Company Quick10K Filing
Reliability
Price0.16 EPS-0
Shares17 P/E-134
MCap3 P/FCF-131
Net Debt-0 EBIT-0
TEV3 TEV/EBIT-229
TTM 2019-09-30, in MM, except price, ratios
10-K 2020-12-31 Filed 2021-03-31
10-Q 2020-09-30 Filed 2020-11-12
10-Q 2020-06-30 Filed 2020-08-14
10-Q 2020-03-31 Filed 2020-06-15
10-K 2019-12-31 Filed 2020-05-01
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-03-28
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-03-29
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2017-08-14
10-Q 2017-03-31 Filed 2017-05-15
10-K 2016-12-31 Filed 2017-03-20
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-15
10-Q 2016-03-31 Filed 2016-05-13
10-K 2015-12-31 Filed 2016-03-30
10-Q 2015-09-30 Filed 2015-11-13
10-Q 2015-06-30 Filed 2015-08-11
10-Q 2015-03-31 Filed 2015-05-14
10-K 2014-12-31 Filed 2015-03-31
10-Q 2014-09-30 Filed 2014-11-13
10-Q 2014-08-08 Filed 2014-08-11
10-Q 2014-03-31 Filed 2014-05-08
10-K 2013-12-31 Filed 2014-03-28
10-Q 2013-09-30 Filed 2013-11-08
10-Q 2013-06-30 Filed 2013-08-01
10-Q 2013-03-31 Filed 2013-05-02
10-Q 2012-06-30 Filed 2012-08-01
10-Q 2012-03-31 Filed 2012-05-03
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-02
10-Q 2011-03-31 Filed 2011-05-10
10-K 2010-12-31 Filed 2011-03-08
10-Q 2010-09-30 Filed 2010-11-15
10-Q 2010-06-30 Filed 2010-08-13
10-Q 2010-03-31 Filed 2010-05-17
10-K 2010-03-29 Filed 2010-03-30
8-K 2020-10-07
8-K 2020-07-15
8-K 2020-05-05
8-K 2020-05-04
8-K 2020-03-30
8-K 2019-12-20
8-K 2019-12-13
8-K 2019-11-20
8-K 2019-11-05
8-K 2019-10-30
8-K 2019-10-29
8-K 2019-09-18

RLBY 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosure
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholders' Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1 - Nature of Operations
Note 2 - Liquidity and Going Concern
Note 3 - Summary of Significant Accounting Policies
Note 4 - Acquisition
Note 5 - Trade Receivables
Note 6 - Property, Plant and Equipment
Note 7 - Goodwill and Other Intangible Assets
Note 8 - Accrued Expenses
Note 9 - Income Taxes
Note 10 - Debt
Note 11 - Variable Interest Entity (Vie)
Note 12 - Commitments and Contingencies
Note 13 - Equity
Note 14 - Related Party Transactions
Note 15 - Employee Benefit Plan
Note 16 - Business Segments
Note 17 - Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10 - K Summary
EX-21.1 ex21-1.htm
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm

Reliability Earnings 2020-12-31

Balance SheetIncome StatementCash Flow
3.1-1.5-6.1-10.8-15.4-20.02012201420172020
Assets, Equity
0.10.10.0-0.0-0.1-0.12012201220132014
Rev, G Profit, Net Income
25143-8-19-302012201420172020
Ops, Inv, Fin

10-K 1 form10-k.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-K

 

 

(Mark One)

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2020

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the annual period from January-1-2020 to December-31-2020

 

Commission File Number: 000-07092

 

 

RELIABILITY INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

 

 

Texas   75-0868913
(State of Incorporation)   (I.R.S. Employer Identification Number)
 
12124 Skylark Rd, Clarksburg, Maryland   20871
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s telephone number, including area code:

(202) 965-1100

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Name of Exchange on Which Registered

Common Stock

No par value

  N/A

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [  ] Yes, [X] No

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [  ] Yes, [X] No

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes, [  ] No

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). [X] Yes, [  ] No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]
    Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes, [X] No

 

The aggregate market value of the common stock held by non-affiliates of the Registrant as of December 31, 2020 was $21,300,000 (based on the closing sale price of the Registrant’s common stock on December 31, 2020 as reported on OTC American).

 

As of March 31, 2021, there were 300,000,000 shares of the Registrant’s common stock outstanding.

 

 

 

   

 

 

TABLE OF CONTENTS

 

 

Page

No.

Forward-Looking Statements 3
   
PART I  
Item 1 Business 4
Item 1A Risk Factors 12
Item 1B Unresolved Staff Comments 27
Item 2 Properties 27
Item 3 Legal Proceedings 28
Item 4 Mine Safety Disclosures 29
PART II  
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 30
Item 6 Selected Financial Data 30
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
Item 7A Quantitative and Qualitative Disclosures About Market Risk 43
Item 8 Financial Statements and Supplementary Data 44
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 72
Item 9A Controls and Procedures 72
Item 9B Other Information 72
PART III  
Item 10 Directors, Executive Officers and Corporate Governance 73
Item 11 Executive Compensation 77
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 79
Item 13 Certain Relationships and Related Transactions, and Director Independence 81
Item 14 Principal Accountant Fees and Services 81
PART IV  
Item 15 Exhibits and Financial Statement Schedules 82
Item 16 Form 10-K Summary 82

 

 2 
   

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements. Forward-looking statements may include, but are not limited to, statements with respect to our future financial or operating performance, future plans and objectives, competitive positioning, requirements for additional capital, government regulation of operations and the timing and possible outcome of litigation and regulatory matters. All statements other than statements of historical fact, included or incorporated by reference in this Annual Report on Form 10-K that address activities, events or developments that we, or our subsidiaries, expect or anticipate may occur in the future are forward-looking statements. Often, but not always, forward-looking statements can be identified by use of forward-looking words such as “aim,” “potential,” “may,” “could,” “would,” “might,” “likely,” “will,” “expect,” “intend,” “plan,” “budget,” “scheduled,” “estimate,” “anticipate,” “believe,” “forecast,” “committed,” “future” or “continue” or the negative thereof or similar variations. Forward-looking statements are based on certain assumptions and analyses made by us, in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. Readers are cautioned not to put undue reliance on such forward-looking statements, which are not a guarantee of performance and are subject to a number of uncertainties and known and unknown risks, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Important factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among other things, general business, economic, competitive, political and social uncertainties, the actual results of current operations, industry conditions, intellectual property and other proprietary rights, liabilities inherent in our industry, accidents, labor disputes, delays in obtaining regulatory approvals or financing and general market factors, including interest rates, equity markets, business competition, changes in government regulations. Additional risks and uncertainties include, but are not limited to, those listed under “Item 1A. Risk Factors.”

 

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus spread to other countries, including the United States, and efforts to contain the spread of this coronavirus intensified. The outbreak and any preventative or protective actions that governments or we may take in respect of this coronavirus may result in a period of business disruption, reduced customer traffic and reduced operations. The Company expects that the impact of this coronavirus will continue to be materially negative in the short term. The full financial impact cannot be reasonably estimated at this time but may materially continue to affect our business, financial condition and results of operations. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, circumstances permitting people to return to work, among others. In reaction to the COVID-19 pandemic, federal and state legislatures have been attempting to push through legislation, much of which affects the employee-employer relationship, and these new laws may have a material impact on our operations, business, finances and prospects. Recently some states have been reducing or eliminating restrictions instituted to contain the spread of the virus, while this may result in a trend toward a more normalized environment, the restrictions may be reinstituted if circumstances warrant. No certainty can be provided as to the future track of the COVID-19 pandemic or the governmental responses to it. Recent federal legislation has proposed significant federal stimulus funds to address the economic impact of the pandemic, and while such legislation may be a positive factor for the Company’s business, no assurance can be given that any such stimulus will ultimately be enacted or that such legislation will in fact benefit the Company.

 

Although we have attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in the forward-looking statements, there may be other factors, such as the impact of the COVID-19 pandemic, that cause results to differ from those anticipated. Forward-looking statements contained in this Annual Report on Form 10-K are made as of the date of the Annual Report on Form 10-K and we disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, results or otherwise, except as required by applicable securities laws.

 

As used in this Annual Report, the terms “we,” “us,” “our,” “Reliability,” “Maslow,” “MMG” and the “Company” meaning Reliability, Inc. and its operational subsidiary, Maslow Media Group Inc., unless otherwise indicated. All dollar amounts in this Annual Report are expressed in thousands except for share and per share values, unless otherwise indicated.

 

The disclosures set forth in this report should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2020. All dollars, except earnings per share, presented in this Form 10-K are in thousands ($000).

 

 3 
   

 

Part I

 

ITEM 1. BUSINESS

 

OVERVIEW AND HISTORY

 

Reliability Incorporated (“Reliability” or the “Company”), headquartered in Clarksburg, Maryland, through its wholly owned subsidiary, The Maslow Media Group, Inc. (“Maslow” or “MMG”), provides workforce solutions to its clients consisting primarily of Employer of Record (“EOR”) services, recruiting and staffing, and video and multimedia production. The Company focuses on domestic clients but provides services to these clients throughout the world. The Company’s clients are in diverse industries including media, financial services, banking, medical devices, pharmaceuticals, telecommunications, energy, healthcare, photography and chain restaurants.

 

Maslow was founded in 1988 by Linda Maslow whose impetuous was recognizing the need for a single resource that could provide qualified production crews to Washington, D.C.’s television, cable, and multimedia outlets. Maslow was later incorporated in Virginia in 1992 and changed its name to our current legal name, The Maslow Media Group, Inc. Maslow’s initial business consisted of providing “script to screen” services which consisted principally of providing production management and services to television, cable, and multimedia outlets. Over time, Maslow expanded its product offerings, adding workforce management solutions, such as EOR services, and recruiting and staffing services. As Maslow grew, it expanded its geographic footprint by acquiring clients outside of the Washington D.C. metro area.

 

On November 9, 2016, Linda Maslow sold the business to Vivos Holdings, LLC (“Vivos Holdings”) owned by Naveen Doki (“Mr. Doki”) and Silvija Valleru (“Mrs. Valleru”).

 

In 2018, Vivos Holdings and several other Vivos companies, (“Vivos Group”) engaged an investment banker who approached management of Reliability to discuss a potential reverse merger transaction. The reverse merger was consummated on October 29, 2019. As a result of the Merger, Vivos Holdings acquired approximately 86% of the issued and outstanding shares of Reliability which were distributed by Vivos Holdings; two married couples through their direct ownership of shares as well as indirect ownership through entities controlled by them.

 

The Company was incorporated under the laws of the State of Texas in 1953. From 1971 to 2007, the Company was principally engaged in the design, manufacture, market, and support of high-performance equipment used to test and condition integrated circuits. This business was shut down in 2007, and the Company was continued as a “shell company” as defined by the Exchange Act, with no operating activities until October 29, 2019 when the Company acquired Maslow.

 

On October 29, 2019, Maslow became a wholly owned subsidiary of Reliability by merging R-M Merger Sub, Inc., a Virginia corporation and a wholly owned subsidiary of Reliability, with and into Maslow, with Maslow being the surviving corporation (the “Merger”). The Merger is more fully described in our Current Report on Form 8-K filed on October 30, 2019.

 

The Company ceased to be a “shell” company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) by virtue of its ownership of Maslow following the Merger. The acquisition of Maslow also resulted in a “change in control” of Reliability.

 

Since the Merger, Maslow expanded its staffing vertical footprint by acquiring the business assets of Intelligent Quality Solutions Inc. (“IQS”), providing IT Staffing solutions in December 2019, which formerly operated in Plymouth, Minnesota.

 

On or about February 17, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and Mr. Doki (collectively “Vivos Debtors”), to enforce Maslow’s rights under certain promissory notes and a personal guarantee made by the Mr. Doki. On or about May 6, 2020, the Defendants filed a counterclaim and third-party complaint for Damages, declaratory and injunctive Relief and jury Demand (the “Counterclaim”). Both cases are proceeding to go to trial scheduled to begin October 4, 2021. We refer to this dispute as the “Vivos Matter.” Please see Item 3 under LEGAL PROCEEDINGS for more detail and context.

 

As of March 15, 2021, there were 300,000,000 shares of the Company’s common stock, no par value per share (the “Company Common Stock,” or “Common Stock”) outstanding.

 

 4 
   

 

EMPLOYEES

 

As of March 23, 2021, we had 22 team members (staff employees) at our Clarksburg, MD corporate and remote locations. During the fiscal year ended 2020, we assigned approximately 1,067 field talent workers and approximately 129 were working on average throughout the year.

 

As of March 23, 2021, 648 active field talent workers had been employed over the past 6 months.

 

Approximately 10% of our field talent are represented by a labor union. We are not aware of any current labor efforts or plans to formalize organize any of our other team members or field talent. To date we have not experienced any material labor disruptions.

 

Because of the sudden drop-in client requirements due to the COVID-19 pandemic, in March 2020 the Company reduced the hours of contracted employees, reduced corporate salaries, and furloughed six (6) general and administrative personnel. However, upon receipt of Payroll Protection Act (“PPP”) funds totaling $5,215,605 in early May 2020, the Company was able to bring back those employees willing to return, plus commence hiring in direct proportion to our client resource demands. The Company also returned those reduced corporate salaries back to normal levels and paid back the previously suspended amounts. The Company also lowered a number of sales and recruiting employee salaries as part of a compensation restructuring, moving more of their compensation to a performance-based commission.

 

PRODUCTS

 

Employer of Record (“EOR”)

 

Maslow’s EOR product is a unique outsourced managed workforce solution. The costs and compliance obligations relating to the employment of contingent or permanent workers is borne by Maslow. These workers are Maslow employees, and the client is responsible for maintaining its workplace, but all administrative roles and responsibilities are handled by Maslow as the employer of record. This arrangement also obviates the need for our clients to hire freelance contractors for short-term or project-based hiring, who may later be re-classified as “employees” by the Department of Labor, resulting in significant costs to the client.

 

The EOR services offered by Maslow consist of the following principal activities;

 

state employment registration;
employee onboarding/offboarding;
payroll processing;
benefits offerings and administration;
workers compensation claim management;
employee relations;
regulatory compliance;
manage State/County/City mandated employee benefits, such as paid safe and sick leave; and

 

Locality mandated training administration
Unemployment claims administration

 

on site workforce management

 

 5 
   

 

The EOR solution is different than a professional employer organization (“PEO”). In the PEO model, the workers are employees of the PEO’s client. EORs differ from PEOs in that the EOR;

 

  is the employer of the customer’s worker;
     
  assumes all liabilities (i.e., U.S. Department of Labor classification, worker’s compensation, etc.) and responsibilities for its workers provided to customers;
     
  is responsible for all compliance with federal and state regulations, including healthcare mandates such as the Affordable Care Act;
     
  customers maintain a single service agreement with the EOR;
     
  has the ability to offer employee benefits to workers that may not be provided on a cost-effective basis by the customer;
     
  manage all issues arising from employment contracts; and
     
  provides its own benefit plan to its employees, meaning clients could enact a significant savings depending on generosity of their benefit package to their employees.

 

Recruiting/Staffing

 

Maslow has been in the staffing business for over thirty years. During that time, Maslow has developed, and we continue to develop, a large global network of multimedia and video production workers for our media clients, camera crews and other technical and creative talent. Maslow uses this extensive network to rapidly respond to our clients’ needs for contingent staffing and permanent placements.

 

In December 2019, Maslow acquired the operational assets of Intelligent Quality Solutions, Inc. (“IQS”), a staffing firm focused on information technology (“IT”) related industries and specializing in software testing. IQS formerly operated out of Plymouth, Minnesota.

 

Our temporary staffing services consist of on-demand or short-term staffing assignments, contract staffing, and on-site management administration. Short-term staffing services assist employers in dealing with employee demands caused by such factors as seasonality, fluctuations in demand for their products and services, vacations, illnesses, parental leave, and special projects, without incurring the ongoing expense and administrative responsibilities associated with recruiting, hiring and retaining these employees. More and more companies are focused on effectively managing variable costs and reducing fixed overhead. The use of short-term staffing services allows companies to utilize a contingent staffing approach for their personnel needs, thereby converting a portion of their fixed personnel costs to a variable expense.

 

Our staffing services place workers with clients for assignments lasting from three months to an indefinite time period or the placement of full-time equivalent employees on a contingency fee basis. We offer our clients several levels of staffing services including providing just the managed service or more involved assignments consisting of staffing an entire department or providing the workforce for a large project.

 

In some cases, we place an experienced workforce manager on-site at our client’s place of business. This manager then has responsibility of conducting all recruiting, employee screening, interviewing, drug testing, hiring and employee placement for employees at the client’s place of business.

 

As is common in the staffing industry, our engagements to provide temporary services to our client are generally of a non-exclusive, short-term nature and subject to termination by our client with little or no notice.

 

 6 
   

 

Video/Multimedia Production

 

Maslow continues to be a provider of multimedia and video production solutions. Maslow provides script-to-screen production services for corporate, government and non-profit clients.

 

We use our large, pre-vetted network of worldwide freelancers with high-level technical and creative skills to respond quickly to our clients’ needs. Our network includes directors of photography, audio engineers, make-up artists, field producers, gaffers and grips, talent, teleprompter operators, and drone operators. Maslow provides video production services to our clients for the purpose of branding videos, documentaries, Public Service Announcements, training modules, live events, webcasts, animation, projects, and more. Our freelance video production teams and clients collaborate with our in-house, full-time Video Production Managers who bring years of experience to every project, and who work side-by-side with the team to create the vision and story for the project. In addition to human assets, Maslow sources the latest technical broadcast equipment for television, the internet and social media. Our network includes freelance talent across the globe to allow us to provide local talent, resulting in cost savings to our clients.

 

Maslow provides, among others, the following production services;

 

  pre-Production conceptualization of final video deliverable;
     
  project consultation from scriptwriting to site scouting;
     
  budget development and management;
     
  booking and managing of logistics for field and studio teams;
     
  broadcast level HD camera crews and field support worldwide including makeup artists, AV support, field producers, and full equipment rental;
     
  post-production facilities and freelance support including non-linear editors, graphic artists, narrators and actors;
     
  animation and graphic design development, including whiteboard animation;
     
  live transmission services from satellite to streaming; and
     
  management of fully staffed client studios.

 

Intelligent Quality Solutions (“IQS”)

 

The Company operates its IQS assets as an IT staffing division within Maslow. Maslow provides quality assurance (“QA”) analysts, engineers, R&D, testers, developers, business systems analysts and other resources to our customers in a myriad of industries including those manufacturing and or providing medical devices, health care, energy technologies, mobile communications, and photography, as well as restaurant chains.

 

We have significant experience with Software Quality Management SQM, affording our clients sophisticated Independent Verification & Validation (“IV&V”) and QA Consulting Solutions. Our clients can leverage our software testing experience to verify and validate the effectiveness of the applications they deploy and thereby get the best value for their technology investments. We provide staff augmentation and permanent placement from our technical resource pool comprised of top industry professionals. Our team members are typically full-time IQS employees that have established themselves as leaders in their chosen field. We can augment your team with any of the following skill sets:

 

 7 
   

 

  ●  architect
  automation Architect
  devOps Engineer
  medical Device Engineers (including Quality Engineers, R&D, Manufacturing and Electrical)
  QA Tester
  program Manager
  project Manager
  QA Analyst
 

quality Engineer (“QE”) and

  software Developer.

 

IQS is an innovative leader in information technology staffing and staff augmentation. As a partner, we provide expertise and technology to help companies achieve their optimal growth and profitability by securing the right talent at the right time. We also offer integrated workforce solutions as a managed service to give companies even more valuable resource options.

 

Our teams support client projects with dedicated research, sourcing and recruiting specialists. IQS provides ongoing training for our managed teams, keeping them abreast of industry trends, practices and technologies. Clients who have partnered for managed Human Resource operations and services with IQS have discovered that they lower costs, reduce risk and streamline critical processes.

 

Our dedicated recruiting project teams provide:

 

  ●  search/Recruiting
    staffing/On-boarding
  payroll Administration
  benefits Administration (where applicable)
  workers Compensation Claims
  contingent Workforce Management
  employee Relations
 

labor Law Requirements and

 

state Employee Registration.

 

OUR INDUSTRY

 

Maslow operates within the workforce management industry. The services Maslow provides (managed services, employer of record, staffing, recruiting, and video production services) generally fall within the broader category known as “workforce management” services.

 

The temporary staffing portion of the workforce management industry supplies workers to clients. These services offer client’s the ability to rapidly match their workforce to changes in business conditions and needs. In some cases, clients can convert fixed labor costs to variable costs. The demand for a flexible workforce continues to grow with competitive and economic pressures on employers to reduce costs, manage payroll compliance risks and respond to changing market conditions.

 

Per Staffing Industry Analysts 2019 North America Staffing Company Survey, the 2019 trend expected to have the most impact to staffing businesses include: An increased role for technology/artificial intelligence (“AI”), expansion of gig work and staffing convergence with human cloud, increased VMS/MSP use, a continuation of talent shortages, more legislative/regulatory involvement in staffing, clients doing more in house recruiting, negative economic trends, and increased use of flexible/remote work.

 

 8 
   

 

The temporary staffing industry is large and highly fragmented with thousands of competing companies. It is estimated that the 2021 U.S. temporary staffing market will be $136.4 billion, which is up from an estimated $119 billion in 2020. The market hit a high in 2019 at $151.8 billion. Staffing companies compete both to recruit and retain a supply of field talent and to attract and retain clients to use these workers. Client demand for temporary staffing services is dependent on the overall strength of the labor market and trends toward greater workforce flexibility. The temporary staffing industry includes several markets focusing on business needs that vary widely in duration of assignment and level of technical specialization.

 

The temporary staffing market is subject to volatility based on overall economic conditions. Historically, in periods of economic growth, the number of companies providing temporary staffing services has increased due to low barriers to entry. During recessionary periods, the number of companies has decreased through consolidation, bankruptcies based on loss of key clients or material reductions of usage by existing clients, or other events. Prior to the onset of the COVID-19 pandemic, we had been seeing that the temporary staffing industry is experiencing increased demand in relation to total job growth as clients continue to seek a more flexible workforce.

