Reliability Inc 10-K for FY2021
Reliability Inc (RLBY)
About this 10-K
Reliability Inc filed this 10-K on March 31, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $26.25M
- down 10.1% from $29.2M a year earlier
- Net income
- $7.89M
- compared with a net loss of $789K a year earlier
- Diluted EPS
- $0.03
- compared with $0.00 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the annual period from January-1-2021 to December-31-2021
Commission
File Number:
(Exact Name of Registrant as Specified in Its Charter)
| (State of Incorporation) | (I.R.S. Employer Identification Number) | |
| (Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s telephone number, including area code:
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, ☒
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,
☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ , ☐ No
Indicate by check mark whether the Registrant has submitted electronically 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). ☒ , ☐ 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 | ☐ | |
| (Do not check if a smaller reporting company) | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with 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, ☒
The
aggregate market value of the common stock held by non-affiliates of the Registrant as of December 31, 2021, was
As of March 31, 2022, there were shares of the Registrant’s common stock outstanding.
TABLE OF CONTENTS
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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 January 2020, the coronavirus spread to the United States, and efforts to contain the spread of this coronavirus intensified. The outbreak and any preventative or protective actions that governments have or may take in respect to the coronavirus may result in a period of business disruption, reduced customer traffic and reduced operations. Now two years into the pandemic, the Company expects that the impact of this coronavirus will continue to be significantly negative as some media clients have not returned to pre-pandemic business levels and several of those who have, now require vaccines and or masks which have led to some of our associates declining a return to work or having to leave their assignment at our customer altogether. 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 vaccination mandates and new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, circumstances relating to people returning to work, among others. Federal and state legislatures continue 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.
Although we have attempted to identify important factors that could cause actual actions, events or results which 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, 2021. All dollars, except earnings per share, presented in this Form 10-K are in thousands ($000).
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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 including banking, medical devices, pharmaceuticals, telecommunications, energy, healthcare, photography and chain restaurants.
Reliability 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.
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 (“Ms. Valleru”).
In 2018, Vivos Holdings and several other Vivos companies, (“Vivos Group”) engaged an investment banker who approached management of Reliability to discuss a potential reverse merger transaction. The other investors who collaborated on a share swap of Maslow for other Vivos companies were Shirisha Janumpally (“Mrs. Janumpally”), wife of Mr. Doki, and Kalyan Pathuri (“Mr. Pathuri”), husband of Silvija Valleru.
These 4 individuals, Mr, Doki, Mrs. Janumpally, Mr. Pathuri, and Mrs, Valleru also have common ownership combinations in a number of other entities [Vivos Holdings, LLC. Vivos Real Estate Holdings, LLC (“VREH”), Vivos Holdings, Inc., Vivos Group, Vivos Acquisitions, LLC., and Federal Systems, LLC], (collectively referred to herein as “Vivos Group”).
The reverse merger was consummated on October 29, 2019. As a result of the Merger, the Vivos Group (Vivos Holdings LLC officially) acquired approximately 84% of the issued and outstanding shares of Reliability which were distributed by Vivos Holdings LLC.
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”), from Vivos Holdings, Inc. providing IT Staffing solutions in December 2019, which formerly operated in Plymouth, Minnesota.
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On or about February 25, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and 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”).
The Company also began pursuing arbitration in New York in 2020 which was the contractual remedy for breaches of the Merger agreement between Maslow and Reliability. It is the Company’s contention that the Vivos Group failed to disclose several material pieces of information to Reliability management pre-merger as was required by the Merger agreement. Additionally, the Vivos Group declined to honor a number of commitments made to Reliability including a $3,000 promissory note and an agreement to shield the Company from their personal debt per the “Liquidation Agreement (See 1A and Item 3). Per the Merger agreement these breaches can lead to a loss of up to all shares in Reliability for the Vivos group.
On December 23, 2020, at a hearing in the Maryland Circuit Court of Montgomery County, Maryland, a motion by the Vivos Group to compel a shareholder meeting was summarily dismissed. On January 20, 2021, Defendants and Counter/Third-Party Plaintiffs, Vivos, VREH, Doki, Pathuri, Igly, Judos, by counsel, filed a Notice of Appeal on the dismissal. However, the deadline to pursue the appeal lapsed absent additional filings by the Vivos Group.
On July 21, 2021, Maslow settled the obligation which with it had been committed by Vivos Holdings, LLC in July 2018, with Libertas Funding, LLC and Kinetic for $475. This debt belonged to Vivos Holdings LLC, and the aforementioned Liquidation Agreement, had been created as a safeguard to shelter Maslow should Vivos Holdings, LLC default, which actually transpired prior to the Merger closing in October 2019. (See Section 1A).
On September 7, 2021, the Company entered to Arbitration and Tolling Agreements with the (the “Agreements”) Vivos Group and all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing to resolve their disputes before a single arbitrator in Maryland.
On March 21, 2022, the Company began its arbitration proceedings against the Vivos group that is slated to run into the second quarter 2022. Maslow contends the Vivos Group committed merger violations which could result in relinquishment in whole or in part shares of Company common stock received by the Respondents in connection with the Merger. We anticipate an arbitration decision by July 7, 2022.
We refer below to the disputes between Reliability and the Vivos Group as the “Vivos Matter.”
As of December 31, 2021, the Vivos Debtor balance was $4,985.
As of March 31, 2022, 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.
EMPLOYEES
As of March 30, 2022, we had 20 team members (staff employees) at our Clarksburg, MD corporate and remote locations. During the fiscal year ended 2021, we assigned approximately 2,000 field talent workers and approximately 268 were working on average or were deemed full time equivalent (FTE) throughout the year.
As of December 31, 2021, 794 active field talent workers and Maslow staff employees had been employed over the past 6 months.
Approximately 15% 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.
In March 2020, the Company began experiencing a sudden drop-in client requirements due to the COVID-19 pandemic, resulting in hours of contracted employees being slashed.
From a corporate employee perspective at 2021 year end, Maslow had 23 FTE’s on staff up from 22 a year ago.
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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 are 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 independent 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 |
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.
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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 overall 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. 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, the majority of 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. Near-term strategy to identify exclusive contractual engagements will further strengthen the stability of this revenue stream.
In 2021, we began focusing on the placement of full-time equivalent employees on a contingency fee basis as a stand-alone practice. Because the margins are significantly higher, this line of business boosts our overall margins and operating incomes as explained in Results of Operations. Permanent Placement margins are much higher than temporary staffing and EOR in that we do not bare employee or 1099 costs for the direct hire/permanent placement.
Video/Multimedia Production
Maslow continues to be a provider of multimedia and video production solutions via its 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; |
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| ● | 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 IT staff augmentation for software developers, architects, quality assurance (“QA”) analysts, engineers, R&D, testers, 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 the restaurant and hospitality industry.
We provide staff augmentation from our technical resource pool comprised of top industry professionals. Our team members are typically full-time employees that have established themselves as leaders in their chosen field. We normally provide talent with skill sets that perform these types of roles:
| ● | Software 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. |
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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’ (SAI) 2021 North America Staffing Company Survey, the 2022 trend expected to have the most impact to staffing businesses include: increased VMS/MSP use, a continuation of talent shortages, economic slowdown or downturn, customers moving to AI and hired recruiters to fulfill staffing needs, and company increasing use of flexible/remote workers.
The temporary staffing industry is large and highly fragmented with thousands of competing companies. It is estimated that the 2022 U.S. temporary staffing market will be between $156.4 and 157.9 billion, which is up from an estimated $151.8 billion in 2021 (Statistica). This matches the market’s previous high in 2019 at $151.8 billion and represents a 16% increase over 2020.
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.
However, 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 was experiencing increased demand in relation to total job growth. Post COVID, clients continue to seek a more flexible workforce. In 2021, staffing revenue returned to 2019 levels with an expectation of a 3-4% growth in 2022.
According to Staffing Industry Analysts (“SIA”) Global talent shortages are at a 15-year high, and more than one in three US employers report difficulty filling jobs. SIA cites the by Manpower Group report which states; “the US has been facing an extreme talent shortage crisis – a crisis that has made it difficult for staffing coordinators to source quality talent for clients. A crisis that might not be leaving soon. A crisis that will require staffing agencies to revamp their recruitment approach.” This addresses the current demand-supply shortage paradigm the staffing industry faces.
SIA states that “Compared to the pre-pandemic year of 2019, the staffing industry in 2022 is more resilient, more automated, more efficient, more empathetic and, thankfully, facing more demand. This should be a good year.”
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. In 2020 and 2021 for instance, restrictions were instituted in several states preventing large number of employees to return to the office. Many companies in 2021 had their workforces return to work in some capacity but included COVID vaccination mandates which a portion of the US population were not willing to comply with, resulting in many cases in employment termination. No certainty can be provided as to the nature of new regulations or their impact. Individual states continue to change their pandemic related requirements to relax or remove restrictions on employers, but no assurance can be given as to the effect of these changes or the potential that they may be reimposed if conditions warrant.
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OUR CLIENTS
Historically the largest portion of our business have come 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). But in 2021, Goldman Sachs revenue exceeded Janssen, and Morgan Stanley’s business improved 69.6% from 2020.
AT&T still remains the clear leader accounting for 27.9% of the Company’s total revenues for 2021. This closely compares to it representing 28.8% in 2020. In 2019 AT&T accounted for 37.5% of the Company’s business.
The combination of revenue from new accounts, increase in revenue from several existing clients and AT&T’s 19.1% drop in revenue due to COVID-19 stay at home orders, and DirecTV loss in programming which moved to other media firms like NBC or were dropped completely, resulted in a more egalitarian client mix.
Goldman Sachs and Co., Janssen Pharmaceuticals, and Morgan Stanley represented 14.9%, 14.5%, and 10.9% respectively in 2021 compared to revenue contributions of 8.7%, 10.8%, and 5.7% respectively in 2020. No other client exceeded 10% of revenues.
Collectively, AT&T and Janssen Pharmaceuticals, represented 58.6% (32.9% and 25.8% respectively) of accounts receivable as of December 31, 2021. Comparatively, AT&T and Janssen Pharmaceuticals were at 48.5%, and 18.4% in their respective portions of our accounts receivable balance in 2020.
Other significant customers include WETA, Kaiser Permanente, Strategic Education (Strayer University), Abbott Labs, US House of Representatives, Felix Lighting, Liberty Mutual, Dahl, NEP, and Newsmax.
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.
If the Vivos Matter (defined and referenced in Overview section) is resolved, the Company plans to tap the capital markets to pursue an aggressive but disciplined acquisition growth strategy, both in terms of using shares for raising capital and as currency to acquire additional businesses as was our intent when we merged with Reliability in October 2019. 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 ideal 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.
Upon ability to utilize the capital markets, 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.
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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.
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.
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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.
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.
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.
We face risks related to health pandemics, wars, inflation, and other widespread outbreaks of contagious disease, including COVID-19 and its variants, or other potential causes of global instability which could significantly disrupt our operations and impact our financial results.
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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. We have had clients implement vaccine mandates which has on occasion had an adverse impact on our business when associates have elected not to comply. In some cases, we are able to backfill the post and in some we may not have the opportunity. When are able to backfill, there are still gaps in the period of revenue generation until a selection is made and a start date is determined. 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. |
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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, and not granted until August 26, 2021.
The Company subsequently entered into Arbitration and Tolling Agreements with alleged shareholder Naveen Doki, M.D., and his affiliates and all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing to resolve their disputes before a single arbitrator in Maryland. The arbitration hearing commenced on March 21, 2022, will conclude on March 30, 2022, with a decision anticipated in the second quarter 2022.
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.
