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 June 30, 2022.
RELIABILITY INCORPORATED
Quarterly Report on Form 10-Q
As of and For the Three and Six Months Ended June 30, 2022
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)
June 30, | December 31, | |||||||
2022 | 2021 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Trade receivables, net of allowance for doubtful accounts | ||||||||
Retention credit receivable | ||||||||
Notes receivable from related parties | ||||||||
Prepaid expenses and other current assets | ||||||||
Total current assets | ||||||||
Property, plant, and equipment, net | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Factoring liability | $ | $ | ||||||
Accounts payable | ||||||||
Accrued expenses | ||||||||
Accrued payroll | ||||||||
Deferred revenue | ||||||||
Income taxes payable | ||||||||
Other current liabilities | ||||||||
Total current liabilities | ||||||||
Total liabilities | ||||||||
Commitment and contingencies (Note 6) | ||||||||
Subsequent events (Note 10) | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, without par value, | shares authorized, issued and outstanding as of June 30, 2022 and as of December 31, 2021||||||||
Additional paid-in capital | ||||||||
Retained earnings | ||||||||
Total shareholders’ equity | ||||||||
Total liabilities and shareholders’ 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 June 30, | ||||||||
2022 | 2021 | |||||||
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 | $ | $ | ||||||
Shares used in per share computation: | ||||||||
Basic | ||||||||
Diluted |
The accompanying notes are an integral part of these statements.
4 |
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
For the Six Months Ended June 30, | ||||||||
2022 | 2021 | |||||||
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 | $ | $ | ||||||
Shares used in per share computation: | ||||||||
Basic | ||||||||
Diluted |
The accompanying notes are an integral part of these statements.
5 |
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGE IN EQUITY
For the Six Months Ended June 30, 2022 and 2021
(amounts in thousands, except per share data)
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total Equity | ||||||||||||||||
Balance, December 31, 2020 | $ | $ | $ | $ | ||||||||||||||||
Net Income | - | |||||||||||||||||||
Balance, June 30, 2021 | ||||||||||||||||||||
Balance, December 31, 2021 | ||||||||||||||||||||
Net Loss | - | ( | ) | ( | ) | |||||||||||||||
Balance, June 30, 2022 | $ | $ | $ | $ |
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 Six Months Ended June 30, | ||||||||
2022 | 2021 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | ( | ) | |||||
Adjustments to reconcile net (loss) to net cash provided by (used in) 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: | ||||||||
Trade receivables | ||||||||
Prepaid expenses and other current assets | ( | ) | ||||||
Accounts payable | ( | ) | ( | ) | ||||
Accrued payroll | ( | ) | ||||||
Accrued expenses | ( | ) | ( | ) | ||||
Deferred revenue | ( | ) | ( | ) | ||||
Other liabilities | ( | ) | ( | ) | ||||
Income taxes payable | ( | ) | ||||||
Net cash provided by (used in) operating activities | $ | ( | ) | |||||
Cash flows from investing activities: | ||||||||
Purchase of fixed assets | ( | ) | ( | ) | ||||
Net cash provided by (used in) investing activities | $ | ( | ) | ( | ) | |||
Cash flows from financing activities: | ||||||||
Net borrowing/(repayment) of factoring liability | ( | ) | ||||||
Borrowing of note payable | ( | ) | ||||||
Net cash provided by (used in) financing activities | $ | ( | ) | |||||
Net increase 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 Six Months Ended June 30, | ||||||||
2022 | 2021 | |||||||
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 | $ | $ |
8 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(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 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. 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 in 2007. The Company completed a reverse merger with MMG (the “Merger”) on October 29, 2019.
Company Background
Linda Maslow founded Maslow Group initially in 1988 and incorporated the firm under the name the Maslow Media Group Inc., in March 1992.
On November 9, 2016, Linda Maslow sold the business to Vivos Holdings, LLC (“Vivos Holdings”) owned by Dr. Naveen Doki (“Dr. Doki”) and Silvija Valleru (“Ms. Valleru”).
In 2018, Vivos Holdings and several other Vivos companies, (“Vivos Group”) engaged an investment banker who approached management of Reliability to discuss a potential reverse merger transaction. The other investors who collaborated on a share swap of MMG for other Vivos companies were Shirisha Janumpally (“Mrs. Janumpally”), wife of Dr. Doki, and Kalyan Pathuri (“Mr. Pathuri”), husband of Silvija Valleru.