 

Each state has their own set of employment laws and regulations. The complexity of keeping up with this regulatory compliance landscape, particularly for smaller employers and companies requiring workers in multiple states, has focused more attention on EOR services. For example, California adopted eleven new employment laws for 2020.

 

In reaction to the COVID-19 pandemic, federal and state legislatures have proposed and enacted legislation affecting the employee-employer relationship and these new and proposed laws may have a material impact on our operations, business, finances and prospects. For instance, restrictions have been instituted in several states preventing large number of employees to return to the office. No certainty can be provided as to the nature of these new regulations or their impact. Individual states continue to change their pandemic related requirements to relax or remove restrictions on employers, but not assurance can be given as to the effect of these changes or the potential that they may be reimposed if conditions warrant.

 

OUR CLIENTS

 

A large portion of our business comes from two clients, AT&T Services, Inc. (inclusive of its DirecTV division) (“AT&T”) and Janssen Pharmaceuticals (which includes workforce partners Ortho McNeil and Johnson & Johnson). AT&T and Janssen Pharmaceuticals accounted for 28.8% and 10.9% of the Company’s total revenues for 2020. In 2019 AT&T accounted for 37.5% of the Company’s business while Janssen accounted for 11.3%. The combination of revenue from new accounts and a drop in revenue by AT&T by 25% due to COVID-19 stay at home orders resulted in a more egalitarian client mix.

 

AT&T comprised of 48.5% and 50% of the accounts receivable balance as of December 31, 2020 and 2019, respectively. Janssen Pharmaceuticals comprised of 18.4% and 19% of accounts receivable as of December 31, 2020 and 2019, respectively. No other client exceeded 10% of revenues.

 

Other significant customers include Morgan Stanley, Goldman Sachs, Abbott Labs, Kaiser Permanente, Discovery, WETA, Felix Lighting, Liberty Mutual, US House of Representatives, and Strayer University. We additionally have a number of fast-growing tech and IT government contracts which outsource organizations recruiting process to Maslow/IQS.

 

GROWTH STRATEGY

 

Maslow had developed its expertise in the EOR market principally in the media industry. We believe there is an opportunity to leverage this expertise into other industries. The client acquisition challenge outside of media consists principally of educating prospective clients of the merits of the EOR solution over other options, finding the unique opportunities in each industry or within a corporate client that lend itself for an EOR solution, and competition from other providers of EOR services. The existing pandemic may make EOR a more desirable solution to companies that are looking for more agile ways of changing the headcount and nature of portions if not all of their workforce in an expeditious and low risk manner.

 

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If the Vivos Matter (defined and referenced in Overview section) is resolved, the Company plans to tap the capital markets to pursue an aggressive, disciplined acquisition growth strategy, both in terms of raising capital and using our shares as currency to acquire additional businesses. We believe that the staffing/EOR segment is fragmented and while there are several large players in the industry, there are also a significant number of smaller businesses that would make acquisition targets. These businesses are often limited in geographic scope or are specialized within an industry. In addition, we continue to emphasize organic growth specifically directing resources to Sales with the hiring of an experienced Vice President of Sales in the first quarter of 2021.

 

Presently, the Company does not have any authorized shares that are not issued. No shares are expected to become available to the Company until an amendment to the Company’s Certificate of Formation to increase the number of authorized shares of Common Stock or a reverse-split of the outstanding shares of Common Stock is approved. Such approval may not likely occur until the Vivos Matter is resolved. Following the Merger, shareholders holding over 80 percent of the issued and outstanding shares of Common Stock notified the Company that acting as a group they would not approve an amendment to the Company’s Certificate of Formation to increase the number of authorized, but unissued, shares of Common Stock. As a result, the Company has not been able to execute on its business plan.

 

We expect to achieve greater synergies and removal of redundant resources by acquiring EOR and specialized staffing firms in more diverse locations and serving diversified industries such as healthcare, medical, biotech, pharmaceuticals, aeronautics, green technologies, oil and gas, and a myriad of IT specialties. We believe that acquisitions would be not only directly accretive, but also provide significant cross-selling opportunities. Moreover, we can see immediate returns on these acquisitions as we can quickly consolidate back-office operations and realize significant savings.

 

We will focus our organic growth on growing our EOR and staffing business and leveraging our experience to enter new industries, particularly those that rely significantly on contractors and freelancers to perform limited time or project-based assignments such as IT (i.e., software developers and testers), marketing, food services (i.e., cafeteria), and sales activities.

 

As stated above under “Our Industry”, the trend for staffing expertise in the areas of AI, gig, cloud services, VMS/MSP, plus the expected need in fields like biotech, and healthcare, are of interest to Maslow. We will continue to embrace this trend and look to expand on our capabilities, which in turn we believe will open up new markets for us.

 

Additionally, we will continue to invest in technology and process improvements, as necessary and resources allow, to ensure that we operate at optimal productivity and performance and are able to quickly adapt if operations scale up.

 

COMPETITION

 

The staffing services market is highly fractured and competitive with limited barriers to entry. We compete in national, regional and local markets with full-service and specialized temporary staffing companies. Some of our competitors have significantly more marketing and financial resources than we do. Price competition in the staffing industry is intense. We expect that the level of competition will remain high.

 

The principal competitive factors in attracting qualified candidates for temporary assignments are pay rates, availability of assignments, duration of assignments and responsiveness to requests for placement. Because temporary employees often use more than one recruiter for assignments, the speed at which we place prospective workers, and the availability of appropriate assignments are important factors in our ability to complete assignments of qualified workers. In addition to having high quality workers to assign in a timely manner, the principal competitive factors in obtaining and retaining potential workers in the temporary staffing industry include properly assessing the clients’ specific job requirements, the appropriateness of the workers assigned to the client, the price of services and the monitoring of client satisfaction. Although we believe we compete favorably with respect to these factors, we expect competition to continue to increase.

 

The workforce management industry is highly fragmented, so we experience competition from different competitors for different services. Some direct competitors of Maslow for EOR services in the television and video production industry include, but are not limited to, Entertainment Partners, Cast & Crew, PayReel, Inc., Innovative Employee Solutions. Competitors in the broader EOR space include, Velocity Global, Easy Payroll Global, Elements Global Services, and Nexus Contingent Workforce. Direct competitors of Maslow in the staffing space include, but are not limited to TeamPeople, a division of System One Inc., Randstad, Insperity, Group Management Services, and Namely.com. Direct competitors of Maslow in the executive recruiting/permanent placement include, but are not limited to, TeamPeople, a division of System One Inc., Creative Circle, The Lucas Group, Onward Search, and DHR International. Some direct competitors of Maslow in the video production services space include, but are not limited to, PayReel, Inc., Crew Connection Inc. and TeamPeople, a division of System One Inc.

 

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In addition to the above identified competitors, there are additional competitors that include any company that provides a similar range of services as us, as well as companies that just provide some or one of the services Maslow provides. The direct competitors listed above service the same industry that Maslow services and relies upon. The criteria for which these companies compete are generally based on price and service levels.

 

While recognizing the need to continue implementation and awareness in human cloud services as referenced, we believe our competitive advantage is underpinned by human relationships and interactions, and that online staffing will never replace relationships built on a personal touch. This plays into MMG’s strength as our underlying client business relies on these personal relationships such to be successful, leading us to continue to hire career professionals who are able to parlay the emotional intelligence needed with ever evolving modern technology. We see this hybrid of technology and client centricity to be our competitive advantage.

 

SEASONALITY

 

The staffing industry has historically been cyclical, often acting as an indicator of both economic downturns and upswings. Staffing clients tend to use temporary staffing to supplement their existing workforces and generally hire direct workers when long-term demand is expected to increase. Consequently, our revenues tend to increase quickly when the economy begins to grow and, conversely, our revenues may decrease quickly when the economy begins to weaken. Other factors include the timing of recurring annual client events or sporting seasons which last a defined period of time throughout the year.

 

REGULATION

 

We are subject to regulation by numerous federal, state and local regulatory agencies, including but not limited to the U.S. Department of Labor, which sets employment practice standards for workers, and similar state and local agencies. We are subject to the laws and regulations of the jurisdictions within which we operate. While the specific laws and regulations vary among these jurisdictions, some require some form of licensing and often have statutory requirements for workplace safety and notice of change in obligation of workers’ compensation coverage in the event of contract termination. Although compliance with these requirements imposes some additional financial risk on us, particularly with respect to clients who breach their payment obligation to us, such compliance has not had a material adverse effect on our business to date. Additional government regulation of the employer-employee relationship could result in additional clients seeking our services. Conversely, increased government regulation of the workplace or of the employer-employee relationship, or judicial or administrative proceedings related to such regulation, could also materially harm our business.

 

Because of the sudden drop-in client requirements during this pandemic as clients have elected to delay productions for safety, the Company was forced to reduce the hours of contracted employees, furlough 6 general and administrative personnel and institute pay-cuts across the board with executives taking a larger temporary cut.

 

AVAILABLE INFORMATION

 

We file electronically with the SEC, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. Our website address is www.maslowmedia.com. The information included on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We will make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we have filed or furnished such material to the SEC. You may read and copy any materials we file with the SEC at the SEC’s Public Reference room at 100 F Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and formation statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. Furthermore, we will provide electronic or paper copies of filings free of charge upon written request to our Chief Financial Officer.

 

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ITEM 1A. RISK FACTORS

 

There are numerous and varied risks that may prevent us from achieving our goals, including those described below. You should carefully consider the risks described below and the other information included in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. Our business, financial condition, and or results of operations, could be harmed by any of the following risks. If any of the events or circumstances described below were to occur, our business, the financial condition and the results of operations could be materially adversely affected. As a result, the trading price of Company Common Stock could decline, and investors could lose part or all of their investment. The risks below are not the only risks we face. Additional risks not currently known to us or that we currently deem to be immaterial may also adversely affect our business, financial condition or results of operations.

 

An investment in our common stock should be considered high risk.

 

An investment in RLBY should be considered high risk and requires a long-term commitment, with no certainty of return.

 

Impact of COVID-19 Pandemic

 

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus spread to other countries, including the United States, and efforts to contain the spread of this coronavirus intensified. The outbreak and any preventative or protective actions that governments or we may take in respect of this coronavirus may result in a period of business disruption, reduced customer traffic and reduced operations.

 

We have maintained our focus on the health and safety of our employees, contractors, customers, and suppliers, working with each stakeholder on precautions to keep everyone safe from the virus. We have worked closely with our clients whom we contract staffing to implement health and safety protocols and develop plans for safely reestablishing or continuing operations during this pandemic.

 

The demand for staffing services has been and will be significantly affected by general economic conditions. Uncertainties related to the duration of the COVID-19 pandemic have had and are expected to have an adverse impact on the staffing industry and the Company’s ability to forecast its financial performance. As such, any resulting financial impact cannot be reasonably estimated at this time but may materially affect our business, financial condition and results of operations. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus, rollout of vaccines, and federal, state and local government and client actions to contain the coronavirus or treat its impact, among others. Our executive management team continues to track COVID-19 news and developments, including the deployment of vaccines.

 

RISKS RELATED TO OUR COMPANY

 

Disputes between Reliability and the Vivos Group have put our growth plans on hold as Reliability cannot tap the public markets for capital.

 

Approximately 84.4% of common stock is owned by two (2) groups of related parties (“Vivos Group”);

 

Name  Directly Owned
Shares of
Common Stock
   Percentage   Beneficial
ownership
of Common Stock
   Percentage 
Naveen Doki,   10,138,882    3.4%   202,634,728(1)   67.5%
Silvija Valleru   4,972,644    1.7%   50,667,482(2)   16.9%
Shirisha Janumpally   192,495,846    64.2%   202,634,728(3)   67.5%
Kalyan Pathuri   45,684,838    15.2%   50,657,482(4)   16.9%
Totals   253,292,210    84.4%          

 

1)10,138,882 shares held by Mr. Doki; (ii) 20,661,816 shares held by Federal Systems, a company owned and controlled by Mrs. Janumpally, which Mr. Doki may be deemed to indirectly beneficially own as the husband of Mrs. Janumpally; (iii) 161,503,122 shares held by Judos Trust, a trust in which Mrs. Janumpally is the sole trustee and beneficiary, and of which Mr. Doki may be deemed to indirectly beneficially own as the husband of Mrs. Janumpally; and (iv) 10,330,908 shares held directly by Mrs. Janumpally which Mr. Doki may be deemed to indirectly beneficially own as the husband of Mrs. Janumpally.
2)Represents (i) 4,972,644 shares held by Mrs. Valleru; and (ii) 40,520,200 shares held by Igly Trust of which Mrs. Valleru may be deemed to indirectly beneficially own as the wife of Kalyan Pathuri, who is the sole trustee and beneficiary of the Igly Trust; and (iii) 5,164,638 shares held by Mr. Pathuri, which Mrs. Valleru may be deemed to indirectly beneficially own as the wife of Mr. Pathuri.
3)Represents (i) 10,330,908 shares that Mrs. Janumpally may be deemed to indirectly beneficially own as the wife of Mr. Doki; (ii) 20,661,816 shares held by Federal Systems, a company owned and controlled by Mrs. Janumpally; (iii) 161,503,122 shares held by Judos Trust, a trust in which Mrs. Janumpally is the sole trustee and beneficiary, and (iv) and 10,330,908 shares Mrs. Janumpally owns directly.
4)Represents (i) 5,164,638 shares held by Mr. Pathuri; (ii) 40,520,200 shares held by Igly Trust of which Mr. Pathuri is the sole trustee and beneficiary; and (iii) 4,972,644 shares held by Mrs. Valleru of which Mr. Pathuri may be deemed to indirectly beneficially own as the husband of Mrs. Valleru.

 

On June 5, 2020, Reliability commenced an arbitration seeking to address purported merger violations before the American Arbitration Association (“AAA”) in New York, New York, as permitted by the Merger Agreement against Mr. Doki; Mrs. Valleru; Mrs. Janumpally (individually and in her capacity as trustee of Judos Trust); Mr. Pathuri (individually in his capacity as trustee of Igly Trust) and Federal Systems (the “Respondents”).as The Respondents filed a counterclaim, but changed their mind, refused to pay the AAA’s fee, and ultimately refused to participate in the arbitration. Thereafter, Reliability petitioned the state court in New York to compel arbitration, but this action was removed to federal court, where it has been pending for several months awaiting court action. The Company is seeking damages which if granted will likely be the remedy set forth within the merger agreement which is primarily the relinquishment in whole or in part shares of Company Common Stock received by the Respondents in connection with the Merger.

 

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The Vivos Group will likely continue to control virtually all matters submitted to shareholders for a vote; may elect all of our directors upon the end of the term of the current directors; and, as a result, may control our management, policies, and operations. Our other shareholders will not have voting control over our actions, including the determination of other industries and markets that we may enter and the entities we acquire, which may be affiliated with Vivos. The various actions taken by the Company against the Vivos Group are motivated by ensuring that either Vivos no longer controls the vote of the shareholders or, in the alternative, that no Vivos Group votes or actions can harm the Company or the minority shareholders. No assurance can be given that the Company will be successful in these actions, however on December 23, 2020 at a hearing in the Maryland District Court, a motion by Vivos to compel a shareholder meeting was summarily dismissed. The judge agreed that permitting Vivos Group to vote their shares at a meeting of shareholders could materially harm the interests of the Company as a whole, its employees and minority shareholders. This judge will be presiding over a full trial on the merits shortly. While our dispute with Vivos continues, we will be unable to execute our busines plan. The Company’s business plan contemplates issuing additional shares of Common Stock to raise capital and to use as currency for our acquisition growth strategy. Presently, the Company does not have any authorized shares that are not issued. No shares are expected to become available to the Company until this matter is resolved. The Company will suffer a material adverse effect if the Company continues to have no shares of Common Stock available for issuance.

 

Related Party Indebtedness; Default.

 

Prior to the Merger, shareholders of Vivos, (“Vivos Debtors”) directly and through affiliated entities, borrowed amounts from Maslow (the “Related Party Debt”) that reached an aggregate outstanding balance (including principal and interest) as of December 31, 2019 of approximately $4,169. The Related Party Debt is evidenced by several promissory notes and a personal guaranty of Mr. Naveen Doki, also a Majority Shareholder. The Related Party Debt is currently in default and as of December 31, 2020 had a balance of $4,258. In February 2020, Maslow brought an action in the District Court of Montgomery County, Maryland, to enforce the promissory notes and guaranty. Failure of the Company to recover the Related Party Debt could have a material adverse effect on the Company. The case is currently pending with a trial date set to begin on October 4, 2021, barring any delays that more likely would be the result of the COVID-19 pandemic.

 

In addition, prior to the Merger, some of the Vivos Group incurred obligations at a number of other businesses they own and caused Maslow to become obligated thereon as co-obligor or guarantor, and pledged assets of Maslow to secure certain of these obligations. During the five months prior to the consummation of the Merger, Maslow paid approximately $450 in satisfaction of these obligations. Maslow continues to be a contingent obligor on certain of these debts. If the direct obligors fail to satisfy these debts, the creditors may bring action against Maslow, which, if determined adversely, could have a material adverse effect on the Company.

 

The existence of these obligations could significantly affect our liquidity, as well as our ability to obtain loans in the future. Certain members of Vivos Group entered into that certain Agreement for the Contingent Liquidation of the Common Stock of Maslow Media Group, Inc., dated as of October 28, 2019 (the “Liquidation Agreement”), pursuant to which those Vivos Group thereto pledged their shares of Company Common Stock to be sold or granted to the applicable creditors in satisfaction of the debts owed to the creditors and terminate any guarantees, liens and obligations affecting Maslow. The sale of the shares subject to the Liquidation Agreement could adversely impact the value of the Common Stock. In addition, the value of the shares of Company Common Stock may be insufficient to pay off all outstanding obligations. The Company may have to resort to the courts to enforce the terms of the Liquidation Agreement, and the sale of these shares may need to be registered under applicable securities laws, which would distract management and increase expenses.

 

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The Company could be subject to unknown liabilities incurred by its previous sole shareholder, Vivos Holdings LLC.

 

Maslow was previously a wholly owned subsidiary of Vivos Holdings, LLC (“Vivos Holdings”). Vivos is owned and controlled by the seven parties that we are currently in dispute. Vivos Holdings had caused Maslow to be a guarantor or direct obligor for loans, advances, or other liabilities for the benefit of Vivos related entities other than Maslow. These obligations were often incurred by Vivos Holdings on behalf of Maslow without the knowledge of Maslow’s senior management. There may be additional obligations of other Vivos Group entities for which Maslow may have liability as a result of these arrangements that are not known to the management of Maslow. These liabilities could have a material adverse effect on the Company and the value of the Common Stock. Reliability runs periodic lien checks, the latest as late as January 2021 and have not seen any new uncommunicated pre-existing liabilities.

 

The success of our business depends on our ability to attract and retain qualified employees that possess the skills demanded by clients and intense competition may limit the ability to attract and retain such qualified employees.

 

For the Company’s staffing, executive recruiting, and video production services, the success of the Company depends on the ability to attract and retain qualified employees who possess the skills and experience necessary to meet the requirements of clients or to successfully bid for new client projects. The ability to attract and retain qualified employees could be impaired by improvement in economic conditions resulting in lower unemployment, increases in compensation, or increased competition. During periods of economic growth, the Company faces increasing competition from other staffing companies for retaining and recruiting qualified temporary and permanent employees, which in turn leads to greater advertising and recruiting costs and increased salary expenses. These problems can be exacerbated by the fact that the Company often must attract and retain employees with skills specific to the video production industry, which narrows the pool of available, qualified employees that the Company may draw upon. If the Company cannot attract and retain qualified temporary and permanent employees, the quality of its services may deteriorate and the financial condition, business, and results of operations may be materially adversely affected.

 

Our success depends to a large degree on growth in market acceptance of human resources outsourcing and related services we provide.

 

Because the majority of our revenues currently comes from EOR services, a large portion of our success depends on the willingness of clients to outsource their human resources (“HR”) function to a third-party service provider. Many companies have invested substantial personnel, infrastructure and financial resources in their own internal HR organizations and therefore may be reluctant to switch to our solution. Companies may not engage us for other reasons, including a desire to maintain control over all aspects of their HR activities, a belief that they manage their HR activities more effectively using their internal administrative organizations, perceptions about the expenses associated with our services, perceptions about whether our services comply with laws and regulations applicable to them or their businesses, or other considerations that may not always be evident. Additional concerns or considerations may also emerge in the future. We must address our potential clients’ concerns and explain the benefits of our approach in order to convince them to change the way that they manage their HR activities, particularly in parts of the United States where our Company and solution are less well-known. If we are not successful in addressing potential clients’ concerns and convincing companies that our solution can fulfill their HR needs, then the market for our solution may not develop as we anticipate thus our business may not grow.

 

Any significant or prolonged economic downturn could result in clients using fewer staffing and executive recruiting services offered by the Company, terminating their relationship with the Company, or becoming unable to pay for services on a timely basis, or at all.

 

Because demand for the types of services our Company offers is sensitive to changes in the level of economic activity, the Company’s business has in the past and may in the future suffer during economic downturns. Demand for the services we provide are highly correlated to changes in the level of economic activity and employment. Consequently, as economic activity begins to slow down, it has been the Company’s experience that companies tend to reduce their use of our services, resulting in decreased revenues and profit levels. In addition, the Company may experience pricing pressure during economic downturns which could have a negative impact on the results of operations. Further, many of our clients are corporate media departments and broadcast networks. As a result, any industry downturn that affects these kinds of companies could have a major effect on our business.

 

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The deterioration of the financial condition and business prospects of clients could reduce their need for the staffing and executive recruiting services we provide and could result in a significant decrease in the Company’s revenues and earnings derived from these clients. In addition, during economic downturns, companies may slow the rate at which they pay their vendors, seek more flexible payment terms or become unable to pay their debts as they become due.

