UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| (Mark One) | |
| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For
the quarterly period ended | |
| 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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| ||
| (Address of principal executive offices) | (Zip Code) |
| (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 | ||
| 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. ☒ ☐ 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). ☒ ☐ 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 ☐ | ||
| Smaller
reporting company |
|||
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ YES ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: shares of Common Stock, no par value, as of September 30, 2021.
RELIABILITY INCORPORATED
Quarterly Report on Form 10-Q
As of and For the Three and Nine Months Ended September 30, 2021
INDEX
| 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
| September 30, December 31, | ||||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | |||||||
| Trade receivables, net of allowance for doubtful accounts | ||||||||
| Notes receivable from related parties | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Other intangible assets, net | ||||||||
| Goodwill | ||||||||
| Total assets | $ | |||||||
| LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Factoring | $ | |||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Accrued payroll | ||||||||
| Deferred revenue | ||||||||
| Income taxes payable | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| PPP loan payable | ||||||||
| Total liabilities | ||||||||
| Commitment and contingencies (Note 7) | ||||||||
| Subsequent events (Note 10) | ||||||||
| SHAREHOLDER’S EQUITY | ||||||||
| Common stock, without par value, shares authorized, issued and outstanding as of September 30, 2021, and as of December 31, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total shareholder’s equity | ||||||||
| Total liabilities and shareholder’s equity | $ | |||||||
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 September 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenue earned | ||||||||
| Service revenue | $ | $ | ||||||
| Cost of revenue | ||||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Income (loss) before income tax (expense) benefit | ( | ) | ||||||
| Income tax (expense) benefit | ( | ) | ||||||
| Consolidated net income (loss) | ( | ) | ||||||
| Net income per share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| Share used in per share computation: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these statements.
| 4 |
RELIABILITY INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenue earned | ||||||||
| Service revenue | $ | $ | ||||||
| Cost of revenue | ||||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income (expense) | ( | ) | ||||||
| Income (loss) before income tax (expense) benefit | ( | ) | ||||||
| Income tax (expense) benefit | ( | ) | ||||||
| Consolidated net income (loss) | ( | ) | ||||||
| Net income (loss) attributable to noncontrolling interest in consolidated affiliates | ||||||||
| Net income (loss) attributable to Reliability Inc. | $ | ( | ) | |||||
| Net income per share: | ||||||||
| Basic | $ | |||||||
| Diluted | $ | |||||||
| Share used in per share computation: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| 5 |
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGE IN EQUITY
For the Nine Months Ended September 30, 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 | ( | ) | ||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| VIE consolidation | - | |||||||||||||||||||||||||||
| VIE disposal | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, September 30, 2020 | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | |||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Balance, September 30, 2021 | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these statements.
| 6 |
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Accrued interest | ( | ) | ( | ) | ||||
| (Gain)/Loss on disposal of property and equipment | ( | ) | ||||||
| Gain on forgiveness of PPP loan payable | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivables | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued payroll | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Other liabilities | ( | ) | ( | ) | ||||
| Income taxes payable | ( | ) | ||||||
| Net cash provided by operating activities | $ | |||||||
| Cash flows from investing activities: | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | $ | ( | ) | ( | ) | |||
| Cash flows from financing activities: | ||||||||
| Net borrowing/(repayment) of line-of-credit | ( | ) | ( | ) | ||||
| Proceeds from long term debt (PPP) | ||||||||
| Repayment of note payable | ( | ) | ||||||
| Borrowing of note payable | ( | ) | ||||||
| Advances to related Parties | ( | ) | ||||||
| Repayment of notes receivable from related parties | ||||||||
| Net cash used in financing activities | $ | ( | ) | ( | ) | |||
| Net decrease in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of year | ||||||||
| Cash and cash equivalents, end of year | $ | |||||||
The accompanying notes are an integral part of these statements.
| 7 |
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(amounts in thousands)
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | ||||||||
| Income taxes | ||||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| The Company received forgiveness from the SBA of its PPP loan payable | - | |||||||
The accompanying notes are an integral part of these statements.
| 8 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 four industry segments: Employer of Record (“EOR”), Recruiting and Staffing, Permanent Direct Placements, and Video and Multimedia Production which provides script to screen media talent. Our Staffing segment provides skilled field talent on a nationwide basis for Media, IT and finance and accounting client partner projects. Our Staffing segment occasionally received requests for (direct) placements. Because of an uptick in direct hire requests in 2021, factoring in the much higher margins that business derives, MMG decided to add Permanent (Direct) Placement as a stand-alone business segment. 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.