Until which time this pending arbitration settles the matter, the Vivos Group continues to control virtually all matters submitted to shareholders for a vote. If they prevail in some form, they could in the future 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 the Vivos Group 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 Group 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. Until this dispute with Vivos is settled, we will be unable to execute our business 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, 2021, had a balance of $4,985. 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 arbitration having commenced on March 21, 2022, and running through March 30, 2022. A decision is anticipated within 60 days of the hearing’s completion.
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. For instance, in December of 2019, the Company’s executive management learned that prior to the Merger, in January 2017, one of the Company’s related parties, on behalf of MMG, executed a guarantee of obligations of Vivos Real Estate Holdings, LLC (“VREH”), under a mortgage loan for the purchase of the property at 22 Baltimore Rd., Rockville, Maryland. From April 2018 until April 2020, MMG leased this space from Vivos Real Estate. The company learned through mortgage holder FVCBank on March 6, 2022, that this loan is now in default.
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On July 21, 2021, Maslow settled the obligation which with it had been committed by Vivos Holdings, LLC in July 2018, with Libertas Funding, LLC and Kinetic for $475. The agreement which included $100 in legal fees Libertas was entitled to, released MMG from all claims judgements and obligation against MMG but did not release Naveen Doki, Silvija Valleru, Judos Trust, Igly Trust, Srinivas Kalidindi, Shirisha Janumpally, Federal Systems, Kalyan Pathuri, US IT Solutions Inc., 360 IT Professionals Inc., Alliance Micro Inc. Vivos’ IT LLC, Vivos Global Holdings LLC, Vivos Acquisitions LLC, or Vivos Holdings from the remaining obligation. This debt belonged to Vivos Holdings LLC, and the aforementioned Liquidation Agreement, (See Note 1A & Item 3) had been created as a safeguard to shelter MMG should the Vivos Group default, which actually transpired prior to the merger closing in October 2019.
Maslow felt compelled to settle Vivos’ Holdings due to 1) added pressure placed by Libertas to collect a balance that now exceeded $1,700, 2) a desire to clear liens against the Company to improve its credit status, and 3) its ability to negotiate a much lower and separate settlement.
The existence of these obligations has significantly affected our liquidity, as well as our ability to obtain loans. 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 expects this to be resolved as part of arbitration and the sale of these shares may need to be registered under applicable securities laws, which would distract management and increase expenses.
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 Arbitration outcome could lead to a new shareholder base where the new affiliated parties decide a different strategic direction for the company and take appropriate action.
If a new shareholder base is the outcome of the arbitration, a new shareholder base may decide to change the strategic direction of the company in a significant way. This might include but is not limited to capitalization plans, whether company remains a public company, merger and acquisition plans, corporate structure, and executive management.
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.
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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 fulfil 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.
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 states 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; |
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| ● | 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.
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 four customers for a material portion of our net revenue. The loss of or a substantial reduction in business of four customers would significantly reduce our net revenue and adversely impact our operating results.
Although revenue reliance was previously concentrated in two clients AT&T (AT&T and DirectTV combined), and Janssen Pharmaceuticals (which includes workforce partners Johnson & Johnson), in 2021 this reliance is not as prolific as it has been in previous years, due in part to a reduction in revenue by AT&T due tom programming cancellations and COVID-19 and increased demand and revenue by Goldman Sachs and Morgan Stanley. In 2021 AT&T and Janssen Pharmaceuticals accounted for approximately 27.9%, 14.5% of our total revenues. This is comparison to AT&T delivering 37.9% of the revenue in 2020. In 2021, Goldman Sachs and Morgan Stanley exceeded 10% of revenues with contributions of 14.9% and 10.9% respectively. No other client exceeded 10% of revenues
In addition, AT&T comprised 41.1% of the accounts receivable balance on December 31, 2021, compared to 48.5% in 2020 and 49.6% in 2019. Janssen Pharmaceuticals comprised of 32.9% in 2021 compared to and 18.4% and 18.7% of accounts receivable as of December 31, 2020, and 2019, respectively. The loss of, or a substantial reduction in business from, these 4 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 level of loss of these customers, and as such, it could have a negative impact on our revenue and results of operations for a prolonged period.
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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.
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.
To mitigate this risk, on September 1, 2021, Reliability entered into new employment agreements with President/CEO Nick Tsahalis and CFO Mark Speck, respectively. The board of directors acted in accordance with the advice of its compensation committee to grant Mr. Tsahalis who has served as wholly owned subsidiary Maslow Media Group’s (MMG) CEO since November of 2016, and Mr. Speck who has served MMG since April of 2019.
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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. Currently mask and vaccine mandates have adversely impacted the business (although some are related to customer compliance requirements vs. government mandates) as some of our associates have elected not to comply meaning they cannot report to work for our customers. 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.
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.
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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.
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 $1,000 in operating income and net income from operations in any one year of approximately $500 since 2015. Net income for the Company specifically was $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 $789. In 2021 the company earned a record $7,893 in net income, but $9,631 was garnered as Other Income based on eligibility for government programs. 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.
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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; | |
| ● | 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 may subject 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 has only been able to secure asset-based lending at this time
The Company relies on its factoring relationship with Triumph Business Capital (TBC) which is based on account receivable balance. As of December 31, 2021, Maslow could raise an additional $4,321 in cash through factoring. In the past Maslow has tried to tap non-asset-based lending but the market for such loans is challenging and the Vivos Group’s association has prevented loans from proceeding in the past. Thus, Maslow at this time is limited in borrowing based on the amount of unfactored accounts receivable that is available.
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, accounting; billing; financial reporting; recruitment, onboarding, benefits administration, scheduling, year-end reporting, and other related human resources issues. Currently, we rely on software provided by Paycom, Intacct., Salesforce, and to a lesser extent, advanced search B2B sales facilitator Zoom Info to help manage these operations; 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.
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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.
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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 early 2020, 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 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 related to IQS which were $688 at the end of 2020 were determined to be impaired and thus were written off in 2021. An unfavorable evaluation could cause us to write-off 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 pushed through legislation, and chief executives have issued executive orders, 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 27.9% and 14.5% of our 2021 revenues, respectively. In addition, these two customers account for approximately 41.1% and 32.9% of our accounts receivables as of December 31, 2021, 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 74% of revenue in 2021, compared to 60.7% in 2020) makes us particularly dependent on factors affecting those companies.
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We face risks related to health pandemics, wars, inflation, and other widespread outbreaks of contagious disease, including COVID-19 and its variants, or other potential causes of global instability which could significantly disrupt our operations and impact our financial results.
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 change 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.
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.
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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.
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. |
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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 stockholders’ 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. For example, in July 2021 the Company paid $475 plus $3 in attorney fees to settle a debt owed by the Vivos Group to Libertas Funding, LLC (“Libertas”). This settlement relieved MMMG from obligation to Libertas given the Vivos Group had included MMG as a signing company to its debt in July 2018 (See Item 1). In March 2022, Vivos Real Estate defaulted on its mortgage loan with FVCBank for which Maslow was listed as a guarantor.
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. Additionally, in the fall of 2020 we implemented an enhanced accounting system. 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.
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.
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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 21,245,047 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 May 1st, 2020, Clarksburg, Maryland became our sole location, as the Company terminated its lease for its office in Plymouth, Minnesota effective December 31, 2020.
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 or about February 25, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and 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 or about May 6, 2020, the Defendants filed with the Circuit Court of Montgomery County, Maryland a Counterclaim and Third-Party Complaint for Damages, Declaratory and Injunctive Relief and Jury Demand (the “Counterclaim”), The Company believes that the Counterclaim has no merit. The Company will vigorously defend itself and its indemnified officers, directors and other parties as permitted by the Company’s organizational documents. The Company and the other Counterclaim defendants have moved to have the Debt Collection Suit and the Counterclaim stayed pending the outcome of the Arbitration which began March 21, 2022, described below.
On or about June 5, 2020, the Company submitted a Claimant’s Notice of Intention to Arbitrate and Demand for Arbitration (the “Arbitration”) with the American Arbitration Association in New York, and to the Respondents thereto: 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. On August 4, 2021, the US District Court, Southern District of New York, denied the Respondents motion to dismiss.
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On June 12, 2020, Igly Trust, a Vivos Group entity, asked the Texas court for an injunction requiring the Company to provide a shareholder list and to hold a shareholder meeting. On October 20, 2020, the Texas court denied the injunction but, incongruously, dismissed all the Vivos Group plaintiffs for lack of personal jurisdiction. The Company appealed the dismissal because the court had jurisdiction over Igly Trust once it made affirmative claims in Texas and because the Court’s order denying the injunction is an important precedent for establishing that the directors under Texas law retain control of shareholder lists and determining the timing of shareholder meetings. This matter has since been moved into a single binding arbitration proceeding in Maryland.
After an extension was granted to Reliability’s “reply brief,” on June 2, 2021, Reliability Incorporated, Maslow Media Group, Inc, Nick Tsahalis and Mark Speck filed an appellant’s brief in the Fourteenth District of Texas, Houston Texas to challenge the court’s prior ruling granting a special appearance to Igly Trust and to the Doki Shareholders. A response to the filed appellant brief has not yet been received. This matter has since been moved into a single binding arbitration proceeding in Maryland.
On December 23, 2020, at a hearing in the Maryland District Court, a motion by the Vivos Group to compel a shareholder meeting was summarily dismissed. The judge agreed with the Company that permitting the Vivos Group to vote their shares at a meeting of shareholders could materially harm the interests of the Company as a whole, its employees and minority shareholders. The judge also commented that, based on the evidence presented, management was performing its fiduciary duties to protect the Company despite adverse circumstances. A full trial to address the Company’s lawsuit to enforce the repayment of notes and the Vivos Group counterclaim, was scheduled to commence in early October 2021 but was pre-empted by an agreement by both sides to go to arbitration in March 2022.
On January 20, 2021, Defendants and Counter/Third-Party Plaintiffs, Vivos Holdings, LLC (“Vivos”), Vivos Real Estate Holdings, LLC (“VREH”), Dr. Naveen Doki (“Doki”), Kaylan Pathuri (“Pathuri”), Igly Trust (“Igly”), Judos Trust (“Judos”), by counsel, filed a Notice of Appeal with the Circuit Court for Montgomery County, Maryland denying their Motion for Preliminary Injunction signed on December 23, 2020. However, the deadline to pursue the appeal lapsed absent additional filings by the Vivos Group.
On August 9, 2021, Reliability filed an additional claim in the Debt Collection Suit and Vivos Default Counterclaim in the Circuit Court of Montgomery County, Maryland against Doki, Valleru, Pathuri, Janumpally, Igly, and Judos, that the Respondents breached the Merger Agreement in a number of significant respects and committed fraud in connection with the Merger.
On September 7, 2021, the Company entered in Arbitration and Tolling Agreements with alleged shareholder Naveen Doki, M.D., and his affiliates and all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing to resolve their disputes before a single arbitrator in Maryland. The parties also agreed to maintain the status quo in corporate governance and related matters pending a final non-appealable judgment confirming any award in arbitration. The parties also signed a Tolling Agreement to toll the statute of limitations following the dismissal of a pending litigation. The binding Arbitration was to be completed within 150 days of the agreement date but both sides agreed to delays due to counsel availability and other administrative matters with the proceedings having commenced on March 21, 2022, and continuing into the 2nd quarter of 2022. We anticipate a decision in the case by July 7, 2022.