 

State unemployment insurance expense is a direct cost of doing business in the staffing industry. State unemployment tax rates are established based on a company’s specific experience rate of unemployment claims and a state’s required funding formula on covered payroll. Economic downturns have in the past, and may in the future, result in a higher occurrence of unemployment claims resulting in higher state unemployment tax rates. This would result in higher direct costs to us. In addition, many state unemployment funds have been depleted during the recent economic downturn and many states have borrowed from the federal government under the Title XII loan program. Employers in all states receive a credit against their federal unemployment tax liability if the employer’s federal unemployment tax payments are current and the applicable participating state is also current with its Title XII loan program. If a state fails to repay such loans within a specific time period, employers in such states may lose a portion of their tax credit.

 

The Company is exposed to employment-related claims and costs as well as periodic litigation that could materially adversely affect the Company’s financial condition, business, and results of operations.

 

Our business often entails employing individuals and placing such individuals in our clients’ workplaces. The Company’s ability to control the workplace environment of clients is limited. As the employer of record of these employees, the Company incurs a risk of liability to its employees and clients for various workplace events, including:

 

  claims of misconduct or negligence on the part of employees;
     
  discrimination or harassment claims against employees, or claims by employees of discrimination or harassment by clients or the Company;
     
  immigration-related claims;
     
  claims relating to violations of wage, hour, and other workplace regulations;
     
  claims related to wrongful termination or denial of employment;
     
  violation of employment rights related to employment screening or privacy issues;
     
  claims relating to employee benefits, entitlements to employee benefits, or errors in the calculation or administration of such benefits; and
     
  possible claims relating to misuse of clients’ confidential information, misappropriation of assets, or other similar claims.

 

The Company may incur fines and other losses and negative publicity with respect to any of these situations. Some of the claims may result in litigation, which is expensive and distracts attention from the operation of ongoing business.

 

The Company assumes the obligation to make wage, tax, and regulatory payments for our employees, and, as a result, is exposed to client credit risks.

 

The Company generally assumes responsibility for and manages the risks associated with employees’ payroll obligations, including liability for payment of salaries, wages, and certain taxes. These obligations are fixed, whether clients make payments as required by service contracts with the Company, which exposes the Company to credit risks of clients. As a result of the broad economic impact of the COVID-19 pandemic, our clients may be more likely to breach their payment obligations.

 

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Workers’ compensation costs for employees may rise and reduce our margins and require more liquidity.

 

The Company is responsible for, and pays, workers’ compensation costs for individuals employed by the Company – both regular staff and client employees for which the Company is the employer of record. At times, these costs have risen substantially as a result of increased claims and claim trends, general economic conditions, changes in business mix, increases in healthcare costs, and government regulations. Although the Company carries insurance, unexpected changes in claim trends, including the severity and frequency of claims, actuarial estimates, and medical cost inflation could result in costs that are significantly different than initially reported. If future claims-related liabilities increase due to unforeseen circumstances, or if new laws, rules, or regulations are passed, costs could increase significantly. There can be no assurance that the Company will be able to increase the fees charged to clients in a timely manner and in a sufficient amount to cover increased costs as a result of any changes in claims-related liabilities.

 

We currently depend on two customers for a material portion of our net revenue. The loss of or a substantial reduction in business of either customer would significantly reduce our net revenue and adversely impact our operating results.

 

AT&T (AT&T and DirectTV combined) and Janssen Pharmaceuticals (which includes workforce partners Johnson & Johnson) accounted for approximately 49% and 38% of our total revenues for the years ended December 31, 2020 and 2019, respectively. In addition, AT&T comprised 49% of the accounts receivable balance in both December 31, 2020 and 2019. Janssen Pharmaceuticals comprised of 18% and 19% of accounts receivable as of December 31, 2020 and 2019, respectively. No other client exceeded 10% of revenues. The loss of, or a substantial reduction in business from, either of these customers would have a significant negative impact on our business and our operating results. We may not be successful in finding a client or clients that could replace the loss of either of these customers, and as such, it could have a negative impact on our revenue and results of operations for a prolonged period.

 

Improper disclosure of employee and client data could result in liability and harm to the reputation of the Company.

 

The business of the Company involves the use, storage, and transmission of information about employees and clients. It is possible that security controls over personal and other data and practices that the Company follows may not prevent the improper access to, or disclosure of, personally identifiable or otherwise confidential information. Our security controls may be inadequate, or hackers or other malicious groups or organizations may attempt to interfere with our data through different means, including but not limited to malware attacks, denial of service attacks, consensus-based attacks. Any event that results in a disclosure of our clients’ and employees’ data could harm the reputation of the Company and subject the Company to liability under contracts and the laws that protect personal data and confidential information, resulting in increased costs or loss of revenue. Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions in which the Company provides services. The failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to the reputation of the Company in the marketplace.

 

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The Company could face disruption and increased costs from outsourcing and offshoring various aspects of its business.

 

The Company may outsource aspects of its business to lower cost of employment areas in the United States and potentially to places such as India. This outsourcing solution would focus predominantly on shared service activities which traditionally consist of back-office functions such as “hire to retire”, “procure to pay” and “order to cash” processes. Although a goal of outsourcing our operations is to reduce the operational costs of our business, it is possible that we will not realize any benefit from outsourcing such aspects of our business, or even increase our overhead expenses. A transition may create risk of errors and omissions or technical disruptions that could negatively impact our clients, and in turn damage our reputation resulting in a loss of customers of our business.

 

The Company is obligated to pay certain fees and expenses.

 

The Company will pay various fees and expenses related to its ongoing operations regardless of whether or not the Company’s activities are profitable. These fees and expenses will require dependence on third-party relationships. The Company is generally dependent on relationships with its strategic partners and vendors, and the Company may enter into similar agreements with future potential strategic partners and alliances. The Company must be successful in securing and maintaining its third-party relationships to be successful. There can be no assurance that such third parties may regard their relationship with the Company as important to their own business and operations, that they will not reassess their commitment to the business at any time in the future, or that they will not develop their own competitive services, either during their relationship with the Company or after their relations with the Company expire. Accordingly, there can be no assurance that the Company’s existing relationships or future relationships will result in sustained business partnerships, successful service offerings, or significant revenues for the Company.

 

The Company depends on its management team to manage its business effectively.

 

The Company’s future success is dependent in large part upon its ability to understand, develop, and execute the business plan and to attract and retain highly skilled management, operational and executive personnel. Thus, the Company is highly dependent on its officers to provide the necessary skills, experience and background to execute the Company’s business plan. Additionally, the employer of record business is a specialty service which requires a full understanding of the service and its merits to be able to educate clients and potential clients to win business and operate optimally. The loss of any officer’s services with this knowledge could stifle the Company’s growth for 4-9 months, and could impede, particularly initially as the Company builds a record and reputation, its ability to develop and execute on its objectives, and as such would negatively impact the Company’s possible overall development.

 

Government regulation could negatively impact the business.

 

The Company’s business is subject to various government regulations in the jurisdictions in which it operates. Currently, the Company has clients and places employees in all 50 U.S. states and in numerous foreign countries. Due to the wide scope of the Company’s operations, the Company could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government sub-divisions. The Company may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. The Company’s operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry, such as the imposition of additional licensing or tax requirements. Failure to comply with the legal regulations in places we do business, or the regulatory prohibition or restriction of employment services, could lead to financial liability and regulatory action against the Company, which could significantly harm our development as a business.

 

 17 
   

 

The Company may face significant competition from companies that serve its industries.

 

The Company may face competition from other companies that offer similar solutions. Some of these potential competitors may have longer operating histories, greater brand recognition, larger client bases and significantly greater financial, technical and marketing resources than the Company possesses. These advantages may enable such competitors to respond more quickly to new or emerging trends and changes in customer preferences. These advantages may also allow them to engage in more extensive market research and development, undertake extensive far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to potential customers, employees and strategic partners. Increased competition may result in price reductions, reduced gross margin and loss of market share. The Company may not be able to compete successfully, and competitive pressures may adversely affect its business, results of operations and financial condition.

 

The staffing industry is highly competitive with low barriers to entry which could limit the Company’s ability to maintain or increase our market share or profitability.

 

The staffing services industry is highly competitive with limited barriers to entry. Although we specialize in EOR and providing staffing services specifically for video production, where the market is not yet saturated by competitors, we still face significant competition on a national, regional and a local scale with full-service and specialized temporary staffing companies. We expect that the level of competition will remain high, which could limit our ability to maintain or increase our market share or profitability.

 

Several of our existing or potential competitors have substantially greater financial, technical and marketing resources than we do, which may enable them to:

 

  Invest in new technologies;
     
  Be more competitive in cash and price paid for acquisitions;
     
  Devote greater resources to marketing;
     
  Aggressively price products and services below market rates; and
     
  Offer better benefit packages that we may not be able to match.

 

The Company is subject to the potential factors of market and customer changes, which could result in our inability to timely respond to the needs of our clients.

 

The business of the Company is susceptible to rapidly changing preferences of the marketplace and its customers. The needs of customers are subject to constant change. Although the Company intends to continue to develop and improve its services to meet changing customer needs of the marketplace, there can be no assurance that funds for such expenditures will be available or that the Company’s competition will not develop similar or superior capabilities or that the Company will be successful in its internal efforts. The future success of the Company will depend in part on its ability to respond effectively to rapidly changing trends, industry standards and customer requirements by adapting and improving the features and functions of its services. In the Company’s industry, failure by a business to adapt to the changing needs and demands of customers is likely to render the business obsolete.

 

Negative publicity could adversely affect our business and operating results.

 

Negative publicity about our industry or our Company, including the utility of our services, even if inaccurate, could adversely affect our reputation and the confidence in, and the use of, our services, which could harm our business and operating results. Harm to our reputation can arise from many sources, including poor performance or misconduct by the workers we supply and recruit for our clients, misconduct by our partners, outsourced service providers or other counterparties, and failure by us to meet minimum standards of service expected by clients in our industry.

 

 18 
   

 

The Company has generated revenues, but limited profits, to date.

 

The business model of the Company involves significant costs of services, resulting in a low gross and net margins on revenues. Coupling this fact with the required operating expenses incurred by the Company, the Company has only generated approximately $1,500 in total profits in any one year, and specifically $195 in 2019 and $386 in 2018. In 2020, with the Company taking on the added expense of being a public company, additional expenses of approximately $900 for management compensation, administrative costs, insurance, consulting, and legal fees for reporting and regulatory compliance, had the most impact on our incurring a net loss of $826. The Company hopes and expects that as its business expands, it will enjoy economies of scale resulting in higher operating and net margins and improved cash flows, but there is no guarantee this will occur.

 

The Company may suffer from lack of availability of additional funds.

 

We have ongoing needs for working capital in order to fund operations, pay costs associated with being a public company, and to continue to expand our operations. To that end, we will be required to raise additional funds through equity or debt financing. However, there can be no assurance that we will be successful in securing additional capital on favorable terms, if at all. There is a potential that we will continue to lack shares of Company Common Stock available for an equity financing. If additional debt is incurred, the Company may fail to comply with the terms of such financing, which could result in significant liability for our Company. If we are unsuccessful, we may need to (a) initiate cost reductions; (b) forego business development opportunities; (c) seek extensions of time to fund liabilities, or (d) seek protection from creditors. In addition, any future sale of our equity securities would dilute the ownership and control of your shares and could be at prices substantially below prices at which our shares currently trade. Our inability to raise capital could require us to significantly curtail or terminate our operations. Our plan is to increase our cash reserves through the sale of additional equity or debt securities. The sale of convertible debt securities or additional equity securities could result in additional and potentially substantial dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties.

 

In addition, if we are unable to generate adequate cash from operations, and if we are unable to find sources of funding, it may be necessary for us to sell all or a portion of our assets, enter into a business combination, or reduce or eliminate operations. These possibilities, to the extent available, may be on terms that result in significant dilution to our shareholders or that result in our shareholders losing all of their investment in our Company.

 

Our acquisition strategy creates risks for our business.

 

We expect that we will pursue acquisitions of other businesses, assets or technologies to grow our business. We may fail to identify attractive acquisition candidates, or we may be unable to reach acceptable terms for future acquisitions. We might not be able to raise enough cash to compete for attractive acquisition targets. If we are unable to complete acquisitions in the future, our ability to grow our business at our anticipated rate will be impaired.

 

We may pay for acquisitions by issuing additional shares of Common Stock, if such shares become available, which would dilute our shareholders, or by issuing debt, which could include terms that restrict our ability to operate our business or pursue other opportunities and subject us to meaningful debt service obligations. We may also use significant amounts of cash to complete acquisitions. Most acquisitions will include “Earn Out” provisions which ensure adequate generation of revenue and profits, but cash required to pay Earn Outs likely will exceed that total or incremental cash flow generated by the acquired business. To the extent that we complete acquisitions in the future, we likely will incur future depreciation and amortization expenses associated with the acquired assets. We may also record significant amounts of intangible assets, including goodwill, which could become impaired in the future. Acquisitions involve numerous other risks, including:

 

  difficulties integrating the operations, technologies, services and personnel of the acquired companies;
     
  challenges maintaining our internal standards, controls, procedures and policies;
     
  diversion of management’s attention from other business concerns;
     
  over-valuation by us of acquired companies;
     
  litigation resulting from activities of the acquired company, including claims from terminated employees, customers, former shareholders and other third parties;

 

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  insufficient revenues to offset increased expenses associated with the acquisitions and unanticipated liabilities of the acquired companies;
     
  insufficient indemnification or security from the selling parties for legal liabilities that we may assume in connection with our acquisitions;
     
  entering markets in which we have no prior experience and may not succeed;
     
  risks associated with foreign acquisitions, such as communication and integration problems resulting from geographic dispersion and language and cultural differences, compliance with foreign laws and regulations and general economic or political conditions in other countries or regions;
     
  potential loss of key employees of the acquired companies; and
     
  impairment of relationships with clients and employees of the acquired companies or our clients and employees as a result of the integration of acquired operations and new management personnel.

 

The Company may suffer from a lack of liquidity.

 

By incurring indebtedness, the Company subjects itself to increased debt service obligations which could result in operating and financing covenants that would restrict our operations and liquidity. This would impair our ability to hire the necessary senior and support personnel required for our business, as well carry out its acquisition strategy and other business objectives.

 

The Company lacks some of the technology necessary to manage its planned staffing operations, payroll, and sales activities.

 

The Company relies heavily on its software providers to manage payroll, recruitment, onboarding, benefits administration, scheduling, year-end reporting, and other related human resources issues. Currently, we rely on software provided by Paycom to help manage these operations. In 2020, we added Intaact finance and accounting suite, SalesForce.Com, and advanced search B2B sales facilitator Zoom Info; all which have made our business more efficient and effective. However, this segmented technology is not an integrated ERP and will not handle the growing complexity of our needs as we evolve our operations through mergers and acquisitions of other businesses. This could hamper our ability to successfully reduce the general and administrative costs of businesses that we acquire, as contemplated by our acquisition strategy, which would ultimately impair our ability to generate a healthy profit.

 

The Company is currently party to Factoring Facilities that are eroding its profit margins and may impair our ability to secure additional financing.

 

The Company has a factoring and security agreements (collectively, the “Factoring Facilities”) with Triumph Business Capital (“Triumph”) who is sometimes referred to herein as a “Factor” or “Factoring Company”. Pursuant to the Factoring Facilities, the Company sells its accounts receivable (i.e., invoices) at a discount so that the Company can meet its immediate cash needs, at which point the value of those invoices become a debt of the Company that must be paid to the Factoring Company. This type of facility is common for companies in the EOR and staffing industries as a great deal of cash is advanced to make payroll and pay contractors. We may use a substantial portion of our cash flow from operations to make debt service payments on these Factoring Facilities, which reduces the funds available to us for other purposes such as working capital, capital expenditures and acquisitions. In addition, because our largest asset (our accounts receivable) is encumbered pursuant to these Factoring Facilities, our ability to obtain lines of credit or other financings for other purposes such as growth initiatives and acquisitions is limited. Additionally, we are exposed to fluctuations in interest rates because our Factoring Facilities have variable rates of interest tied to the prime interest rate. The reduction of cash flow as a result of these Factoring Facilities may put us at a competitive disadvantage and reduce our flexibility in planning for, or responding to, changing conditions in our industry, including increased competition, and makes us more vulnerable to general economic downturns and adverse developments in our business.

 

 20 
   

 

No formal market survey has been conducted.

 

No independent marketing survey has been undertaken to determine the potential demand for the Company’s services over the longer term. The Company has conducted no marketing studies regarding whether its business would continue to be marketable. No assurances can be given that upon marketing, sufficient customer markets and business can be developed to sustain the Company’s operations on a continued basis.

 

The Company services numerous geographic areas, and therefore may be subject to risks such as natural disasters and travel-related disruptions, which may materially adversely affect our business, financial condition and results of operations.

 

We operate in all U.S. states and in numerous countries around the world. To do so, we often send workers to locations that could be affected by various factors beyond our control that could adversely affect our ability to service our clients. These factors could also affect our employees, vendors, insurance carriers and other contractual counterparties. Such factors include:

 

  war, terrorist activities or threats and heightened travel security measures instituted in response to these events;
     
  outbreaks of pandemic or contagious diseases or consumers’ concerns relating to potential exposure to contagious diseases;
     
  natural disasters, such as hurricanes, fires, earthquakes, tsunamis, tornados, floods and volcanic eruptions and man-made disasters;
     
  bad weather and even forecasts of bad weather, including abnormally hot, cold and/or wet weather;
     
  oil prices and travel costs and the financial condition of the airline, automotive and other transportation-related industries, any travel-related disruptions or incidents and their impact on travel; and
     
  actions or statements by U.S. and foreign governmental officials related to travel and corporate travel-related activities (including changes to the U.S. visa rules) and the resulting public perception of such travel and activities.

 

Any one or more of these factors could adversely affect our ability to offer services to clients, which could materially adversely affect our business, financial condition and results of operations.

 

A downturn of the U.S. or global economy could result in our clients using fewer workforce solutions or becoming unable to pay us for our services on a timely basis or at all, which would materially adversely impact our business.

 

Because demand for workforce solutions and services, particularly staffing services, is sensitive to changes in the level of economic activity, our business may suffer during an economic downturn resulting from among other things the COVID-19 pandemic. During periods of weak economic growth or economic contraction, the demand for staffing services typically declines. When demand drops, our operating profit is typically impacted unfavorably as we experience a deleveraging of our selling and administrative expense base as expenses may not decline as quickly as revenues. In periods of decline, we can only reduce selling and administrative expenses to a certain level without negatively impacting our long-term prospects. Additionally, during economic downturns companies may slow the rate at which they pay their vendors, or they may become unable to pay their obligations. If our clients become unable to pay amounts owed to us, or pay us more slowly, then our cash flow and profitability may suffer.

 

 21 
   

 

Client services may be terminated on short notice, leaving us vulnerable to a significant loss in revenue

 

Client staffing needs can change and as a result we could lose staffing or EOR headcount rather quickly. In late 2019, this was the case when AT&T announced the cancellation of two (2) live anchor multiple hour DirecTV sports programs, which had an estimated $4,000 revenue impact on the Company. A reduction in such needs and resulting loss of clients or placements at clients could result in a significant decrease in revenue within a short period of time that would be difficult to quickly replace.

 

Inability to retain or attract new clients.

 

Growth and profitability of our business is dependent upon our ability to retain and capture new clients. Our ability to achieve success in both areas is reliant on our sales and service organization. If we are unable to execute effectively, or our selected business development efforts falter, we may not be able to attract a significant number of new clients and our existing client base could shrink, resulting in an adverse impact on our revenues and profitability.

 

We could be required to write-off goodwill and intangible assets.

 

In accordance with generally accepted accounting principles, we are required to review our goodwill and intangible assets for impairment at least annually. Our goodwill and intangibles assets were $721 at the end of 2020. An unfavorable evaluation could cause us to write-off these assets in future periods. Any future write-offs could have a material adverse impact on our operational results or Operating Income Before Interest, Taxes, Depreciation, and Amortization (“OIBITDA”). OIBITDA is a non-GAAP metric we use to better reflect the operating results of the Company.

 

Our business is subject to federal, state and local labor and employment laws and a failure to comply could materially harm our business.

 

We are subject to regulation by a host of federal, state and local regulatory agencies in the jurisdictions within which we operate including but not limited to the U.S. Department of Labor. There are local agencies which have similar state and city regulations as well with specific laws and regulations varying among these jurisdictions. This acts both as an opportunity for the Company since we manage these risks as a matter of course for our EOR service, and a risk as compliance with these requirements imposes some additional burden on us. However, in the past challenges complying with these local, state and federal regulations has not resulted in a material adverse event on Maslow’s business. Any inability or failure to comply with government regulation could however materially harm our business. Increased government regulation of the workplace or of the employer-employee relationship, or judicial or administrative proceedings related to such regulation, could create additional business for the Company, but could also materially harm our business

 

In reaction to the COVID-19 pandemic, federal and state legislatures have been attempting to push through legislation, much of which affects the employee-employer relationship, and these new laws may have a material impact on our operations, business, finances and prospects. No certainty can be provided as to the nature of these new regulations or their impact.

 

Concentration Risk of Customers

 

Workforce clients AT&T and DirecTV (under a single AT&T agreement) and Janssen Pharmaceuticals (which includes workforce partners Johnson & Johnson) made up approximately 29% and 11% of our 2020 revenues, respectively. In addition, these two customers account for approximately 49% and 18% of our accounts receivables as of December 31, 2020, respectively. Our business relies on relationships with several large customers, to generate a large portion of our revenue. This revenue concentration in a relatively small number of customers (5 clients make up 65% of revenue) makes us particularly dependent on factors affecting those companies.

 

 22 
   

 

RISKS RELATED TO OWNERSHIP OF COMMON STOCK

 

Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for our shareholders.