Company Background
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
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 7).
On or about May 6, 2020, the Vivos Debtors and other Vivos Group members, specifically. Kaylan Pathuri (“Pathuri”), Judos Trust by Shirisha 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”). The remedy for the nature and extent of the alleged violations, per the merger agreement, is the forfeiture of Vivos Group shares.
On September 7, 2021, the Company entered in Arbitration and Tolling Agreements with alleged shareholder Naveen Doki, M.D., and his affiliates and all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing to resolve their disputes before a single arbitrator in Maryland (See Note 7).
Basis of presentation
The
unaudited condensed consolidated interim financial statements include the accounts of the Company and all wholly owned divisions, including
its
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 nine months ended September 30, 2021,
| 9 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(amounts in thousands, except per share data)
NOTE 2. LIQUIDITY AND GOING CONCERN
Going Concern
Management considers on a regular basis, the Company’s ability to continue as a going concern. The factors which have impacted the business and our liquidity are;
| ● | Notification
from the SBA on June 10, 2021, that our PPP Loan totaling $ | |
| ● | Eligibility
for Employee Retention Credits (“ERC”) resulting in refunds totaling $ | |
| ● | Operating
loss in third quarter ending September 30, 2021, of $ | |
| ● | Elimination of the ERC by Congress’ passing infrastructure bill, retroactively effective September 30, 2021; | |
| ● | 2020
tax return submission with net operating loss carry back of $ | |
| ● | Operating
loss of approximately $ | |
| ● | Payment
of $ | |
| ● | 2021
estimated tax of $ | |
| ● | Ability
to finance over $ | |
| ● | The pandemic-resulting decline in client demand for our services continuing through the present; | |
| ● | Difficulties in raising cash via public markets 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 $ | |
| ● | Contingent liabilities, described further in Note 7. |
All
these conditions noted and factored in above, but from a prevailing operational view there is still substantial doubt about the Company’s
ability to continue as a going concern as the underlying business has yet to recover from COVID-19 with revenue levels down as
much as 35% from 2019 standards. There is also the risk that the arbitration (see Note 7) outcome is not in the Company’s favor,
and or the $
The Company’s ongoing liquidity position is facing pressures due to the loss of business resulting from the COVID-19 pandemic, as well as ongoing outside legal costs related to Doki Group disputes and increased pressure to make cash payments for Doki group MCA obligations, which ultimately took place on July 21, 2021, 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 and how long it will take to enforce the requirements of the Liquidation Agreement. As a result, the Company could face hurdles 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.
| 10 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(amounts in thousands, except per share data)
The Company is quoted on the OTC Marketplace under the symbol “RLBY”.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts Receivable can be broken down as follows
| September 30, December 31, | ||||||||
| 2021 | 2020 | |||||||
| Accounts Receivable | ||||||||
| Trade receivables | $ | |||||||
| Other receivables (ERC Refund) | ||||||||
| Unbilled receivables | ||||||||
| Less allowance for doubtful accounts | - | - | ||||||
| Total Accounts Receivable | ||||||||
NOTE 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
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 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.
| 11 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(amounts in thousands, except per share data)
The Company does not believe any other recently issued but not yet effective accounting pronouncement, if adopted, would have a material effect on its present or future consolidated financial statements.
NOTE 5. DEBT
Convertible Debt
The
Company had notes payable in the amount of $
Warrants
can only be redeemable if the proceeds of $
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.