These 4 individuals, Dr. Doki, Mrs. Janumpally, Mr. Pathuri, and Mrs. Valleru, also have common ownership combinations in a number of other entities [Vivos Holdings, LLC. Vivos Real Estate Holdings, LLC (“VREH”), Vivos Holdings, Inc., Vivos Group, Vivos Acquisitions, LLC., and Federal Systems, LLC], (collectively referred to herein as “Vivos Group”).
The reverse merger was consummated on October 29, 2019. As a result of the Merger, the Vivos Group (Vivos Holdings LLC, officially) acquired approximately % of the issued and outstanding shares of Reliability which were distributed by Vivos Holdings, LLC.
On October 29, 2019, MMG became a wholly owned subsidiary of Reliability by merging R-M Merger Sub, Inc., a Virginia corporation and a wholly owned subsidiary of Reliability, with and into Maslow, with MMG being the surviving corporation.
The Company ceased to be a “shell” company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) by virtue of its ownership of MMG following the Merger. The acquisition of MMG also resulted in a “change in control” of Reliability.
On or about February 25, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and Dr. Doki (collectively “Vivos Debtors”), to enforce Maslow’s rights under certain promissory notes and a personal guarantee made by the Dr. Doki.
On or about May 6, 2020, the Vivos Debtors filed a counterclaim and third-party complaint for damages, declaratory and injunctive relief, and jury demand (the “Counterclaim”).
9 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(amounts in thousands, except per share data)
The Company also began pursuing arbitration in New York in 2020, which was the contractual remedy for breaches of the Merger agreement between MMG and Reliability. It is the Company’s contention that the Vivos Group failed to disclose several material pieces of information to Reliability management pre-merger as was required by the Merger agreement. Additionally, the Vivos Group declined to honor multiple commitments made to Reliability, including a $3,000 promissory note and an agreement to shield the Company from their personal debt per the “Liquidation Agreement.” Per the Merger Agreement, these breaches can lead to a loss of up to all shares in Reliability for the Vivos Group.
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, Dr. Doki, Mr. 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, MMG settled the obligation which with it had been committed by Vivos Holdings, LLC in July 2018, with Libertas Funding,
LLC and Kinetic for $
On September 7, 2021, the Company entered to Arbitration and Tolling Agreements (the “Agreements”) with the Vivos Group 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.
On March 21, 2022, the Company began its arbitration proceedings against the Vivos Group. MMG contends the Vivos Group committed merger violations which could result in relinquishment in whole or in part shares of Company common stock received by the Respondents in connection with the Merger. We anticipate an arbitration decision in the third quarter 2022.
We refer below to the disputes between Reliability and the Vivos Group as the “Vivos Matter.”
Upon a final resolution as to the underlying ownership and rights of certain shareholders, the Company intends to hold an annual meeting of shareholders within a reasonable time thereafter.
Basis of presentation
The
unaudited consolidated interim financial statements include the accounts of the Company and all wholly owned divisions, including its
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the SEC and should be read in conjunction with the audited financial statements and notes thereto contained in our Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented have been reflected herein. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2021.
10 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(amounts in thousands, except per share data)
Concentration of Credit Risk
For
the six months ended June 30, 2022,
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:
● | Uncertainty in outcome of the arbitration hearing with Vivos Group which will likely have decision rendered in the third quarter 2022; | |
● | Operating
losses in nine of the last ten quarters starting with the first quarter of 2020 through the second quarter of 2022 ending June 30,
2022, totaling in aggregate $ | |
● | The slow-moving rebound of client demand for our services to pre-pandemic levels; | |
● | Difficulties in raising cash via public markets for organic and inorganic growth, due to lack of unissued authorized shares available for Company use; | |
● | Inability to realize approximately
$ | |
● | Commitments and Contingencies, described further in Note 6. |
All
these conditions noted and factored above with the primary risk being that the arbitration (see Item 1) outcome is not in the Company’s
favor, and the $
Therefore, there can be no assurances that the Company will be successful in managing the impact of the foregoing or its ability to maintain sufficient liquidity over a period of time that will allow it to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome from these uncertainties.
The Company is quoted on the OTC Marketplace under the symbol “RLBY.”