 

The market price of Common Stock has been, and is likely to continue to be, volatile for the foreseeable future. The market price of Common Stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including the factors listed below:

 

  actual or anticipated fluctuations in our results of operations;
     
  any financial projections we provide to the public, any changes in these projections or our failure to meet these projections;
     
  lack of securities analyst coverage;
     
  effect of applicable “penny stock” rules and FINRA Rule 2111;
     
  failure of securities analysts to initiate or maintain coverage of our Company, changes in financial estimates by any securities analysts who follow our Company, or our failure to meet these estimates or the expectations of investors;
     
  ratings changes by any securities analysts who follow our Company;
     
  announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
     
  changes in operating performance and stock market valuations of other business services companies generally, or those in our industry in particular;
     
  price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
     
  changes in our board of directors or management;
     
  sales of large blocks of Company Common Stock, including sales by our executive officers, directors and significant shareholders;
     
  lawsuits threatened or filed against us;
     
  short sales, hedging and other derivative transactions involving our capital stock;
     
  general economic conditions in the United States and abroad; and
     
  other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

 

In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many business services companies. Stock prices of many business services companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of operations and financial condition.

 

 23 
   

 

Common Stock is subject to risks arising from restrictions on reliance on Rule 144 by shell companies or former shell companies.

 

Under a regulation of the SEC known as “Rule 144,” a person who beneficially owns restricted securities of an issuer and who is not an affiliate of that issuer may sell them without registration under the Securities Act provided that certain conditions have been met. One of these conditions is that such person has held the restricted securities for a prescribed period, which will be 6 months for Common Stock. However, Rule 144 is unavailable for the resale of securities issued by an issuer that is a shell company (other than a business combination related shell company) or, unless certain conditions are met, that has been at any time previously a shell company.

 

The SEC defines a shell company as a company that has (a) no or nominal operations and (b) either (i) no or nominal assets, (ii) assets consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets.

 

As a result of the Merger described in Item 1.01, the Company ceased being a shell company as such term is defined in Rule 12b-2 under the Exchange Act.

 

While we believe that as a result of the Merger, Reliability ceased to be a shell company, the SEC and others whose approval is required for shares to be sold under Rule 144 might take a different view.

 

Rule 144 is available for the resale of securities of former shell companies if and for as long as the following conditions are met:

 

  (i) the issuer of the securities that was formerly a shell company has ceased to be a shell company;
     
  (ii) the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;
     
  (iii) the issuer of the securities has filed all Exchange Act reports and materials required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Current Reports on Form 8-K; and
     
  (iv) at least one year has elapsed from the time that the issuer filed current comprehensive disclosure with the SEC reflecting its status as an entity that is not a shell company known as “Form 10 Information.”

 

Although the Company has filed Form 10 Information with the SEC on its Current Report on Form 8-K filed October 29, 2019, shareholders who receive the Company’s restricted securities will not be able to sell them pursuant to Rule 144 without registration until the Company has met the other conditions to this exception and then for only as long as the Company continues to meet the condition described in subparagraph (iii), above, and is not a shell company. No assurance can be given that the Company will meet these conditions or that, if it has met them, it will continue to do so, or that it will not again be a shell company.

 

The issuance of the additional shares of Common Stock could cause the value of Common Stock to decline.

 

The sale or issuance of a substantial number of shares of Common Stock, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish. Further, if we do sell or issue more Common Stock, any investors’ investment in the Company will be diluted. Moreover, the Company has outstanding warrants. The conversion or exercise of the warrants for shares of Company Common Stock would dilute the common shareholders. If significant dilution occurs, any investment in Common Stock could significantly decline in value.

 

The application of the “penny stock” rules could adversely affect the market price of Common Stock and increase transaction costs to sell those shares. This can be exacerbated by the current low float of the stock in relation to the shares outstanding.

 

 24 
   

 

The SEC has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:

 

  that a broker or dealer approve a person’s account for transactions in penny stocks, and
     
  the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:

 

  obtain financial information and investment experience objectives of the person, and
     
  make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has enough knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:

 

  sets forth the basis on which the broker or dealer made the suitability determination, and that the broker or dealer received a signed written agreement from the investor prior to the transaction.

 

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of Common Stock and cause a decline in the market value of Common Stock.

 

Financial Industry Regulatory Authority (“FINRA”) sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.

 

In addition to the “penny stock” rules described above, FINRA has adopted Rule 2111 that requires a broker-dealer to have reasonable grounds for believing that an investment is suitable for a customer before recommending the investment. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy Common Stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

We do not intend to pay dividends for the foreseeable future.

 

We have never declared or paid any cash dividends on our stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors.

 

RISKS RELATED TO OUR PREVIOUS STATUS AS A SHELL COMPANY

 

We may have contingent liabilities related to our operations prior to the Merger of which we are not aware and for which we have not adequately provided for.

 

We identified as a shell company with no operating activities prior to the Merger. Upon completion of the Merger, we acquired all of the operations of The Maslow Media Group, Inc. Prior to the consummation of the Merger, Reliability Incorporated was engaged from 1971 to 2007 in the design, manufacture, market, and support of high-performance equipment used to test and condition integrated circuits. This business was closed in 2007. We cannot assure you that there are no material claims outstanding, or other circumstances of which we are not aware, that would give rise to a material liability relating to those prior operations, even though we do not record any provisions in our financial statements related to any such potential liability. If we are subject to past claims or material obligations relating to our operations prior to the consummation of the Merger, such claims could materially adversely affect our business, financial condition and results of operations.

 

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RISK RELATED TO THE MERGER AND OWNERSHIP OF COMMON STOCK

 

Costs of being a public company and risks associated with having been a shell.

 

We are now incurring increased costs with demands upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies; any failure to establish and maintain adequate internal control over financial reporting or to recruit, train and retain necessary accounting and finance personnel could have an adverse effect on our ability to accurately and timely prepare our consolidated financial statements.

 

We identified as a shell company with no recent operating activities prior to the Merger. Upon completion of the Merger, we acquired all the operations of The Maslow Media Group. Inc. As a public operating company, we are now incurring significant administrative, legal, accounting and other burdens and expenses beyond those of a private company, including those associated with corporate governance requirements and public company reporting obligations. We have already enhanced and supplemented our internal accounting resources with additional accounting and finance personnel with the requisite technical and public company experience and expertise, as well as refined our quarterly and annual financial statement closing process, to enable us to satisfy such reporting obligations. However, even with perceived success in doing so, there can be no assurance that our finance and accounting organization will be able to adequately meet the increased demands that result from being a public company.

 

Furthermore, we are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. In order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we are required to document and test our internal control procedures and prepare annual management assessments of the effectiveness of our internal control over financial reporting. These assessments will need to include disclosure of identified material weaknesses in our internal control over financial reporting. Testing and maintaining internal control over financial reporting will involve significant costs and could divert management’s attention from other matters that are important to our business. Additionally, we cannot provide any assurances that we will be successful in remediating any deficiencies that may be identified. If we are unable to remediate any such deficiencies or otherwise fail to establish and maintain adequate accounting systems and internal control over financial reporting, or we are unable to recruit, train and retain necessary accounting and finance personnel, we may not be able to accurately and timely prepare our consolidated financial statements and otherwise satisfy our public reporting obligations. Any inaccuracies in our consolidated financial statements or other public disclosures (in particular if resulting in the need to restate previously filed financial statements), or delays in our making required SEC filings, could have a material adverse effect on the confidence in our financial reporting, our credibility in the marketplace and the trading price of Common Stock.

 

In addition, our management team will also have to adapt to other requirements of being a public company. We will need to devote significant resources to address these public company-associated requirements, including compliance programs and investor relations, as well as our financial reporting obligations. Complying with these rules and regulations will substantially increase our legal and financial compliance costs and make some activities more time-consuming and costly.

 

 26 
   

 

Common Stock may not be eligible for listing on a national securities exchange.

 

Common Stock is not currently listed on a national securities exchange, and we do not currently meet the initial quantitative listing standards of a national securities exchange. We cannot assure you that we will be able to meet the initial listing standards of any national securities exchange, or, if we do meet such initial qualitative listing standards, that we will be able to maintain any such listing. Common Stock is currently quoted on the pink sheets OTCQB of the OTC Marketplace under the symbol of “RLBY”, and, unless and until Common Stock is listed on a national securities exchange, we expect that it will continue to be eligible and quoted on the “pink sheets,” to which time we are eligible to apply to the OTCQB or OTCQX. However, in order to qualify for the OTCQB for instance, we would need our float to be a minimum of 5% of outstanding shares to even apply for an exception. Currently our float is under 3% of outstanding. Until outstanding shares are increased, or sufficient number of shares registered and eligible for trade we will be unable to apply for an exception to move to the OTCQB or OTCQX. In those venues, however, an investor may find it difficult to obtain accurate quotations as to the market value of Common Stock. In addition, if we continue to fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations normally deter broker-dealers from recommending or selling Common Stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital.

 

We cannot predict whether there will be an active trading market for our common stock and the market price of our common stock may remain volatile.

 

Given our low float of approximately 11,675,503 shares and the absence of an active trading market shareholders may have difficulty buying and selling our common stock at all or at the price you consider reasonable. Market visibility for shares of our common stock may be limited, which may have a depressive effect on the market price for shares of our common stock and on our ability to raise capital or make acquisitions by issuing our common stock.

 

Our compliance with regulations concerning corporate governance and public disclosure has resulted and may in the future result in additional expenses.

 

Evolving disclosure, governance and compliance laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 (“SOX”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act. New or changing laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards of a public company are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2. PROPERTIES

 

The Company’s headquarters and operations were moved from Rockville, Maryland to Clarksburg, Maryland effective April 30, 2020 as the Company terminated its lease. As of December 31, 2020, Clarksburg, Maryland became our sole location, as the Company terminated its lease for its office in Plymouth, Minnesota effective December 31, 2020.

 

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ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these, or other matters may arise from time to time that may harm our business. Except as set forth below, we are not aware of any such legal proceedings or claims against the Company.

 

On September 28, 2018, Credit Cash filed a complaint against Maslow, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Mr. Doki, Mr. Valleru (the “Parties”) and other defendants in the United States District Court for the District of New Jersey. Credit Cash alleged, among other things, that the Parties breached the Maslow and HCRN Credit Facilities and their respective guaranties in relation to the November 15, 2017 agreement (the “DNJ Action”).

 

On October 9, 2018, Maslow Media Group, Inc. was named as a defendant in an Affidavit of Confession of Judgment filed in the Supreme Court of the State of New York in relation to a case brought by Hop Capital, which the defendants collectively agree to pay a sum of $400 to Hop Capital. Maslow Media Group, Inc. is named as one defendant among six other defendants, all of which are entities related to the Vivos Group. The claim brought by Hop Capital against the defendants in this case is in relation to a Merchant Agreement dated October 4, 2018; an agreement to which Maslow Media Group, Inc. was not a party. As such, Maslow Media Group, Inc. contends that being named in the Affidavit of Confession of Judgment as a defendant was made in error and is currently seeking to have its name removed from Affidavit of Confession of Judgment as a defendant.

 

On October 30, 2018, Credit Cash filed a motion to intervene in an action pending in New York State, Monroe County, filed by HCRN and LE Finance, LLC against the Parties and other defendants (“NY State Action”).

 

On December 10, 2018, the Parties entered into a settlement agreement for the purpose of settling certain claims related to the DNJ Action only. Pursuant to the settlement agreement, certain repayment terms were agreed upon between Credit Cash and the Parties, but Credit Cash did not relinquish the right to pursue any claims related to the NY State Action, nor to pursue any remedies against any of the parties in relation to the November 15, 2017 agreement.

 

Because the Parties acknowledged and agreed, that the Credit Cash relationship benefitted Parties other than Maslow, certain of the Parties and their related parties, executed and delivered to the Company that certain Agreement for the Contingent Liquidation of the Common Stock of Maslow Media Group, Inc., dated as of October 28, 2019 (the “Liquidation Agreement”). Pursuant to the Liquidation Agreement the parties thereto pledged shares of Company Common Stock to Maslow to be used to obtain releases from the Lenders defined therein, including Credit Cash and its affiliates. The Liquidation Agreement permits Maslow to either transfer the shares to the Lenders in satisfaction of the outstanding obligations or to arrange for the sale of the shares and using the cash to satisfy such obligations.

 

On or about February 17, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and Mr. Naveen Doki, to enforce Maslow’s rights under certain promissory notes and a personal guarantee made by the defendants. The case is proceeding. The Company believes that it will be granted a judgment in its favor. Maslow intends to continue to vigorously pursue this litigation.

 

On February 28, 2020, Healthcare Resource Network, LLC filed a complaint against Maslow in the Circuit Court of Montgomery County, Maryland alleging that Maslow participated with the Vivos Group to financially harm the plaintiff. The plaintiff has not specified any alleged damage caused by Maslow and the Company believes any claims are without merit. The Company will defend itself from this case.

 

On March 16th, 2020, CC Business Solutions, a division of Credit Cash NJ, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Naveen Doki and Silvija Valleru.  This foreign judgement relates to Vivos Holdings adding Maslow Media Group as a guarantor on a loan made to Health Care Resources Network which is in default by HCRN and Vivos Holdings.  Foreign judgement total is $820. This judgement relates to the default on the settlement agreement dated December 10, 2018 referenced above.

 

On May 5th, 2020, Libertas Funding, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Vivos IT, LLC, Vivos Global Services, LLC, Alliance Micro, Inc. and Naveen Doki.  This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding Maslow Media Group additional collateral.  This loan is currently in default. Foreign Judgement total is $229.  

 

On May 5th, 2020, Kinetic Direct Funding domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, US IT Solutions Inc., 360 IT Professionals, Alliance Micro, Inc. and Naveen Doki.  This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding Maslow Media Group as additional collateral.  This loan is currently in default. Foreign Judgement total is $579.

 

On May 5th, 2020, Libertas Funding, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Vivos IT, LLC, Vivos Global Services, LLC, Alliance Micro, Inc. and Silvija Valleru.  This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding Maslow Media Group additional collateral.  This loan is currently in default. Foreign Judgement total is $229.

 

On or about May 6, 2020, the Defendants filed with the Circuit Court of Montgomery County, Maryland a Counterclaim and Third-Party Complaint for Damages, Declaratory and Injunctive Relief and Jury Demand (the “Counterclaim”), The Company believes that the Counterclaim has no merit. The Company will vigorously defend itself and its indemnified officers, directors and other parties as permitted by the Company’s organizational documents. The Company and the other Counterclaim defendants have moved to have the Debt Collection Suit and the Counterclaim stayed pending the outcome of the Arbitration described below. Trial on this matter is scheduled for March 2021.

 

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On or about June 5, 2020, the Company submitted a Claimant’s Notice of Intention to Arbitrate and Demand for Arbitration (the “Arbitration”) with the American Arbitration Association in New York, and to the Respondents thereto: Naveen Doki; Silvija Valleru; Shirisha Janumpally (individually and in her capacity as trustee of Judos Trust); Kalyan Pathuri (individually in his capacity as trustee of Igly Trust) and Federal Systems (the “Respondents”). The Arbitration alleges that the Respondents breached the Merger Agreement in a number of significant respects and committed fraud in connection with the Merger. The Company is seeking damages which if granted will likely be the remedy set forth within the Merger Agreement which is in whole or in part shares of Company Common Stock received by the Respondents in connection with the Merger. The Company has brought a motion to compel the Arbitration which is currently being decided by the Federal Courts in New York. The Company believes a strong basis for the motion exists, but no assurance can be given that it will be granted. Regardless, the Company intends to pursue claims under the Merger Agreement in whatever venue is required.

 

On June 12, 2020, Igly Trust, a Vivos Group entity, asked the Texas court for an injunction requiring the Company to provide a shareholder list and to hold a shareholder meeting. On October 20, 2020, the Texas court denied the injunction but, incongruously, dismissed all the Vivos Group plaintiffs for lack of personal jurisdiction. The Company appealed the dismissal because the court had jurisdiction over Igly Trust once it made affirmative claims in Texas and because the Court’s order denying the injunction is an important precedent for establishing that the directors under Texas law retain control of shareholder lists and determining the timing of shareholder meetings.

 

On December 23, 2020, at a hearing in the Maryland District Court, a motion by the Vivos Group to compel a shareholder meeting was summarily dismissed. The judge agreed with the Company that permitting the Vivos Group to vote their shares at a meeting of shareholders could materially harm the interests of the Company as a whole, its employees and minority shareholders. This judge will be presiding over a full trial regarding these matters over a two-week period starting on October 4, 2021, absent any COVID-19 disruptions that could affect scheduling.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERS’ MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

MARKET INFORMATION AND HOLDERS

 

The Company’s common stock trades in the over-the-counter market under the symbol RLBY. The high and low sale prices for 2020 and 2019 are set forth below. High and Low price is based on last trading day of quarter.

 

   First Quarter   Second Quarter   Third Quarter   Fourth Quarter 
2020                
High  $.2500   $.1690   $.1980   $.0990 
Low  $.0831   $.0600   $.0550   $.0336 
                     
2019                    
High  $.0600   $.0900   $.1850   $.6900 
Low  $.0300   $.0360   $.0360   $.1600 

 

The Company paid no cash dividends in 2019 or 2020.

 

As of March 16, 2021, the last reported sales price for Company Common Stock was $ .061 per share.

 

As of March 16, 2021, there were 565 holders of record of Company Common Stock.

 

EQUITY COMPENSATION PLANS

 

None

 

RECENT SALES OF UNREGISTERED SECURITIES

 

None

 

SHARE REPURCHASES

 

None

 

ITEM 6. SELECTED FINANCIAL DATA

 

The following tables set forth our summary consolidated historical financial data. You should read the information set forth below in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated historical financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The statement of operations data for the fiscal years ended 2020 and 2019 and the balance sheet data as of December 31, 2020 and 2019 set forth below are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

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   December 31 
Balance Sheet Data:  2020   2019 
Working capital  $5,970   $784 
Total assets  $12,284   $14,276 
Total outstanding borrowings, net  $8,287   $8,188 
Total other long-term liabilities  $-   $1,745 
Stockholders’ equity  $1,517   $2,227 

 

   December 31 
Statement of Operation Data:  2020   2019 
Revenues  $29,202   $38,444 
Gross profit  $3,474   $4,069 
Selling, general and administrative expenses  $4,462   $2,985 
Operating income (loss)  $(988)  $1,084 
Interest income  $8   $- 
Interest Income from related parties   112    68 
Interest expense  $(281)  $(438)
Other expense  $(1)  $(206)
Income (loss) before income taxes  $(1,150)  $508 
Income tax benefit (expense)  $230   $(156)
Consolidated net income  $(920)  $352 
Non-consolidated interest in consolidated affiliates  $131   $(157)
Net income (loss)  $(789)  $195 

 

   December 31 
Net Income (Loss) Per Share:  2020   2019 
Net income (loss) per share – basic  $-   $- 
Net income (loss) per share - diluted  $-   $- 
Weighted average shares outstanding – basic   300,000,000    300,000,000 
Weighted average shares outstanding – diluted   300,000,000    300,000,000 

 

   December 31 
Other Financial Data:  2020   2019 
OIBITDA (1)  $658   $1,348 

 

(1) We present OIBITDA as a measure that is not in accordance with generally accepted accounting principles (“non-GAAP”), in this Annual Report on Form 10-K to provide investors with a supplemental measure of our operating performance. We believe that OIBITDA is a useful performance measure and is employed by us to facilitate comparisons of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our core business than measures under generally accepted accounting principles (“GAAP”) can provide alone. Our board and management also use OIBITDA as some of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual result against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for our management and organization.

 

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We define OIBITDA as operational earnings before interest expense, related party interest, income taxes, depreciation and amortization expense, loss on early extinguishment of debt and related party debt, transaction fees and costs related to our corporate overhead which consist mainly of costs associated with being a public company. Omitting interest, taxes and the other items provides a financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness and tax structures that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make like comparisons. Similarly, we omit depreciation and amortization because many other companies likely employ a greater amount of property and intangible assets. We omit corporate or non-operating costs as they are meant to be allocated against a larger operational base which our business plan outlines. As we grow our operations organically and through M&A activities these corporate costs are absorbed more equitably, we will use Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) as our means of measuring comparable operational performance to other companies in our industry. We also believe that investors, analysts and other interested parties view our ability to generate OIBITDA as an important measure of our operating performance and that of other companies in our industry. OIBITDA should not be considered as an alternative to net income (loss) for the periods indicated as a measure of our performance.

 

The use of OIBITDA has limitations as analytical tools, and you should not consider these performance measures in isolation from, or as an alternative to, GAAP measures such as net income (loss). OIBITDA is not a measure of liquidity under GAAP or otherwise and is not an alternative to cash flow from continuing operating activities. Our presentation of OIBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. The limitations of OIBITDA include: (i) it does not reflect our corporate expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) it does not reflect the cash requirements necessary to service interest or principal payments associated with indebtedness.

 

To properly and prudently evaluate our business, we encourage you to review our consolidated financial statements included elsewhere in this Annual Report on Form 10-K and the reconciliation to OIBITDA from net income (loss), the most directly comparable financial measure presented in accordance with GAAP, set forth in the following table. All the items included in the reconciliation from net income (loss) to OIBITDA are either (i) corporate costs or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect on-going operating performance.

