NATURE OF OPERATIONS AND BASIS OF PRESENTATION

6 Months Ended

Jun. 30, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

NATURE OF OPERATIONS AND BASIS OF PRESENTATION

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

Reliability, Inc. is a leading provider of employer workforce management solutions that operates, along with its wholly-owned subsidiary, The Maslow Media Group, Inc (“MMG”), (collectively, “Reliability” or the “Company”), primarily within the United States of America in four industry segments: Employer of Record (“EOR”), Recruiting and Staffing, Direct Placements, and Video and Multimedia Production Services, which provides script to screen media talent. Our Staffing segment provides skilled field talent on a nationwide basis for Media, IT, and finance and accounting client partner projects. Video Production involves assembling and providing staff and/or crews with equipment for live or taped programming. This service can be provided within client facilities or on location across the globe and cover pre-production planning to post-production services.

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

Linda Maslow founded Maslow Group initially in 1988 and incorporated the firm under the name the Maslow Media Group Inc. (“MMG”) in March 1992.

On November 9, 2016, MMG was sold 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 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 individuals included but were not limited to Dr. Doki, Mrs. Janumpally, Mr. Pathuri, Mrs. Valleru. Igly Trust and Judos Trust also have common ownership combinations in a number of other entities [Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC (“VREH”), Vivos Holdings, Inc., Vivos Group, Vivos Acquisitions, LLC, and Federal Systems, LLC], (collectively referred to herein as “Vivos Group”).

The reverse merger was consummated on October 29, 2019. As a result of the Merger, the Vivos Group (Vivos Holdings LLC, officially) acquired approximately 84% 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.

RELIABILITY INCORPORATED AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(amounts in thousands, except per share data)

Upon purchasing MMG and thereafter, the “Vivos Group”) began borrowing monies from MMG starting with $1,400 in 2016 and by the end of 2019 the balance had reached $3,418, which included a $3,000 guarantee from Dr. Naveen Doki. (See Note 8 for more details).

The attempted collection of the guarantee and debt from the Vivos Group set off a chain of legal events culminating in an arbitration hearing and award in 2022. (See below and Item 3 for complete summary). We refer below to the disputes between Reliability and the Vivos Group as the “Vivos Matter.”

A series of legal actions and hearings took place starting in March of 2020 through September of 2021. At that time, arbitration was agreed by both the Vivos Group and MMG, The proceedings began in February 2022 and were completed in March 2022.

On August 31, 2022, the Arbitrator issued an award (the “Award”) with the Company and MMG prevailing on their claims. The Company and MMG were awarded the following:

● an award in favor of MMG against Vivos Holdings LLC under Note I (as defined in the Award) in the amount of $3,458, with interest thereon from June 30, 2022, at the rate of 4.5% per year;

● no award as to Note II (as defined in the Award) until and at such time as the automatic stay imposed by the United States Bankruptcy Court as a result of the filing of a petition in bankruptcy by VREH is lifted or the bankruptcy proceeding is terminated;

● an award in favor of MMG against Vivos Holdings, LLC under Note III (as defined in the Award) in the amount of $800, with interest thereon from June 30, 2022, at the rate of 2.5% per year, plus collection costs, including reasonable attorneys’ fees, incurred in the effort to collect Note III;

● an award in favor of MMG against Naveen under the Personal Guaranty (as defined in the Award) in the amount of $2,309, plus interest thereon at the rate of 6% per year from the date of the Award;

● an award in favor of the Company against Naveen, Valleru, Janumpally, individually and as Trustee of Judos Trust, and Pathuri, as Trustee of Igly Trust, jointly and severally, for contract damages of $1,000, to be satisfied by the transfer of their shares of the Company common stock to the Company equal in value to $1,000, valued as of the date of the Award, in accordance with the provisions of Section 9.06(d) of the Merger Agreement;

● an award in favor of the Company against Naveen, Valleru, Janumpally, individually and as Trustee of Judos Trust, and Pathuri, as Trustee of Igly Trust, jointly and severally, for fraud damages in the amount of $4,327, plus interest thereon at the rate of 6% per year from the date of the Award, together with any out-of-pocket fees and expenses, including attorneys’ and accountants’ fees;

● an award appointing a rehabilitative receiver for the Company under the deadlock situation provisions of Section 11.404(a)(1)(B) of the Texas Business Organizations Code, the primary function of which is to collect the contract and fraud damages, including costs, expenses and fees provided in the Award, due to the Company, with matters regarding such receivership to be set forth in a supplemental award; and

● declaratory relief in favor of the Company and its officers and directors.