11 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(amounts in thousands, except per share data)
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable can be broken down as follows
6/30/2022 | 12/31/2021 | |||||||
Accounts Receivable | ||||||||
Trade receivables | $ | |||||||
Unbilled receivables | ||||||||
Less allowance for doubtful accounts | ||||||||
Total trade accounts receivable |
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Adopted Accounting Pronouncements
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 Company adopted this during 2021 resulting in an impairment charge as stated in the financial statements.
The Company does not believe any other recently issued but not yet effective accounting pronouncement, if adopted, would have a material effect on its present or future consolidated financial statements.
NOTE 5. DEBT
Tax Liabilities
When
MMG was initially acquired by Vivos Holdings, LLC in December 2016, the Company’s corporate status was changed from an S Corp to
a C Corp due to its new ownership structure. This triggered an accelerated tax event, a $
As
of June 30, 2022, the Company no longer has a federal tax liability related to tax periods prior to 2020, with the combined federal and
state tax liability at $
12 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(amounts in thousands, except per share data)
Factoring Facility
Triumph Business Capital
On
November 4, 2016, the Company entered into a factoring and security agreement with Triumph Business Capital (“Triumph”).
Pursuant to the agreement, the Company received advances on its accounts receivable (i.e., invoices) through Triumph to fund growth and
operations. The proceeds of this agreement were used to pay operating costs of the business which include employee salaries, vendor payments
and overhead expenses. On January 5, 2018, the agreement was amended to lower the factoring fee and interest rate for a term of one year.
The agreement was amended again on January 19, 2018, to increase the maximum advance rate to $
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 June 30, 2022, the required amount was
Accounts
receivables were sold with full recourse. Proceeds from the sale of receivables were $
The factoring facility is collateralized by substantially
all the assets of the Company. In the event of a default, the factor may demand that the Company repurchase the receivable or debit the
reserve account. Total finance line fees for the three months ended June 30, 2022 and 2021 totaled $
NOTE 6. COMMITMENTS AND CONTINGENCIES
There are a number of debts and confessions of judgement (“COJ”) related to the Vivos Group that included MMG as a co-signer or guarantor at some stage in the Vivos Group debt process from November 2016 through October 29, 2019, when Vivos Holdings LLC, owned Maslow.
In December 2019, the Company’s executive management learned that prior to the Merger, in January 2018, one of the Company’s related parties, on behalf of MMG, executed a guarantee of obligations of Vivos Real Estate Holdings, LLC (“VREH”), under a mortgage loan for the purchase of the property at 22 Baltimore Rd., Rockville, Maryland. MMG leased this space on market terms. This obligation had not been disclosed by the Vivos Group to Reliability prior to the Merger and consequently not included in MMG’s financial statements.
On
March 3, 2022, MMG received a notice of default, acceleration, and demand for payment in full, from FVCBank due to incurable events of
default on behalf of Borrower, Vivos Real Estate Holdings, LLC. Per the default notice, “As of March 2, 2022, the total indebtedness
due and owing under the Loan (the ‘‘Debt’’) is $
13 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(amounts in thousands, except per share data)
On July 12, 2022, MMG was advised that a foreclosure sale of the 22 Baltimore Road property was scheduled to take place on Thursday August 4, 2022, at Montgomery County Circuit Court in Rockville, Maryland. It was subsequently cancelled after VREH filed for bankruptcy on August 2nd.
Maslow has filed a Motion to Vacate Confessed Judgment entered against it by FVC Bank in the Circuit Court for Fairfax County and has requested that the matter be heard before the end of 2022.
On
October 9, 2018, Maslow Media Group, Inc. was named as a defendant in an Affidavit of COJ filed in the Supreme Court of the State of
New York in relation to a case brought by Hop Capital against members of the Vivos Group, which had collectively agreed to pay a sum
of $
On or about May 6, 2020, the Vivos Debtors and other Vivos Group members, specifically. Mr. 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 is vigorously defending itself and its indemnified officers, directors, and other parties as permitted by the Company’s organizational documents, via a March 2022 arbitration hearing which both parties agreed on September 7, 2021, to resolve their disputes before a single arbitrator in Maryland. The hearing portion began on March 21,2022 and has since concluded. A decision is not anticipated until the third quarter 2022.
At the present time, the Company is uncertain as to whether any of the above items will have a material impact on their consolidated financial statements.
NOTE 7. EQUITY
The Company’s authorized capital stock consists of shares of common stock, with par value. All authorized shares of Company Common stock are issued and outstanding.