 

OIBITDA calculation comparison for the years ended December 31, 2020 and 2019 is as follows:

 

   December 31 
   2020   2019 
Operating income (loss)  $(988)  $1,084 
Depreciation and amortization   79    25 
Corporate, general and administrative   1,567    239 
   $658   $1,348 

 

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Operational performance comparison for the years ended December 31, 2020 and 2019 is as follows:

 

   December 31 
   2020   2019 
Revenue  $29,202   $38,444 
Gross profit  $3,474   $4,069 
OIBITDA  $658   $1,348 
Net income (loss)  $(789)  $195 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This section includes several forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect our current views with respect to future events and financial performance. All statements that address expectations or projections about the future, including, but not limited to, statements about our plans, strategies, adequacy of resources and future financial results (such as revenue, gross profit, operating profit, cash flow), are forward-looking statements. Some of the forward-looking statements can be identified by words like “anticipates,” “believes,” “expects,” “may,” “will,” “can,” “could,” “should,” “intends,” “project,” “predict,” “plans,” “estimates,” “goal,” “target,” “possible,” “potential,” “would,” “seek,” and similar references to future periods. These statements are not a guarantee of future performance and involve a number of risks, uncertainties and assumptions that are difficult to predict. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. Important factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to: the impact of the COVID-19 pandemic on us and our clients; our ability to access the capital markets by pursuing additional debt and equity financing to fund our business plan and expenses; our continued inability to issue additional shares of equity securities; negative outcome of pending and future claims and litigation and our ability to comply with our contractual covenants, including in respect of our debt; potential loss of clients and possible rejection of our business model and/or sales methods; weakness in general economic conditions and levels of capital spending by customers in the industries we serve; weakness or volatility in the financial and capital markets, which may result in the postponement or cancellation of our customers’ projects or the inability of our customers to pay our fees; delays or reductions in U.S. government spending; credit risks associated with our customers; competitive market pressures; the availability and cost of qualified labor; our level of success in attracting, training and retaining qualified management personnel and other staff employees; changes in tax laws and other government regulations, including the impact of health care reform laws and regulations; the possibility of incurring liability for our business activities, including, but not limited to, the activities of our temporary employees; our performance on customer contracts; and government policies, legislation or judicial decisions adverse to our businesses. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We assume no obligation to update such statements, whether as a result of new information, future events or otherwise, except as required by law. We recommend readers to carefully review the entirety of this Annual Report, including the “Risk Factors” in Item 1A of this Annual Report and the other reports and documents we file from time to time with the Securities and Exchange Commission (“SEC”), particularly our Quarterly Reports on Form 10-Q and our reports on Form 8-K.

 

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The following discussion and analysis of our financial condition and results of operations, our expectations regarding the future performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors including those described in “Item 1A. Risk Factors” of this Annual Report on Form 10-K. Our actual results may differ materially from those contained in any forward-looking statements. You should read the following discussion together with our audited consolidated financial statements and related notes thereto and other financial information included in this Annual Report on Form 10-K.

 

Our financial information may not be indicative of our future performance.

 

EXECUTIVE OVERVIEW

 

Demand for Maslow EOR services and field talent is dependent upon general economic conditions and labor trends. The United States economic backdrop during the first quarter 2020 was positive until the rise in COVID 19 cases changed the business landscape profoundly. Before the pandemic, the United States marked a 50-year unemployment low in February 2020, with just 3.5% of Americans unemployed. Starting the week of March 9, 2020, numerous U.S. state and federal governments began urging or requiring residents to stay home and banning large gatherings and restricted travel. Schools were closed and all sporting events across the United States were either cancelled or postponed indefinitely. Many companies mandated that their employees work from home and discontinued use of many workers who could not perform their type of work from home (e.g., video, sound, lighting crew, makeup-artists). Maslow began seeing the effects the week of March 16, 2020 as its contracted employee and freelance payroll hours dropped as much as 49% during the second quarter. This was because a large portion of Maslow employees were assigned to field, location, or studio filming projects for our clients that require close contact with others. These projects were placed on indefinite hold and these employees who saw their hours dramatically reduced. Those who could continue to work from their homes for our clients, have continued to log hours. Not surprisingly the months of April and May 2020 saw the largest drop in comparative 2020 revenue to 2019 at 49% ($3,379 from $6,673). Second quarter 2020 revenue of $5,197 was 46% off the pace of 2019’s $9,617 comparative. In the third quarter of 2020, that loss dwindled to approximately 38%, as the Company generated $6,201 in third quarter revenues vs. $10,089 in the same period in 2019.

 

However, our fourth quarter revenue of $9,003 was only 13.7% less than the fourth quarter in 2019 when it was $10,438. This was due to our clients increasing their payrolls as COVID-19 restrictions by state began to wane, and seasonal fall business activities such as the U.S. elections were held, and the 17-week regular season of the National Football League (“NFL”) season commenced and proceeded.

 

We are hopeful that the dissemination of vaccines will result in resumption of a normally functioning economy which will continue to enable our clients to return their payrolls to normal levels that in turn, will continue ours and an overall economic rebound. However, no assurance can be given on if and when this will happen or what impact it will have on our business.

 

As far as cash is concerned, in 2020 although COVID-19 exacerbated our already precarious cash position as explained more thoroughly below (see Liquidity and Capital Resources), we received a $250 short term loan from Triumph at 10% annual percentage rate (“APR”), in February,2020 and then in May 2020, $5,215 in Payroll Protection Plan (PPP) funds which assisted us in weathering the storm, especially through the lean months from May through August 2020. By the end of August 2020, we had exhausted our use of PPP funds, but our working capital remained strong at $5,693.

 

Because our larger clients scaled back media related activities in 2020 due to COVID-19, our revenue became more diverse as reliance on our top 2 clients dropped from 49% in 2019 to 39% in 2020. Four clients with revenues greater than $500 actually increased revenue in 2020 by $2,111.

 

Our working capital though has assumed repayment of Vivos Holdings debt which as of December 31, 2020 was $5,970. We had expected repayment in early 2020 after Vivos Holdings defaulted on two of their notes at the end of December 2019.

 

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From a technology perspective, we updated our finance and accounting system from Sage 50 which was a client server version, to Sage Intaact, a cloud-based application. We also bolstered our automated sales and marketing capabilities by adding SaaS applications Salesforce.com and ZoomInfo. So, although we still do not possess an integrated ERP, we improved our business intelligence, CRM, Finance and Accounting capabilities.

 

On February 17, 2020, after several attempts to negotiate a payment plan with Suresh Venkat Doki (brother of Mr. Doki) and Mr. Doki, Maslow, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Mr. Doki and other Vivos Debtors.

 

In February 2020, the shortage of cash at this juncture resulted from, among other things, the Company being unable to finance IQS invoices through Triumph because a lien was discovered to exist on IQS assets delaying utilization of Maslow’s much more favorable factoring relationship with Triumph. As for the lien, it was not disclosed to Maslow by Vivos Holdings, the seller, before or after the transaction closed. This is when Maslow sought $250 from Triumph and later made a payment to buy its way out of the unfavorable factoring arrangement and take on other actions to move IQS financing to Triumph.

 

The Company’s executives and its board of directors worked together on managing costs and implementing measures to facilitate the rapid ramp-up of operations once the governmental restrictions began being lifted in June 2020. But we did not see our clients return to better than 60% of their customary levels of demand until September 2020.

 

Cash and working capital began stabilizing in late September 2020 after the PPP funds had been exhausted for their intended purpose, payroll only in our case, and we began utilizing our factoring facility again, but not the 93% level we have over the past 2 years.

 

2021 and Beyond

 

The continued impact of this pandemic cannot be precisely predicted. We believe that the short to mid-term impacts on how our clients conduct work will continue to be aligned with our strategic path.

 

As a result, we have continued to move forward with our diversified offerings and future specialization staffing strategy, updating our already expert operating model and organizing our business to more easily acquire and maintain client accounts.

 

We believe given the changing nature in specialized staffing due to the pandemic that there likes a greater opportunity to expand our EOR business as it offers businesses of all types and industries, more flexibility in on and off boarding employees as well as managing 1099 risk. As far as staffing, media staffing, we believe it will grow but there are also opportunities to get into staffing specialties which represent areas where we see the most rebound for a robust demand. We will continue to focus on growing the contingent staffing side of our business. Our IT Staffing brand, Intelligent Quality Solutions, will be a primary focus moving forward. Bringing on new segments whether organically or through M&A reflect our desire to shift our portfolio toward a higher margin, higher value proposition.

 

COMPANY OVERVIEW

 

Maslow is a national provider of employer of record, recruiting and staffing services, consisting of media and IT resources. We provide services to client primarily within the United States of America.

 

Our services consist of:

 

  Employer of Record (“EOR”): A unique workforce solution for any organization who seeks efficiency in employee administrative management including payroll and benefits, labor risk associated with compliance with federal-state and local regulations including Fair Labor Standards Act (“FLSA”), in onboarding and offboarding employees, and in managing benefit costs.
  Recruiting and Staffing: Staffing covering a wide variety of specialties. Currently Media and Information Technology (“IT”) encompass most of our placements.
  Video and Multimedia Production: With 32 years of experience, the Company’s subsidiary, Maslow, offer script to screen expertise including producers, audio engineers, editors, broadcasters, makeup artists, camera crews, Gaffers and grips, drone operators and more.

 

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The Company’s subsidiary, The Maslow Media Group, Inc. (“Maslow”) is currently the only earning entity for the business. After our Merger in October 2019, non-operational expenses (e.g., public company fees, D&O insurance, investor relations, etc.) were assigned at the corporate level. This enables a more pristine focused view of the operational side of the business we refer to as Operational Income Before Depreciation, Interest, and Amortization.

 

RESULTS OF OPERATIONS

 

Maslow had revenues totaling $29,202 in 2020, which was a 24% decrease over $38,444 in 2019. IQS, our IT Staffing business segment, which was acquired on December 1, 2019, accounted for $2,571, or 8.8%. The COVID-19 impact to revenue was undoubtedly profound but difficult to measure given there is no way to know what level of growth existing clients may have had or revenue potential of new clients.

 

Overall, Maslow lost $7,611 to accounts with declining revenues => $500, but conversely added $2,111 from new or growing accounts that had at least $500 more in revenue in 2020 from 2019. AT&T’s DirecTV cancelled Sirius-XM programming in February 2020 that we believe had a negative impact of $3,400 on revenue. Overall DirecTV year over year revenue declined by $4,759.

 

If we assume that those clients who had revenues in 2019 and zero in 2020 and include those with steep declines > $500 and 2020 revenues < $10, the total in attrition is approximately $3,874. This attrition may not be permanent as many clients hire Maslow for special events. The decision to leave Maslow or not use Maslow services in 2020 by these three clients was not attributable to Maslow’s pricing, service, or performance.

 

Overall, the top 10 clients represented $24,242 which is 82% of 2020 revenues, which was a decrease by approximately $7,249 to 2019’s top 10 at approximately $31,491. $24 in rebates were issued in December 2020 which was $24 less than a year ago when they were $48 in 2019.

 

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of revenues, and have been derived from our consolidated financial statements.

 

   December 31 
   2020   2019 
Revenue  $29,202   $38,444 
Cost of services   25,728    34,375 
Gross profit   3,474    4,069 
Selling, general and administrative expenses   4,462    2,985 
Operating income (loss)   (988)   1,084 
Interest income   8    - 
Interest income from related parties   112    68 
Interest expense   (281)   (438)
Other expense   (1)   (206)
Income/(loss) before taxes   (1,150)   508 
Income tax benefit (expense)   230    (156)
Non-controlling interest in consolidated affiliates   131    (157)
Net income (loss)  $(789)  $195 

 

The 2019 consolidated statement of income includes only 1 month of IQS operations versus 12 months in 2020.

 

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Revenues: By Segment

 

   2020   %
of Revenue
   2019   %
of Revenue
 
EOR  $23,564    80.7%  $34,452    89.6%
Recruiting and Staffing   4,478    15.3%   2,190    5.7%
Video and Multimedia Production   1,125    3.9%   1,641    4.3%
Other   35    .1%   161    0.4%
Total Revenue  $29,202    100%  $38,444    100.0%

 

Employer of Record (EOR) Revenues: EOR represented 80.7% of our revenue in 2020 as opposed to 89.6% in 2019. This can be attributed to this business segment being hit the hardest by COVID-19 as our large corporate clients curtailed non-essential media activities and AT&T announced the cancellation of two (2) live anchor multiple hour DirecTV sports programs, which we estimate reduced revenue by $4,000. Additionally, our IT staffing business which we enjoyed for its first full year, contributed 8% of revenue, thus also reducing EOR concentration.

 

Recruiting and Staffing Revenues: Staffing revenues buoyed by having a full year of IT Staffing capabilities increased revenue by $2,288, or 104%. The IT Staffing (IQS) contributing the vast majority, but Media Staffing despite COVID-19 headwinds, managed to eke out a slight increase in 2020 of $17 over 2019, finishing year with $1,904 in revenue.

 

IQS, our IT Staffing division although contributing $2,571 in revenue and $784 in gross profit (30.5%) in 2020, saw a decline in business from its 2019 full year levels (including pre-acquisition as it was acquired December 2019) of $3,206 in revenue and $908 in gross profit. These are declines at levels of $723 or 28% and $131 or 17% in revenue and gross profit, respectively. The decline in IQS business was most poignant in Q4 with revenue coming in at $478 compared to $751 in Q4 2019; a drop of 36.4%. When IQS Q4 2020 revenue is compared to Q1 2020, the decline is comparative at 39.5%. The drop in revenue began in April 2020 due to COVID-19 as the next 6 months saw an approximate decline of 27% compared to same period a year ago. The decline however was not as steep as the EOR, Video Production and Media Staffing comparative declines because a few clients had essential business exceptions and accommodations to keep their IT projects active. The reason there was no bounce back for this business segment in Q4 was a combination of losing 7 staffing positions to permanent offers and what we believe is the temporary loss of two clients, Inspire Brands and Accruent who both began implementing temporary hiring freezes in early 2020. This resulted in a $745 revenue loss in 2020. Conversely, Abbott Labs through vendor management firm Tapfin, had a 57% increase in revenues going from $691 in 2019 to $1,083 in 2020.

 

Video and Multimedia Production Revenues: Video Production by nature of the freelance work our clients undertake, did see a decline in revenue by $516 or 31.4%, from $1,641 in 2019 to revenues of $1,125 in 2020.

 

Gross Profit: Gross profit represents revenues from services less cost of services expenses, which consist of payroll, payroll taxes, benefits, payroll-related insurance, union benefits, field talent and reimbursable costs for out-of-pocket items.

 

Overall, our gross profit declined $595, or 14.6% to $3,474 from $4,069 in 2019; but the decline was not proportionate and as steep as our revenue’s decline by 24%. This was due primarily to an increase in higher margin activities such as IT staffing which garnered 30.5% as it represented 8.8% of the overall revenue. This coupled with a reduction in the low margin EOR business at 9.2%and increase in Media Staffing at 22.8% drove an overall margin of 11.9% which was 1.3% higher than 2019’s margin of 10.6%.

 

Selling, General and Administrative Expenses (“SG&A”): SG&A expenses increased $1,477, or 49.5%, to $4,462, $1,567 of which were related to non-operational corporate costs, with $1,109 of which were public company based and $446 were for outside legal fees associated with our Vivos Group dispute. Otherwise, our operational SG&A increase in 2020 over 2019 was only $63.

 

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Operational SG&A increases were in salary of $381 in 2020 over 2019, which can be attributed to having IQS IT Staffing unit for full year which added approximately $453 to 2020’s salary demonstrating that when comparing MMG pre IQS salaries from 2020 to 2019, there was actually a savings of $72. The savings in salaries was attained despite adding business development personnel.

 

IQS salaries were trimmed to be in line with reduction in revenue, which included a change in senior management. For the first 8 months of 2020, SG&A salary, payroll tax and benefits averaged $40 a month, in contrast to the last 5 months of 2020 where salaries averaged $28, without a loss in productivity. This staff realignment was implemented to position this division for success and growth moving forward.

 

Non-operational corporate costs for 2020 totaled $1,567, which are not comparable to 2019 as these costs only were classified as such after the Company went public via the reverse merger in October 2019. The 2020 cost drivers were salary, payroll tax, and benefits at $738 and D&O insurance totaling $115. The former consists of our general counsel and allocated executive and senior management loaded salaries.

 

Depreciation and Amortization: Depreciation and amortization charges were $79 compared to $25 in 2019, with the increase coming from capitalized software and IQS brand name and client relationships amortization.

 

Interest Income: Interest income from related parties increased from $68 to $120, as a result of the Vivos Holdings 2019 tax note accruing interest for a full year.

 

Other Expense: Other expenses decreased by $205 from $206 to $1 primarily due to elimination of these non- essential, non-operational costs the Company had incurred in 2019.

 

Interest Expense: Interest expense, decreased by $157 from $438 to $281 as reliance on factoring was minimized as a benefit of having PPP loan proceeds, managing expenses downward and business picking up in Q4. Additionally, interest accrual at 12% on $890 in convertible notes began subsiding as notes were repaid from July through September 2020. Conversely PPP loan interest was carried at 1% starting in May 2020 through end of the year, and interest of 10% on a $250 loan from Triumph Capital.

 

Income Taxes: Income tax expense improved from $156 in income tax expense to an income tax benefit of $230 due to the net loss recorded in 2020.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our working capital requirements are driven predominantly by EOR field talent payments, SG&A salaries, public company costs, interest associated with factoring, and client accounts receivable receipts. Since receipts from client payments are on average 70 days behind payments to field talent, working capital requirements can be periodically challenged. We have a Factoring Facility with Triumph Business Capital (TBC). TBC advances 93% of our eligible receivables at an advance rate of 15 basis points, an interest rate of prime plus 2%., and our prime floor rate at 4%. As a result of the impact of the COVID-19 pandemic, our clients may be more likely to be delinquent in their payments. As of December 31, 2020, 63% of our $6,629 were current, 26% 1 to 30 days past due, 8% between 31 and 60 days past due and 3% ($202) greater than 60 days.

 

Our primary sources of liquidity are cash generated from operations via accounts receivable and borrowings under our Factoring Facility with Triumph enabling access to the 7% unfactored portion. Because certain large clients have changed their payment practices announcing 60- and 90-day terms amounting to a unilateral extension to contractual terms by 30-60 days, we can be adversely impacted since Triumph no longer provides credit if an account obligor pays more than 120 days after the invoice date.

 

Our primary uses of cash are for payments to field talent, corporate and staff employees, related payroll liabilities, operating expenses, public company costs, including but not limited to general and professional liability and directors and officer’s liability insurance premiums, legal fees, filing fees, auditor and accounting fees, stock transfer services, and board compensation; followed by cash factoring and other borrowing interest; cash taxes; and debt payments.

 

Since we are an EOR with the majority of contracted talent paid as W-2 employees who are paid known amounts on a consistent schedule; our cash inflows do not typically align with these required payments, resulting in temporary cash challenges, which is why in the past we have employed factoring.

 

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Vivos Debtors as of December 31, 2020, had notes receivable totaling $4,258 including default on a $3,000 promissory note and on a $750 tax obligation in December 2019. After numerous failed collection attempts, on February 17, 2020 the Company initiated an action in the Circuit Court of Montgomery County Maryland against Naveen Doki and the Vivos Holdings for nonpayment.

 

It was also anticipated that following the Merger, the Company would both access the capital markets by selling additional shares of Company Common Stock and use shares of Company Common Stock as currency to acquire other business revenues.  However, all 300 million authorized shares of Company Common Stock were issued in connection with the Merger.  No shares are expected to become available to the Company until the legal dispute with the Vivos Debtors and Vivos Group is resolved. At that point the Company can decide whether to amend the Company’s Certificate of Formation to increase the number of authorized shares of Company Common Stock or approve a reverse-split of the outstanding shares of Company Common Stock to provide additional shares for these purposes. No assurance can be given as to when this might take place.

 

On May 5, 2020, Maslow received $5,216 loan through the Paycheck Protection Program (the “PPP”) with a term of two (2) years and an interest rate of 1% per annum. The PPP provides that the Company may apply for forgiveness of this loan if the loan proceeds were used for payroll and certain other specified operating expenses while maintaining specified headcount requirements. The accrued interest on the PPP loan as of December 31, 2020 was $34.

 

On June 5, 2020, The Paycheck Protection Program Flexibility Act (the “PPPF Act”) went into effect providing more flexibility to participants in the PPP which included extending the time to begin repayment of the PPP loan until the amount of forgiveness, if any, is determined, which could be as late as December 31, 2020. The Company may apply for forgiveness earlier if they determine that doing so will maximize the amount of loan forgiveness.

 

On December 22, 2020, the United States Congress passed an omnibus spending bill (the December relief bill) that included significant revisions and additions to the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), and previously amended by the Paycheck Protection Program Flexibility Act (PPP Flexibility Act). President Trump signed the bill on December 27, 2020. The December relief bill permits expenses paid with PPP loan funds to be deductible.

 

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues ‎Act (the “PPP2 Act”) contained in the Consolidated Appropriations Act, 2021 (“2021 Appropriations Act”) ‎was enacted. The PPP2 Act and 2021 Appropriations Act included several changes to the forgiveness ‎deadline process and deadlines allowing PPP borrowers up to 10 months to apply for loan forgiveness after the covered period ends.

The Company utilized PPP funds for their intended purpose, in this case for payroll only following guidelines for wage earners > $100.

 

The funds bolstered our working capital and enabled us to bring back employees and continue to serve our clients even though their requirements had lessened.

 

As of December 31, 2020, our working capital was $5,970, compared to $784 a year ago as the PPP funds enabled the Company to build A/R reserves since PPP funds were employed to pay salaries of both outsourced and SG&A employees, while approximately 58% of 2019 revenue was still attained and collectible during the covered 24-week period between May and October 2020.

 

We anticipate approximately $300 in additional SG&A costs in 2021, when compared with 2020 relating to increase in sales and marketing head count to meet growth objectives.

 

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A summary of our operating, investing and financing activities are shown in the following table:

 

   December 31 
   2020   2019 
         
Net cash provided by (used in) operating activities  $(2,070)  $1 
Net cash used in investing activities   (50)   (39)
Net cash provided by financing activities   1,915    284 
Net change in cash and cash equivalents  $(205)  $246 

 

Operating Activities

 

Cash employed by operating activities consists of net income (loss), adjusted for non-cash items, including depreciation and amortization, and the effect of working capital changes. The primary drivers of cash inflows and outflows are factoring, accounts receivable and accrued payroll and expenses.

 

During 2020, net cash used in operating activities was ($2,070), a decrease of $2,071 compared with $1 for 2019. This decrease is primarily attributable to our net loss of ($789), and changes in income tax payable by ($525), accrued payroll ($455), and accounts payable ($401).

 

Investing Activities

 

Cash used in investing activities consists primarily of cash paid for capital expenditures.