The following legal proceedings where Vivos Group borrowings impacting MMG:
On September 28, 2018, Credit Cash filed a complaint against MMG, Vivos, Vivos Acquisitions, LLC, Dr. Doki, Dr. Valleru (the “Parties”) and other defendants in the United States Circuit Court of Montgomery County, Maryland for the District of New Jersey for, among other things, breach of contract of the MMG and HCRN Credit Facilities and their respective guaranties in relation to the November 15, 2017, agreement (the “DNJ Action”). On October 30, 2018, Credit Cash filed a motion to intervene in an action pending in New York State, Monroe County, filed by HCRN and LE Finance, LLC against the Parties, and other defendants (“NY State Action”). On December 10, 2018, the Parties entered into a settlement agreement for the purpose of settling certain claims related to the DNJ Action only. Pursuant to the settlement agreement, certain repayment terms were agreed upon between Credit Cash and the Parties, but Credit Cash did not relinquish the right to pursue any claims related to the NY State Action, nor to pursue any remedies against any of the parties in relation to the November 15, 2017, agreement. Certain of the Vivos Group executed and delivered to MMG that certain Agreement for the Contingent Liquidation of the Common Stock of Maslow Media Group, Inc., dated as of October 28, 2019 (the “Liquidation Agreement”), pursuant to which such Vivos Group pledged to MMG the shares of Company Common Stock they received in the Merger to provide the capital required to satisfy the Parties’ obligations under the Settlement Agreements. Vivos Group misrepresented upon the execution of the Liquidation Agreement to MMG the status of its obligations under the Settlement Agreement, which were, in fact, then in default. To date these Vivos Group have not cooperated with the Company to monetize those shares as contemplated by the Liquidation Agreement. The Company will take appropriate action to enforce its rights under the Liquidation Agreement, which actions will be dictated in part by the outcome of the Arbitration. On or about March 16, 2020, Credit Cash entered its New Jersey confession of judgment with the Circuit Court of Montgomery County, Maryland. MMG needs to confirm whether this matter has been settled and if so whether MCA lenders and HCRN remitted payments to Credit Cash, and if so, which liens have been removed.
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Healthcare Resource Network Complaint: On or about February 25, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and Mr. Naveen Doki, to enforce MMG’s rights under certain promissory notes and a personal guarantee made by the defendants. The case is proceeding. The Company believes that it will be granted a judgment in its favor. MMG intends to continue to vigorously pursue this litigation. On September 3, 2020, MMG and HCRN entered into a Tolling Agreement pursuant to which HCRN dismissed MMG from this litigation without prejudice and agreed to forebear filing a new complaint or initiating any lawsuit or other legal proceeding against MMG until January 31, 2022.
On or about May 5, 2020, Kinetic Direct Funding domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, US IT Solutions Inc., 360 IT Professionals, Alliance Micro, Inc. and Naveen Doki. This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding Maslow Media Group as additional collateral. This loan is currently in default. Foreign Judgement total is $579. There was a settlement reached on October 1,2021 with both parties releasing each other of any and all claims with no assets changing hands. MMG needs to determine which lien releases have been filed.
On July 21, 2021, MMG came to an agreement with Kinetic and Libertas for $475 to release MMG from being obligated to this Vivos Group debt. The intended shield to protect MMG from having to pay Vivos Group’s debt was the aforementioned Liquidation Agreement which Vivos Debtors refuse to comply with.
On September 7, 2021, the Company entered in Arbitration and Tolling Agreements with alleged shareholder Naveen Doki, M.D., and his affiliates and all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing to resolve their disputes before a single arbitrator in Maryland. The parties also agreed to maintain the status quo in corporate governance and related matters pending a final non-appealable judgment confirming any award in arbitration. The parties also signed a Tolling Agreement to toll the statute of limitations following the dismissal of a pending litigation. The binding Arbitration is scheduled to begin on March 21, 2022, and will continue into the 2nd quarter of 2022. A decision isn’t anticipated until July 7, 2022.
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 2021 and 2020 are set forth below. High and Low price is based on last trading day of quarter.
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| 2021 | ||||||||||||||||
| High | $ | .0900 | $ | .0900 | $ | .3760 | $ | .1095 | ||||||||
| Low | $ | .0462 | $ | .0281 | $ | .0160 | $ | .0310 | ||||||||
| 2020 | ||||||||||||||||
| High | $ | .2500 | $ | .1690 | $ | .1980 | $ | .0990 | ||||||||
| Low | $ | .0831 | $ | .0600 | $ | .0550 | $ | .0336 | ||||||||
The Company paid no cash dividends in 2020 or 2021.
As of March 29, 2022, the last reported sales price for Company Common Stock was $ .0388 per share.
As of March 29, 2022, there were 527 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 2021 and 2020 and the balance sheet data as of December 31, 2021, and 2020 set forth below are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
| December 31 | ||||||||
| Balance Sheet Data: | 2021 | 2020 | ||||||
| Working capital | $ | 9,361 | $ | 5,970 | ||||
| Total assets | $ | 14,288 | $ | 12,284 | ||||
| Total outstanding borrowings, net | $ | 946 | $ | 8,287 | ||||
| Total other long-term liabilities | $ | - | $ | 5,250 | ||||
| Stockholders’ equity | $ | 9,410 | $ | 1,517 | ||||
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| December 31 | ||||||||
| Statement of Operation Data: | 2021 | 2020 | ||||||
| Revenues | $ | 26,246 | $ | 29,202 | ||||
| Gross profit | $ | 3,266 | $ | 3,474 | ||||
| Selling, general and administrative expenses | $ | 3,567 | $ | 4,462 | ||||
| Operating loss | $ | (301 | ) | $ | (988 | ) | ||
| Interest income | $ | - | $ | 8 | ||||
| Interest income from related parties | $ | 274 | $ | 112 | ||||
| Interest expense | $ | (39 | ) | $ | (281 | ) | ||
| Impairment of goodwill and other intangible assets | $ | (688 | ) | - | ||||
| Other income (expense) | $ | 9,631 | $ | (1 | ) | |||
| Income (loss) before income taxes | $ | 8,877 | $ | (1,150 | ) | |||
| Income tax benefit (expense) | $ | (984 | ) | $ | 230 | |||
| Consolidated net income | $ | 7,893 | $ | (920 | ) | |||
| Non-consolidated interest in consolidated affiliates | $ | - | $ | 131 | ||||
| Net income (loss) | $ | 7,893 | $ | (789 | ) | |||
| December 31 | ||||||||
| Net Income (Loss) Per Share: | 2021 | 2020 | ||||||
| Net income (loss) per share – basic | $ | .03 | $ | - | ||||
| Net income (loss) per share – diluted | $ | .03 | $ | - | ||||
| 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: | 2021 | 2020 | ||||||
| OIBITDA (1) | $ | 674 | $ | 658 | ||||
(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.
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.
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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, 2021, and 2020 is as follows:
| December 31 | ||||||||
| 2021 | 2020 | |||||||
| Operating income (loss) | $ | (301 | ) | $ | (988 | ) | ||
| Depreciation and amortization | 72 | 79 | ||||||
| Corporate, general and administrative | 903 | 1,567 | ||||||
| $ | 674 | $ | 658 | |||||
Operational performance comparison for the years ended December 31, 2021, and 2020 is as follows:
| December 31 | ||||||||
| 2021 | 2020 | |||||||
| Revenue | $ | 26,246 | $ | 29,202 | ||||
| Gross profit | $ | 3,266 | $ | 3,474 | ||||
| OIBITDA | $ | 674 | $ | 658 | ||||
| Net income (loss) | $ | 7,893 | $ | (789 | ) | |||
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 took a negative turn in the first quarter 2020 as COVID 19 (“COVID”) profoundly changed the business landscape. Stay at home orders which was federally mandated and later left to states and companies themselves to self-regulate in order to prevent the spread of COVID, meant many Maslow workers could not perform their type of work from home (e.g., video, sound, lighting crew, makeup-artists). 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. Consequently, our business suffered as our revenues dropped from $38,444 in 2019 to $29,202 in 2020. In the first quarter of 2020 our performance, which was negatively impacted in the last 2 weeks of the quarter, saw a $500 increase over the comparative first quarter of 2019, with $8,801 to $8,301. For the remaining three quarters MMG saw quarterly 2020 declines of 46%, 38.5%, and 13.7% respectively compared to 2019.
However, despite the revenue decline year over year by 24%, MMG’s gross profit fell only by 14.6% as our margins increased due to our burgeoning higher margin media and IT staffing businesses. This was evident in our 2020 annual gross margin percentage of 11.9% being 12.4% improvement than the 10.6% derived in 2019. But what could not be managed proportionately in 2020 was our SG&A which rose 49.5% to $4,462 as public company costs added $1,532, which represented 104% of the $1,477 SG&A increase in 2020 over 2019. In May 2020, we received $5,216 in Payroll Protection Plan (“PPP”) funds, which enabled our business to be able to reduce the number of job cuts and in some cases keep customer assigned employees working.
In 2021 many companies were slow to have their employees return to an office or group setting from a work from home paradigm which continued to hamper our business. Vaccines were rolled out so by the end of the Spring 2021, many states had lifted restrictions and MMG customers began having media employees back in the studio and in the field. However, several clients had vaccine and or mask mandates that some of our workers opted not to qualify resulting in a loss of revenue. More impactfully, the Company began to feel the ill effects of a full year’s loss of some DirecTV programming from February 2020, and customers who left MMG altogether, to either eliminate media activities for foreseeable future, offshore or insource their media departments. The 6 largest attritted customers represented a $4,385 loss of revenue in 2021 over 2020, with DirecTV accounting for $1,204. Since the estimated loss of programming was estimated to be $4,000, DirecTV otherwise increased use of existing services at approximately $2,796. Also positive was MMG recognizing new client revenue in 2021 of $1,315 and existing customers increasing their business with us by $4,765.
We are hopeful that the dissemination of vaccines and the waning of serious COVID cases 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.
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As far as cash is concerned, in 2021 our cash positioned strengthened due to our receiving forgiveness (Per the IRS on June 6, 2021) for the PPP loan we received in May 2020, and the Employee Retention Credit (ERC) which we were eligible for in the first 3 quarters of 2021 and received $1,253 in active payroll credits and refunds. Overall, our ERC refunds for quarters one through three totaled $4,465. However, the Internal Revenue Service (IRS) withheld $718 of our ERC entitlements that were filed via 941X forms, to apply to our 1120 tax liability, leaving us $2,494 remaining due to us in deferred ERC refunds, which as of March 28, 2022, we have yet to receive.
Our working capital though has assumed repayment of Vivos Debtors which as of December 31, 2021, was $9,361. Our adjusted working capital excluding the $4,985 in Vivos Debtor notes is $4,376.
In 2021, we bolstered our business development department adding a vice president of sales with extensive industry experience and a second account executive. Meanwhile the Company’s executives and its board of directors worked together on managing costs with the rest of our organization tightening it’s proverbial belt by overall eliminating $484 in employee wages, tax and benefits from 2020. Some positions were eliminated and reclassed, payroll cycles consolidated, and non-essential spend ceased, to reduce overhead costs by 16.5%
2022 and Beyond
The continued impact of the COVID pandemic cannot be precisely predicted. We do know that virtual staffing is no longer a limited niche for certain companies and certain positions. Virtual scenarios are also favored by generation Z which values work-life balance as one of the most important factors when deciding on a company to work for. Considering the perks that remote working offers, and the keen interest shown by employees from different age groups, we believe that remote working will be prevalent in 2022 and beyond. This paradigm however should not adversely impact MMG, in that whether media jobs are filled virtually or not, MMG has the pipeline of talent to fill these diversified roles.