Factoring Facilities
Triumph Business Capital
On
November 4, 2016, MMG entered into a factoring and security agreement with Triumph Business Capital (“TBC”). Pursuant
to the agreement, MMG received advances on its accounts receivable (i.e., invoices) through TBC 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 $
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 September 30, 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 (A/R) were sold with full recourse. Proceeds from the sale of receivables were $
| 12 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(amounts in thousands, except per share data)
Maslow’s
outstanding balance with TBC as of September 30, 2021, was $
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 September 30,
2021, and 2020 comparatively totaled $
NOTE 6. 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 challenges its status as 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 $
NOTE 7. 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.
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.
| 13 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(amounts in thousands, except per share data)
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 $
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”). This was settled on October 1st, 2021 with both parties mutually releasing each other of any claims
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 HCRN, MMG, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Naveen Doki and Silvija Valleru. This foreign judgement relates to Vivos Holdings adding MMG as a guarantor on a loan made to HCRN which is in default by HCRN and Vivos Holdings. Foreign judgement total is $. This judgement relates to the default on the settlement agreement dated , referenced above in the Credit Cash Complaint.
On
May 5, 2020, Libertas Funding, LLC (“Libertas”) 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 $. Maslow settled with Libertas/Kinetic (both judgements) this summer
for $
On
May 5, 2020, Kinetic Direct Funding (Kinetic”) 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 $. There were 4 total loans in the settlement, with the 3 domesticated judgements in Montgomery County circuit
court relating to MMG totaling $
| 14 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(amounts in thousands, except per share data)
On or about May 6, 2020, the Vivos Debtors and other Vivos Group members, specifically. Pathuri, Judos, and Igly responded to the Vivos Default Claim with the “Vivos Default Counterclaim. The Company continues to believe that the Counterclaim has no merit and had planned to vigorously defend itself and its indemnified officers, directors and other parties as permitted by the Company’s organizational documents, when a trial on this matter was scheduled to begin on October 4, 2021, but both parties agreed on September 7th, 2021, to resolve their disputes before a single arbitrator in Maryland, which calls for the stay or dismissal of the pending litigation. The agreement provides 150 days to resolve all pending matters through binding arbitration in Maryland.
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, but the Respondents countered with a motion to dismiss Reliability’s Petition to Compel Arbitration to the Federal Courts in New York. On August 4, the US District Court, Southern District of New York, denied the Respondents motion to dismiss.
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. On January 20, 2021, Defendants and Counter/Third-Party Plaintiffs, Vivos, VREH, Doki, Pathuri, Igly, Judos, by counsel, filed a Notice of Appeal on the dismissal. However, the deadline to pursue the appeal lapsed absent additional filings by the Vivos Group.
On
July 21, 2021, Maslow settled the obligation which with it had been committed by Vivos Holdings, LLC in July 2018, with Libertas and
Kinetic for $
Maslow felt compelled to settle Vivos’ Holdings at this time due to 1) added pressure placed by Libertas to collect a balance that now exceeded $1,700, 2) a desire to clear liens against the Company to improve its credit status, and 3) its ability to negotiate a much lower and separate settlement.
Maslow
is pursuing remedy for the $
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(amounts in thousands, except per share data)
NOTE 8. EQUITY
The Company’s authorized capital stock consists of shares of common stock, with par value. All authorized shares of Company Common Stock are issued and outstanding.
NOTE 9. RELATED PARTY TRANSACTIONS
Stock Purchase Agreement
On
November 9, 2016, Vivos Holdings LLC, the former owner of MMG, acquired
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
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 $
In
January 2021, MMG began applying the legal rate of interest which per Virginia statute is
On
November 15, 2017, MMG executed an intercompany promissory note receivable with VREH in the amount of $
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(amounts in thousands, except per share data)
On June 12, 2019, MMG entered into a Personal Guaranty agreement with Dr. Doki, pursuant to which Dr. Naveen Doki personally guaranteed to MMG repayment of $ of the balance of the Promissory Note issued to Vivos on November 15, 2017, within the 2019 calendar year via cash, stock, or other business assets acceptable to the Company. Dr. Doki is a % or greater beneficial holder of Company Common Stock, and therefore is a related party.
As of February 2020, the Company filed a lawsuit against the majority shareholder, pursuant to the personal guaranty agreement for defaulting on the outstanding notes receivables.