NOTE 8. RELATED PARTY TRANSACTIONS
On
November 9, 2016, Vivos Holdings, LLC, the former owner of MMG, acquired
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 minimum rate of interest which per Virginia
statute is
14 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(amounts in thousands, except per share data)
In
connection with the Vivos/MMG Purchase Agreement, on November 15, 2016, MMG executed a promissory note receivable with Vivos Holdings,
LLC in the amount of $
On
November 15, 2017, MMG executed an intercompany promissory note receivable with VREH in the amount of $
On June 12, 2019, MMG entered into a Personal Guaranty agreement with Dr. Doki, pursuant to which Dr. Naveen Doki personally guaranteed to MMG repayment of $ of the balance of the Promissory Note issued to Vivos Debtors on November 15, 2017, within 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.
On
September 5, 2019, MMG entered into a Secured Promissory Note agreement with Vivos, pursuant to which MMG issued a secured promissory
note to the Vivos Group in the principal amount of $
15 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(amounts in thousands, except per share data)
Additionally,
the Vivos Group had borrowings of $
Debt Settlement Agreements
On
July 21, 2021, MMG settled the obligation which Vivos Holdings, LLC had obligated MMG to in July 2018, with Libertas Funding, LLC and
Kinetic for $
On March 6, 2022, MMG received a notice of default, acceleration, and demand for payment-in-full from FVC Bank due to incurable events of default on behalf of Borrower Vivos Real Estate Holdings, LLC.
Maslow has filed a Motion to Vacate Confessed Judgment entered against it by FVC Bank in the Circuit Court for Fairfax County and has requested that the matter be heard before the end of 2022.
Related Party Relationships
On
October 29, 2019, prior to the Merger, pursuant to the Merger Agreement, Dr. Doki and Silvija Valleru became beneficial owners of
In
2019, the Company entered into transactions with two executive officers, Nick Tsahalis and Mark Speck, of the Company, resulting in the
issuance of warrants to purchase
The
term “warrant” herein refers to warrants issued by MMG and assumed by the Company as a result of the Merger. The terms of
all warrants are the same other than as to the number of shares covered thereby. The Warrant may be exercised at any time or from time
to time during the period commencing at 10:00 a.m. Eastern time on first business day following the completion of the Qualified Financing
(as defined below) and expiring at 5:00 p.m. Eastern time on the fifth annual anniversary thereof (the “Exercise Period”).
For purposes herein, a “Qualified Financing” means the issuance by the Company, other than certain excluded issuances of
shares of Common stock, in one transaction or series of related transactions, which transaction(s) result in aggregate gross proceeds
actually received by the Company of at least $
On September 7, 2021, the Company entered in Arbitration and Tolling Agreements with alleged shareholder Dr. Doki, and his affiliates and all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing to resolve their disputes before a single arbitrator in Maryland. The parties also agreed to maintain the status quo in corporate governance and related matters pending a final non-appealable judgment confirming any award in arbitration. The parties also signed a Tolling Agreement to toll the statute of limitations following the dismissal of a pending litigation.
16 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(amounts in thousands, except per share data)
NOTE 9. BUSINESS SEGMENTS
The
Company operates within
The following tables provides a reconciliation of revenue by reportable segment to consolidated results for the three and six months ended June 30, 2022 and 2021, respectively:
For the three months ended June 30:
2022 | 2021 | |||||||
Revenue: | ||||||||
EOR | $ | |||||||
Recruiting and Staffing | ||||||||
Permanent Placement | ||||||||
Video and Multimedia Production | ||||||||
Total | $ |
For the six months ended June 30:
2022 | 2021 | |||||||
Revenue: | ||||||||
EOR | $ | |||||||
Recruiting and Staffing | ||||||||
Permanent Placement | ||||||||
Video and Multimedia Production | ||||||||
Total | $ |
NOTE 10. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through August 15, 2022, the date on which the unaudited consolidated financial statements were available to be issued. Based upon this evaluation, management has determined that no material subsequent events have occurred that would require recognition in or disclosures in the accompanying unaudited condensed consolidated financial statements, except as follows:
Maslow has filed a Motion to Vacate Confessed Judgment entered against it by FVC Bank in the Circuit Court for Fairfax County and has requested that the matter be heard before the end of 2022.
17 |
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, 2021, 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, 2021, 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, 2021.