Furthermore, we believe given the changing nature in specialized staffing there exists 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 for media, IT and finance and accounting staffing is concerned, we believe it will grow but there are also opportunities to get into staffing specialties which represent areas where we see the most rebound or a robust demand. While we will continue to focus on growing the contingent staffing side of our business, our splash into Permanent Placement or Direct Hire, has opened up a new avenue in business of diversified relationships (Media, IT, and finance and administrative roles) that have strengthened our gross margins and has the potential to grow and flourish.
Direct hiring of talent for our existing clients has always been a part of our business model, but more often than not, however it was done by transitioning a contingent worker to a full-time position which contractually based on time of service has not resulted in any incremental revenue for the company.
But we are now finding success fulfilling this need on the front end of the employment life cycle for new clients and existing ones, having added $167 in high margin revenue in 2021.
This focus reflects our desire to shift our portfolio toward a higher margin, higher value proposition.
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.
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. One major difference in this service offering is that our customers usually source the talent and MMG hires and leases the employees to our customers. |
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| ● | 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. | |
| ● | Permanent Placements: Also referred to as Direct Hires, we strategically recruit and fill a variety of fulltime roles for our customers which is only limited by our recruiting capabilities which are diversified. |
The Company’s subsidiary, The Maslow Media Group, Inc. (“Maslow”) is currently the only earning entity for the business. After our Merger in October 2020, 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 $26,246 in 2021, which was a 10.1% decrease over $29,202 in 2020. The $2,956 decline can be attributed to several factors including the COVID-19 impact which undoubtedly was 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 $8,354 to accounts with declining revenues => $100, including terminated accounts totaling $4,385 or 52% of the decline; but conversely added $4,765 from new or growing accounts that had at least $100 more in revenue in 2021 from 2020. AT&T’s DirecTV cancelled Sirius-XM programming in February 2020 that we believe had a negative impact of $4,000 on revenue. However overall, DirecTV year over year revenue declined by only $1,204 as the Red Zone added another week due to the NFL’s expanded 17 game schedule.
The attrition cited above at $4,385 may not be permanent as many clients hire Maslow for special events and some have elected to offshore or insource its media or IT workforce which may not work out long term. The decision to leave Maslow or not use Maslow services in 2021 by these six clients was not attributable to Maslow’s pricing, service, or performance.
Of the 6 attritted accounts, 3 were IQS legacy customers totaling $1,352 or 31% of the attritted total. The largest was Lifetouch which elected to offshore at the end of 2020 resulting is a 2021 over 2020 revenue loss of $991.
2021 saw 11 MMG customers increase revenue year over year by =>$100, resulting in $4,765 revenue increase. This includes 17 accounts representing $1,315 in new customer revenue, which includes two accounts which actually began with marginal revenue late in 2020.
From a revenue contribution standpoint our top 10 clients represented $22,417 which is 85.4% of 2021 revenues, which was an increase in top 10 revenue reliance as in 2020 the top 10 represented 78.4% of revenue at $23,160.
$33 in rebates were issued in December 2021 which was $9 more than a year ago when they were $24 in 2020.
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 | ||||||||
| 2021 | 2020 | |||||||
| Revenue | $ | 26,246 | 29,202 | |||||
| Cost of services | $ | 22,980 | $ | 25,728 | ||||
| Gross profit | 3,266 | 3,474 | ||||||
| Selling, general and administrative expenses | 3,567 | 4,462 | ||||||
| Operating loss | (301 | ) | (988 | ) | ||||
| Interest income | - | 8 | ||||||
| Interest income from related parties | 274 | 112 | ||||||
| Interest expense | (39 | ) | (281 | ) | ||||
| Impairment of goodwill and intangibles | (688 | ) | - | |||||
| Other income (expense) | 9,631 | (1 | ) | |||||
| Income/(loss) before taxes | 8,877 | (1,150 | ) | |||||
| Income tax benefit (expense) | (894 | ) | 230 | |||||
| Non-controlling interest in consolidated affiliates | - | 131 | ||||||
| Net income (loss) | 7,893 | (789 | ) | |||||
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Revenues: By Segment
| 2021 | % of Revenue | 2020 | % of Revenue | |||||||||||||
| EOR | $ | 21,346 | 81.3 | % | $ | 23,599 | 80.8 | % | ||||||||
| Recruiting and Staffing | 3,613 | 13.8 | % | 4,478 | 15.3 | % | ||||||||||
| Video and Multimedia Production | 1,121 | 4.3 | % | 1,125 | 3.9 | % | ||||||||||
| Permanent Placement | 166 | 0.6 | % | - | 0.0 | % | ||||||||||
| Total Revenue | $ | 26,246 | 100 | % | $ | 29,202 | 100.0 | % | ||||||||
In 2020 we showed $35 as Other revenue which has been reclassified as an EOR revenue for presentation purposes.
Employer of Record (EOR) Revenues: EOR represented 81.3% of our revenue in 2021 as opposed to 80.8% in 2020 and 89.6% in 2019. The 2019 to 2021 EOR decline from $34,613 to $21,346 can be attributed to this business segment being hit the hardest by COVID-19 with large accounts not fully recovered to 2019 levels, and attritted clients. The burgeoning Media Staffing revenue by $1,135 also impacted the level of EOR’s revenue concentration.
Recruiting and Staffing Revenues: Whereas our IT Staffing business weathered a steep decline in approximately $2,000 from $2,571 to $571, our Media Staffing division did make up 60% of the decline delivering $1,135 in incremental revenue over its 2020 performance. Thus, Media Staffing at $3,042 represented 11.6% of total 2021 annual revenue whereas it only represented 6.5% based on its $1,907 in revenue in 2020.
The decline in IQS business was in motion prior to Reliability’s acquisition of IQS from the Vivos Group in December 2019. Quarter over quarter revenue decline had begun in in the third quarter 2019 when run rate revenue dropped from $3,696 to $3,419. In the fourth quarter 2019 this decline had reached a run rate of $3,004. This decline has continued for another 8 quarters ending December 2021, with COVID-19 in the 2nd quarter 2020 having the most profound impact as business dropped 19.4% to a run rate of $2,574, and then in the 4th quarter 2020 by 30.9% once it became apparent Lifetouch was offshoring its IT software assurance business which had delivered $999 in 2020 despite COVID. This brought the 2021 first quarter run rate down to $1,096.
The reason there was no bounce back for this business segment in Q4 2020 was a combination of what we still 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, and Abbott Labs through vendor management firm Tapfin, of losing 7 staffing positions to permanent offers.
Video and Multimedia Production Revenues: Video Production which includes managed services and project freelance work, was relatively flat in achieving $1,121 in revenue in 2021 against $1,125 a year earlier. This business has a number of US government contracts with the US House of Representatives leading the pack with $112 in 2021 revenue.
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, recruiting software and reimbursable costs for out-of-pocket items.
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Overall, our gross profits did not decline as much on a percentage basis in relation to our revenue decline. Whereas our revenue declined $2,956 or 10.1%, our gross profit decreased by $208 or 6% from $3,474 to $3,266.
This was due to a gross margin improvement from 11.9% to 12.4% as Permanent Placements alone accounted entirely for 50 basis point rise in delivering $164 in gross profit which was after only $3 in incremental COR. Although we experienced positive margin increases in our EOR and Video Productions business segments, the loss of higher margin IT staffing volume and with some margin erosion in our Media Staffing business neutralized that gain.
Although EOR’s revenue declined by $2,253 its gross margin improved 60 basis points to 9.8% from 9.2% in 2020. Our Media Staffing however saw its gross margins decline from 22.8% to 21.2% as a consequence of being more competitive to win new business as our staffing revenues increased by 59.5% or $1,135. The combined $4,900 in 2021 non EOR revenue garnered a gross profit margin of 24.1% which did not compare quite as favorably in gross margin to 2020’s $5,603 in non EOR revenue which garnered a margin percentage of 24.1%. This was because our IT Staffing revenue dropped by $2,000 and its gross margin from 30.5% to 27%.
Selling, General and Administrative Expenses (“SG&A”): SG&A expenses decreased for second straight year this time by $895 to $3,567 from $4,462 in 2020, $903 of which were related to non-operational corporate costs, with approximately $339 of which were public company based and $132 were for outside legal fees associated with our Vivos Group dispute. Otherwise, our operational SG&A decrease in 2021 over 2020 was only $231.
The overall SG&A savings were in wages and benefits of $484 in 2021 over 2020, which can be attributed to elimination of our General Counsel post, reorganization of IQS into Maslow Media, favorable replacement costs for departed overhead resources, and not filling certain open posts. We did however add two business development personnel.
Non-operational corporate costs for 2021 were $903 or 42.6% less than they totaled in 2020 when they were $1,567. These are costs classified as such after the Company went public via the reverse merger in October 2019. The 2021 savings drivers were salary, payroll tax, and benefits all totaling $348, and outside counsel (legal) at $326, investor relations at $43 and insurance at $15; all cost reductions respectively 2021 over 2020.
Interest Income: Interest income from related parties increased by $162 from $112 to $274, as a result of employing the contractual default interest rate on Vivos Debtor notes receivable which began 2021 and applied to eligible periods prior, with a note balance of $4,258 and ended with $4,985 which included a $454 net increase in principal due to $478 Libertas payment minus $24 for presumed IQS bad debt recovery.
Other Income (Expense): Other income was $9,681 as the Company took the PPP long term debt to other
income once it was forgiven in June 2021, and the $4,465 in ERC refunds.
Interest Expense: Interest expense, decreased by $242 from $281 to $39 as $35 of $57 credited in accrued PPP interest was recorded in 2020, and reliance on factoring was minimized in large part to the benefit of having ERC applied to payrolls from the end of the second quarter through the third quarter. Overall, factoring interest totaled $71; and interest on business insurance was $2.
Income Taxes: Income tax expense was $984 compared to a $230 tax credit as 2020 yielded a net operating loss (NOL) of $789 and 2021 net income of $7,893.
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 of December 31, 2021, 74% of our $5,592 in A/R was current compared to 63% out of $6,629 which was current in on December 31, 2020. 17.9% is 1 to 30 days past due compared to 26% a year ago, 4.6% between 31 and 60 days past due versus 8% in 2020, and 3.6% greater than 60 days versus 3% at end of 2020.
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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. Because we do also employ 1099 contracted firms and individuals with payments terms which vary from immediate to 30 days, our cash requirements can be quite variable.
Vivos Debtors as of December 31, 2021, had notes receivable totaling $4,985 including default on a $3,000 promissory note and on a $750 tax obligation in December 2019. After numerous failed collection attempts, on February 25, 2020, the Company initiated an action in the Circuit Court of Montgomery County Maryland against Naveen Doki and the Vivos Holdings for non-payment.
In July 2021, Maslow paid $475 to Libertas to settle a portion of Vivos Group debt which had included Maslow as a signer going back to 2018. The “Liquidation Agreement,” was supposed to shield the Company from this debt as part of the Merger Agreement; but the Vivos Group refused to comply with the agreed upon terms.
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.
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.
On June 10, 2021, MMG received notification by the Small Business Administration (“SBA”) of forgiveness of its PPP 2020 Loan totaling $5,216. The forgiveness included the deferred interest of $59 totaling $5,275 in principal and interest.
Because it’s first three-quarter revenues were 80% or less than they were in 2019, the Company was eligible for the Employee Retention Credit. Consequently, Maslow received $155 in direct payroll credits from the IRS via its payroll provider Paycom in the late 2nd quarter and $1,086 in the third quarter. Maslow has to return $842 to the IRS for payroll credits received in the 4th quarter once the program ended retroactively in mid-November 2021.This payment was made to the IRS through Paycom, the Company’s payroll provider in January 2022.