In
summary, the Vivos Group receivable totaled $
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
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 $
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 $
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(amounts in thousands, except per share data)
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 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.
MMG
was 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. So, on July 21, 2021, as explained in Note 7, Maslow
signed a settlement agreement with Kinetic Direct Funding, LLC and Libertas Funding, LLC for $
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. The anticipated arbitration process could have this matter settled in the first quarter 2022. However, no assurance can be given how long it will take to enforce the requirements of the Liquidation Agreement. Having made the payment may at some point present a liquidity issue for the Company.
On August 9th, 2021, Reliability filed an additional claim in the Debt Collection Suit and Vivos Default Counterclaim in the Circuit Court of Montgomery County, Maryland against Doki, Valleru, Pathuri, Janumpally, Igly, and Judos, that the Respondents breached the Merger Agreement in a number of significant respects and committed fraud in connection with the Merger.
On September 7, 2021, the Company entered in Arbitration and Tolling Agreements with alleged shareholder Naveen Doki, M.D., and his affiliates and all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing to resolve their disputes before a single arbitrator in Maryland. The parties also agreed to maintain the status quo in corporate governance and related matters pending a final non-appealable judgment confirming any award in arbitration. The parties also signed a Tolling Agreement to toll the statute of limitations following the dismissal of a pending litigation.
Related Party Relationships
On
October 29, 2019, prior to the Merger, pursuant to the Merger Agreement, Naveen Doki and Silvija Valleru became beneficial owners of and shares of RLBY Common Stock, respectively, equal to % and
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 (on a post-Merger basis) shares of Company Common Stock, a warrant (as defined
below) for (on a post-Merger basis) shares of Company Common Stock and a convertible promissory note of same date in the initial
principal amount of $
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(amounts in thousands, except per share data)
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 (on a post-Merger basis) shares of MMG Common Stock and a convertible promissory note of same date in the initial
principal amount of $
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 (on a post-Merger basis) shares of MMG Common Stock,
and a Warrant to purchase (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 $
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 $
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 $
NOTE 10. BUSINESS SEGMENTS
The
Company operates within
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(amounts in thousands, except per share data)
The following table provides a reconciliation of revenue by reportable segment to consolidated results for the three and nine months ended September 30, 2021, and 2020, respectively:
For the three months ended September 30:
| 2021 | 2020 | |||||||
| Revenue: | ||||||||
| EOR | $ | $ | ||||||
| Recruiting and Staffing | ||||||||
| Permanent Placement | ||||||||
| Video and Multimedia Production | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
For the Nine months ended September 30:
| 2021 | 2020 | |||||||
| Revenue: | ||||||||
| EOR | $ | $ | ||||||
| Recruiting and Staffing | ||||||||
| Permanent Placement | ||||||||
| Video and Multimedia Production | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
NOTE 11. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through November 15, 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 November 5, 2021, Congress passed H.R. 3684) infrastructure bill which terminated early the ERC program, making wages paid after Sept. 30, 2021, ineligible for the credit. It is expected that monies the Company has been credited in the 4th quarter will reduce the 941 refund portions owed. The Company awaits IRS guidance on how this will be handled, given the retroactive nature of the legislation.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our unaudited consolidated financial statements and related 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.
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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 September 30, 2021, was $6,941 which was $740 or 12% greater than for the same period in 2020 which was $6,201. EOR led the revenue uptick by delivering $5,705 or 82% of the quarterly revenue. This was a $831 or 17%, improvement over the third quarter in 2020. IQS the Company’s IT staffing division saw a revenue decline of $410 or 82% from the same period a year ago which offset the improvement in revenue by the Media Staffing division which was up $267 or 44% from the same period a year ago. Permanent Placement which was not an earning center in 2020 contributed $38 which was $8 more than the second quarter. Although IT staffing revenues do not include IT direct placements made by the Company, which are considered Permanent Placement these are among the diverse resources we provide clients along with finance and accounting, and Media. The Company expects an increase in this activity as certain new clients are asking us for this service.