Management’s Discussion included in the Form 10-K for the year ended December 31, 2021, 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 2022 operations; thus, the reader of this report should read Management’s Discussion included in Form 10-K for the year ended December 31, 2021.
RESULTS OF OPERATIONS
Revenues
Revenues for the three months ended June 30, 2022, was $6,481, which was $1,407 or 27.7% greater than for the same period in 2021 with second quarter revenue at $5,074. EOR grew by $1,534 or 38.5% to $5,515, which represented 85.1% of second quarter revenue.
Staffing grew $86 to $898 in the second quarter of 2022, but approximately $106 of this total was based on two reassignments of specific US government projects from Video Production to Media Staffing.
Media Staffing, a subset of Staffing, grew beyond benefitting for $106 in reclassed Video Production project revenue from a year ago, with second quarterly revenues of $824 compared to $676 a year ago, an increase of $148. The reclass was merely taking recurring non project revenue previously classified as Video Production and reassigning it appropriately to Media Staffing. The impact in 2022 was $106 in the second quarter. IT Staffing, the other subset, declined comparatively in the second quarter 2022 to 2021 by $62, garnering $74 in 2022.
Video Production would have had a decline in revenue outside the $106 deemed not be staffing work, had remained, as that segment produced $68 in revenue compared to $250 in the second quarter 2021.
Permanent Placement failed to post revenue in the quarter ending June 30, 2022.
For the six months ended June 30, 2022, revenue totaled $12,264 compared to $10,868 in the same period a year ago, resulting in $1,396 in incremental revenue comparably.
EOR revenues produced an even larger comparative gain in the first half of 2022 compared to 2021, with $10,288 for the six months ended June 30, 2022, compared to $8,478 a year ago. This is an increase of $1,810 or 21.3%, which represented 83.9% of the Company’s total year to date (YTD) revenue through June 30.
Staffing increased as well when comparing six-month performance ending June 30, 2022, to same period in 2021, by $126 to a total of $1,822. This represented a 7.4% increase over 2021’s Staffing Revenue of $1,696 through the six months ending June 30, 2021.
Media Staffing grew $397 to $1,683 with $206 attributable to the reassignment of two client projects previously credited to Video Production.
Video Production revenue compared unfavorably to the same period in 2021, with revenues of $115 compared to $661 in 2021, a $546 drop. If adjusted for the reclassification of work credited to it in 2021, Video Production would have dropped by $340.
Cost of Revenue / Gross Profit
Gross profit for the three-month period ending June 30, 2022, was $887 representing 13.7% of revenues, which is a $169 improvement over the $718 in gross profit MMG earned in 2021’s second quarter when the gross margin reached 14.1%.
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The quarter over quarter gross margin (“GM”) percentage drop can be partially attributed to the strength of the aforementioned EOR revenue increase of $1,534, which resulted in EOR dominating the four business segments by accounting for 85.1% of the business versus 78.5% in the second quarter 2021; as EOR business GM percentage was 11.7% to the rest which totaled 22.7%, the over quarterly average slipped from a year ago.
However, EOR’s 11.7%, margin was strong compared with 10.4% in the first quarter 2022, 10.1% in the second quarter a year ago and a 9.8% average for all of 2021. This improvement can be attributed to some pricing changes negotiated with several key clients, and the client mix being favorable as clients with slightly higher margins contributed more heavily to the quarter. This is not expected to be the case throughout 2022.
MMG’s Staffing gross profit grew modestly by $6 to $191, as volume had more to do with the growth than gross margin percentage as Staffing margins declined by 80 basis points to 20.7%. IT Staffing dropped approximately 1% in gross margin percentage to 27.8%.
Year to date 2022, the Company’s gross profit improved by $153 or 10.5% to $1,616 compared to 2021.
Gross margin percentage fell slightly to 13.2% from 13.5%.
EOR experienced a margin boost year to date to 11.1% compared to 10.1% through June 30, 2021. Video Production’s YTD GM % also improved to 24.9% from 20.9% a year ago. Media Staffing GM % has slipped to 21.9% versus 24.5% in the six months ended June 30, 2021. Gross Profit in Media Staffing for the nine months ending June 30, however rose to $368 from $314 as volumes increased.
General and Administrative (“G&A”)
General and administrative (“G&A”) expenses for the three months ended June 30, 2022, were $1,097, as compared to $878 in the comparable period in 2021, representing a $220 or 25.1% increase. This increase was predominantly the result of having an estimated $107 in arbitration related costs, employee salaries and benefits ratcheting up by $64 or 9.4% from the second quarter 2021, and contracted labor and recruiting costs increasing by $33 comparatively from a year ago.