As of December 31, 2021, our working capital was $9,361 compared to $5,970 in 2020 and $784 at the end of 2019. ERC of $4,450 in 2021 enabled the Company to build A/R reserves as the PPP funds in 2020 were employed to pay salaries of both outsourced and SG&A employees. Once the $2,494 in ERC is fully refunded, the Company will have sufficient capital resources, but these are based on government stimulus programs.
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We anticipate approximately $500 in additional SG&A costs in 2022, when compared with 2021 relating to increase in sales and marketing head count and additional operational and payroll automation to meet growth objectives.
A summary of our operating, investing and financing activities are shown in the following table:
| December 31 | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by (used in) operating activities | $ | 2,505 | $ | (2,070 | ) | |||
| Net cash used in investing activities | (7 | ) | (50 | ) | ||||
| Net cash provided by financing activities | (2,544 | ) | 1,915 | |||||
| Net change in cash and cash equivalents | $ | (46 | ) | $ | (205 | ) | ||
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 2021, net cash provided by operating activities was $2,505, an increase $4,575 compared with ($2,070) for 2020. This increase is primarily attributable to cash change driven by ERC netting $3,414 (Net Income of $7,893 minus PPP Forgiveness of $5,216), plus ERC tax payable for drawing in the 4th quarter of $841.
Investing Activities
Cash used in investing activities consists primarily of cash paid for capital expenditures.
Financing Activities
Cash used in financing activities in 2021 was ($2,544) as compared to cash employed for same purpose totaling $1,915 in 2020. The decrease was due to the Company in 2020 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. In 2021, Maslow borrowed $6,436 from TBC, but repatriated $8,489 and paid $475 to Libertas on behalf of the Vivos Group and $37 in early part of year to pay back a term loan from TBC (See Item 1) which led to the 2021 $2,544 financing activity deficit.
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 four segments: EOR, Recruiting and Staffing (temporary), Permanent Placement (Direct Hire) and Video and Multimedia Production. 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.
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.
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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 impairment indicators for these assets during the year ended December 31, 2021, and thus impaired $170 in remaining carrying value of IQS based intangible assets.
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 goodwill impairment during the year ended December 31, 2021.
Thus, the Company recorded a goodwill impairment adjustment of $518 upon finalizing the detailed step two impairment analysis for the IQS segment that led to a decrease in revenue ($2,000) in 2021 from 2020. In total the Company recorded $688 in goodwill and intangible impairment charges for the IQS business segment.
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.
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.
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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.
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, 2021, and 2020, 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, 2021, and 2020, 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.
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.
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.
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 10 and 12 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 determined the (1) evaluation of the identification of related parties, (2) related party transactions and (3) collectability of notes receivable from related parties, collectively, 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.
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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 any new agreements and contracts between the Company and its related parties, noting none;
● 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 as to the collectability of these balances due from related parties;
● 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 management and its outside counsel as to the status of the lawsuits.
We have served as the Company’s auditor since 2009.
March 31, 2022
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RELIABILITY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| 2021 | 2020 | |||||||
| (amounts in thousands, except per share data) | December 31 | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade receivables, net of allowance for doubtful accounts | ||||||||
| Retention credit receivable | - | |||||||
| Notes receivable from related parties | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Other intangible assets, net | - | |||||||
| Goodwill | - | |||||||
| Total assets | $ | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Factoring liability | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Accrued payroll | ||||||||
| Deferred revenue | ||||||||
| Income taxes payable | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| PPP loan payable | - | |||||||
| Total liabilities | ||||||||
| Commitment and contingencies (Note 12) | - | |||||||
| Subsequent events (Note 15) | - | |||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, without par value, shares authorized, issued and outstanding as of December 31, 2021, and 2020 | - | - | ||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
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)
| 2021 | 2020 | |||||||
| For the Years Ended December 31 | ||||||||
| 2021 | 2020 | |||||||
| Revenue earned | ||||||||
| Service revenue | $ | $ | ||||||
| Cost of revenue | ||||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Operating income (loss) | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Interest income from related parties | ||||||||
| Interest income | - | |||||||
| Interest expense | ( | ) | ( | ) | ||||
| Impairment of goodwill and other intangible assets | ( | ) | - | |||||
| Other income (expense) | ( | ) | ||||||
| Income (loss) before income tax benefit / (expense) | ( | ) | ||||||
| Income tax benefit/(expense) | ( | ) | ||||||
| Consolidated net income (loss) | ( | ) | ||||||
| Less net (income) loss attributable to noncontrolling interest in consolidated affiliates | - | |||||||
| Net income (loss) attributable to Reliability Inc. | $ | $ | ( | ) | ||||
| Net income per share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| Share used in per share computation: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
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, 2021 and 2020
(amounts in thousands, except per share data)
| Shares | Amount | Capital | Earnings | Total | Affiliates | Equity | ||||||||||||||||||||||
| 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, 2020 | - | ( | ) | |||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| VIE Disposal | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, December 31, 2020 | - | - | ||||||||||||||||||||||||||
| Net income | - | - | - | - | ||||||||||||||||||||||||
| Balance, December 31, 2021 | - | - | ||||||||||||||||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
| 48 |
RELIABILITY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
| 2021 | 2020 | |||||||
| For the Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| (Gain)/loss on disposal of property and equipment | ( | ) | ( | ) | ||||
| Accrued interest | ( | ) | ( | ) | ||||
| Loss on impairment of goodwill and other intangible assets | - | |||||||
| Gain on forgiveness of PPP loan payable and interest | ( | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Trade receivables | ||||||||
Retention credit receivable | ( | ) | - | |||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued payroll | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Other liabilities | ( | ) | ( | ) | ||||
| Income taxes payable | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net borrowing/(repayment) of line-of-credit | ( | ) | ( | ) | ||||
| Proceeds from long-term debt (PPP) | - | |||||||
| Repayment of notes | ( | ) | - | |||||
| Advances to related parties | ( | ) | ||||||
| Repayment of long-term debt | - | ( | ) | |||||
| Net cash used in financing activities | ( | ) | ||||||
| Net (decrease) in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of year | ||||||||
| Cash and cash equivalents, end of year | $ | $ | ||||||
The accompanying notes 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: | 2021 | 2020 | ||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| PPP Loan and interest forgiveness | $ | $ | ||||||
| VIE net asset consolidated (unconsolidated) | $ | $ | ( | ) | ||||
| VIE liabilities consolidated (unconsolidated) | $ | $ | ( | ) | ||||
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
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.
In
2021 MMG began building its direct hire business as a separate business segment titled Permanent placement. This division added $
NOTE 2 - LIQUIDITY AND GOING CONCERN
During
the years ended December 31, 2021, and 2020, we had an operating loss of $
Management considers on a regular basis, the Company’s ability to continue as a going concern. The factors which have impacted the business and our liquidity are;
| ● | Uncertainty in outcome of arbitration hearing with Vivos Group which will likely not have decision rendered until approximately the end of the second quarter; | |
| ● | Operating
loss of approximately $ | |
| ● | Payment
of $ | |
| ● | The pandemic-resulting decline in client demand for our services continuing through the present; | |
| ● | Difficulties in raising cash via public markets for organic and inorganic growth, due to lack of unissued authorized shares available for Company use, despite having public company cost structure; | |
| ● | Inability
to realize approximately $ | |
| ● | Contingent liabilities, described further in Note 10 |
All
these conditions noted and factored in above with the prevailing risk being that the arbitration (see Item 1) outcome is not in the Company’s
favor, and the $
Therefore, there can be no assurances that the Company will be successful in managing the impact of the foregoing or its ability to maintain sufficient liquidity over a period of time that will allow it to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome from these uncertainties.
| 51 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
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, goodwill and intangible assets, useful lives for depreciation and amortization, loss contingencies, 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.
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, 2021, the Company’s top 10 clients generated over
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, 2021, and 2020 to be fully collectible, therefore an allowance for doubtful accounts is not provided for.
| 52 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
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, 2021, and 2020, the Company’s deferred revenue totaled $
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, 2021 and 2020 for cash and cash equivalents, trade receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, and factoring liability 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 approximated its carrying value as the rate on this debt was 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 —
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. The Company recorded an impairment loss in
the amount of $
| 53 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
Intangible Assets
The
Company held intangible assets with finite lives. Intangible assets with finite useful lives were 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, 2021, and 2020, amortization expense was $
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 and goodwill
to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company determined that
there was impairment needed for these assets during the year ended December 31, 2021, and thus impaired $
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 goodwill impairment during the year ended December 31, 2021.
Thus,
the Company recorded a goodwill impairment adjustment of $
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 14 for disaggregated revenues by segment.
| 54 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
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, 2021. There were no revenues
recognized during years ended December 31, 2021, and 2020 related to performance obligations satisfied or partially satisfied in previous
periods. There are
Advertising
The
Company recognizes marketing and promotion expense in selling, general and administrative expenses as the services are incurred. Total
marketing and promotion expense for the years ended December 31, 2021, and 2020 was $
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 carry forwards, using enacted tax rates and laws that are expected to be in effect when the differences reverse.
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
Recently Issued Accounting Pronouncements
| 55 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments. This ASU was issued to address the day-one loss issue related to a lessor’s accounting for certain leases with variable lease payments. Under the update, a lessor will classify a lease with variable lease payments that do not depend on an index or a rate as operating if the following two conditions are met: the lease would be classified as sales-type or direct financing lease and doing so would result in recognizing a selling loss. Fixed lease payments will be recognized in income on a straight-line basis and any variable payments will continue to be recognized when the changes in facts and circumstances on which those variable payments are based occur. ASU 2021-05 if effective for all companies in fiscal year starting after December 15, 2021. Public companies are required to adopt this ASU in interim periods during the fiscal year starting after December 15, 2021, which other entities will adopt in interim periods starting after December 2022. Early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements and related disclosures.
In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs. This ASU provides more detailed explanation on the subsequent measurement of callable debt and whether callable debt falls within the scope of paragraph 310-20-35-33. ASU 2020-08 applies to all entities with callable debt and is effective for public business entities for fiscal years beginning after December 15, 2020, with early adoption not permitted. The Company’s adoption of this ASU did not have a material impact on its consolidated financial position and results of operations for the year ending December 31, 2021.
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, 2021
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 did have a material impact on our consolidated financial position and results of operations as of and for the year ended December 31, 2021.
| 56 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this update will be effective for the Company beginning with fiscal year 2023, with early adoption permitted. The Company adopted this during 2021 resulting in an impairment charge as stated in the financial statements.
The Company does not believe any other recently issued but not yet effective accounting pronouncement, if adopted, would have a material effect on its present or future consolidated financial statements.