Video Production’s $236 in revenue was $21 higher than the third quarter in 2020 as new clients more than filled the void of those with declining demand due to COVID-19.
For the nine months ended September 30, revenue totaled $17,809 which was $2,390 less than a year ago, or a 12% decrease when compared to the prior year. Business segments with the largest declines in the nine-month period ending September 30, 2021, when compared to a year earlier, were EOR at $1,678 or 11% and IQS which derived $1,593 less, a 76% decline. EOR was largely negatively impacted by COVID-19, which has seen some of our larger clients not yet return to full strength on site. IQS’s experienced the loss of its largest customer Lifetouch, which informed the Company in the fall of 2020 that it had decided to offshore their IT software quality assurance professionals effective January 1, 2021, resulting in declines of revenue of $874 year to date, when compared to same period in 2020. Meanwhile Tapfin, which is the vendor management solution for Abbott Labs, has converted a number of IQS’s employees to their staff and have not renewed other employee resulting in a year-to-date loss of revenue of $380. In order to offset these lost revenues, the Company has begun focusing business development resources on growing the IT staffing business in the second half of 2021.
Conversely, Media Staffing has increased its nine-month revenue to $2,158 from $1,445, a $713 or 49% improvement. This is due to the acquisition of 7 new clients by our revamped 6-month-old sales team, which added $546 and an increased demand for this service ($167) by our existing clients, driven by our expertise in delivering top rated media talent to our customers.
Video Production’s nine-month revenue performance also saw an improvement to the same period a year ago by $101, with revenues totaling $897.
Cost of Revenue / Gross Profit
Gross profit for the three-month period ending September 30, 2021, was $803 representing 11.6% of revenues, which was $149 greater than in 2020’s third quarter when the gross margin was at 10.5%.
Media Staffing which saw a 44.2% increase in revenue had strong margins at 21.1%, while Permanent Placement margins were greater than 90%. EOR margins were compressed by just over 1 point to 9.1% due to contractual incentives given to certain clients for reaching predetermined revenue levels, and a high level of sick leave paid by the company to its outsourced employees.
Year to date 2021, the Company’s gross margin percentage improved to 12.7% from 11.9% which can be attributed mainly to Media and IT Staffing margins being > 21% and Permanent Placement which so far have enjoyed margins north of 90%. Absent our Media Staffing year over year Growth and Permanent Placement Revenue, our margins year to date for the period ending September 30, 2021, would be half a point lower at 12.2%.
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Overall margin improvement in EOR, Media Staffing and Video Production year over year contributed $82 in gross profit, representing 4.7% of 2020 first half gross profit.
General and Administrative (“G&A”)
General and administrative expenses for the three months ended September 30, 2021, were $866, as compared to $1,086 in the comparable period in 2020, representing a 20.3% reduction. This was also a reduction of $12 from our prior quarter ending on June 30, 2021. The $220 decrease in comparative three-month periods can be attributed directly to savings in salary and benefit costs by $109, and outside legal costs of $111. Over the nine-month period ending September 30, 2021, management has trimmed $884 or 25.7% of G&A costs, as they represent 14.3% of revenue as opposed to 17% a year ago. The reduction was achieved while increasing the sales portion of G&A in the last 6 months ending September 30, 2021 by $174 as the Company has added additional sales resources.
Interest Expense
The Company recognized interest expense in the amount of $15 during the three months ended September 30, 2021, compared to $30 or 50% during the same prior year period. For the nine-month period ending September 30, 2021, MMG interest costs were $78 compared to $283 for the same nine-month period a year earlier, representing a $205, or 72% savings. This cost reduction is directly attributed to a significantly reduced reliance on the factoring line that had an outstanding ending Q3 2021 balance of $939 compared to $1,043 at conclusion of second quarter 2020. The reduced reliance on factoring is attributed to the Earned Income Credit (“ERC”) which enabled the Company to reduce its payroll cost obligations by $1,156 during the third quarter.
However, when compared to the second quarter 2021, MMG’s $939 factoring balance was $853 higher. This was largely because of our need to finance $475 to pay Vivos Group outside debt. The other factor was that the $86 balance at the end of June 2021 was exceedingly low as our average year to date balance had been around $530.