Section 11.404(a)(1)(B) of the Texas Business Organizations Code provides for the appointment of a rehabilitative receiver when “the governing persons of the entity are deadlocked in the management of the entity’s affairs, the owners or members of the entity are unable to break the deadlock, and irreparable injury to the entity is being suffered or is threatened because of the deadlock.” With respect to the receivership, the owners or holders of all of the shares of common stock of the Company received as a result of the conversion of 1,600 shares of common stock of MMG owed by Naveen and Valleru under the Merger Agreement shall not be entitled to vote any of those shares at any annual or special meeting of the shareholders of the Company during the period of the receivership. Upon the completion of the receiver’s primary function of collecting damages due to the Company, the receivership shall terminate and the restrictions on the rights of the shareholders of the Company imposed by the Award shall be lifted.

RELIABILITY INCORPORATED AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(amounts in thousands, except per share data)

On May 17, 2023, the Arbitrator issued an Amended and Supplemental Arbitration Award (the “Amended Award”) which included the following:

● the Arbitrator will appoint a rehabilitative receiver under Maryland law in a Supplemental Award Appointing Rehabilitative Receiver;

● an award in favor of MMG and against VREH under Note II in the amount of $835,156 as of June 30, 2022, with interest thereafter at the rate of 5.5% per year; and

● because the loss sustained by Reliability, Inc. in fraud damages (Award 6) is the same as the loss sustained by Reliability, Inc.’s wholly-owned subsidiary, Maslow Media Group, Inc., in the nonpayment of Notes I, II, and the Personal Guaranty (Awards 1, 2, and 4), there can be only one recovery.

On May 31, 2023, the Arbitrator appointed a Rehabilitative Receiver in the above case, an assignment which the appointee accepted. We now await the Supplemental Order Appointing the Rehabilitative Receiver.

On June 16, 2023, we learned that the principal amount due on 22 Baltimore Road had been satisfied via sale and thus the Fairfax, Virginia court released the VREH confessed judgement; meaning MMG was no longer listed as a guarantor.

On July 21, 2023, MMG filed a petition for attorneys’ fees, as requested by the Arbitrator. The Arbitrator set the following remaining schedule for submitting petitions for attorneys’ fees: Vivos Holdings, LLC response on August 21, 2023 and our reply on September 6, 2023.

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.

As of June 30, 2023, the Vivos Debtor (“Vivos Debtor”) balance was $5,348. The arbitration award covering all bulleted items above currently totals $6,348 independent of legal fees, interest, and other fees (see Note 2 below). This amount represents a reduction in earlier estimates as a result of the clarifications issued by the Arbitrator in the Amended Award on May 17, 2023.

Basis of presentation

The unaudited condensed consolidated interim financial statements include the accounts of the Company and all wholly-owned divisions, including its 100%-owned subsidiary, MMG. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 herein 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, 2022.

Concentration of Credit Risk

For the six months ended June 30, 2023, 24.5% of revenue came from one customer, and 13.6% from a second customer. Combined, this totals 38.1% of revenue. Last year, these two customers plus a third, accounted for 48.6% of revenue for the same period ended June 30, 2022. This year, the top five customers accounted for 60.6% of revenue versus a year ago, when the top five landed on 63.5%. No other client has exceeded 10% of revenues for the six months ended June 30, 2023 or 2022.

RELIABILITY INCORPORATED AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(amounts in thousands, except per share data)