NOTE 4 – TRADE RECEIVABLES
| 2021 | 2020 | |||||||
| Contract receivables consist of the following as of: | ||||||||
| 2021 | 2020 | |||||||
| Billed receivables | $ | $ | ||||||
| Unbilled receivables | ||||||||
| Accounts receivable, factored | ||||||||
| Total | $ | $ | ||||||
All of the net trade receivables are pledged as collateral on a loan agreement.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2021, and 2020 consists of the following:
SUMMARY OF PROPERTY, PLANT AND EQUIPMENT
| 2021 | 2020 | |||||||
| Office equipment | ||||||||
| Computer software | ||||||||
| Operating lease asset | - | |||||||
| Property, plant and equipment, gross | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS
The
Company acquired intangible assets as part of the IQS acquisition in 2019. The Company recorded $
| 57 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consist of the following as follows:
SUMMARY OF ACCRUED EXPENSES
| 2021 | 2020 | |||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Accrued vendor costs | $ | |||||||
| Financed insurance payable | ||||||||
| Other | ||||||||
| Accrued expenses | $ | $ | ||||||
NOTE 8 - INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2021, and 2020 are comprised of the following:
SUMMARY OF INCOME TAX EXPENSE
| 2021 | 2020 | |||||||
| Current federal income tax | $ | $ | ( | ) | ||||
| Current state income tax | ||||||||
| Deferred income tax (benefit) | - | - | ||||||
| Income tax expense (benefit) | $ | ( | ) | |||||
Significant components of the Company’s deferred income tax assets (liabilities) are as follows at:
SUMMARY OF DEFERRED INCOME TAX ASSETS (LIABILITIES)
| 2021 | 2020 | |||||||
| December 31 | ||||||||
| 2021 | 2020 | |||||||
| Deferred tax assets (liabilities): | ||||||||
| Employee accruals | $ | $ | ||||||
| Cash to accrual | - | ( | ) | |||||
| Accrued workers’ compensation and other | ||||||||
| State deduction | - | |||||||
| Sec. 163(j) interest limitation | - | |||||||
| Federal and State net operating loss carry forwards | ||||||||
| Deferred tax liabilities: | ||||||||
| Intangibles | - | ( | ) | |||||
| Fixed assets | ( | ) | ( | ) | ||||
| Deferred income taxes, net | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets (liabilities) | $ | $ | ||||||
The income tax provision, reconciled to the tax computed at the statutory federal rate, is as follows:
SCHEDULE OF INCOME TAX PROVISION, RECONCILED TO TAX COMPUTED AT STATUTORY FEDERAL RATE
| December 31 | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Tax expense at federal statutory rate | $ | % | $ | ( | ) | % | ||||||||||
| State income taxes, net | % | ( | ) | % | ||||||||||||
| Meals and entertainment | % | - | % | |||||||||||||
| Forgiveness of PPP Loan - Federal | ( | ) | - | % | ||||||||||||
| Valuation allowance | ( | ) | - | % | - | % | ||||||||||
| Other, net | % | ( | ) | % | ||||||||||||
| Income tax expense | $ | % | $ | ( | ) | % | ||||||||||
| 58 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
NOTE 9 - DEBT
Convertible Debt
Tax Liabilities
When
MMG was initially acquired by Vivos Holdings, LLC in December 2016, the Company’s corporate status was changed from an S Corp to
a C Corp due to its new ownership structure. This triggered an accelerated tax event, a $
Factoring Facility
Triumph Business Capital
On
November 4, 2016, the Company entered into a factoring and security agreement with Triumph Business Capital (“Triumph”).
Pursuant to the agreement, the Company received advances on its accounts receivable (i.e., invoices) through Triumph to fund growth and
operations. The proceeds of this agreement were used to pay operating costs of the business which include employee salaries, vendor payments
and overhead expenses. On January 5, 2018, the agreement was amended to lower the factoring fee and interest rate for a term of one year.
The agreement was amended again on January 19, 2018, to increase the maximum advance rate to $
In
accordance with the agreement, a reserve amount is required for the total unpaid balance of all purchased accounts multiplied by a percentage
equal to the difference between one hundred percent and the advanced rate percentage. As of December 31, 2021, the required amount was
Accounts
receivables were sold with full recourse. Proceeds from the sale of receivables were $
The
Factoring Facility is collateralized by substantially all the assets of the Company. In the event of a default, the Factor may demand
that the Company repurchase the receivable or debit the reserve account. Total finance line fees for the years ended December 31, 2021,
and 2020 totaled $
PPP Loan Payable
On
June 10, 2021, MMG received notification by the Small Business Administration (“SBA”)
of forgiveness of its PPP 2020 Loan totaling $
| 59 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
NOTE 10 – COMMITMENTS AND CONTINGENCIES
There are a number of debts and confessions of judgement (“COJ”) related to the Vivos Group that included Maslow as a co-signer or guarantor at some stage in the Vivos Group debt process from November 2016 through October 29, 2019, when Vivos Holdings LLC owned Maslow. All known debts disclosed to Maslow management and Reliability prior to the merger were addressed by various safeguards such as the Liquidation Agreement, and the Naveen Doki personal guarantee described in Item 1. However, there were certain non-disclosures by Vivos Holdings, LLC that are included below which are completely covered in Note 12 and Item 3 Legal Proceedings.
In December 2019, the Company’s executive management learned that prior to the Merger, in January 2018, one of the Company’s related parties, on behalf of 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.
On
March 3, 2022, Maslow received a notice of default, acceleration, and demand for payment in full from FVCBank due to incurable
events of default on behalf of Borrower Vivos Real Estate Holdings LLC. Per the default notice, “As of March 2, 2022, the
total indebtedness due and owing under the Loan (the ‘‘Debt’’) is $
Credit Cash: Maslow has not been formally notified of an obligation to pay Credit Cash due to a now known default on Vivos Group’s COJ.
On
October 9, 2018, Maslow Media Group, Inc. was named as a defendant in an Affidavit of COJ filed in the Supreme Court of the State of
New York in relation to a case brought by Hop Capital against members of the Vivos group, which had collectively agreed to pay a sum
of $
On 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.
On or about May 6, 2020, the Vivos Debtors and other Vivos Group members, specifically. Pathuri, Judos, and Igly responded to the Vivos Default Claim with the “Vivos Default Counterclaim”. The Company continues to believe that the Counterclaim has no merit and is vigorously defending itself and its indemnified officers, directors and other parties as permitted by the Company’s organizational documents, via a March 2022 arbitration hearing which both parties agreed on September 7, 2021, to resolve their disputes before a single arbitrator in Maryland. The hearing began on March 21 and is set to conclude on March 30, 2022. A decision isn’t anticipated until sometime in the late second quarter.
At the present time, the Company is uncertain as to whether any of the above items will have a material impact on their consolidated financial statements.
| 60 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
NOTE 11 - EQUITY
The
Company’s authorized capital stock consists of shares of common stock, with
NOTE 12 - RELATED PARTY TRANSACTIONS
Stock Purchase Agreement
On
November 9, 2016, Vivos Holdings LLC, the former owner of MMG, acquired
Notes Receivable
The
Company has notes receivable from Vivos Holdings, LLC and VREH, a member of Vivos Group, both related party affiliates due to their ownership
percentage in the Company. In January 2021, MMG began applying the legal minimum rate of interest which per Virginia statute is
In
connection with the Vivos/MMG Purchase Agreement, on November 15, 2016, MMG executed a promissory note receivable with Vivos Holdings
LLC in the amount of $
On
November 15, 2017, MMG executed an intercompany promissory note receivable with VREH in the amount of $
On June 12, 2019, MMG entered into a Personal Guaranty agreement with Dr. Doki, pursuant to which Dr. Naveen Doki personally guaranteed to MMG repayment of $ of the balance of the Promissory Note issued to Vivos Debtors on November 15, 2017, within the 2019 calendar year via cash, stock, or other business assets acceptable to the Company. Dr. Doki is a % or greater beneficial holder of Company Common Stock, and therefore is a related party.
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RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
As of February 2020, the Company filed a lawsuit against the majority shareholder, pursuant to the personal guaranty agreement for defaulting on the outstanding notes receivables.
In
summary, the Vivos Group receivable totaled $
On
September 5, 2019, MMG entered into a Secured Promissory Note agreement with Vivos, pursuant to which MMG issued a secured promissory
note to the Vivos Group in the principal amount of $
Debt Settlement Agreements
On
July 21, 2021, Maslow settled the obligation which Vivos Holdings, LLC had obligated Maslow to in July 2018, with Libertas Funding, LLC
and Kinetic for $
On March 6, 2022, Maslow received a notice of default, acceleration, and demand for payment in full from FVCBank due to incurable events of default on behalf of Borrower Vivos Real Estate Holdings LLC. (See Note 10).
Related Party Relationships
On
October 29, 2019, prior to the Merger, pursuant to the Merger Agreement, Naveen Doki and Silvija Valleru became beneficial owners of
and shares of RLBY Common Stock, respectively, equal to % and
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RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
On June 27, 2019, prior to the Merger, MMG entered into a Securities Purchase Agreement with Hawkeye Enterprises, Inc., a company owned and controlled by Mark Speck (“Mr. Speck”), an officer and then director of Maslow.
Pursuant
to this agreement, MMG issued to Hawkeye Enterprises (on a post-Merger basis) shares of Company Common Stock, a warrant (as defined
below) for
On
July 31, 2019, prior to the Merger, MMG entered into a Securities Purchase Agreement with Mr. Speck, the Company issued to this individual
a Warrant for
On
July 31, 2019, prior to the Merger, MMG entered into a Securities Purchase Agreement with Nick Tsahalis, an executive officer and director
of MMG. Pursuant to this agreement, the Company issued to this individual (on a post-Merger basis) shares of MMG Common Stock,
and a Warrant to purchase
a
post-Merger basis) shares of the MMG Common Stock, and a Convertible Promissory Note of same date in the initial principal amount of
$
On
September 18, 2019, in anticipation of the closing of the Merger and intending that it be assumed by MMG after the closing of the Merger,
Hawkeye entered into a letter of intent (the “LOI”) regarding the potential acquisition of a complementary business. MMG
was then prohibited from entering into the LOI directly. In connection with the LOI, Hawkeye paid a non-refundable deposit of $
The
term “warrant” herein refers to warrants issued by MMG and assumed by the Company as a result of the Merger. The terms of
all Warrants are the same other than as to the number of shares covered thereby. The Warrant may be exercised at any time or from time
to time during the period commencing at 10:00 a.m. Eastern time on first business day following the completion of the Qualified Financing
(as defined below) and expiring at 5:00 p.m. Eastern time on the fifth annual anniversary thereof (the “Exercise Period”).
For purposes herein, a “Qualified Financing” means the issuance by the Company, other than certain excluded issuances of
shares of Common Stock, in one transaction or series of related transactions, which transaction(s) result in aggregate gross proceeds
actually received by the Company of at least $
On September 7, 2021, the Company entered in Arbitration and Tolling Agreements with alleged shareholder Naveen Doki, M.D., and his affiliates and all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing to resolve their disputes before a single arbitrator in Maryland. The parties also agreed to maintain the status quo in corporate governance and related matters pending a final non-appealable judgment confirming any award in arbitration. The parties also signed a Tolling Agreement to toll the statute of limitations following the dismissal of a pending litigation.
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RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
NOTE 13 - 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.
NOTE 14 - BUSINESS SEGMENTS
The
Company operates within
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:
SCHEDULE OF RECONCILIATION OF REVENUE AND OPERATING INCOME BY REPORTABLE SEGMENT TO CONSOLIDATED RESULTS
| December 31 | ||||||||
| 2021 | 2020 | |||||||
| Revenue: | ||||||||
| EOR | $ | $ | ||||||
| Recruiting and Staffing | ||||||||
| Video and Multimedia Production | ||||||||
| Permanent Placement | ||||||||
| Total | $ | $ | ||||||
NOTE 15- SUBSEQUENT EVENTS
The Company has evaluated subsequent events after the balance sheet date of December 31, 2021, through March 31, 2021, 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 6, 2022, Maslow received a notice of default, acceleration, and demand for payment in full from FVCBank due to
incurable events of default on behalf of Borrower Vivos Real Estate Holdings LLC. Per the default notice, “As of March 2,
2022, the total indebtedness due and owing under the Loan (the ‘‘Debt’’) is $
On March 21, 2022, the Company began its arbitration proceedings against the Vivos Group that is slated to run into the 2nd quarter of 2022, with anticipation of a decision by July 7, 2022. Maslow contends the Vivos Group committed merger violations and continues to pursue the defaults on the related party notes receivable. The outcome of the arbitration could result in relinquishment in whole or in part shares of Company common stock received by the Respondents in connection with the Merger.