Other Income (Expense)
Spurred by ERC other income for the three-month period ending September 30, 2021, which totaled $1,813 resulting in the Company experiencing third quarter pre-tax net income of $1,816 compared to a $429 pre-tax net loss a year earlier.
Over the nine-month period ending September 30, 2021, the PPP forgiveness of $5,216 and the ERC’s totaling $4,674 enabled the Company to experience pre-tax net earnings of $9,725 compared to a loss of $1,221 in the comparable period of the prior year.
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 TBC, whereas 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) for first nine months of 2021 at 59 comparable to the 61 DSO for period ending December 31, 2020. By June 2020 our DSO increased to 67 from 60 in 2019 as several of our large clients began demanding 60-to-90-day terms. Delays in receipt of purchase orders also had an adverse impact on DSO. It appears the pendulum over the past 3 quarters has swung favorably as only 3.5% of $4,405 in Accounts Receivable (“A/R”) was > 31 days past invoice due dates, with only 1% > 60.
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When looking at A/R aging in relation to invoice date, as of September 30, 2021, 56.3% of our $4,405 in total A/R was < 31 days aged, compared to 49% a year ago.
The Company has an additional $3,221 in other receivables associated with our ERC eligibility for the first three quarters of 2021. Conversely our Federal and state tax liability has now increased to $1,030.
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 does not provide credit if an account obligor pays more than 120 days after the invoice date.
Our primary uses of cash are for payments to field talent, corporate and staff employees, related payroll liabilities, operating expenses, public company costs, including but not limited to, general and professional liability and directors and officer’s liability insurance premiums, legal fees, filing fees, auditor and accounting fees, stock transfer services, and board compensation; followed by cash factoring and other borrowing interest; cash taxes; and debt payments.
Since we are an EOR with the majority of contracted talent paid as W-2 employees who are paid known amounts on a consistent schedule; our cash inflows do not typically align with these required payments, resulting in temporary cash challenges, which is why we employ factoring.
Vivos Debtors as of September 30, 2021, had notes receivable totaling $4,949 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 non-payment.
It was also anticipated that following the Merger, the Company would both access the capital markets by selling additional shares of Company Common Stock and use shares of Company Common Stock as currency to acquire other business revenues. However, all 300 million authorized shares of Company Common Stock were issued in connection with the Merger. No shares are expected to become available to the Company until the legal dispute with the Vivos Debtors and Vivos Group is resolved. At that point, the Company can decide whether to amend the Company’s Certificate of Formation to increase the number of authorized shares of Company Common Stock or approve a reverse-split of the outstanding shares of Company Common Stock to provide additional shares for these purposes. No assurance can be given as to when this might take place.
On May 5, 2020, MMG received a $5,216 loan through the Paycheck Protection Program (the “PPP”) with a term of two (2) years and an interest rate of 1% per annum. The PPP provided that the Company be eligible for forgiveness if the loan proceeds were used for payroll and certain other specified operating expenses while maintaining specified headcount requirements. On June 10, 2021, the Company was informed by the SBA that it had met the requirements and that both the $5,216 and of accrued interest totaling $57 were forgiven
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 September 30, 2021, our working capital was $9,417, compared to $5,970 at the end of December 2020, $7,991 as of September 30, 2020, and $566 as of March 30, 2020, approximately one month before the PPP funds were received. 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. Our adjusted working capital at the end of September 2021, excluding the notes receivable related to the Vivos Debtors totaling $4,949, was $4,865.
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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.
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RELIABILITY INC.
OTHER INFORMATION
September 30, 2021
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 but as of September 7, both parties agreed to have their case heard in front of a Maryland Arbiter (See Below).
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 believing the Counterclaim has no merit, 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. On September 7th, 2021 (see last paragraph below) both parties agreed to have all matters settled through a binding arbitration process which was cited as a remedy for merger violations in the merger agreement. This process is to be completed within 150 days of the execution of this agreement on September 7th, 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 brought a motion to compel the Arbitration and the Respondents countered with a motion to dismiss Reliability’s Petition to Compel Arbitration to the Federal Courts in New York. On August 4, the US District Court, Southern District of New York, denied the Respondents motion to dismiss.