For the six months ending June 30, 2022, G&A was $2,402 compared with $1,688 a year ago, an increase of $714 or 29.7%. However, the legal and consulting costs associated with our arbitration (See Note 1) represented $506 in totality, a $419 increase in like costs associated with the Vivos Matter from a year ago. MMG salaries and benefits increased $201 with sales and client services department non incentive based compensation increasing $127, as we increased our investment in these two vital groups. The other areas of spend increase were commissions to drive sales and recruiting totaling $33; bonus accrued at $72 as we move to tie more compensation to performance-based measures; commercial legal $19; recruiting software $15; and travel $11.
Interest Expense
The Company incurred $66 in interest charges for financing (factoring) its invoices in the first six months of 2022 compared with $63 in the same period a year ago, In the second quarter MMG incurred $36 in interest changes compared to $18 in the same period a year ago as MMG increased its average position under finance from $1.3M a year ago to $2.5M in the second quarter 2022.
Other Income (Expense)
MMG benefitted from $1 in corporate credit card rebate in the second quarter 2022. For the six months ended June 3, 2021, MMG had $0 in other income compared to a year ago when MMG earned $8,042 in other income courtesy of $5,273 in the PPP Forgiveness which included the recovery of accrued interest, and $2,769 In Employee Retention Credits (ERC).
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LIQUIDITY AND CAPITAL RESOURCES
Our working capital requirements are driven primarily by EOR field talent payments, G&A salaries, public company costs, 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, whereas Triumph advances 93% of our eligible receivables at an advance rate of 15 basis points, an interest rate of prime plus 2%., and our prime floor rate at 4%. Our Days Outstanding (DSO) for the trailing 12 months ending June 30, 2022, is at 64 comparable to 62 DSO for the trailing twelve months ending June 30, 2021.
In 2021, a few of our large clients began demanding 90-day terms. Delays in receipt of purchase orders also has had an adverse impact on our DSO since 2019. Despite these challenges, our DSO in the second quarter ending June 30, 2022, improved to 65 from 80 in the first three months of 2022.
When looking at A/R aging in relation to due date, as of June 30, 2022, 77.4% or $3,620 of our $4,668 in total trade receivables were < 31 days aged, compared to 97.6% a year ago. This has much to do with extended payment terms to our larger clients as well as delays of up to 30 days on receiving purchase orders after the invoice has been prepared. MMG management is working on ways to speed back up the cash conversion process outside of financing.
Our Federal and state tax liability has a balance of $92 at the end of the second quarter 2022, mainly because we deposited $725 for our 2021 expected tax liability.
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 experience an adverse cash flow impact 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 officers’ liability insurance premiums, legal fees, filing fees, auditor and accounting fees, stock transfer services, and board compensation; followed by cash factoring and other borrowing interest; cash taxes; and debt payments.
Since we are an EOR with the majority of contracted talent paid as W-2 employees who are paid known amounts on a consistent schedule; our cash inflows do not typically align with these required payments, resulting in temporary cash challenges, which is why we employ factoring.
Vivos Debtors as of June 30, 2022, had notes receivable totaling $5,094 including default on a $3,000 promissory note and on a $750 tax obligation in December 2019. After numerous failed collection attempts, on February 17, 2020, the Company initiated an action in the Circuit Court of Montgomery County Maryland against Dr. Doki and the Vivos Holdings for non-payment.
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.
Because our first three-quarter revenues in 2021 were 80% or less than they were in 2019, the Company was eligible for the Employee Retention Credit. Consequently, MMG received $155 in direct payroll credits from the IRS via its payroll provider Paycom in the late 2nd quarter and $1,086 in the third quarter. MMG returned $842 to the IRS for payroll credits received in the 4th quarter once the program ended retroactively in mid-November 2021.This payment was made to the IRS through Paycom, the Company’s payroll provider in January 2022.
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Overall, these programs bolstered our working capital and enabled us to bring back employees and continue to serve our clients.