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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
The Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Principal Executive Officer and Principal Financial Officer to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
The Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. Based on this evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of December 31, 2021, internal control over financial reporting was effective.
The consolidated financial statements of the Company for 2021 have been audited by the independent registered public accounting firm of Ramirez Jimenez International CPAs who were given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders and the Board of Directors. This annual report does not include an attestation report from the independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Board Composition
Our board of directors consists of four directors. Our board of directors has determined that the following directors are “independent” as defined under the rules of the OTC American: Hannah Bible, Louis Parks, and John Chanaud. On November 13, 2019, Hannah Bible was nominated and assumed the role of Chairperson. The authorized number of directors may be changed by resolution of our board of directors amending the applicable by-law provision. Vacancies on our board of directors can be filled by resolution of our board of directors.
Board Leadership and Role in Risk Oversight
Meetings of our board of directors are presided over by our chairperson of the board, Hannah Bible. Our board of directors believes that Hannah Bible is currently best situated to preside over meetings of our board of directors because of her familiarity with SEC regulations, board protocols, our staffing business and ability to effectively identify strategic priorities and lead the discussion and execution of our strategy.
Our board of directors oversees the risk management activities designed and implemented by our management and executes its oversight responsibility for risk management directly. The full board of directors also considers specific risk topics, including risks associated with our strategic plan, business operations and capital structure. In addition, our board of directors receives detailed regular reports from members of our executive management who are also board members that include assessments of risk, exposures, and plans for mitigation.
Our other board of directors’ committees also consider and address risk as they perform their respective committee responsibilities. All committees report to the full board of directors as appropriate, including when a matter rises to the level of a material or enterprise level risk.
Committees of the Board of Directors
The standing committees of our board of directors consist of an Audit Committee and a Compensation Committee. Each of the committees reports to our board of directors as they deem appropriate and as our board may request. The composition, duties and responsibilities of these committees are set forth below.
Audit Committee
The Audit Committee is responsible for, among other matters: (1) appointing, retaining and evaluating our independent registered public accounting firm and approving all services to be performed by them; (2) overseeing our independent registered public accounting firm’s qualifications, independence and performance; (3) overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC; (4) reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls and compliance with legal and regulatory requirements; (5) establishing procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing matters; (6) reviewing and approving related person transactions; and (7) overseeing the risk management process.
Our Audit Committee consists of John Chanaud (Chairman), Hannah Bible and Louis Parks. We believe that each qualifies as independent directors according to the rules and regulations of the SEC and OTC American with respect to audit committee membership. We also believe that Mr. Chanaud qualifies as our “audit committee financial expert,” as such term is defined in Item 407(d)(5)(ii) of Regulation S-K. Our board of directors has adopted a written charter for the Audit Committee, which is available on our corporate website under the investor relations tab at www.maslowmedia.com. The information on our website is not part of this Annual Report on Form 10-K.
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Compensation Committee
The Compensation Committee is responsible for, among other matters: (1) reviewing key team members compensation goals, policies, plans and programs; (2) reviewing and approving the compensation of our directors and executive officers; and (3) reviewing and approving employment agreements and other similar arrangements between us and our executive officers. The Committee shall have the authority to delegate any of its responsibilities, along with the authority to act in relation to such responsibilities, to one or more subcommittees as the committee may deem appropriate in its sole discretion. The Compensation Committee may invite such members of management to its meetings as it deems appropriate. However, the Compensation Committee meets regularly without such members present, and in all cases no officer may be present at meetings at which such officer’s compensation or performance is discussed or determined. The Committee has the authority, in its sole discretion, to select, retain and obtain the advice of a compensation consultant as necessary to assist with the execution of its duties and responsibilities. Neither the Compensation Committee nor management engaged a compensation consultant with respect to fiscal 2021.
Our Compensation Committee consists of Hannah Bible, Louis Parks, and John Chanaud. Our board of directors has adopted a written charter for the Compensation Committee.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is charged with the responsibility of ensuring a corporate governance framework is in place and provides oversight and guidance thereof, while also attracting and securing top talent for leadership positions.
The Committee is responsible for the following Nomination activities; (1) review our policies and ensure they are equipped with clear selection criteria; (2) determine criteria for director and executive officer qualifications (3) recommend to the Board candidates for election by the Board to fill vacancies occurring on the Board or corporate officers; (4) Consider stockholders’ nominees in accordance with applicable rules and regulations and develop procedures regarding the nomination process as required by the federal securities laws and the rules and regulations of the SEC and Nasdaq; (5) Make recommendations to the Board concerning the selection criteria to be used by the Nominating and Corporate Governance Committee in seeking nominees for election to the Board; and (6) Assist in attracting qualified candidates to serve on the Board and interview and otherwise assist in the screening of such candidates
The Committee is responsible for the following Corporate Governance Matters:(1) Develop and recommend to the Board corporate governance guidelines applicable to the Company; (2) Review board size, composition, and structure; (3) oversee areas of authority, segregation of duties; checks and balances; political spending, diversity, corporate social responsibility, communications, proxy filings and other stakeholder areas. (4) Review any issues relating to conflicts of interests and (in conjunction with the Audit Committee of the Board as necessary or appropriate) all related party transactions in accordance with SEC and Nasdaq requirements and report the same to the Board; and (5) perform annual board evaluations.
Other Committees
Our board of directors may establish other committees, including a Strategic Advisory Committee, as it deems necessary or appropriate from time to time.
Family Relationships
There are no family relationships among any of our executive officers or any of our directors.
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Directors
Hannah Bible
Independent Director and Chairwoman,
Age: 42
Director Since: 2014
Committees Served: Compensation Committee (Chair), Audit Committee, Nominating and Corporate Governance Committee
Hannah M. Bible is a Director of the Company and has served in such capacity since April 25, 2014. Ms. Bible is Vice President of Legal at Digirad Corporation (“DRAD”) since October 2019. She has also served the subsidiaries of DRAD as Chief Financial Officer and in-house counsel to Lone Star Value Management, LLC (“Lone Star Value Mgmt.”), and VP-Finance to ATRM Holdings, Inc. since April 2019. Ms. Bible has over 15 years of combined legal and accounting experience across a variety of industries. From May 2016 through August 2017 Ms. Bible served on the board of Crossroads Systems, Inc. (NASDAQ: CRDS, now OTC: CRSS), a data storage company. Prior to joining Lone Star Value Mgmt. in June 2014, Ms. Bible was the Director of Finance/CFO at Trinity Church in Greenwich, CT. From October 2011 to December 2012, Ms. Bible served as a legal advisor to RRMS Advisors, a company providing advisory and due diligence services to banking and other institutions with high-risk assets. From June 2009 to December 2013, Ms. Bible advised family fund and institutional clients of International Consulting Group, Inc., and its affiliates within the Middle East on matters of security, corporate governance, and U.S. legal compliance. From 2006 to 2008, Ms. Bible served within the U.N. General Assembly as a diplomatic advisor to the Asian-African Legal Consultative Organization, a permanent observer mission to the United Nations. Ms. Bible has also taught as an Adjunct Professor at Thomas Jefferson School of Law, within the International Tax and Financial Services program. Prior to this Ms. Bible held various accounting positions with Samaritan’s Purse, a large $300MM+ 501(c)(3) organization dedicated to emergency relief and serving the poor worldwide. Previously, Ms. Bible served as a director of AMRH Holdings, Inc. (formerly Spatializer Audio Laboratories). Ms. Bible earned an LLM in Tax from New York University School of Law, a JD with honors from St. Thomas University School of Law, and a BBA in Accounting from Middle Tennessee State University.
Louis Parks
Independent Director
Age: 61
Director Since: 2020
Committees Served: Audit Committee, Nominating and Corporate Governance Committee (Chair)
Louis A. Parks is Managing Member at Tyro Capital Management LLC, a New York City-based equity hedge fund, serving as the firm’s COO and CFO. Mr. Parks has spent over 30 years on Wall Street in various capacities of senior management. His responsibilities have included overseeing large work forces, managing risk, equity trading, implementing compliance and ethics protocols, client interface, marketing, and revenue production. In addition, he is an investor who focuses on deploying capital and providing expertise to small companies both independently and through his partnership stake in Metropolitan Business Funding, LLC. Mr. Parks was previously Senior Managing Director, Head of Equities at CL King & Associates as well as Senior Managing Director, Head of Equity Trading at Raymond James Financial. Mr. Parks began his career as an institutional equity sales trader covering both domestic and international accounts for Morgan Stanley & Company, Sanford C. Bernstein & Company, and Merrill Lynch & Company.
Mr. Parks holds Master of Business Administration and Master of Arts degrees from Columbia University, as well as Bachelor of Arts degrees from Columbia University, magna cum laude, Phi Beta Kappa, and New York University, cum laude. In 2000, he established the Louis A. Parks Fellowship in Classics at the Graduate School of Arts & Sciences at Columbia University to provide scholarship funding to graduate students studying ancient Greek & Roman history, language, and culture.
Mr. Parks serves as a director on both for-profit and non-profit boards.
John Chanaud
Independent Director
Age: 58
Director Since: 2020
Committees Served: Audit Committee (Chair), Compensation Committee, Nominating and Corp Governance Committee
Mr. Chanaud is Vice President and Chief Financial Officer of The Bernstein Companies an 85-year-old Washington, DC based real estate development, management, and investment firm where his primary responsibility is financial oversight and planning for the Company, its subsidiaries, and operating divisions. The Bernstein Companies invests in, develops, and operates multi-family properties, office buildings, hotels, and mixed-use projects, as well as operates a structured finance division managing tax credit investments across the country. During his time as VP & CFO the Company has had direct ownership interest in projects totaling over $3B, both through institutional investment funds and its own private portfolio. In addition, TBC’s structured finance division has directed another $2B+ in investments nationwide. Prior to joining Bernstein in 1997, Mr. Chanaud served for over 10 years as a Certified Public Accountant with a regional CPA firm. Mr. Chanaud is a member of the American Institute of Certified Public Accountants and the Maryland Association of CPA’s. He is a 1986 graduate of Towson University with a BS degree in accounting.
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Nick Tsahalis
Age: 44
Director Since: 2019
Committees Served: Nominating and Corp Governance Committee
Nick Tsahalis began serving as President and Chief Executive Officer of Maslow Media Group Inc. in December 2016, after serving as CFO starting in October 2015. Mr. Tsahalis was instrumental in leading Maslow Media to the finish line to close on the Reverse Merger with Reliability, being named Director and President of Reliability upon conclusion of reverse merger on October 29, 2019. Prior to joining Maslow Media Group, Mr. Tsahalis was the CFO of Recycled Green Industries, a wholesale organic recycling company that procured materials through its commercial and residential land clearing division and through contracts with local government yard waste recycling facilities. Recycled Green was positioned for sale to Harvest Garden Pro, a national consumer products business that sold similar organic materials through relationships with national home retailers, Lowe’s, and Home Depot. Prior Mr. Tsahalis was the CFO of Atlantic Video, a video production company that produced multiple shows for ESPN in both Washington, D.C., and New York City. Additional experiences include the creative staffing industry, hotel industry and waste management. He has over 22 years of experience as an operational leader, covering accounting and finance, IT, Human Resources, and business development.
Executive Officers
Our board of directors appoints our executive officers and updates the executive officer positions as needed throughout the fiscal year. Each executive officer serves at the behest of our board of directors and until their successors are appointed, or until the earlier of their death, resignation, or removal.
