; potential loss of clients
and possible rejection of our business model and/or sales methods; weakness in general economic conditions and levels of capital
spending by customers in the industries we serve; weakness or volatility in the financial and capital markets, which may result
in the postponement or cancellation of our customers’ projects or the inability of our customers to pay our fees; delays
or reductions in U.S. government spending; credit risks associated with our customers; competitive market pressures; the availability
and cost of qualified labor; our level of success in attracting, training and retaining qualified management personnel and other
staff employees; changes in tax laws and other government regulations, including the impact of health care reform laws and regulations;
the possibility of incurring liability for our business activities, including, but not limited to, the activities of our temporary
employees; our performance on customer contracts; and government policies, legislation or judicial decisions adverse to our businesses.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
We assume no obligation to update such statements, whether as a result of new information, future events or otherwise, except
as required by law. We recommend readers to carefully review the entirety of this Quarterly Report, the “Risk Factors”
in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and the other reports and documents
we file from time to time with the Securities and Exchange Commission (“SEC”), particularly our Quarterly Reports
on Form 10-Q and our Current Reports on Form 8-K.
The
following discussion and analysis of our financial condition and results of operations, our expectations regarding the future
performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements.
These forward-looking statements are subject to risks, uncertainties and other factors including those described in “Item
1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 with the SEC. Our
actual results may differ materially from those contained in any forward-looking statements. You should read the following discussion
together with our financial statements and related notes thereto and other financial information included in this Quarterly Report
on Form 10-Q.
CRITICAL
ACCOUNTING POLICIES AND COMMENTS RELATED TO OPERATIONS
This
discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation
of these unaudited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses based on historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
20
There
have been no material changes or developments in the Company’s evaluation of the accounting estimates and the underlying
assumptions or methodologies that it believes to be Critical Accounting Policies and Estimates as disclosed in its Form 10-K for
the year ended December 31, 2020.
Management’s
Discussion included in the Form 10-K for the year ended December 31, 2020 includes discussion of various factors and items related
to the Company’s results of operations and liquidity. There have been no other significant changes in most of the factors
discussed in the Form 10-K and many of the items discussed in the Form 10-K are relevant to 2021 operations; thus, the reader
of this report should read Management’s Discussion included in Form 10-K for the year ended December 31, 2020.
RESULTS
OF OPERATIONS
Revenues
Revenues
for the three months ended March 31, 2021 was $5,794 which was $3,007 lower than for the same period in 2020 which was $8,801.
EOR revenues declined 37.1% or $2,655, and staffing revenue by 31.5% or $406 as demand for services was down from a year ago which
before the mid-March 2020 governmental shutdown caused by the COVID-19 pandemic, was buoyed by election and sporting event client
activities. AT&T’s DirecTV unit cancellation of several Sirius-XM shows accounted for an estimated $1,000 revenue decline
which represents approximately 33% of our overall comparative revenue decline and 37% of the EOR comparative Q1 decline.
Staffing
revenue was adversely impacted by our IQS IT division which saw a dramatic decline of $516 or 65.3% from $790 in Q1 2020, to $274
in the Q1 2021, as 2 clients ceased employing our IT solutions almost altogether ($402 revenue decline) and one of our largest
clients converted 4 full-time equivalents (“FTE”) to permanent roles over the course of 12 months after April 1, 2020,
leading to a $84 top line comparative Q1 reduction. Conversely, Media staffing grew 22% to $610 as head count increased by a commensurate
percentage of 25% by end of the quarter.
Cost
of Revenue / Gross Profit
Gross
Profit was $747 representing 12.9% of revenues, which was $285 below the gross profit of $1,032 in the first quarter of 2020.
Although revenues from Q1 declined by 34.2% from Q1 2020, gross margins only declined by 27.7%. This was a result of Q1 profit
margin improved from 11.7% in Q1 2020 to 13% in Q1 2021. Margin improvement can be attributed to product mix being more titled
to higher margin staffing and Video Production, which combined was 22.3% in Q1 2021 versus 18.5% in Q1 2020.
General
and Administrative (“G&A”)
General
and administrative expenses for the three months ended March 31, 2021 were $810, as compared to $1,091 in the comparable period in
2020. The $281decrease in comparative three-month periods is due to $101 in salary and benefit cost reductions, outside legal costs
declined by $90 and accounting fees by $19. Given the adverse effect on revenues caused by COVID-19, and the need to add new
clients, management restructured the organization accordingly, which improved sales resources, but lowered overhead costs by 15% to
a year ago.
Interest
Expense
The
Company recognized interest expense in the amount of $45 during the three months ended March 31, 2021, compared to $138 during
the prior year period. The $93 decrease is directly attributed to a significant decreased reliance on the factoring line that
had an outstanding average Q1 2020 balance of $4,711 compared to $2,164 in 1Q 2021. This resulted in a savings of approximately
$50 and paying off the convertible note which carried approximately $26 in interest in 2020. The Triumph Loan for $250 which was
satisfied in February had $11 more in costs in 2020.