As of June 30, 2022, our working capital was $8,608 compared to $9,361 on December 31, 2021, and compared to $9,361 on December 31, 2021. Our adjusted working capital at the end of June 2022, excluding the notes receivable related to the Vivos Debtors totals $3,514 compared to $3,605 a year earlier.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Risk Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The 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
June 30, 2022
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On or about February 25, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and Dr. Doki, to enforce Maslow’s rights under certain promissory notes and a personal guarantee made by the defendants. 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 or about May 6, 2020, the Defendants filed with the Circuit Court of Montgomery County, Maryland a Counterclaim and Third-Party Complaint for Damages, Declaratory and Injunctive Relief and Jury Demand (the “Counterclaim”), The Company believes that the Counterclaim has no merit. The Company will vigorously defend itself and its indemnified officers, directors and other parties as permitted by the Company’s organizational documents. The Company and the other Counterclaim defendants have moved to have the Debt Collection Suit and the Counterclaim stayed pending the outcome of the Arbitration which began March 21, 2022, described below.
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: Dr. 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. On August 4, 2021, the US District Court, Southern District of New York, denied the Respondents motion to dismiss.
On June 12, 2020, Igly Trust, a Vivos Group entity, asked the Texas court for an injunction requiring the Company to provide a shareholder list and to hold a shareholder meeting. On October 20, 2020, the Texas court denied the injunction but, incongruously, dismissed all the Vivos Group plaintiffs for lack of personal jurisdiction. The Company appealed the dismissal because the court had jurisdiction over Igly Trust once it made affirmative claims in Texas and because the Court’s order denying the injunction is an important precedent for establishing that the directors under Texas law retain control of shareholder lists and determining the timing of shareholder meetings. 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 2, 2021, Reliability Incorporated, MMG 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.
On December 23, 2020, at a hearing in the Maryland District Court, a motion by the Vivos Group to compel a shareholder meeting was summarily dismissed. The judge agreed with the Company that permitting the Vivos Group to vote their shares at a meeting of shareholders could materially harm the interests of the Company as a whole, its employees and minority shareholders. 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 2021 but was pre-empted by an agreement by both sides to go to arbitration in March 2022.
On January 20, 2021, Defendants and Counter/Third-Party Plaintiffs, Vivos Holdings, LLC (“Vivos”), Vivos Real Estate Holdings, LLC (“VREH”), Dr. Doki, Mr. 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.
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On August 9, 2021, Reliability filed an additional claim in the Debt Collection Suit and Vivos Default Counterclaim in the Circuit Court of Montgomery County, Maryland against Dr. Doki, Valleru, Mr. Pathuri, Mrs. Janumpally, Igly, and Judos, that the Respondents breached the Merger Agreement in a number of significant respects and committed fraud in connection with the Merger.
On September 7, 2021, the Company entered in Arbitration and Tolling Agreements with alleged shareholder Dr. Doki. and his affiliates and all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing to resolve their disputes before a single arbitrator in Maryland. The parties also agreed to maintain the status quo in corporate governance and related matters pending a final non-appealable judgment confirming any award in arbitration. The parties also signed a Tolling Agreement to toll the statute of limitations following the dismissal of a pending litigation. The hearing portion of the binding Arbitration formally began on March 21, 2022, and has since concluded. A decision is anticipated in the third quarter 2022.
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 MMG, 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 took appropriate actions to enforce its rights under the Liquidation Agreement, which 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 25, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and Dr. Doki, to enforce MMG’s rights under certain promissory notes and a personal guarantee made by the defendants. The case is proceeding. The Company believes that it will be granted a judgment in its favor. MMG intends to continue to vigorously pursue this litigation. On September 3, 2020, MMG and HCRN entered into a Tolling Agreement pursuant to which HCRN dismissed MMG from this litigation without prejudice and agreed to forebear filing a new complaint or initiating any lawsuit or other legal proceeding against MMG until January 31, 2022.
On or about May 5, 2020, Kinetic Direct Funding domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, US IT Solutions Inc., 360 IT Professionals, Alliance Micro, Inc. and Dr. Doki. This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding Maslow Media Group as additional collateral. This loan is currently in default. Foreign Judgement total is $579. There was a settlement reached on October 1,2021 with both parties releasing each other of any and all claims with no assets changing hands. MMG needs to determine which lien releases have been filed.
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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.
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, 2021, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
We are currently engaged in substantial and complex litigation and arbitration with the Vivos Group, the outcome of which could materially harm our business and financial results.
As more fully described in 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.
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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). | |
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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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) | |
August 15, 2022 | /s/ Nick Tsahalis |
Reliability President and 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). | |
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections
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