 

Financing Activities

 

Cash provided by financing activities in 2020 was $1,915 as compared to cash used for same purpose totaling $284 in 2019. The increase was due to the Company receiving $5,216 in PPP offset by $853 in repayments from the issuance of convertible notes starting in June of 2019 and return of cash flows from short-term borrowing via our factoring vehicle.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We had no material off-balance sheet arrangements that have, or are likely to have, a current or future material effect on our operations.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

We have identified the policies listed below as critical to our business and the understanding of our results of operations. For a detailed discussion of the application of these and other accounting policies, see Note 3 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K. The preparation of consolidated financial statements in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods.

 

On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, collectability of accounts receivable, impairment of goodwill and intangible assets, contingencies, litigation, income taxes, stock option expense, and other liabilities. Management based its estimates and judgments on historical experiences and on various other factors believed to be reasonable under the circumstances. Actual results under circumstances and conditions different than those assumed could result in differences from the estimated amounts in the consolidated financial statements.

 

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REVENUE RECOGNITION

 

On January 1, 2019 the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers, for all open contracts and related amendments as of December 31, 2019 using the modified retrospective method. The adoption had no impact to the reported results.

 

The Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligation(s) in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.

 

The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered.

 

We derive our revenues from three segments: EOR, Recruiting and Staffing, and Video and Multimedia Production. We provide temporary staffing and permanent placement services. Revenues are recognized when promised services are delivered to client, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Revenues as presented on the consolidated statements of operations represent services rendered to client less variable consideration, such as sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and equivalent amounts of reimbursable expenses are included in cost of services.

 

We record revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. We have concluded that gross reporting is appropriate because we (i) have the risk of identifying and hiring qualified workers, (ii) have the discretion to select the workers and establish their price and duties and (iii) we bear the risk for services that are not fully paid for by client.

 

Temporary staffing revenues is accounted for as a single performance obligation satisfied over time because the customer simultaneously receives and consumes the benefits of the Company’s performance on an hourly basis. The contracts stipulate weekly billing, and the Company has elected the “as invoiced” practical expedient to recognize revenue based on the hours incurred at the contractual rate as we have the right to payment in an amount that corresponds directly with the value of performance completed to date.

 

Permanent placement revenue is recognized on the date the candidate’s full-time employment with the customer has commenced. The customer is invoiced on the start date, and the contract stipulates payment due under varying terms, typically 90 days. The contract with the customer stipulates a guarantee period whereby the Company will replace the candidate for free of charge if the employee is terminated within that 90-day period. As such, the Company’s performance obligations are satisfied upon commencement of the employment, at which point control has transferred to the customer.

 

Allowances, recorded as a liability, are established to estimate these losses. Fees to client are generally calculated as a percentage of the new worker’s annual compensation. No fees for permanent placement services are charged to employment candidates.

 

Video and Multimedia Production revenues from contracts with client are recognized in the amount to which we have a right to invoice when the services are rendered by our field talent.

 

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INTANGIBLE ASSETS

 

The Company holds intangible assets with finite lives. Intangible assets with finite useful lives are amortized over their respective estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible asset is realized.

 

Identifiable intangible assets recognized in conjunction with acquisitions are recorded at fair value. Significant unobservable inputs are used to determine the fair value of the identifiable intangible assets based on the income approach valuation model whereby the present worth and anticipated future benefits of the identifiable intangible assets were discounted back to their net present value.

 

The Company evaluates the recoverability of intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. The Company annually evaluates the remaining useful lives of all intangible assets to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company determined that there were no impairment indicators for these assets during the year ended December 31, 2020.

 

GOODWILL

 

Goodwill represents the difference between the enterprise value/cash paid less the fair value of all recognized net asset fair values including identifiable intangible asset values in a business combination. The Company reviews goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Based on annual testing, the Company has determined that there was no goodwill impairment during the year ended December 31, 2020.

 

The Company first evaluates qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the reporting unit is less than its carrying amount, including goodwill. If after qualitatively assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then further testing is unnecessary. If after assessing the totality of events or circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company then estimates the fair value of the reporting unit and compares the fair value of the reporting unit with its carrying amount, including goodwill, as discussed below.

 

In assessing whether it is more likely than not that an indefinite-lived intangible asset is impaired, the Company assesses relevant events and circumstances that could affect the significant inputs used to determine the fair value.

 

The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, the Company shall recognize an impairment loss in an amount equal to that excess.

 

The quantitative goodwill impairment test involves a two-step process. In the first step, the Company compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired, and no further testing is required. If the fair value of the reporting unit is less than the carrying value, The Company must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit’s fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit’s goodwill is less than the carrying value, the difference is recorded as an impairment loss.

 

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RECENT ACCOUNTING PRONOUCEMENTS

 

For a discussion of recent accounting pronouncements and their potential effect on our results of operations and financial condition, refer to Note 3 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to certain market risks from transactions we enter in the normal course of business. Our primary market risk exposure relates to interest rate risk, which currently is tied to the Prime Interest rate.

 

INTEREST RATES

 

Our Factoring Facility is priced at a variable interest rate of prime plus 2% with a 15-basis point advance rate with a floor of 4%. Accordingly, future interest rate increases could potentially put us at risk for an adverse impact on future earnings and cash flows.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

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18012 Sky Park Circle, Suite 200

Irvine, California 92614

tel 949-852-1600

fax 949-852-1606

www.rjicpas.com

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and Board of Directors

Reliability Incorporated:

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Reliability Incorporated and Subsidiary (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the “consolidated financial statements”).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Security and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the Company has experienced cash constraints and extended payment terms from its customers, has been unable to negotiate payments due on its related party receivables which are currently in default, is currently unable to access the capital markets, and believes the impact of the COVID 19 pandemic will continue to have a material impact on its business, operations and cash flows. These factors raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Critical Audit Matters

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit Committee of the Board of Directors and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.

 

Related Party Transactions and Recoverability of Notes Receivable from Related Parties

 

As discussed in Notes 12 and 14 to the consolidated financial statements, the Company has significant related party transactions and arrangements with the majority owners of the Company and other companies owned by the majority owners. In addition to holding several receivable agreements, including notes receivable with these related parties, the Company is currently involved in a lawsuit against one of the majority owners and other companies owned by the majority owner.

 

We identified the evaluation of the identification of related parties, related party transactions and collectability of notes receivable from related parties as a critical audit matter. Auditor judgement was involved in assessing the sufficiency of the procedures performed to identify related parties, identify related party transactions and assess the collectability of the notes receivable from related parties.

 

The following are the primary procedures we performed to address this critical audit matter. We performed the following procedures to evaluate the identification of related parties, related party transactions and the collectability of the notes receivable from related parties by the Company:

 

● Reviewed new agreements and contracts between the Company and its related parties;

● Queried the accounts payable system for transactions with its related parties;

● Inspected director and officer questionnaires from the Company’s directors and officers;

● Evaluated the Company’s reconciliation of its applicable accounts to the related parties’ records of transactions and balances;

● Read the Company’s minutes from meetings of the Board of Directors and related committees;

● Inquired with executive officers and key members of management;

● Reviewed public filings, external news, and research sources for information related to transactions between the Company and related parties; and

● Confirmed with the Company’s legal counsel, management, and its outside counsel as to the status of the lawsuits and the collectability of the notes receivable from related parties.

 

We have served as the Company’s auditor since 2009.

 

 

Irvine, California

March 31, 2021

 

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RELIABILITY INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share data)

 

   December 31 
   2020   2019 
ASSETS        
CURRENT ASSETS          
Cash and cash equivalents  $70   $275 
Trade receivables, net of allowance for doubtful accounts   6,870    7,029 
Notes receivable from related parties   4,258    3,418 
Prepaid expenses and other current assets   289    316 
Total current assets   11,487    11,038 
           
Property, plant and equipment, net   76    2,483 
Other intangible assets, net   203    237 
Goodwill   518    518 
Total assets  $12,284    14,276 
LIABILITIES AND STOCKHOLDER’S EQUITY          
           
CURRENT LIABILITIES          
Factoring liability  $2,999   $5,508 
Accounts payable   936    1,087 
Accrued expenses   375    548 
Accrued payroll   691    907 
Deferred revenue   182    347 
Income taxes payable   292    817 
Note payable   -    890 
Current portion of mortgage loan payable   -    45 
Other current liabilities   42    105 
Total current liabilities   5,517    10,254 
Mortgage loan payable, net of current portion        1,745 
PPP loan payable   5,250    - 
Total liabilities   10,767    11,999 
Commitment and contingencies (Note 12)          
Subsequent events (Note 17)          
STOCKHOLDER’S EQUITY          
Common stock, without par value, 300,000,000 shares authorized, 300,000,000 issued and outstanding as of December 31, 2020 and 2019   -    - 
Additional paid-in capital   750    750 
Retained earnings   767    1,840 
Total stockholder’s equity attributable to Reliability Inc.   1,517    2,590 
Noncontrolling interest in consolidated affiliates   -    (313)
Total equity   1,517    2,277 
Total liabilities and stockholder’s equity  $12,284   $14,276 

 

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

 

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RELIABILITY INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

 

   For the Years Ended December 31 
   2020   2019 
Revenue earned          
Service revenue  $29,202   $38,444 
Cost of revenue          
Cost of revenue   25,728    34,375 
Gross profit   3,474    4,069 
Selling, general and administrative expenses   4,462    2,985 
Operating income (loss)   (988)   1,084 
Other income (expense)          
Interest income from related parties   112    68 
Interest income   8    - 
Interest expense   (281)   (438)
Other expense   (1)   (206)
Income (loss) before income tax benefit / (expense)   (1,150)   508 
Income tax benefit/(expense)   230    (156)
Consolidated net income (loss)   (920)   352 
Less net (income) loss attributable to noncontrolling interest in consolidated affiliates   131    (157)
Net income (loss) attributable to Reliability Inc.  $(789)  $195 
Net income per share:          
Basic  $0.00   $0.00 
Diluted  $0.00   $0.00 
           
Share used in per share computation:          
Basic   300,000,000    300,000,000 
Diluted   300,000,000    300,000,000 

 

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

 

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RELIABILITY INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS’ EQUITY

For the year ended December 31, 2020 and 2019

(amounts in thousands, except per share data)

 

   Controlling Interest           
           Add-           Non - Controlling       
           itional           Interest in       
   Common Stock   Paid-in   Retained       Consolidated   Total  
   Shares   Amount   Capital   Earnings   Total   Affiliates   Equity  
                               
Balance, January 1, 2019   282,000,000           -    -    1,472    1,472        1,472  
Net income (loss)                  352    352    (157)  195  
Recapitalization   18,000,000              16    16        16  
Note receivable from shareholder for tax debt             750         750        750  
VIE consolidation                            (156)  (156 )
Balance, December 31, 2019   300,000,000         750    1,840    2,590    (313)  2,277  
Net income (loss)                  (971)   (971)   182   (789 )
VIE disposal                  (102)   (102)   131   29  
Balance, December 31, 2020   300,000,000         750    767    1,517    -   1,517  

 

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

 

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RELIABILITY INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

 

   For the Years Ended December 31, 
   2020   2019 
Cash flows from operating activities:          
Net income (loss)  $(789)  $195 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Depreciation and amortization   79    25 
(Gain)/loss on disposal of property and equipment   (176)   3 
Deferred income taxes   -    (344)
Accrued interest   (68)   (25)
Changes in operating assets and liabilities:          
Trade receivables   159    (548)
Prepaid expenses and other current assets   27    (68)
Accounts payable   (151)   250 
Accrued payroll   (217)   238 
Accrued expenses   (142)   (62)
Deferred revenue   (166)   112 
Other liabilities   (101)   72 
Income taxes payable/tax paid   (525)   153 
Net cash provided by operating activities   (2,070)   1 
Cash flows from investing activities:          
Cash from merger   -    2 
Purchase of fixed assets   (50)   (41)
Net cash used in investing activities   (50)   (39)
Cash flows from financing activities:          
Net borrowing/(repayment) of line-of-credit+   (2,509)   916 
Proceeds from issuing short-term debt   -    850 
Net borrowing/(payment) of long-term debt   5,216    (794)
Advances to related parties   61    (688)
Repayment of long-term debt   (853)   - 
Net cash provided by financing activities   1,915    284 
Net increase (decrease) in cash and cash equivalents   (205)   246 
Cash and cash equivalents, beginning of year   275    29 
Cash and cash equivalents, end of year  $70   $275 

 

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

 

 49 
   

 

RELIABILITY INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS, continued

(amounts in thousands)

 

   For the years ended December 31, 
Supplemental disclosures of cash flow information:  2020   2019 
Cash paid during the year for:          
Interest  $275   $364 
Income taxes  $301   $389 
           
Supplemental disclosures of non-cash investing and financing activities:          
Net tangible assets acquired in acquisition of IQS  $-   $623 
Net intangible assets acquired in acquisition of IQS  $-   $758 
Liabilities assumed during acquisition of IQS  $-   $735 
Reduction in notes receivable from related parties for acquisition of IQS  $-   $646 
ASC 842 leases added to property, plant and equipment  $-   $30 
Leases placed in other current liabilities  $-   $30 
Non-cash impact of recapitalization from merger          
Liabilities assumed in merger  $-   $7 
Conversion of shareholder loan to equity in merger  $-   $162 
VIE net asset consolidated (unconsolidated)  $(1,790)  $1,631 
VIE liabilities consolidated (unconsolidated)  $(1,790)  $1,790 
VIE reduction in equity  $-   $160 

 

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

 

 50 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

NOTE 1 - NATURE OF OPERATIONS

 

Reliability, Inc. is a leading provider of employer of record and temporary media and information technology (“IT”) staffing services that operates, along with its wholly owned subsidiary, The Maslow Media Group, Inc., (collectively, “Reliability” or the “Company”), primarily within the United States of America in three industry segments: Employer of Record (“EOR”), Recruiting and Staffing and Video and Multimedia Production which provides script to screen media talent. EOR which is a unique workforce management solution, represented 80.7% of the revenue in 2020. Our Staffing segment provides skilled field talent on a nationwide basis for IT and finance and accounting client partner projects. Our Staffing includes revenue derived from permanent placement. Video Production involves assembling and providing crews for special projects that can last anywhere from a week to 6 months.

 

On October 29, 2019, Maslow Media Group (“Maslow” or “MMG”) became a wholly owned subsidiary of Reliability via a reverse merger (the “Merger”).

 

On December 1, 2019, the Company acquired the customer contracts and trade receivables and assumed certain liabilities of Intelligent Quality Solutions, Inc. (“IQS”). IQS operates as a division of MMG.

 

NOTE 2 - LIQUIDITY AND GOING CONCERN

 

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus spread to other countries, including the United States, and efforts to contain the spread of this coronavirus intensified. This outbreak continued throughout 2020 and into 2021. The outbreak and any preventative or protective actions that governments or we may take in respect of this coronavirus may result in a period of business disruption, reduced customer traffic and reduced operations. The impact of this coronavirus has had a material negative in the short term. The full financial impact cannot be reasonably estimated at this time, but may materially affect our business, financial condition and results of operations. The impact of the COVID-19 pandemic on the Company and its clients continues to evolve and is expected to adversely impact the Company’s profitability, cash, assumptions and projections.

 

Even before the state and U.S. governments’ reaction to COVID-19 forced employees to work from their homes starting around March 12, 2020, the Company had begun to experience cash constraints due to the following factors:

 

  1. Approximately $4,300 of outstanding debt owed to the Company had not been paid and is in default.
  2.

The utilization of cash used in financing Vivos Group affiliated activities of $688 in 2019.

  3. The inability to access capital markets due to not having any available shares of common stock.

 

Executive management took swift action on March 16, 2020 by reducing hours of employees who worked on clients significantly impacted by the COVID-19 virus concerns. Six (6) administrative employees were subsequently furloughed as of March 20, 2020, and a temporary across the board reduction in pay was instituted across the remaining administrative staff members with executives taking a 50% larger cut in salary. We also began having employees work from their homes making full use of our cloud-based infrastructure, and subsequently terminated the lease effective April 30, 2020 in Rockville, MD which saved the Company approximately $246 a year. On May 5, 2020 (the “Effective Date”), MMG received the proceeds of a loan pursuant to into a promissory note (the “Note”) under the Paycheck Protection Program with TBK Bank, SSB (“Lender”), in the amount of $5,216 (the “PPP Loan”). The Paycheck Protection Program (“PPP”) was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). These funds were utilized entirely for payroll during the 24-week covered period which commenced in May 2020 and ended in October 2020. Maslow exhausted use of the funds for payroll by the end of August 2020.

 

 51 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

The PPP Loan enabled MMG to return furloughed employees who were still available to work and hire additional staff for purposes of vital sales, marketing and general and administrative projects. Salaries were returned to normal levels and amounts that were previously suspended were returned to most corporate employees. Those employees who accepted permanent reductions in pay were given incentives to achieve at those levels and beyond. No employee was reduced below the 25% threshold that the PPP Loan mandated.

 

Even after receiving PPP funds, we continued to look for ways to streamline our business by re-structuring IQS, eliminating occupancy of office in Plymouth, MN, and trimming many non-essential SG&A expenses.

 

The Company applied for PPP loan forgiveness on March 3, 2020 for the entire amount borrowed in accordance with the PPP rules and guidance. The Company believes that the entire $5,216 of the PPP Loan will be forgiven. However, no assurance can be given that all or any of the PPP Loan will, in fact, be forgiven. Our consolidated financial statements do not include any adjustments to reflect the possible future effects on the forgiveness of the PPP Loan.

 

Additionally, the Company is pursuing CARES Act Paycheck Protection Program round 2 for which we believe we qualify.

 

During the year ended December 31, 2020, we incurred a net loss in the amount of $789 and utilized cash from operating activities in the amount of $2,070. Our revenues decreased by $9,242 or 24% when compared to 2019, largely due to the COVID-19 pandemic. We also incurred an operating loss of $988 in 2020 compared to operating income of $1,084 in 2019.

 

All these conditions noted above, most notably the adverse impact of sales by COVID 19and presumption that all debts coming due without ability to raise cash from Vivos Holdings receivable, raise substantial doubt about the Company’s ability to continue as a going concern. There can be no assurances that the Company will be successful in managing the impact of the foregoing or its ability to maintain sufficient liquidity over a period of time that will allow it to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liability that may results from the possible inability of the Company to continue as a going concern.

 

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The Company’s consolidated financial statements reflect the financial position and operating results of Reliability, Inc. including its wholly owned subsidiary, Maslow. All intercompany transactions and balances have been eliminated in consolidation.

 

Fiscal Year

 

The Company’s fiscal year is from January 1st through December 31st.

 

Management Estimates

 

The consolidated financial statements and related disclosures are prepared in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The Company must make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to revenue recognition, allowances for doubtful accounts, recoverability of notes receivable, useful lives for depreciation and amortization, loss contingencies, allocation of purchase price in connection with business combinations, valuation allowances for deferred income taxes, and the assumptions used for web site development cost classifications. Actual results may be materially different from those estimated. In making its estimates, the Company considers the current economic and legislative environment.

 

 52 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of 90-days or less to be cash equivalents.

 

Concentration of Credit Risk

 

For the year ended December 31, 2020, the Company’s top 10 clients generated over 82% of the revenue. A large portion of our business comes from two clients, AT&T Services, Inc. (inclusive of its DirecTV division) (“AT&T”) and Janssen Pharmaceuticals (which includes workforce partners Johnson & Johnson). AT&T accounted for 29% and 38% of revenue in 2020 and 2019, respectively. AT&T comprised approximately 49% and 50% of the accounts receivable balance as of December 31, 2020 and 2019, respectively. Janssen Pharmaceuticals (which includes workforce partners Johnson & Johnson) accounted for approximately 11% of our total revenues for the years ended December 31, 2020 and 2019. Janssen Pharmaceuticals comprised approximately18% and 19% of accounts receivable as of December 31, 2020 and 2019, respectively. No other client exceeded 10% of revenues.

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, are primarily cash and accounts receivable. The Company performs continuing credit evaluations of its customers and does not require collateral. The Company has not experienced significant losses related to receivables.

 

Accounts Receivable, Contract Assets, and Contract Liabilities (Deferred Revenue)

 

Receivables represent both trade receivables from customers in relation to fees for the Company’s services and unpaid amounts for benefit services provided by third-party vendors, such as healthcare providers for which the Company records a receivable for funding until the payment is received from the customer and a corresponding customer obligations liability until the Company disburses the balances to the vendors.

 

The Company provides for an allowance for doubtful accounts by specifically identifying accounts with a risk of collectability and providing an estimate of the loss exposure. Management considers all contract receivables as of December 31, 2020 and 2019 to be fully collectible, therefore an allowance for doubtful accounts is not provided for.

 

The Company records accounts receivable when its right to consideration becomes unconditional. Contract assets primarily relate to the Company rights to consideration for services provided that they are conditional on satisfaction of future performance obligations.

 

The Company holds customer deposits of certain customers related to its EOR business to minimize cash flow impact and reduces risks of uncollectible trade receivables.

 

The Company records contract liabilities (deferred revenue) when payments are made or due prior to the related performance obligations being satisfied. The current portion of the Company contract liabilities is included in accrued liabilities in its consolidated balance sheets. The Company does not have any material contract assets or long-term contract liabilities.

 

As of December 31, 2020, and 2019, the Company’s deferred revenue totaled $182 and $347 respectively.

 

 53 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

Fair Value Measurements

 

The Company measures fair value based on the price that the Company would receive upon selling an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. Various inputs are used in determining the fair value of assets or liabilities. Inputs are classified into a three-tier hierarchy, summarized as follows:

 

  Level 1 – Quoted prices in active markets for identical assets or liabilities;
  Level 2 – Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the assets or liabilities;
  Level 3 – Significant unobservable inputs for the assets or liabilities.

 

When Level 1 inputs are not available, the Company measures fair value using valuation techniques that maximize the use of relevant observable inputs (Level 2) and minimizes the use of unobservable inputs (Level 3).The carrying amounts reported as of December 31, 2020 and 2019 for cash and cash equivalents, trade receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, factoring liability, notes and mortgages payable approximate their fair values due to the short-term nature of these instruments or are based on interest rates available to the Company that are comparable to current market rates. The estimated fair value of the Company’s PPP loan payable approximates its carrying value as the rate on this debt is determined by the U.S. government which was offered to all participating companies under the CARES Act. It is not practicable to estimate the fair value of the notes receivable from related parties due to their related party nature.