Net
Loss
The
Company incurred a lower net loss in first quarter of 2021 at $28 compared to a year earlier when it was $237 as the reduced G&A
and interest charges (includes VIE related interest), and income tax coupled with $75 in earned interest, totaled a $489 improvement
from a year ago, compared to a reduction of $285 netting 204 in net profit improvement in Q1 2021compared to March 31, 2020.
21
LIQUIDITY
AND CAPITAL RESOURCES
Our
working capital requirements are driven predominantly by EOR field talent payments, G&A salaries, public company costs, interest
associated with factoring, and client accounts receivable receipts. Since receipts from client payments are on average 70 days
behind payments to field talent, working capital requirements can be periodically challenged. We have a Factoring Facility with
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. However, to date, we have not seen any adverse change in our collections,
with our Days Outstanding (DSO) improving to 63 days compared to 73 on December 31, 2020. Our DSO increased in 2020 because several
of our large clients now require 60-to-90-day terms. As of March 31, 23% of our invoicing was > 60 days aged.
As
of March 31, 2021, 64% of our $3,964 in total A/R was < 31 days, 34% 1 to 30 days past due, 5% between 31 and 60 days past
due and 2% ($66) greater than 60 days. As of March 31, 2021, having 7% of our A/R > 31 days is an improvement over December
31, 2020, where 11% of our A/R was aged >31 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.
Vivos
Debtors as of March 31, 2021, had notes receivable totaling $4, 308 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, MMG received a $5,216 loan through the Paycheck Protection Program (the “PPP”) with a term of
two (2) years and an interest rate of 1% per annum. The PPP 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.
22
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 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 at the
Federal level.
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 the PPP funds for their intended purposes, 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 March 31, 2021, our working capital was $5,938, compared to $5,970 at the end of December 2020, and $566 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 G&A
employees during the covered 24-week period between May and October 2020.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Not
applicable.
Item 4. Risk Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures . The President and Chief Financial Officer evaluated the effectiveness of
the disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the President
and Chief Financial Officer concluded that the disclosure controls and procedures as of the end of the period covered by this
report were effective such that the information required to be disclosed in reports filed under the Securities Exchange Act of
1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms
and (ii) accumulated and communicated to the President and Chief Financial Officer to allow timely decisions regarding disclosure.
A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been
detected.
(b)
Changes in Internal Control over Financial Reporting . There were no changes in the Company’s internal controls over
financial reporting, known to the President and Chief Financial Officer that occurred during the period covered by this report
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
23
RELIABILITY
INC.
OTHER
INFORMATION
March
31, 2021
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
For
a description of our legal proceedings, see Note 6, Commitments and Contingencies, of the Notes to Unaudited Consolidated Financial
Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
From
time to time, the Company 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
or about February 17, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against
Vivos Holdings, LLC, VREH and Naveen Doki (the “Defendants”), to enforce MMG’s rights under certain promissory
notes and a personal guarantee made by the defendants (the “Debt Collection Suit”). The aggregate amount of these obligations
as of the balance sheet date is approximately $4,308. The case is proceeding. The Company believes that it will be granted a judgment
in its favor. MMG has vigorously pursued this litigation and a full trial on this matter that is expected to last two weeks is
scheduled to begin in Maryland Circuit Court of Montgomery County, Maryland, on October 4, 2021, absent any COVID-19 disruptions that
could cause further delay.
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 “Vivos Default Counterclaim”), The Company believes
that the Counterclaim has no merit. The Company continues to vigorously defended 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 in Intent to
Arbitrate. A full trial covering the Vivos Group note defaults and the Vivos Group’s countersuit which was originally scheduled
for March 2021, will take place over a two-week period starting on October 4, 2021, absent any COVID-19 disruptions that could affect
scheduling.
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. There exists an extension on Reliability’s “reply brief,” which is due on May 17, 2021.
24
On
December 23, 2020, after an evidentiary hearing before the Circuit Court for Montgomery County, Maryland, a judge denied a motion by
Vivos Holdings, LLC, VREH, Doki, Kaylan Pathuri (“Pathuri”), Judos Trust by Shrishsha Janumpally, its trustee (“Judos”)
and Igly Trust by Kaylan Pathuri, its trustee, (“Igly”) to compel a shareholder meeting based on the facts presented
at trial. The judge also commented that, based on the evidence presented, management was performing its fiduciary duties to protect the
Company despite adverse circumstances. This same judge will be presiding over a full trial regarding Company’s lawsuit to enforce
the repayment of notes and the Vivos Group counterclaim, over a two-week period starting on October 4, 2021, absent any COVID-19 disruptions
that may affect scheduling.