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. This matter has since been moved into a single binding arbitration proceeding in Maryland.
After an extension was granted to Reliability’s “reply brief,” on June 2nd, 2021, Reliability, Incorporated, Maslow Media Group, Inc, Nick Tsahalis and Mark Speck filed an appellant’s brief in the Fourteenth District of Texas, Houston Texas to challenge the court’s prior ruling granting a special appearance to Igly Trust and to the Doki Shareholders. A response to the filed appellant brief has not yet been received. This matter has since been moved into a single binding arbitration proceeding in Maryland.
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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 Shirisha 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. A full trial to address the Company’s lawsuit to enforce the repayment of notes and the Vivos Group counterclaim, was scheduled to commence in early October but was preempted by an agreement by both sides to go to arbitration (See last paragraph).
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. However, the deadline to pursue the appeal lapsed absent additional filings by the Vivos Group.
On August 9th, 2021, Reliability filed an additional claim in the Debt Collection Suit and Vivos Default Counterclaim in the Circuit Court of Montgomery County, Maryland against Doki, Valleru, Pathuri, Janumpally, Igly, and Judos, that the Respondents breached the Merger Agreement in a number of significant respects and committed fraud in connection with the Merger.
The following legal proceedings where Vivos Group borrowings impacting MMG:
On September 28, 2018, Credit Cash filed a complaint against MMG, Vivos, Vivos Acquisitions, LLC, Dr. Doki, Dr. Valleru (the “Parties”) and other defendants in the United States Circuit Court of Montgomery County, Maryland for the District of New Jersey for, among other things, breach of contract of the MMG and HCRN Credit Facilities and their respective guaranties in relation to the November 15, 2017, agreement (the “DNJ Action”). On October 30, 2018, Credit Cash filed a motion to intervene in an action pending in New York State, Monroe County, filed by HCRN and LE Finance, LLC against the Parties, and other defendants (“NY State Action”). On December 10, 2018, the Parties entered into a settlement agreement for the purpose of settling certain claims related to the DNJ Action only. Pursuant to the settlement agreement, certain repayment terms were agreed upon between Credit Cash and the Parties, but Credit Cash did not relinquish the right to pursue any claims related to the NY State Action, nor to pursue any remedies against any of the parties in relation to the November 15, 2017, agreement. Certain of the Vivos Group executed and delivered to MMG that certain Agreement for the Contingent Liquidation of the Common Stock of 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. MMG needs to confirm whether this matter has been settled and if so whether MCA lenders and HCRN remitted payments to Credit Cash, and if so, which liens have been removed.
Healthcare Resource Network Complaint: On or about February 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.
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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. There was a settlement reached on 10/1/2021 with both parties releasing each other of any and all claims with no assets changing hands. MMG needs to determine which lien releases have been filed.
On July 21, 2021, MMG came to an agreement with Kinetic and Libertas for $475 to release MMG from being obligated to this Vivos Group debt. The intended shield to protect MMG from having to pay Vivos Group’s debt was the aforementioned Liquidation Agreement which Vivos Debtors refuse to comply with (as covered in Note 7).
On September 7, 2021, the Company entered in Arbitration and Tolling Agreements with alleged shareholder Naveen Doki, M.D., and his affiliates and all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing to resolve their disputes before a single arbitrator in Maryland. The parties also agreed to maintain the status quo in corporate governance and related matters pending a final non-appealable judgment confirming any award in arbitration. The parties also signed a Tolling Agreement to toll the statute of limitations following the dismissal of a pending litigation. The binding Arbitration must be completed with 150 days of the agreement date which places the deadline date around February 4, 2022.
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.
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 7 (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.
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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). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RELIABILITY INCORPORATED (Registrant) | |
| November 15, 2021 | /s/ Nick Tsahalis |
| Reliability President and Maslow Chief Executive Officer | |
| /s/ Mark Speck | |
| Secretary and Chief Financial Officer |
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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
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