The following table sets forth certain information with respect to our executive officers as of the date of this Annual Report:
| Name | Age | Position | ||
| Nick Tsahalis | 44 | President and Chief Executive Officer | ||
| Mark Speck | 61 | Chief Financial Officer and Secretary |
Code of Ethics
The Company is establishing a Code of Business Ethics and Corporate Conduct (the “Code of Conduct”) and expects to have the Code of Conduct approved in April 2022. Upon approval, the Company will file a Current Report on Form 8-K containing the Code of Conduct and it will also make the Code of Conduct available on our website at www.maslowmedia.com. If we amend or grant a waiver of one or more of the provisions of our Code of Business Ethics and Corporate Conduct, we intend to satisfy the requirements under Item 5.05 of Item 8-K regarding the disclosure of amendments to or waivers from provisions of our Code of Conduct that apply to our principal executive, financial and accounting officers by posting the required information on our website at the above address. Our website is not part of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Named Executive Officers
Our named executive officers for Fiscal 2021 are:
| ● | Nick Tsahalis, our President, and Chief Executive Officer | |
| ● | Mark Speck, our Chief Financial Officer, and Secretary |
Throughout this section, the term “named executive officer” is intended to refer to the individuals identified above. During Fiscal 2021, we had only two named executive officers, each of whom is set forth above.
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Summary Compensation Table
The following table presents compensation information for our named executive officers with respect to Fiscal 2021 and 2020. These structures are based on Maslow agreements with Vivos Holdings when Vivos Holdings owned Maslow before the Merger.
| Name and Principal Position | Year | Salary ($)* | Bonus ($) ** | Stock Awards ($) | Option Awards ($) | Non-equity incentive plan compensation ($) | Non-qualified deferred compensation earnings ($) | All Other Compensation ($) *** | Total ($) | |||||||||||||||||||||||||||
| Nick Tsahalis President and Chief | 2021 | $ | 288 | $ | 95 | $ | 24 | $ | 407 | |||||||||||||||||||||||||||
| Executive Officer | 2020 | $ | 260 | $ | 78 | $ | 30 | $ | 368 | |||||||||||||||||||||||||||
| Mark Speck Chief Financial Officer and | 2021 | $ | 260 | $ | 75 | $ | 30 | $ | 355 | |||||||||||||||||||||||||||
| Secretary | 2020 | $ | 250 | $ | 90 | $ | 14 | $ | 354 | |||||||||||||||||||||||||||
| (*) | Salary represents the annualized contracted salary of the executive and not the earned salary over the fiscal year. | |
| (**) | Bonus amounts for 2021 have been deferred. Compensation Committee has authority to pay a discretionary portion up to 50% of the executive officer’s base salary. | |
| (***) | Represents car allowance and premium subsidy for medical benefits. |
Name | Board Member ($) | Audit Committee ($) | Compensation Committee ($) | Nominating & Governance Committee ($) | Chairperson of the Board ($) | Total ($) | ||||||||||||||||||
| Hannah Bible | $ | 20 | $ | 20 | ||||||||||||||||||||
| Louis Parks | $ | 20 | $ | 20 | ||||||||||||||||||||
| John Chanaud | $ | 20 | $ | 20 | ||||||||||||||||||||
Agreements with Executive Officers
The President and Chief Executive Officer and the Chief Financial Officer of the Company have employment agreements with Maslow.
Director Compensation
Set forth below is a summary of the components of compensation payable to our non-management directors.
Cash Compensation
We reimburse each non-management member of our board of directors for all reasonable out-of-pocket expenses incurred in connection with their attendance at meetings of our board of directors and any committees thereof, including, without limitation, reasonable travel, lodging and meal expenses. Each director who is not also an officer of Reliability is also entitled to quarterly payments of $5 for their service on our board of directors which remain unpaid to date. Currently there is no additional compensation for committee’s chaired or for presiding as chairperson of the board, due to cash constraints and unavailability of equity compensation.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the beneficial ownership of Company Common Stock as of March 31, 2022, by:
| ● | each person, or group of affiliated persons, known by us to be the beneficial owner of more than 5% of our outstanding shares of Company Common Stock; | |
| ● | each of our named executive officers and directors; and | |
| ● | all our executive officers and directors as a group. |
Each stockholders’ percentage ownership is based on 300,000,000 shares of Company common stock outstanding as of March 31, 2022.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Except as otherwise indicated, each person or entity named in the table has sole voting and investment power with respect to all shares of our capital shown as beneficially owned, subject to applicable community property laws.
The number and percentage of shares beneficially owned by a person includes shares that may be acquired by such person within 60 days of March 16, 2022, through the exercise of vested options or warrants, while these shares are not counted as outstanding for computing the percentage ownership of any other person.
Except as otherwise set forth below, the address of the persons below is c/o Reliability, 22505 Gateway Center Drive, P.O. Box 71 Clarksburg, MD 20871.
| Name | Directly Owned Shares of Common Stock | Percentage | Beneficial ownership of Common Stock | Percentage | ||||||||
| Officers and Directors | ||||||||||||
| Mark Speck, 22505 Gateway Center Drive, P.O. Box 71, Clarksburg, MD 20871 | 3,014,882 | 1.0 | % | 3,276,052(1) | 1.1 | % | ||||||
| Nick Tsahalis, 22505 Gateway Center Drive, P.O. Box 71, Clarksburg, MD 20871 | 3,276,052 | 1.1 | % | 3,276,052 | 1.1 | % | ||||||
| All directors and executive officers as a group (2 persons) | 6,290,934 | 2.1 | % | 6,552,104 | 2.2 | % | ||||||
| 5% Holders (6) | ||||||||||||
| Naveen Doki, | 10,138,882 | 3.4 | % | 202,634,728(2) | 67.5 | % | ||||||
| Silvija Valleru | 4,972,644 | 1.7 | % | 50,667,482(3) | 16.9 | % | ||||||
| Shirisha Janumpally | 192,495,846 | 64.2 | % | 202,634,728(4) | 67.5 | % | ||||||
| Kalyan Pathuri | 45,684,838 | 15.2 | % | 50,657,482(5) | 16.9 | % | ||||||
| 5% Holders Totals | 253,292,210 | 84.4 | % | |||||||||
| (1) | Represents (i) 3,014,882 shares held by Mr. Speck; (ii) 261,170 shares held by Hawkeye Enterprises Inc, a company owned and controlled by Mr. Speck. | |
| (2) | Represents (i) 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. |
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| (3) | 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. | |
| (4) | Represents (i) 10,138,882 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. | |
| (5) | 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. | |
| (6) | On or about June 5, 2020, the Company submitted a Claimant’s Notice of Intention to Arbitrate and Demand for Arbitration to the Respondents: Mr. Doki; Mrs. Valleru; Mrs. 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 certain of the Respondents breached the Merger Agreement providing for the Merger of MMG into a subsidiary of Reliability, in a number of significant respects and potentially committed fraud in connection with the Merger. The Company is seeking damages which if granted will 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. The Company has brought a motion to compel the Arbitration in accordance with the Merger Agreement 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. |
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
The 5% holders listed above, although considered affiliates, currently do not actively participate in the management and policies of the Company.
Directors, Executive Officers, Promoters, and Control Persons
The following table sets forth the name and position of our current executive officers and directors.
| Name | Age | Position(s) | ||
| Nick Tsahalis (1) | 44 | President and Director | ||
| Mark Speck (2), (6) | 61 | Chief Financial Officer, Secretary | ||
| Hannah Bible (3), (4) | 42 | Chairwoman of the Board, Director | ||
| Louis Parks (5) | 61 | Director | ||
| John Chanaud (7) | 58 | Director |
| (1) | On October 29, 2019, Nick Tsahalis was appointed as President of the Company. On October 30, 2019, Mr. Tsahalis was appointed as a director of the Company. In September 2021, Nick Tsahalis was appointed CEO of the company. | |
| (2) | On October 29, 2019, Mark Speck was appointed as Chief Financial Officer, Secretary, and as a director of the Company. | |
| (3) | On April 25, 2014, Hannah Bible was appointed as a director of the Company. | |
| (4) | On November 13, 2019, Hannah Bible, was appointed Chairwoman of the board.
| |
| (5) | On August 10, 2020, Louis Parks was appointed director of the Company.
| |
| (6) | On October 7, 2020, Mark Speck voluntarily resigned as Director
| |
| (7) | On October 7, 2020, John Chanaud was appointed director of the Company |
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Equity Compensation Plans
None at this time.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Policy on Review and Approval of Transactions with Related Persons
Our board of directors is currently primarily responsible for developing and implementing processes and controls to obtain information from our directors, executive officers, and significant stockholders regarding related-person transactions and then determining, based on the facts and circumstances, whether we or a related person has a direct or indirect material interest in these transactions. Our Audit Committee is responsible for the review, approval, and ratification of “related-person transactions” between us and any related person. Under SEC rules, a related person is a director, executive officer, nominee for director or beneficial holder of more than of 5% of any class of our voting securities or an immediate family member of any of the foregoing. In the course of its review and approval or ratification of a related-person transaction, the Audit Committee will consider:
| ● | the nature of the related person’s interest in the transaction; | |
| ● | the material terms of the transaction, including the amount involved and type of transaction; | |
| ● | the importance of the transaction to the related person and to the Company; | |
| ● | whether the transaction would impair the judgment of a director or executive officer to act in our best interest and the best interest of our stockholders; and | |
| ● | any other matters the Audit Committee deems appropriate. |
Any member of the Audit Committee who is a related person with respect to a transaction under review will not be able to participate in the deliberations or vote on the approval or ratification of the transaction. However, such a director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Through December 31, 2021, the Company’s principal independent registered accountant was RJI International CPAs (“RJI”).
Aggregate fees billed or incurred related to the following years for fiscal 2021 and 2020 by RJI is set forth below.
| 2021 | 2020 | |||||||
| Audit Fees (1) | $ | 100 | $ | 94 | ||||
| Audit-Related Fees (2) | ||||||||
| Tax Fees | $ | 14 | $ | 25 | ||||
| All Other Fees | ||||||||
| Total | $ | 114 | $ | 119 | ||||
| (1) | Audit fees consist principally of fees for the audit of our consolidated financial statements, review of our interim consolidated financial statements and audit services related to our acquisitions. | |
| (2) | These fees consist principally of fees related to the preparation of SEC registration statements, acquisition due diligence, and U.S. Department of Labor filings. |
Selection
The Audit Committee appointed RJI as our independent registered public accounting firm for Fiscal 2021 and RJI has served in this capacity since 2009.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements
The following consolidated financial statements of Reliability and the reports of the Independent Registered Public Accounting Firms are contained in Item 8 of Part II of this Annual Report on Form 10-K as indicated:
Financial Statement Schedules
Financial statement schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.
Exhibits
See the list of exhibits in the Index to Exhibits to this Annual Report on Form 10-K, which is incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2022.
| RELIABILITY INCORPORATED | ||
| By: | /s/ Nick Tsahalis | |
| Name: | Nick Tsahalis | |
| Title: | President and Chief Executive Officer | |
| By: | /s/ Mark Speck | |
| Name: | Mark Speck | |
| Title: | Chief Financial Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 31, 2022.
| By: | /s/ Nick Tsahalis | |
| Name: | Nick Tsahalis | |
| Title: | President and Chief Executive Officer | |
| By: | /s/ Louis Parks | |
| Name: | Louis Parks | |
| Title: | Director | |
| By: | /s/ Hannah Bible | |
| Name: | Hannah Bible | |
| Title: | Chairperson of the Board | |
| By: | /s/ John Chanaud | |
| Name: | John Chanaud | |
| Title: | Director |
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EXHIBIT INDEX
| (d) | The following Exhibits are filed with this Annual Report on Form 10-K: |
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| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| * | Filed herewith. |
| ** | Management contract or compensatory plan or arrangement. |
| † | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. |
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