 

Property and Equipment

 

Property and equipment are stated at cost and are depreciated using primarily the straight-line method over the following estimated useful lives: furniture, fixtures, and computer equipment — three to seven years; leasehold improvements — over the shorter of the estimated useful life of asset or the lease term. The estimated useful life of building was thirty-nine years. Expenditures for renewals and betterments are capitalized whereas expenditures for repairs and maintenance are charged to income as incurred. Upon sale or disposition of property and equipment, the difference between the unamortized cost and the proceeds is recorded as either a gain or a loss. Depreciation and amortization expense for the years ended December 31, 2020 and 2019 totaled $46 and $23, respectively.

 

Long-Lived Assets

 

The Company reviews its long-lived assets, primarily fixed assets, intangible assets and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. There were no impairments recorded during the years ended December 31, 2020 and 2019.

 

Intangible Assets

 

The Company holds intangible assets with finite lives. Intangible assets with finite useful lives are amortized over their respective estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible asset is realized. For the years ended December 31, 2020 and 2019, amortization expense was $33 and $3, respectively.

 

 54 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

Identifiable intangible assets recognized in conjunction with acquisitions are recorded at fair value. Significant unobservable inputs are used to determine the fair value of the identifiable intangible assets based on the income approach valuation model whereby the present worth and anticipated future benefits of the identifiable intangible assets were discounted back to their net present value.

 

The Company evaluates the recoverability of intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. The Company annually evaluates the remaining useful lives of all intangible assets to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company determined that there was no impairment needed for these assets during the year ended December 31, 2020.

 

Goodwill

 

Goodwill represents the difference between the enterprise value/cash paid less the fair value of all recognized net asset fair values including identifiable intangible asset values in a business combination. The Company reviews goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Based on annual testing, the Company has determined that there was no goodwill impairment during the year ended December 31, 2020.

 

The Company first evaluates qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the reporting unit is less than it’s carrying amount, including goodwill. If after qualitatively assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of the reporting unit is less than it’s carrying amount, then further testing is unnecessary. If after assessing the totality of events or circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company then estimates the fair value of the reporting unit and compares the fair value of the reporting unit with its carrying amount, including goodwill, as discussed below.

 

In assessing whether it is more likely than not that an indefinite-lived intangible asset is impaired, the Company assesses relevant events and circumstances that could affect the significant inputs used to determine the fair value.

 

The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, the Company shall recognize an impairment loss in an amount equal to that excess.

 

The quantitative goodwill impairment test involves a two-step process. In the first step, the Company compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired, and no further testing is required. If the fair value of the reporting unit is less than the carrying value, The Company must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit’s fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination.

 

 55 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

If the implied fair value of the reporting unit’s goodwill is less than the carrying value, the difference is recorded as an impairment loss. The Company determined that there was no impairment needed for the year ended December 31, 2020.

 

Revenue Recognition

 

The Company derives its revenues from three segments: EOR, Recruiting and Staffing, and Video and Multimedia Production. The Company provides temporary staffing and permanent placement services. Revenues are recognized when promised services are delivered to client, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues as presented on the consolidated statements of operations represent services rendered to clients, less sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and the related amounts of reimbursable expenses are included in cost of services.

 

Temporary staffing revenues - Field talent revenues from contracts with clients are recognized in the amount to which the Company has a right to invoice when the services are rendered by the Company’s field talent.

 

Permanent placement staffing revenues - Permanent placement staffing revenues are recognized when employment candidates start their permanent employment. The Company estimates the effect of permanent placement candidates who do not remain with its client through the guarantee period (generally 90 days) based on historical experience. Allowances, recorded as a liability, are established to estimate these losses. Fees to client are generally calculated as a percentage of the new worker’s annual compensation. No fees for permanent placement services are charged to employment candidates.

 

Refer to Note 16 for disaggregated revenues by segment.

 

Payment terms in our contracts vary by the type and location of our client partner and the services offered. The term between invoicing and when payment is due is not significant. There were no unsatisfied performance obligations as of December 31, 2020. There were no revenues recognized during years ended December 31, 2020 and 2019 related to performance obligations satisfied or partially satisfied in previous periods. There are no contract costs capitalized. The Company did not recognize any contract impairments during the years ended December 31, 2020 and 2019.

 

Advertising

 

The Company recognizes advertising expense in selling, general and administrative expenses as the services are incurred. Total advertising expense for the years ended December 31, 2020 and 2019 was $24 and $43, respectively.

 

Earnings (Loss) Per Share

 

Basic earnings (loss) per common share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year.

 

Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

 

Income Taxes

 

The Company accounts for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and net operating loss and tax credit carryforwards, using enacted tax rates and laws that are expected to be in effect when the differences reverse.

 

 56 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

A valuation allowance is recorded against deferred tax assets in these cases when management does not believe that the realization is more likely than not. While management believes that its judgements and estimates regarding deferred tax assets and liabilities are appropriate, significant differences in actual results may materially affect the Company’s future financial results.

 

The Company recognizes any uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2020, and 2019, the Company did not record any accruals for interest and penalties. The Company does not foresee material changes to its uncertain tax positions within the next twelve months. The Company’s tax years are subject to examination for 2017 and forward for U.S. Federal tax purposes and for 2016 and forward for state tax purposes.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred loss methodology with an expected credit loss model that requires consideration of a broader range of information to estimate credit losses over the lifetime of the asset, including current conditions and reasonable and supportable forecasts in addition to historical loss information, to determine expected credit losses. Pooling of assets with similar risk characteristics and the use of a loss model are also required. Also, in April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, to clarify the inclusion of recoveries of trade receivables previously written off when estimating an allowance for credit losses. The amendments in this update were required to be applied using the modified retrospective method with an adjustment to retained earnings and were effective for us beginning with fiscal year 2020, including interim periods. The adoption of the amendments in this update as of January 1, 2020 did not have a material impact on our accounts receivable, retained earnings, as well as our results of operations for the year ended December 31, 2020.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement, to improve the fair value measurement reporting of financial instruments. The amendments in this update require, among other things, added disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update eliminate, among other things, disclosure of the reasons for and amounts of transfers between Level 1 and Level 2 for assets and liabilities that are measured at fair value on a recurring basis and an entity’s valuation processes for Level 3 fair value measurements. The amendments in this update were effective for us beginning with fiscal year 2020. Retrospective application is required for all amendments in this update except the added disclosures, which should be applied prospectively. The adoption of the amendments in this update did not have a material impact on our consolidated financial position and results of operations as of and for the year ended December 31, 2020.

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles–Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, to provide additional guidance on the accounting for costs of implementing cloud computing arrangements that are service contracts. The amendments in this update require the capitalization of implementation costs during the application development stage of such hosting arrangements and amortization of the expense over the term of the arrangement, including any option to extend reasonably certain to be exercised or option to terminate reasonably certain not to be exercised. Capitalized implementation costs and amortization thereof are also required to be classified in the same line item in the statements of financial position, operations and cash flows associated with the hosting service fees. The amendments in this update were effective for us beginning with fiscal year 2020. Entities may select retrospective or prospective application to all implementation costs incurred after the adoption date. We selected prospective application to all implementation costs incurred after the adoption date. The adoption of the amendments in this update did not have a material impact on our property and equipment, net and results of operations as of and for the year ended December 31, 2020.

 

 57 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting, that provides optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR), which will be discontinued by the end of 2021. Also, in January 2021, the FASB issued ASU No. 2021-01 Reference Rate Reform (Topic 848)—Scope, to clarify that cash flow hedges are eligible for certain optional expedients and exceptions for the application of subsequent assessment methods to assume perfect effectiveness as previously presented in ASU 2020-04. The amendments in this update are effective for us immediately and may be applied through December 31, 2022. The adoption of this update is not expected to have a material impact on our consolidated financial position and results of operations.

 

In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes, to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update will be effective for us beginning with fiscal year 2021, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of the amendments in this update is not expected to have a material impact on our consolidated financial position and results of operations.

 

In October 2020, the FASB issued ASU No. 2020-10 Codification Improvements, to make incremental improvements to U.S. GAAP and address stakeholder suggestions, including, among other things, clarifying that the requirement to provide comparative information in the financial statements extends to the corresponding disclosures section. The amendments in this update will be effective for the Company beginning with fiscal year 2021, with early adoption permitted. The amendments in this update should be applied retrospectively and at the beginning of the period that includes the adoption date. The adoption of the amendments in this update is not expected to have a material impact on our consolidated financial position and results of operations.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this update will be effective for the Company beginning with fiscal year 2023, with early adoption permitted. The adoption of the amendments in this update is not expected to have a material impact on our consolidated financial position and results of operations.

 

The Company does not believe any other recently issued but not yet effective accounting pronouncement, if adopted, would have a material effect on its present or future consolidated financial statements.

 

 58 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

NOTE 4 - ACQUISITION

 

Intelligent Quality Solutions (“IQS”)

 

On December 1, 2019, the Company acquired the customer contracts and trade receivables and assumed certain liabilities of Intelligent Quality Solutions, Inc. IQS in exchange for a reduction of approximately $691 of the notes receivable from relates parties (Vivos Group).

 

The assets acquired in the IQS asset purchase agreement were acquired by Maslow. The acquisition of IQS allows the Company to strengthen and expand its IT operations throughout the Midwest U.S. region and expand to markets across the country with talent and software quality assurance services.

 

The consolidated statement of operations for the year ended December 31, 2019 includes one month of IQS operations, which was approximately $245 of revenue and $6 of net operating loss. The purchase price has been allocated to the assets acquired and liabilities assumed as of the date of acquisition. All amounts recorded to goodwill are expected to be deductible for tax purposes. The allocation is as follows:

 

   2019 
Accounts receivable  $529 
Prepaid expenses and other assets   119 
Intangible assets   240 
Goodwill   451 
Liabilities assumed   759 
Total net assets acquired  $580 
Cash  $44 
Working capital adjustment   67 
Total fair value of consideration transferred for acquired business  $691 

 

The allocation of the intangible assets is as follows:

 

   Estimated Fair Value   Estimated
Useful Lives
Customer relationships  $41   3 years
Trade name   199   10 years
Total  $240    

 

The Company incurred costs of $6 related to the IQS acquisition. These costs were expensed as incurred in selling, general and administrative expenses in 2019.

 

The following unaudited pro forma financial information includes the results of operations of the Company and is presented as if IQS had been acquired as of January 1, 2019. The unaudited pro forma information has been provided for illustrative purposes only. The unaudited proforma information does not purport to be indicative of the actual results that would have been achieved by the combined companies for the periods presented, or the results that may be achieved by the combined companies in the future. Future results may vary significantly from the results reflected in the following unaudited pro forma financial information because of future events and transactions, as well as other factors, many of which are beyond the control of the Company. Net profit was calculated using an assumed blended tax rate of approximately 28%.

 

 59 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

Proforma (unaudited)  2019 
Revenues  $41,441 
Operating Income   1,218 
Net Profit   248 

 

NOTE 5 – TRADE RECEIVABLES

 

Contract receivables consist of the following as of:
   2020   2019 
Billed receivables  $3,630   $1,312 
Unbilled receivables   241    209 
Accounts receivable, factored   2,999    5,508 
Total  $6,870   $7,029 

 

All of the net trade receivables are pledged as collateral on a loan agreement.

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment as of December 31, 2020 and 2019 consists of the following:

 

   2020   2019 
Building  $-   $1,856 
Land   -    510 
Office equipment   63    248 
Computer software   107    61 
Leasehold improvements   -    6 
Operating lease asset   18    18 
    188    2,699 
Accumulated depreciation   (112)   (216)
Property, plant and equipment, net  $76   $2,483 

 

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RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS

 

The Company acquired intangible assets as part of the IQS acquisition during the year ended December 31, 2019 as discussed in Note 4. The Company recorded $518 of goodwill from this acquisition.

 

Information regarding purchased intangible assets as of December 31, 2020 is as follows:

 

   Gross Value   Accumulated Amortization   Net Carrying Value 
Trade name  $199   $22   $177 
Customer relationships   41    15    26 
Total  $240   $37   $203 

 

Information regarding purchased intangible assets as of December 31, 2019 is as follows:

 

   Gross Value   Accumulated Amortization   Net Carrying Value 
Trade name  $199   $2   $197 
Customer relationships   41    1    40 
Total  $240   $3   $237 

 

Trade name and customer relationships are amortized over 10 and 3 years, respectively. Amortization expense relating to purchased intangible assets was $33 and $3, for the years ended December 31, 2020 and 2019, respectively.

 

Estimated future amortization expense for the next five years and thereafter is as follows:

 

Years Ending December 31:    
2021  $34 
2022   32 
2023   20 
2024   20 
2025   20 
Thereafter   77 
Total  $203 

 

NOTE 8 - ACCRUED EXPENSES

 

Accrued expenses consist of the following as follows:

 

   December 31, 
   2020   2019 
Accrued vendor costs  $166    229 
Financed insurance payable   133    258 
Other   76    61 
Accrued expenses  $375   $548 

 

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RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

NOTE 9 - INCOME TAXES

 

Income tax expense (benefit) for the years ended December 31, 2020 and 2019 are comprised of the following:

 

   2020   2019 
Current federal income tax  $(276)  $246 
Current state income tax   46    254 
Deferred income tax (benefit)   -    (344)
Income tax expense (benefit)  $(230)   156 

 

Significant components of the Company’s deferred income tax assets (liabilities) are as follows at:

 

   December 31 
   2020   2019 
Deferred tax assets (liabilities):          
Employee accruals  $70   $74 
Cash to accrual   (15)   (31)
Accrued workers’ compensation and other   26    33 
State deduction   -    7 
Acquisition fees   -    14 
Sec. 163(j) interest limitation   38    - 
Federal and State net operating loss carryforwards   79    - 
Deferred tax liabilities:          
Intangibles   (5)   - 
Fixed assets   (19)   (13)
Deferred income taxes, net   173    85 
Valuation allowance   (173)   (85)
Deferred tax assets (liabilities)  $-   $- 

 

The income tax provision, reconciled to the tax computed at the statutory federal rate, is as follows:

 

   December 31 
   2020    2019 
Tax expense at federal statutory rate  $(214)   21%   $74    21%
State income taxes, net   (54)   5.3%    20    5.7%
Meals and entertainment   1    -0.1%    2    0.7%
Penalties   -    -     5    1.3%
Nondeductible acquisition costs   -    -     16    4.6%
Valuation allowance   88    -8.7%    85    16.7%
Other, net   (51)   6.2%    (46)   13.3%
Income tax expense  $(230)   22.58%   $156    21.3%

 

 62 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

NOTE 10 - DEBT

 

Convertible Debt

 

The Company had notes payable in the amount of $890 as of December 31, 2019, pursuant to a convertible debt offering that commenced June 13, 2019. The offering was conducted pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and the rules promulgated thereunder. Pursuant to this agreement, the Company issued to each individual a warrant for 0.5 shares of Company Common Stock and a convertible promissory note of same date in the initial principal amount of $50, in exchange for $50. The notes bore interest at 12% per year with the balance becoming due within 1 year from the issuance date unless earlier converted into shares of Company Common Stock upon the issuance by Reliability of Company Common Stock for gross proceeds of at least $5,000. Since this did not happen and the Company did not have Common Stock available to convert into these, notes were paid in full as they became due over a 3-month period between June 2020 and September 2020.

 

Warrants can only be redeemable if the proceeds of $5,000 are secured.

 

Tax Liabilities

 

When MMG was initially acquired by Vivos Holdings, LLC in December 2016, the Company’s corporate status was changed from an S Corp to a C Corp due to its new ownership structure. This triggered an accelerated tax event, a $215 estimated annual impact per year for 4 years which was accounted for in subsequent tax returns through 2019. As of December 31, 2020, the Company’s overall tax liability was $292 which include tax liabilities for 2018, 2019 from completed tax returns and loss carryback provisions for 2020.

 

Factoring Facility

 

Triumph Business Capital

 

On November 4, 2016, the Company entered into a factoring and security agreement with Triumph Business Capital (“Triumph”). Pursuant to the agreement, the Company received advances on its accounts receivable (i.e., invoices) through Triumph to fund growth and operations. The proceeds of this agreement were used to pay operating costs of the business which include employee salaries, vendor payments and overhead expenses. On January 5, 2018, the agreement was amended to lower the factoring fee and interest rate for a term of one year. The agreement was amended again on January 19, 2018, to increase the maximum advance rate to $5,500. In January 2020, a new agreement was negotiated with Triumph lowering advance rate from 18 basis points to 15 and the interest rate from prime plus 2.5% to prime plus 2%. The amount of an invoice eligible for sale to Triumph went from 90% to 93%. The agreement which previously renewed annually, is now month to month. The Company continues to be obligated to meet certain financial covenants in respect to invoicing and reserve account balance.

 

In accordance with the agreement, a reserve amount is required for the total unpaid balance of all purchased accounts multiplied by a percentage equal to the difference between one hundred percent and the advanced rate percentage. As of December 31, 2020, the required amount was 10%. Any excess of the reserve amount is paid to the Company on a weekly basis, as requested. If a reserve shortfall exists for a period of ten-days, the Company is required to make payment to the financial institution for the shortage.

 

Wilco Capital Management

 

In order to be able to factor IQS invoices after the IQS asset acquisition as discussed in Note 4, the Company took on a factoring relationship with Wilco Capital Management (formerly known as First Avenue Funding, LLC) (“Wilco”). The original agreement was signed on January 7, 2019 with a minimum monthly volume of $125 with a maximum advance of $500 for a term of one year. The advanced rate was 90% of eligible accounts receivable (as defined by the agreement) and a finance rate of 1.275% per month and adjusted with any increase to the prime rate. As of December 31, 2019, the outstanding balance was $479. This relationship ended on March 31, 2020, when Triumph bought out this factoring relationship.

 

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RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

Accounts receivable were sold with full recourse. Proceeds from the sale of receivables were $13,787 and $29,367 for the years ended December 31, 2020 and 2019, respectively. The total outstanding balance under the recourse contract was $2,999 and $5,508 as of December 31, 2020 and 2019, respectively.

 

The Factoring Facility is collateralized by substantially all the assets of the Company. In the event of a default, the Factor may demand that the Company repurchase the receivable or debit the reserve account. Total finance line fees for the years ended December 31, 2020 and 2019 totaled $65.

 

PPP Loan Payable

 

On April 29, 2020, MMG was approved for a $5,216 loan through the Paycheck protection Program (the “PPP”) with a term of two (2) years and an interest rate of 1% per annum. The PPP provides that the Company may apply for forgiveness of this loan if the loan proceeds were used for payroll and certain other specified operating expenses while maintaining specified headcount requirements. The accrued interest on the PPP loan as of December 31, 2020 was $34.

 

On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “PPPF Act”) went into effect providing more flexibility to participants in the PPP which included extending the time to begin repayment of the PPP loan until the amount of forgiveness, if any, is determined, which could be as late as December 31, 2020. The Company may apply for forgiveness earlier if they determine that doing so will maximize the amount of loan forgiveness (see Note 17).

 

Other Debt

 

In February 2020, the Company took out a $250 6-month term loan from Triumph at 10% per annum, in order to meet the Company’s cash obligations (“Triumph Term Loan”). On April 7, 2020, in the face of the COVID 19 lockdown, Triumph offered a 2-month payment holiday and to extend the note payment, which ultimately was agreed to end in February 2021. As of December 31, 2020, $37 was outstanding under the Triumph Term Loan Arrangement.

 

NOTE 11 – VARIABLE INTEREST ENTITY (VIE)

 

In December 2019, the Company’s executive management learned that prior to the Merger, in January 2017, one of the Company’s related parties, on behalf of Maslow, executed a guarantee of obligations of Vivos Real Estate Holdings, LLC (“VREH”), under a mortgage loan for the purchase of the property at 22 Baltimore Rd., Rockville, Maryland. Maslow leased this space on market terms. This obligation had not been included in Maslow’s financial statements and were not separately disclosed prior to the Merger.

 

U.S. GAAP requires the Company to assess whether VREH is a variable interest entity (“VIE”) because Maslow (i) share common shareholders who may or may not have significant influence or control, (ii) is a guarantor of the mortgage loan, (iii) is the sole lessee under a lease where the landlord is an affiliate of the Company, and (iv) has no other business in VREH.

 

A VIE is a legal business structure (such as a corporation, partnership, or trust) that:

 

  does not provide equity investors with voting rights; or
  the equity investors do not have sufficient financial resources to meet the ongoing operating needs of the business. This is referred to as a thinly capitalized structure.

 

 64 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

Although the Company had neither any decision-making authority over VREH, nor financial interest in the operations of VREH, the Company was required to consolidate its financial statements with those of VREH for the reasons mentioned above, as it was considered the primary beneficiary of the VIE.

 

Due to a lack of cooperation from VREH, the Company had not been able to acquire financial information about this entity for consolidation purposes prior to 2019. As a result, the Company has consolidated this entity for 2019.

 

The assets and liability of the consolidated VIE were comprised of the following:

 

   2019 
Building  $1,856 
Office equipment   185 
Land   510 
Accumulated depreciation   148 
Liabilities assumed   1,790 
Total net assets consolidated  $613 

 

In addition, the related party note receivable with the VIE in the amount of $772 was eliminated in 2019.

 

The potential financial exposure to loss as a guarantor could equal all the book value of the related party mortgage loan payable, a total of approximately $1,745 as of December 31, 2020, with $126 due within the next year. VREH is currently three months behind on payments. To date, the Company has not been called on for any loan repayment guarantee. The Company believes there is adequate equity in the property should the bank decide to foreclose, and the Company decides not to make past due payments.

 

The Company terminated the lease of the property at 22 Baltimore Road effective April 30, 2020. As a result, VREH was considered a VIE for only four months of the 2020 fiscal year.

 

See Note 14 for details on the related party notes receivable.