On
January 20, 2021, Defendants and Counter/Third-Party Plaintiffs, Vivos Holdings, LLC (“Vivos”), Vivos Real Estate
Holdings, LLC (“VREH”), Dr. Naveen Doki (“Doki”), Kaylan Pathuri (“Pathuri”), Igly Trust (“Igly”),
Judos Trust (“Judos”), by counsel, filed a Notice of Appeal with the Circuit Court for Montgomery County, Maryland
denying their Motion for Preliminary Injunction signed on December 23, 2020.
The following legal
proceedings were Vivos Group borrowings impacting
MMG:
On
September 28, 2018, Credit Cash filed a complaint against MMG, Vivos, Vivos Acquisitions, LLC, Dr. Doki, Dr. Valleru (the “Parties”)
and other defendants in the United States Circuit Court of Montgomery County, Maryland for the District of New Jersey for, among other
things, breach of contract of the MMG and HCRN Credit Facilities and their respective guaranties in relation to the November 15,
2017 agreement (the “DNJ Action”). On October 30, 2018, Credit Cash filed a motion to intervene in an action pending in New
York State, Monroe County, filed by HCRN and LE Finance, LLC against the Parties, and other defendants (“NY State Action”).
On December 10, 2018, the Parties entered into a settlement agreement for the purpose of settling certain claims related to the DNJ Action
only. Pursuant to the settlement agreement, certain repayment terms were agreed upon between Credit Cash and the Parties, but Credit
Cash did not relinquish the right to pursue any claims related to the NY State Action, nor to pursue any remedies against any of the
parties in relation to the November 15, 2017 agreement. Certain of the Vivos Group executed and delivered to MMG that certain
Agreement for the Contingent Liquidation of the Common Stock of Maslow Media Group, Inc., dated as of October 28, 2019 (the “Liquidation
Agreement”), pursuant to which such Vivos Group pledged to MMG the shares of Company Common Stock they received in the Merger
to provide the capital required to satisfy the Parties’ obligations under the Settlement Agreements. Vivos Group misrepresented
upon the execution of the Liquidation Agreement to MMG the status of its obligations under the Settlement Agreement, which were,
in fact, then in default. To date these Vivos Group have not cooperated with the Company to monetize those shares as contemplated by
the Liquidation Agreement. The Company will take appropriate action to enforce its rights under the Liquidation Agreement, which actions
will be dictated in part by the outcome of the Arbitration. On or about March 16, 2020, Credit Cash entered its New Jersey confession
of judgment with the Circuit Court of Montgomery County, Maryland.
Healthcare
Resource Network Complaint: 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 MMG’s rights
under certain promissory notes and a personal guarantee made by the defendants. The case is proceeding. The Company believes that it
will be granted a judgment in its favor. MMG intends to continue to vigorously pursue this litigation. On September 3, 2020, MMG
and HCRN entered into a Tolling Agreement pursuant to which HCRN dismissed MMG from this litigation without prejudice and agreed to forebear
filing a new complaint or initiating any lawsuit or other legal proceeding against MMG until January 31, 2022.
On
or about May 5, 2020, Kinetic Direct Funding domesticated a foreign judgement in the Montgomery County Circuit Court system again
Health Care Resources Network (HCRN), Maslow Media Group, US IT Solutions Inc., 360 IT Professionals, Alliance Micro, Inc. and
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.
Item
1a. Risk Factors
In
addition to the other information set forth in this Quarterly Report, shareholders should carefully consider the factors discussed
in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2020, which could materially affect
our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks
facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also
may materially adversely affect our business, financial condition and/or operating results.
25
We
are currently engaged in substantial and complex litigation and arbitration with the Vivos Group, the outcome of which could materially
harm our business and financial results.
As
more fully described in Note 6(Commitments and Contingencies) of the Notes to Unaudited Consolidated Financial Statements, we
are currently engaged in litigation and arbitration with the Vivos Group. The litigation includes multiple complaints and counterclaims
by us and the Vivos Group in venues in Maryland and Texas. The arbitration was brought by the Company to enforce its rights under
the Merger Agreement.
The
litigation and arbitration are substantial and complex, and they have caused and could continue to cause us to incur significant
costs, as well as distract our management over an extended period. The litigation and arbitration may substantially disrupt our
business and we cannot assure you that we will be able to resolve the litigation on terms favorable to us or that we will be successful
in the arbitration.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not
applicable.
Item
5. Other Information
None.
Item 6. Exhibits :
The
following exhibits are filed as part of this report:
31.1
CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2
CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1
CEO and CFO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Interactive
data files pursuant to Rule 405 of Regulation S-T: (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements
of Cash Flows and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL).
26
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
RELIABILITY
INCORPORATED
(Registrant)
May
14, 2021
/s/
Nick Tsahalis
Reliability
President and Maslow Chief Executive Officer
/s/
Mark Speck
Secretary
and Chief Financial Officer
27
Index
to Exhibits
Exhibit No.
Description
31.1
CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2
CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1
CEO and CFO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL).
**
XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section
18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections
28
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.