 

NOTE 12 – COMMITMENTS AND CONTINGENCIES

 

The Company is engaged from time to time in legal matters and proceedings arising out of its normal course of business. The Company establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of the loss can be made.

 

 65 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

On September 28, 2018, Credit Cash filed a complaint against Maslow, Vivos Holdings, Vivos Acquisitions, LLC, Mr. Doki, Mrs. Valleru (the “Parties”) and other defendants in the United States District Court for the District of New Jersey for, among other things, breach of contract of the Maslow and HRCN Credit Facilities and their respective guaranties in relation to the November 15, 2017 agreement (the “DNJ Action”). On October 30, 2018, Credit Cash filed a motion to intervene in an action pending in New York State, Monroe County, filed by HCRN and LE Finance, LLC against the Parties and other defendants (“NY State Action”). On December 10, 2018, the Parties entered into a settlement agreement for the purpose of settling certain claims related to the DNJ Action only. Pursuant to the settlement agreement, certain repayment terms were agreed upon between Credit Cash and the Parties, but Credit Cash did not relinquish the right to pursue any claims related to the NY State Action, nor to pursue any remedies against any of the parties in relation to the November 15, 2017 agreement. Because the Parties acknowledged and agreed, that the Credit Cash relationship benefitted Parties other than Maslow, certain of the Parties and their related parties, executed and delivered to the Company that certain Agreement for the Contingent Liquidation of the Common Stock of Maslow Media Group, Inc., dated as of October 28, 2019 (the “Liquidation Agreement”). Pursuant to the Liquidation Agreement the parties thereto pledged shares of Company Common Stock to Maslow to be used to obtain releases from the Lenders defined therein, including Credit Cash and its affiliates. The Liquidation Agreement permits Maslow to either transfer the shares to the Lenders in satisfaction of the outstanding obligations or to arrange for the sale of the shares and using the cash to satisfy such obligations.

 

On October 9, 2018, Maslow Media Group, Inc. was named as a defendant in an Affidavit of Confession of Judgment filed in the Supreme Court of the State of New York in relation to a case brought by Hop Capital, which the defendants collectively agree to pay a sum of $400 to Hop Capital. Maslow Media Group, Inc. is named as one defendant among six other defendants, all of which are entities related to the Vivos Group. The claim brought by Hop Capital against the defendants in this case is in relation to a Merchant Agreement dated October 4, 2018; an agreement to which Maslow Media Group, Inc. was not a party. As such, Maslow Media Group, Inc. contends that being named in the Affidavit of Confession of Judgment as a defendant was made in error and is currently seeking to have its name removed from Affidavit of Confession of Judgment as a defendant. As of March 2021, we have not been contacted again on this matter, nor have we been notified on any developments The Company will defend itself from this case.

 

On or about February 17, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and Naveen Doki, to enforce Maslow’s rights under certain promissory notes and a personal guarantee made by the defendants. The case is proceeding. The Company believes that it will be granted a judgment in its favor. The Company intends to continue to vigorously prosecute this litigation.

 

On February 28, 2020, Healthcare Resource Network, LLC filed a complaint against Maslow in the Circuit Court of Montgomery County, Maryland alleging that Maslow participated with the Vivos Group to financially harm the plaintiff. The plaintiff has not specified any alleged damage caused by Maslow and the Company believes any claims are without merit. The Company will defend itself from this case.

 

On March 16th, 2020, CC Business Solutions, a division of Credit Cash NJ, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Naveen Doki and Silvija Valleru.  This foreign judgement relates to Vivos Holdings adding Maslow Media Group as a guarantor on a loan made to Health Care Resources Network which is in default by HCRN and Vivos Holdings.  Foreign judgement total is $820. This judgement relates to the default on the settlement agreement dated December 10, 2018 referenced above.

 

On May 5th, 2020, Libertas Funding, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Vivos IT, LLC, Vivos Global Services, LLC, Alliance Micro, Inc. and Naveen Doki.  This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding Maslow Media Group additional collateral.  This loan is currently in default. Foreign Judgement total is $229.

 

On May 5th, 2020, Kinetic Direct Funding domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, US IT Solutions Inc., 360 IT Professionals, Alliance Micro, Inc. and Naveen Doki.  This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding Maslow Media Group as additional collateral.  This loan is currently in default. Foreign Judgement total is $579.

 

On May 5th, 2020, Libertas Funding, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Vivos IT, LLC, Vivos Global Services, LLC, Alliance Micro, Inc. and Silvija Valleru.  This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding Maslow Media Group additional collateral.  This loan is currently in default. Foreign Judgement total is $229.

 

On or about May 6, 2020, the Defendants filed with the Circuit Court of Montgomery County, Maryland a Counterclaim and Third-Party Complaint for Damages, Declaratory and Injunctive Relief and Jury Demand (the “Counterclaim”), The Company believes that the Counterclaim has no merit. The Company will vigorously defend itself and its indemnified officers, directors and other parties as permitted by the Company’s organizational documents. The Company and the other Counterclaim defendants have moved to have the Debt Collection Suit and the Counterclaim stayed pending the outcome of the Arbitration described below. Trial on this matter is scheduled for March 2021.

 

On or about June 5, 2020, the Company submitted a Claimant’s Notice of Intention to Arbitrate and Demand for Arbitration (the “Arbitration”) with the American Arbitration Association in New York, and to the Respondents thereto: Naveen Doki; Silvija Valleru; Shirisha Janumpally (individually and in her capacity as trustee of Judos Trust); Kalyan Pathuri (individually in his capacity as trustee of Igly Trust) and Federal Systems (the “Respondents”). The Arbitration alleges that the Respondents breached the Merger Agreement in a number of significant respects and committed fraud in connection with the Merger. The Company is seeking damages which if granted will likely be the remedy set forth within the Merger Agreement which is in whole or in part shares of Company Common Stock received by the Respondents in connection with the Merger. The Company has brought a motion to compel the Arbitration which is currently being decided by the Federal Courts in New York. The Company believes a strong basis for the motion exists, but no assurance can be given that it will be granted. Regardless, the Company intends to pursue claims under the Merger Agreement in whatever venue is required.

 

On June 12, 2020, Igly Trust, a Vivos entity, asked the Texas court for an injunction requiring the Company to provide a shareholder list and to hold a shareholder meeting. On October 20, 2020, the Texas court denied the injunction but, incongruously, dismissed all the Vivos plaintiffs for lack of personal jurisdiction. The Company appealed the dismissal because the court had jurisdiction over Igly Trust once it made affirmative claims in Texas and because the Court’s order denying the injunction is an important precedent for establishing that the directors under Texas law retain control of shareholder lists and determining the timing of shareholder meetings.

 

On December 23, 2020, at a hearing in the Maryland District Court, a motion by the Vivos Group to compel a shareholder meeting was summarily dismissed. The judge agreed with the Company that permitting the Vivos Group to vote their shares at a meeting of shareholders could materially harm the interests of the Company as a whole, its employees and minority shareholders. This judge will be presiding over a full trial regarding these matters over a two-week period starting on October 4, 2021, absent any COVID-19 disruptions that could affect scheduling.

 

NOTE 13 - EQUITY

 

The Company’s authorized capital stock consists of 300,000,000 shares of common stock, with no par value. All authorized shares of Company Common Stock are issued and outstanding.

 

NOTE 14 - RELATED PARTY TRANSACTIONS

 

Stock Purchase Agreement

 

On November 9, 2016, Vivos Holdings LLC (Vivos), a related party affiliate and former owner of Maslow Media Group, acquired 100% of the Company through a stock acquisition exchange for a purchase price of $1,750. $1,400 was paid at settlement with proceeds from the Company and also entered into a promissory note to pay the remaining $350. The promissory note was to be paid in twenty-four equal installments, including interest at 4.5%, in the amount of approximately $15, commencing six months after closing with the last payment on March 1, 2019; these payments were paid by the Company on behalf of the Vivos Holdings. Vivos Holdings subsequently entered into a promissory note receivable with the Company, described below, for the full stock purchase price.

 

 66 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

Notes Receivable

 

The Company has notes receivable from Vivos Holdings and VREH, a member of the Vivos Group, both related party affiliates.

 

In connection with the stock purchase agreement noted above, on November 15, 2016, the Company executed a promissory note receivable with Vivos Holdings in the amount of $1,400. As defined by the agreement, the loan consists of two periods, whereby the first period from November 15, 2016 until September 30, 2018, no principal or interest payments were required. Interest will accrue monthly and a new loan in the amount of $1,773 will be subject to a second loan period. During the second loan period, interest shall be paid in 20 equal consecutive payments, quarterly. Principal plus any unpaid interest is due September 20, 2023. Interest during both loan periods accrues at a rate of 2.5%. Additionally, monthly payments of $15 are made on behalf of Vivos Holdings to the seller by the Company. These payments, plus any other payments made by the Company on behalf of Vivos Holdings, are added to the principal balance of the promissory note receivable. In 2018, all quarterly interest payments to be made in phase 2 were offset by the management fees due to Vivos Holdings. As of December 31, 2020, and 2019, the total outstanding balances were $2,736 and $2,666, which includes accrued interest receivable of $229 and $162, respectively.

 

On November 15, 2017, the Company executed an intercompany promissory note receivable with VREH in the amount of $772. As defined by the agreement, the loan consists of two periods, whereby the first period from November 15, 2017 until March 31, 2018, no principal or interest payments are required. During the first loan period, interest accrued monthly and a new loan amount of $781 will be subject to a second loan period. During the second period, interest is payable in 20 equal consecutive installments and the principal balance plus accrued and unpaid interest is due March 31, 2023. Interest during both periods accrues at a rate of 3.5% annually. In 2018, all quarterly interest payments to be made in Phase 2 were offset by the management fees due to Vivos Holdings. In addition, principal payments totaling $30 were made by Vivos Holdings. As of December 31, 2020, and 2019, the total outstanding balance was $753 and $772, respectively.

 

On June 12, 2019, Maslow entered into a Personal Guaranty agreement with Mr. Doki, pursuant to which Mr. Naveen Doki personally guaranteed to Maslow the repayment of $3,000 of the balance of the Promissory Note issued to Vivos on November 15, 2017 within the 2019 calendar year via cash, stock, or other business assets acceptable to the Company. Mr. Doki is a 5% or greater beneficial holder of Company Common Stock, and therefore is a related party. As of February 2020, the Company filed a lawsuit against the majority stockholder, pursuant to the personal guaranty agreement for defaulting on the outstanding notes receivables.

 

In summary the Vivos Holdings receivable totaled $4,169 on December 31, 2019 which included $2,007 of additional borrowings over the period between November 2016 and December 31, 2109. As of December 31, 2020, the receivable totaled $4,258.

 

 67 
   

 

RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

On September 5, 2019, Maslow entered into a Secured Promissory Note agreement with Vivos Holdings, pursuant to which Maslow issued a secured promissory note to Vivos in the principal amount of $750. The note bears interest at 2.5% per year and requires Vivos Holdings to make monthly payments to Maslow of $10 beginning December 1, 2019, with balance due and payable on November 1, 2026. Upon an event of default, which occurs upon failure of Vivos Holdings to make any monthly payment due under the terms of the note, Maslow has the right to declare the entire unpaid balance of the note due and payable. The note is secured by 30,000,000 shares of Company Common Stock, which is due and payable upon a default by Vivos, which occurs upon failure of Vivos to make any monthly payment due under the terms of the note. In addition, both Naveen Doki and Silvija Valleru personally guaranty the repayment of the note by Vivos Holdings. Naveen Doki and Silvija Valleru are beneficial owners of Vivos Holdings and are also 5% or greater beneficial owners of Company Common Stock. As of December 31, 2020, and 2019, the total outstanding balance was $769 and $752, respectively which includes interest of $19 and $2 respectively.

 

Debt Settlement Agreements

 

On July 10, 2018, Vivos Holdings executed a receivable financing agreement with a financial institution and agreed to remit $670 of accounts receivable over a six-month period through daily remittances of $5 in exchange for $485. The agreement is guaranteed by Vivos Holdings, both shareholders and Maslow. In October 2018, Vivos defaulted on the agreement and on October 25, 2018, executed a settlement agreement whereby Maslow was to pay the outstanding balance over eleven installments with the final amount due August 31, 2019. The total outstanding balance as of December 31, 2018 was $212. As of December 31, 2020, and 2019, there was no outstanding balance due.

 

On July 5, 2018, Vivos Holdings executed a receivable financing agreement with a financial institution whereby Vivos Holdings agreed to remit $556 of accounts receivable over a six-month period through daily remittances of $4 in exchange for $400. The agreement was guaranteed by Vivos Holdings, it’s shareholders and the Company. In October of 2018, Vivos Holdings defaulted on the agreement and on January 24, 2019, executed a settlement agreement whereby the Company is to pay the outstanding balance over eight installments with the final amount due August 31, 2019. On July 10, 2018, the Company (as a “merchant”) and Vivos Holdings (as a “owner/guarantor”) entered into a receivable financing agreement with Kinetic Direct Funding LLC pursuant to which the Company and Vivos Holdings agreed to remit $670 of the Company’s accounts receivable over a six-month period through daily remittances of $5 in exchange for $485 (the “Kinetic Financing Agreement”). The agreement is guaranteed by Vivos Holdings as well as Naveen Doki in his individual capacity, and an owner of Vivos Holdings. In October of 2018, there was a default under the Kinetic Financing Agreement by Vivos Holdings. On October 25, 2018, the Company, Naveen Doki, Silvija Valleru, and Vivos Holdings (among other entities) entered into a settlement agreement with Kinetic Direct Funders LLC in relation to default of the Kinetic Financing Agreement whereby the Company is to pay the outstanding balance over eleven installments with the final amount due August 31, 2019. On April 10, 2019, the settlement agreement was amended extending the remaining payment term to July 15, 2020. The Company has a binding and enforceable agreement with certain shareholders permitting the Company to liquidate up to the full amount of the Company’s equity held by such shareholders in order to satisfy the shareholders’ obligations under the Settlement Agreements. As of October 31, 2019, the Company has paid its portion of the outstanding balance due under the settlement agreement in full.

 

On August 10, 2017, Vivos Holdings executed a receivable advance agreement with Argus Capital Funding. The Company received a net advance of $487 in exchange for $705 of the Company’s accounts receivable. Included in this loan is a fee of $218. The agreement was refinanced on November 15, 2017, when Vivos Holdings, and Vivos Acquisitions, LLC, via Mr. Naveen Doki and Mrs. Silvija Valleru entered into an agreement with CC Business Solutions, a division of Credit Cash NJ, LLC (“Credit Cash”) pursuant to which Credit Cash advanced to the Company $600 in exchange for $780 of the Company’s accounts receivable, to be repaid fully by approximately May 20, 2019 (the “Maslow Credit Facility”).

 

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RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

In addition, pursuant to the same agreement, Credit Cash advanced to Healthcare Resource Network, a company owned by the Vivos Group (“HCRN”) a credit facility in the principal amount of $1,005 (“HCRN Credit Facility”). Each of Maslow, Vivos Holdings, Vivos Acquisitions, LLC, Mr. Naveen Doki and Mrs. Silvija Valleru guaranteed the HCRN Credit Facility. To secure repayment of their guarantee obligations, the Company and Vivos Holdings granted to Credit Cash a security interest in all their assets. On September 14, 2018, the Company defaulted on the Maslow Credit Facility. In addition, on same date, the HCRN Credit Facility went into default. As a result, repayment on both facilities was accelerated, with the full balance for each becoming immediately due and payable. On December 10, 2018, the Company, Vivos Holdings, Vivos Acquisitions, LLC, Mr. Doki, and Mrs. Valleru and Credit Cash entered into a settlement agreement in connection the November 15, 2017 agreement to govern the terms of the repayment of the HCRN Credit Facility and Maslow Credit Facility. Pursuant to the settlement agreement, the Company agreed to pay $10 per week until the entire balance of the Maslow Credit Facility was paid off. Pursuant to a subsequent agreement dated May 17, 2019 not involving the Company, Vivos Holdings and Vivos Acquisitions, LLC agreed to fully repay the HCRN Credit Facility via quarterly payments beginning June 30, 2019. The HCRN Credit Facility is still being repaid by Vivos Holdings, and as of October 29, 2019, has an outstanding balance of approximately $635. The Company has a binding and enforceable agreement with certain shareholders permitting Maslow to liquidate up to the full amount of Maslow equity held by such shareholders in order to satisfy the shareholders’ obligations under the Settlement Agreements. As of December 31, 2019, the Company had repaid the outstanding balance due for the Maslow Credit Facility under the settlement agreement in full.

 

Related Party Relationships and Transactions

 

On October 29, 2019, prior to the Merger, pursuant to the Merger Agreement, Naveen Doki and Silvija Valleru became beneficial owners of 206,606,528 and 51,652,908 shares of RLBY Common Stock, respectively, equal to 68.9% and 17.2% of the total number of shares of RLBY Common Stock outstanding after giving effect to the Merger, respectively. The Company is seeking damages which if granted will likely be the remedy set forth within the merger agreement which is primarily the relinquishment in whole or in part shares of Company Common Stock received by the Respondents in connection with the Merger.

 

On June 27, 2019, prior to the Merger, Maslow entered into a Securities Purchase Agreement with Hawkeye Enterprises, Inc., a company owned and controlled by Mark Speck, an officer and then director of the Company. Pursuant to this agreement, Maslow issued to Hawkeye Enterprises 16,323 (on a post-Merger basis) shares of Company Common Stock, a warrant (as defined below) for 81,616 (on a post-Merger basis) shares of Company Common Stock and a convertible promissory note of same date in the initial principal amount of $50, in exchange for $50. The note bore interest at 12% per year, with the balance of $56 paid in full on June 26, 2020.

 

On July 31, 2019, prior to the Merger, the Company entered into a Securities Purchase Agreement with the same officer and then director discussed above. Pursuant to this agreement, the Company issued to this individual a Warrant for 81,616 (on a post-Merger basis) shares of Company Common Stock and a convertible promissory note of same date in the initial principal amount of $50, in exchange for $50. The note bore interest at 12% per year, with balance of $56 paid in full on August 4, 2020.

 

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RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

On July 31, 2019, prior to the Merger, the Company entered into a Securities Purchase Agreement with Nick Tsahalis, an executive officer and director of the Company. Pursuant to this agreement, the Company issued to this individual 32,646 (on a post-Merger basis) shares of RLBY Common Stock, and a Warrant to purchase 16,323 (on a post-Merger basis) shares of the RLBY Common Stock, and a Convertible Promissory Note of same date in the initial principal amount of $100, in exchange for $100. The note bore interest at 12% per year, with balance of $112 becoming due and paid on July 31, 2020.

 

On September 18, 2019, in anticipation of the closing of the Merger and intending that it be assumed by Maslow after the closing of the Merger, Hawkeye entered into a letter of intent (the “LOI”) regarding the potential acquisition of a complementary business. Maslow was then prohibited from entering into the LOI directly. In connection with the LOI, Hawkeye paid a non-refundable deposit of $75 with the understanding that after the closing of the Merger, the LOI would be assigned to the Company and the Company would reimburse Hawkeye for the deposit. On October 17, 2019, Hawkeye assigned, and Maslow agreed to assume the LOI and reimbursed Hawkeye for the deposit. The reimbursement took place on May 8, 2020 and totaled $83.

 

The term “warrant” herein refers to warrants issued by Maslow and assumed by RLBY as a result of the Merger. The terms of all Warrants are the same other than as to the number of shares covered thereby. The Warrant may be exercised at any time or from time to time during the period commencing at 10:00 a.m. Eastern time on first business day following the completion of the Qualified Financing (as defined below) and expiring at 5:00 p.m. Eastern time on the fifth annual anniversary thereof (the “Exercise Period”). For purposes herein, a “Qualified Financing” means the issuance by the Company, other than certain excluded issuances of shares of Common Stock, in one transaction or series of related transactions, which transaction(s) result in aggregate gross proceeds actually received by the Company of at least $5,000. The exercise price per full share of RLBY Common Stock shall be 120% of the average sale price of the RLBY Common Stock across all transactions constituting a part of the Qualified Financing, with equitable adjustments being made for any splits, combinations or dividends relating to the RLBY Common Stock, or combinations, recapitalization, reclassifications, extraordinary distributions and similar events, that occur following one transaction constituting a part of the Qualified Financing and prior to one or more other transactions constituting a part of the Qualified Financing (the “Exercise Price”).

 

Convertible note warrants were not valued and included as liability on balance sheet because of uncertainty around their pricing, value and low probability at this juncture in receiving the $5,000 trigger.

 

NOTE 15 - EMPLOYEE BENEFIT PLAN

 

The Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible full-time employees. The 401(k) Plan allows employees to make contributions subject to applicable statutory limitations. The Company currently does not match employee contributions.

 

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RELIABILITY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands)

 

NOTE 16 - BUSINESS SEGMENTS

 

The Company operates within three industry segments: EOR, Recruiting and Staffing, and Video and Multimedia Production. The EOR segment provides media field talent to a host of large corporate customers in all 50 states. The Recruiting and Staffing segment provides skilled Media and IT field talent on a nationwide basis for customers in a myriad of industries. The Video and Multimedia Production segment provides Script to Screen services for corporate, government and non-profit clients, globally.

 

Segment operating income includes revenue and cost of services only. Currently, the Company is not allocating sales, general and administrative costs at the segment level.

 

The following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results for the periods indicated:

 

   December 31 
   2020   2019 
Revenue:          
EOR  $23,564   $34,452 
Recruiting and Staffing   4,478    2,190 
Video and Multimedia Production   1,125    1,641 
Other   35    161 
Total  $29,202   $38,444 

 

NOTE 17- SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events after the balance sheet date of December 31, 2020 through March 16, 2020, the date on which the consolidated financial statements were available to be issued. Based upon this evaluation, management has determined that no material subsequent events have occurred that would require recognition in or disclosures in the accompanying consolidated financial statements, except as follows:

 

On March 4, 2021, Maslow Media Group submitted an application with the SBA for 100% forgiveness of its PPP loan payable.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures