RLBY 10-K
Reliability Inc (RLBY)
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-1-2022 to December-31-2022
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As of March 24, 2023, 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.”
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 variants of COVID-19 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, 2022. 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, and education.
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 who’s 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 Employer of Record (“EOR”), 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 (“Dr. Doki”) and Silvija Valleru (“Ms. Valleru”).
In 2018, Vivos Holdings and several other Vivos companies, (“Vivos Group”) engaged an investment banker who approached management of Reliability to discuss a potential reverse merger transaction. The other investors who collaborated on a share swap of Maslow for other Vivos companies were Shirisha Janumpally (“Mrs. Janumpally”), wife of Dr. Doki, and Kalyan Pathuri (“Mr. Pathuri”), husband of Silvija Valleru.
These individuals included but were not limited to Dr. Doki, Mrs. Janumpally, Mr. Pathuri, and Mrs. Valleru, Igly Trust, and Judos Trust also have common ownership combinations in a number of other entities [Vivos Holdings, LLC. Vivos Real Estate Holdings, LLC (“VREH”), Vivos Holdings, Inc., Vivos Group, Vivos Acquisitions, LLC., and Federal Systems, LLC], (collectively referred to herein as “Vivos Group”).
The reverse merger was consummated on October 29, 2019. As a result of the Merger, the Vivos Group (Vivos Holdings LLC officially) acquired approximately 84% of the issued and outstanding shares of Reliability which were distributed by Vivos Holdings LLC.
On October 29, 2019, 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.
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.
Upon purchasing MMG and thereafter, Vivos Holdings, LLC and their affiliates (collectively the “Vivos Group”) began borrowing monies from MMG starting with $1,400 in 2016 and by the end of 2019 the balance had reached $3,418 which included a $3,000 guarantee from Dr. Naveen Doki. (See Note 12 for more details). Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC, and Mr. Doki are collectively b referred to as “Vivos Debtors.”
The attempted collection of the guarantee and debt from the Vivos Group set off a chain of legal events culminating in an arbitration hearing and award in 2022. (See below and Item 3 for complete summary). We refer below to the disputes between Reliability and the Vivos Group as the “Vivos Matter.”
A series of legal actions and hearings took place starting in March of 2020 through September of 2021. At that time, Arbitration was agreed by both the Vivos Group and MMG, The proceedings began in February 2022 and were completed in March 2022.
On August 31, 2022, the Arbitrator issued an award (the “Award”) with the Company and MMG prevailing on their claims. The Company and MMG were awarded the following:
| ● | an award in favor of MMG against Vivos Holdings LLC under Note I (as defined in the Award) in the amount of $3,458, with interest thereon from June 30, 2022, at the rate of 4.5% per year; | |
| ● | no award as to Note II (as defined in the Award) until and at such time as the automatic stay imposed by the United States Bankruptcy Court as a result of the filing of a petition in bankruptcy by VREH is lifted or the bankruptcy proceeding is terminated; | |
| ● | an award in favor of MMG against Vivos Holdings, LLC under Note III (as defined in the Award) in the amount of $800, with interest thereon from June 30, 2022, at the rate of 2.5% per year, plus collection costs, including reasonable attorneys’ fees, incurred in the effort to collect Note III; | |
| ● | an award in favor of MMG against Naveen under the Personal Guaranty (as defined in the Award) in the amount of $2,309, plus interest thereon at the rate of 6% per year from the date of the Award; |
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| ● | an award in favor of the Company against Naveen, Valleru, Janumpally, individually and as Trustee of Judos Trust, and Pathuri, as Trustee of Igly Trust, jointly and severally, for contract damages of $1,000, to be satisfied by the transfer of their shares of the Company common stock to the Company equal in value to $1,000, valued as of the date of the Award, in accordance with the provisions of Section 9.06(d) of the Merger Agreement; | |
| ● | an award in favor of the Company against Naveen, Valleru, Janumpally, individually and as Trustee of Judos Trust, and Pathuri, as Trustee of Igly Trust, jointly and severally, for fraud damages in the amount of $4,327, plus interest thereon at the rate of 6% per year from the date of the Award, together with any out-of-pocket fees and expenses, including attorneys’ and accountants’ fees; | |
| ● | an award appointing a rehabilitative receiver for the Company under the deadlock situation provisions of Section 11.404(a)(1)(B) of the Texas Business Organizations Code, the primary function of which is to collect the contract and fraud damages, including costs, expenses and fees provided in the Award, due to the Company, with matters regarding such receivership to be set forth in a supplemental award; and | |
| ● | declaratory relief in favor of the Company and its officers and directors. |
Section 11.404(a)(1)(B) of the Texas Business Organizations Code provides for the appointment of a rehabilitative receiver when “the governing persons of the entity are deadlocked in the management of the entity’s affairs, the owners or members of the entity are unable to break the deadlock, and irreparable injury to the entity is being suffered or is threatened because of the deadlock.” With respect to the receivership, the owners or holders of all of the shares of common stock of the Company received as a result of the conversion of 1,600 shares of common stock of MMG owed by Naveen and Valleru under the Merger Agreement shall not be entitled to vote any of those shares at any annual or special meeting of the shareholders of the Company during the period of the receivership. Upon the completion of the receiver’s primary function of collecting damages due to the Company, the receivership shall terminate and the restrictions on the rights of the shareholders of the Company imposed by the Award shall be lifted.
The parties submitted material for clarification of the Award on March 7, 2023, and March 20, 2023, which included proposed language for an award to be entered against Vivos Real Estate Holdings, LLC (“VREH”), in light of the bankruptcy court order lifting the stay that pertains to VREH, which filed a petition in bankruptcy court. The date of a final award is unknown.
Upon a final resolution as to the underlying ownership and rights of certain shareholders, the Company intends to hold an annual meeting of shareholders within a reasonable time thereafter.
As of December 31, 2022, the Vivos Debtor balance was $5,251. The arbitration award covering all bulleted items above currently totals $9,585, independent of legal fees, interest, and other fees.
As of March 31, 2023, 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 26, 2023, we had 22 team members (staff employees) at our Clarksburg, MD corporate and remote locations. During the fiscal year ended 2022, we assigned approximately 1,200 field talent workers of which 244 were deemed full time equivalent (FTE) throughout the year.
As of December 31, 2022, 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.
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 workers are borne by Maslow. These workers are Maslow employees. The client is responsible for maintaining its workplace, but all administrative roles and responsibilities are administered by Maslow. This arrangement provides our clients compliance and legal protection as our expert staff takes responsibility for properly classifying and onboarding employees or independent contractors. Misclassifying an employee as an independent contractor can result in significant costs to the client.
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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 |
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 direct hires.
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. This benefits organizations from incurring the ongoing expense and administrative responsibilities associated with recruiting, hiring, and retaining these employees. 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 as little as one day up to an indefinite period of time. We offer our clients several levels of staffing services: freelance, contract, temp to hire, direct hire or managed services. Our managed services solution includes building or assuming an existing team and placing an onsite manager, or managers, to help manage the team.
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.
In 2022, 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 income as explained in Results of Operations. Direct Hire, previously titled “Permanent Placement,” margins are much higher than temporary staffing and EOR in that we do not bear employee or 1099 costs for the direct hire placement. The only cost of revenue assigned is the relational use of recruiting software subscriptions.
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Video/Multimedia Production
Maslow continues to be a provider of multimedia and video production solutions for corporate, government and broadcast 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.
Maslow provides, among others, the following production services;
| ● | pre-Production conceptualization of final video deliverables; | |
| ● | project consultation from scriptwriting to site scouting; | |
| ● | budget development and management; | |
| ● | booking and managing of logistics for field and studio teams; |
| ● | broadcast level HD camera crews and field support worldwide including makeup artists, AV support, field producers, and full equipment rental; | |
| ● | post-production facilities and freelance support including non-linear editors, graphic artists, narrators and actors; | |
| ● | animation and graphic design development, including whiteboard animation; | |
| ● | live transmission services from satellite to streaming; and | |
| ● | management of fully staffed client studios. |
Intelligent Quality Solutions (“IQS”)
The Company operates its IQS assets as an IT Staffing division within Maslow. Maslow provides IT staff augmentation solutions placing top industry professionals at our customers in a myriad of industries.
Our team members are typically full-time employees that have established themselves as leaders in their chosen field. Some examples of positions that we recruit for, and place include:
| ● | 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. |
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OUR INDUSTRY
Maslow operates within the workforce management and production services 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” solutions.
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’ (SIA) 2022 North America Staffing Company Survey, the 2022 trends expected to have the greatest impact to staffing businesses in 2023 and beyond include: remote work, which continues to be considered a boon to operations with 20% of temps and 50% of internal staff working remote in 2022 and acquisition multiples hitting new highs on EBITDA. Wage and hourly pay and working time compliance; workers’ compensation, health and safety claims; and data privacy laws were most frequently cited as top compliance concerns with California, considered far and away the most challenging given their aggressive regulatory stance.
The temporary staffing industry is large and highly fragmented with thousands of competing companies. It was estimated that the 2022 U.S. temporary staffing market was $185.5 billion according to SIA up from the pre-pandemic market size of $152.8 billion in 2019.
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 remote workforce. In 2022, staffing revenue returned to 2019 levels with an expectation of a 2.2% growth in 2023.
According to SIA the US staffing industry grew 28% in 2022. Headwinds, however, are slowing the growth rate as SIA predicts the US staffing industry will likely experience a more subdued macroeconomic environment with GDP growth decelerating to 2.2%. The culprits are rising interest rates, continued supply chain problems, slow wage inflation, and disruptions and sanctions related to the war in Ukraine.
Per SIA’s Staffing Trends 2023, published January 19, 2023, there are reasons for staffing firms to be optimistic in 2023. “Contingent forms of labor like temporary staffing proved to be a valuable hedge in an extremely volatile and rapidly changing business environment. Staffing Industry Analysts’ data continues to suggest that organizations are increasingly receptive to proactively using contingent workers as part of their workforce mix.” SIA predicts 2023 will be inverse to 2022 in that the second half will be stronger than the first.
The complexity of keeping up with this regulatory compliance landscape, particularly for smaller employers and companies requiring workers in multiple states, has provided greater opportunity for EOR solutions. For example, California adopted eleven new employment laws in 2020. Additionally in 2022, Maryland and Maine became the latest states to enact paid family and medical leave legislations. Payroll deductions in the state of Maryland are set to begin on October 1st, 2023.
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OUR CLIENTS
Historically the largest portion of our business has come from two clients, Client AA (Client A inclusive of its Client B division) and Client D. But in 2022, Client C became the number one contributor to revenue with $5,052, which was a 29.5% improvement over 2021 performance. Client A and Client B (previously Client AA), split from being under a single contract, with Client B coming in second in 2022 with $3,693, Client D third at $3,309, and Client A fourth at $3,075.
In terms of revenue contribution, Client C represented 19.6% of our 2022 revenue compared with 14.9% in 2021, Client B represented 14.4% of 2022 revenue compared with 11% as standalone in 2021, Client D delivered 12.9% of 2022 revenue compared with 14.5% in 2021, while Client A contributed 12% of revenue vs. 16.8% in 2021, and Client E pitched in 5.3% of our 2022 revenue compared with 10.9% in 2021.
No other client exceeded 10% of revenues.
If looking at Client B and Client A as if combined as they had been for the last three years, its 2022 contribution was 26.3% compared to 28.5% in 2021, 28.7% in 2020, and 37.5% in 2019.
Client A’s drop in 2022 was related to conversions of long-term contract employees to direct hires, reducing the contingent staffing requirements for the year. In 2021, Client E’s revenues increased substantially due to freelance staffing and employer of record requirements within the company’s creative division. Client E’s decline in revenues in 2022 was due to it moving its creative business to a non-US firm at the end of 2021.
From a revenue concentration standpoint, our top five customers represented 66% of our revenue in 2022 compared to 75.9% in 2021, keeping in mind Client A and Client B (Client AA) was treated as one client in 2021.
Collectively, Client B (33.7%), Client D (22.4%), Client C (18.5%), and Client A (13.7%) represent 87.6% of accounts receivable as of December 31, 2022. Comparatively, Client B (15.3%), Client D (32.9%), Client C (5.5%), and Client A (25.8%) represented 79.5% in their respective portions of our accounts receivable balance in 2021. In 2021, we reported Client B and Client A as combined with 41.1% of accounts receivable. Client A no longer has a controlling position of Client B.
GROWTH STRATEGY
Maslow’s growth strategy is a three-pronged approach with emphasis of the 1) Media Staffing market, 2) IT Staffing market, and 3) EOR expansion.
Media Staffing margins are healthy in the 20% range and increased by $106 from $3,033 from period ending December 31, 2021, to $3,176 in the same period, 2022, representing 12.3% of MMG’s total revenue.
IT Staffing is being revisited after the IQS revenue base shrunk rapidly due to the COVID-19 pandemic which saw us lose our top acquired client with a significant decline in revenues for the next 2 largest customers. We are hiring seasoned staffing professionals with experience in Media, IT and other verticals. Our overarching goal is to have account executives who can sell all our workforce management solutions. Our new VP of Sales brings over 20 years of staffing industry experience including lead roles at large national providers. Because the IT market for contracted contingent workers remains high, MMG is still keen to compete in this space and offer these services to our existing client base.
Total Staffing revenue in 2022 was $3,468 compared to $3,613 in 2021. The objective in 2023 is to increase these levels back to 2020 and beyond by focusing sales efforts on these types of immediate needs of clients.
Maslow’s EOR approach is to continue to seek media-based opportunities given the transient, contingent, and part time nature of corporate media is conducive to an EOR solution. We believe, however, there is an opportunity to leverage this expertise into other industries. The client acquisition challenge outside of media consists principally of educating prospective clients of the merits of the EOR solution over other options, finding the unique opportunities in each industry or within a corporate client that lend itself for an EOR solution, and competition from other providers of EOR services. The existing pandemic may make EOR a more desirable solution to companies that are looking for more agile ways of changing the headcount and nature of portions if not all of their workforce in an expeditious and low risk manner.
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We expect to explore expanding our EOR to enter new industries, particularly those that rely significantly on contractors or freelancers to perform limited time or project-based assignments.
To ensure success, we have increased and added industry expertise to our client services and recruiting teams. Once the Vivos Matter (defined and referenced in Overview section) is completely 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 by restructuring our sales organization that began in the fourth quarter of 2022.
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 stock split of the outstanding shares of Common Stock is approved. Such approval may not likely occur until the Vivos Matter is completely resolved. Following the Merger, the Vivos Group which holds over 80 percent of the issued and outstanding shares of Common Stock notified the Company that 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 its business plan.
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 and resources to grow the staffing side of our business and 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. The high level of competition in the industry continues to put downward pressure on pricing for services being offered. 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. Client retention is highly predicated on being able to source quality candidates that meet their specific requirements in a timely manner. Although we believe we compete favorably with respect to these factors, we expect competition to continue to increase, which may cause margin compression.
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 fully replace relationships built on 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. In the past four years, including 2022, the fourth quarter has been our busiest with 29% of our annual revenue being the average. This is because of the fall schedule and year-end projects planned by several large clients.
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.
The demand for staffing services has been and will be significantly affected by general economic conditions. The trend of companies allowing remote workers has negatively impacted the media staffing business because some companies have elected not to bring back the worker count it had pre-pandemic. Also, pandemic related vaccine mandates maintained by some clients have 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 we 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 new strains of the virus, 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.
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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”), set forth below, however their ownership has been the subject of an arbitration which is described in Note 2.
| Name | Directly Owned Shares of Common Stock | Percentage | Beneficial 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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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, 2022, had a balance of $5,251. 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.
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. In 2021 Maslow paid approximately $450 in satisfaction of obligations incurred before the merger.
In September 2022 MMG learned that a Vivos IT, LLC lawsuit against Second Wind Consultants (“SWC”) in May 2019 included MMG as a plaintiff. The lawsuit brought claims of fraud in the inducement, unjust enrichment and other monetary claims against SWC. The 5 parties suing SWC, included Vivos IT, LLC, Maslow Media Group, Suresh Venkat Doki, Naveen Doki and Silvija Valleru The lawsuit related to a debt restructuring services agreement secured by Suresh Doki, Naveen Doki and Silvija Valleru to assist the following then owned Vivos entities: Maslow Media Group, Inc., Health Care Resources Network, Inc., Mettler & Michael, Inc., 360 IT Professionals, Inc. and US IT Solutions, Inc. SWC countersued all plaintiffs on September 30, 2019, seeking to collect the balance of $403 not paid by the Vivos Group. This was not disclosed to Maslow Management or to Reliability before the merger closed on October 29, 2019.
Maslow has retained counsel and filed a motion to include all original parties to the SWC agreement, dated September 2018, as two of the original parties were not in the original filings (Health Care Resources Network (“HCRN”) and Media Solutions). Counsel for SWC requested an extension to the deadline to respond to this motion but failed to respond before the extension deadline received. The motion is under the consideration of the court at this time.
In December of 2019, the Company’s executive management learned that prior to the Merger, in December 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 was in default. VREH filed for Chapter 11 bankruptcy in the District Court of Maryland in 2022. FVCBank filed a motion to dismiss VREH’s bankruptcy filing in October 2022. Maslow filed a response supporting FVC’s motion to dismiss the bankruptcy on November 2, 2022. An agreement was reached between FVCBank and VREH, through the bankruptcy, to stay this matter until March 31, 2023, allowing VREH the time to pay delinquent taxes, make repairs to the building, hire a property manager and to seek a new lender to refinance the mortgage. VREH has not been able to meet these requirements, specifically not finding a new lender.
On August 24, 2022, the Company filed a motion to modify the automatic stay in the VREH Bankruptcy case filing to allow the Arbitrator to rule on the Company’s claims against VREH. The Court granted the motion to modify the stay on September 16, 2022, after the initial award by the Arbitrator. The parties submitted material for clarification of the Award on March 7, 2023, and March 20, 2023, which included proposed language for an award to be entered against VREH, in light of the bankruptcy court order lifting the stay.
The existence of these obligations has significantly affected our liquidity, as well as our ability to obtain commercial loans. Because there exists uncertainty as to the timing of the arbitration award this can have a future impact on the Company’s liquidity.
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. For example, review the post-merger events that were discovered post-merger including SWC which we became aware of in October 2022, under Related Party Indebtedness in the section preceding this one. These liabilities could have a material adverse effect on the Company and the value of the common stock. Reliability periodically runs lien checks to detect if there are any other new uncommunicated pre-existing liabilities on the record.
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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 the 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 legal dispute with the Vivos Group has negatively impacted the Company’s ability to attract and retain some of our top talent. The level of uncertainty since the legal dispute began in late 2019 until the arbitration award issued in August 2022 provided reason for concern for existing and prospective staff in remaining or joining the Company. The ability to attract and retain qualified employees could be impaired by improvement in economic conditions resulting in lower unemployment, increases in compensation, or increased competition. During periods of economic growth, the Company faces increasing competition from other staffing companies for retaining and recruiting qualified temporary and permanent employees, which in turn leads to greater advertising and recruiting costs and increased salary expenses. These problems can be exacerbated by the fact that the Company often must attract and retain employees with skills specific to the video production industry, which narrows the pool of available, qualified employees that the Company may draw upon. If the Company cannot attract and retain qualified temporary and permanent employees, the quality of its services may deteriorate and the financial condition, business, and results of operations may be materially adversely affected.
Our success depends to a large degree on growth in market acceptance of human resources outsourcing and related services we provide.
Because the majority of our revenues currently come from EOR services, a large portion of our success depends on the willingness of clients to outsource their contingent staffing requirements 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 is highly correlated to changes in the level of economic activity and employment. Consequently, as economic activity begins to slow down, it has been the Company’s experience that companies tend to reduce their use of our services, resulting in decreased revenues and profit levels. In addition, the Company may experience pricing pressure during economic downturns which could have a negative impact on the results of operations. Further, many of our clients are corporate media departments and broadcast networks. As a result, any industry downturn that affects these kinds of companies could have a major effect on our business.
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The deterioration of the financial condition and business prospects of clients could reduce their need for the staffing and executive recruiting services we provide and could result in a significant decrease in the Company’s revenues and earnings derived from these clients. In addition, during economic downturns, companies may slow the rate at which they pay their vendors, seek more flexible payment terms or become unable to pay their debts as they become due.
In late 2022 and early 2023 some of our clients have announced layoffs. We are uncertain at this time to the extent this will affect our business but are keeping track of customer trends.
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; |
| ● | 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.
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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 one of these four customers would significantly reduce our net revenue and adversely impact our operating results.
Revenue reliance in 2022 is among four clients, whereas it has been concentrated more so in two over the past two years. Client C increased revenue in the 12 months ended December 31, 2022, by $1,152 compared to a year ago, and Client A and Client E’s revenue dropped by $1,346 and $1,481, respectively, year over year. This created greater equality among the four at 7.2% compared to 22% when comparing the number one to number five revenue producers in 2022 compared with 2021, respectively. Client D remained our number three customer, but had a drop in revenue for the year ended December 31, 2022, when compared to the same period in 2021, by $510.
In terms of accounts receivable balances on December 31, 2022, Client B had 33.7% compared to 17.8% for the same period 2021. In 2021, Client A had the greatest percentage of accounts receivable with 29.4%, which combined with Client B, represented 47.1%. Client D comprised 22.4% in 2022 compared to 32.9% as of December 31, 2021. The loss of, or a substantial reduction in business from, these five 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.
Improper disclosure of employee and client data could result in liability and harm to the reputation of the Company.
The business of the Company involves the use, storage, and transmission of information about employees and clients. It is possible that security controls over personal and other data and practices that the Company follows may not prevent the improper access to, or disclosure of, personally identifiable or otherwise confidential information. Our security controls may be inadequate, or hackers or other malicious groups or organizations may attempt to interfere with our data through different means, including but not limited to malware attacks, denial of service attacks, consensus-based attacks. Any event that results in a disclosure of our clients’ and employees’ data could harm the reputation of the Company and subject the Company to liability under contracts and the laws that protect personal data and confidential information, resulting in increased costs or loss of revenue. Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions in which the Company provides services. The failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to the reputation of the Company in the marketplace.
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The Company could face disruption and increased costs from outsourcing and offshoring various aspects of its business.
The Company may outsource aspects of its business to lower cost of employment areas in the United States and potentially to places such as India. This outsourcing solution would focus predominantly on shared service activities which traditionally consist of back-office functions such as “hire to retire”, “procure to pay” and “order to cash” processes. Although a goal of outsourcing our operations is to reduce the operational costs of our business, it is possible that we will not realize any benefit from outsourcing such aspects of our business, or even increase our overhead expenses. A transition may create the 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 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.
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. Due to the wide scope of the Company’s operations, the Company could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government sub-divisions. The Company may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. The Company’s operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry, such as the imposition of additional licensing or tax requirements. Failure to comply with the legal regulations in places we do business, or the regulatory prohibition or restriction of employment services, could lead to financial liability and regulatory action against the Company, which could significantly harm our development as a business.
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.
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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 sales and marketing; | |
| ● | Aggressively price products and services below market rates; and | |
| ● | Offer better benefit packages that we may not be able to match. |
The Company is subject to the potential factors of market and customer changes, which could result in our inability to timely respond to the needs of our clients.
The business of the Company is susceptible to rapidly changing preferences of the marketplace and its customers. The needs of customers are subject to constant change. Although the Company intends to continue to develop and improve its services to meet changing customer needs of the marketplace, there can be no assurance that funds for such expenditures will be available or that the Company’s competition will not develop similar or superior capabilities or that the Company will be successful in its internal efforts. The future success of the Company will depend in part on its ability to respond effectively to rapidly changing trends, industry standards and customer requirements by adapting and improving the features and functions of its services. In the Company’s industry, failure by a business to adapt to the changing needs and demands of customers is likely to render the business obsolete.
Negative publicity could adversely affect our business and operating results.
Negative publicity about our industry or our Company, including the utility of our services, even if inaccurate, could adversely affect our reputation and the confidence in, and the use of, our services, which could harm our business and operating results. Harm to our reputation can arise from many sources, including poor performance or misconduct by the workers we supply and recruit for our clients, misconduct by our partners, outsourced service providers or other counterparties, and failure by us to meet minimum standards of service expected by clients in our industry.
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 $386 in 2018, $195 in 2019; and 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, D&O 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.
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The Company may suffer from a 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 equity financing. If additional debt is incurred, the Company may fail to comply with the terms of such financing, which could result in significant liability for our Company. If we are unsuccessful, we may need to (a) initiate cost reductions; (b) forego business development opportunities; (c) seek extensions of time to fund liabilities, or (d) seek protection from creditors. In addition, any future sale of our equity securities would dilute the ownership and control of your shares and could be at prices substantially below prices at which our shares currently trade. Our inability to raise capital could require us to significantly curtail or terminate our operations. Our plan is to increase our cash reserves through the sale of additional equity or debt securities. The sale of convertible debt securities or additional equity securities could result in additional and potentially substantial dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties.
In addition, if we are unable to generate adequate cash from operations, and if we are unable to find sources of funding, it may be necessary for us to sell all or a portion of our assets, enter into a business combination, or reduce or eliminate operations. These possibilities, to the extent available, may be on terms that result in significant dilution to our shareholders or that result in our shareholders losing all of their investment in our Company.
Our acquisition strategy creates risks for our business.
We expect that we will pursue acquisitions of other businesses, assets or technologies to grow our business. We may fail to identify attractive acquisition candidates, or we may be unable to reach acceptable terms for future acquisitions. We might not be able to raise enough cash to compete for attractive acquisition targets. If we are unable to complete acquisitions in the future, our ability to grow our business at our anticipated rate will be impaired.
We may pay for acquisitions by issuing additional shares of common stock, if such shares become available, which would dilute our shareholders, or by issuing debt, which could include terms that restrict our ability to operate our business or pursue other opportunities and subject us to meaningful debt service obligations. We may also use significant amounts of cash to complete acquisitions. Most acquisitions will include “Earn Out” provisions which ensure adequate generation of revenue and profits, but cash required to pay Earn Outs likely will exceed that total or incremental cash flow generated by the acquired business. To the extent that we complete acquisitions in the future, we likely will incur future depreciation and amortization expenses associated with the acquired assets. We may also record significant amounts of intangible assets, including goodwill, which could become impaired in the future. Acquisitions involve numerous other risks, including:
| ● | difficulties integrating the operations, technologies, services, and personnel of the acquired companies; | |
| ● | challenges maintaining our internal standards, controls, procedures and policies; | |
| ● | diversion of management’s attention from other business concerns; | |
| ● | over-valuation by us of acquired companies; | |
| ● | litigation resulting from activities of the acquired company, including claims from terminated employees, customers, former shareholders and other third parties; | |
| ● | 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; |
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| ● | 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 Gulf Coast Bank which is based on account receivable balance. As of December 31, 2022, Maslow could raise an additional $2,257 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 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.
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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.
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 Client A announced the cancellation of two (2) live anchor multiple hour Client B sports programs, which had an estimated $4,000 impact on the Company. In 2022, our client did rebid on a government contract, and it was awarded to another party. The end customer required a minority or disadvantaged business to own the contract, a requirement that our Company cannot meet. The result was a loss of approximately $130 in revenue in 2022 and a 2023 go forward revenue impact of approximately $320. 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.
The 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 in large part 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.
Concentration Risk of Customers
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 make us particularly dependent on factors affecting those companies. Workforce clients Client A, Client C, Client B, and Client D made up approximately 58.8% of our 2022 revenues. In addition, these four customers account for approximately 87.6% of our accounts receivable as of December 31, 2022.
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; |
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| ● | 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.
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.
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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. |
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. |
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Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of common stock and cause a decline in the market value of Common Stock.
Financial Industry Regulatory Authority (“FINRA”) sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted Rule 2111 that requires a broker-dealer to have reasonable grounds for believing that an investment is suitable for a customer before recommending the investment. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy Common Stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors.
RISKS RELATED TO OUR PREVIOUS STATUS AS A SHELL COMPANY
We may have contingent liabilities related to our operations prior to the Merger of which we are not aware and for which we have not adequately provided for. For example, in October 2022, we learned about a Vivos IT, LLC lawsuit against Second Wind Consultants (‘SWC”) in May 2019 which included MMG as a plaintiff. SWC is seeking to collect the balance of $403 not paid by the Vivos Group. 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 MMG 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.
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.
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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.
We devote significant resources to address public company-associated requirements, including compliance programs as well as our financial reporting obligations. Complying with these rules and regulations has substantially increased our legal and financial compliance costs and make some activities more time-consuming and costly.
Our Common Stock may not be eligible for listing on a national securities exchange.
Our 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. Our Common stock is currently quoted on the pink sheets OTC of the OTC Marketplace under the symbol of “RLBY”, and, unless and until our 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. 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 9.8% of outstanding. In those venues, however, an investor may find it difficult to obtain accurate quotations as to the market value of our Common Stock. In addition, if we continue to fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations normally deter broker-dealers from recommending or selling common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital.
We cannot predict whether there will be an active trading market for our common stock and the market price of our common stock may remain volatile.
Given our low float of approximately 29,523,512 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.
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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 does not have any active office leases at this time and has been operating the Company in a remote environment since April of 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.
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.
On August 2, 2022, VREH filed for Chapter 11 Bankruptcy Protection in the District Court of Maryland. This action prevented the Arbitrator from providing any ruling relating to Note II in the arbitration case at the time of his award.
On August 24, 2022, the Company filed a motion to stay the VREH Bankruptcy filing to allow the Arbitrator to rule on the claims against VREH. The motion to lift the stay was granted by the court on September 16, 2022, after the initial award by the Arbitrator.
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On August 31, 2022, the Arbitrator issued an award (the “Award”) with the Company with MMG prevailing on their claims. The Company and MMG were awarded the following:
| ● | an award in favor of MMG against Vivos under Note I (as defined in the Award) in the amount of $3,458, with interest thereon from June 30, 2022, at the rate of 4.5% per year; | |
| ● | no award as to Note II (as defined in the Award) until and at such time as the automatic stay imposed by the United States Bankruptcy Court as a result of the filing of a petition in bankruptcy by VREH is lifted or the bankruptcy proceeding is terminated; | |
| ● | an award in favor of MMG against Vivos under Note III (as defined in the Award) in the amount of $800, with interest thereon from June 30, 2022, at the rate of 2.5% per year, plus collection costs, including reasonable attorneys’ fees, incurred in the effort to collect Note III; | |
| ● | an award in favor of MMG against Naveen under the Personal Guaranty (as defined in the Award) in the amount of $2,309, plus interest thereon at the rate of 6% per year from the date of the Award; | |
| ● | an award in favor of the Company against Naveen, Valleru, Janumpally, individually and as Trustee of Judos Trust, and Pathuri, as Trustee of Igly Trust, jointly and severally, for contract damages of $1,000, to be satisfied by the transfer of their shares of the Company common stock to the Company equal in value to $1,000, valued as of the date of the Award, in accordance with the provisions of Section 9.06(d) of the Merger Agreement; | |
| ● | an award in favor of the Company against Naveen, Valleru, Janumpally, individually and as Trustee of Judos Trust, and Pathuri, as Trustee of Igly Trust, jointly and severally, for fraud damages in the amount of $4,327, plus interest thereon at the rate of 6% per year from the date of the Award, together with any out-of-pocket fees and expenses, including attorneys’ and accountants’ fees; | |
| ● | an award appointing a rehabilitative receiver for the Company under the deadlock situation provisions of Section 11.404(a)(1)(B) of the Texas Business Organizations Code, the primary function of which is to collect the contract and fraud damages, including costs, expenses and fees provided in the Award, due to the Company, with matters regarding such receivership to be set forth in a supplemental award; and | |
| ● | declaratory relief in favor of the Company and its officers and directors. |
Section 11.404(a)(1)(B) of the Texas Business Organizations Code provides for the appointment of a rehabilitative receiver when “the governing persons of the entity are deadlocked in the management of the entity’s affairs, the owners or members of the entity are unable to break the deadlock, and irreparable injury to the entity is being suffered or is threatened because of the deadlock.” With respect to the receivership, the owners or holders of all of the shares of common stock of the Company received as a result of the conversion of 1,600 shares of common stock of MMG owed by Naveen and Valleru under the Merger Agreement shall not be entitled to vote any of those shares at any annual or special meeting of the shareholders of the Company during the period of the receivership. Upon the completion of the receiver’s primary function of collecting damages due to the Company, the receivership shall terminate and the restrictions on the rights of the shareholders of the Company imposed by the Award shall be lifted.
The parties to the Arbitration filed their requests related to the Supplemental Award and the assignment of a Receiver to the Arbitrator on November 23, 2022. The Company does not have a definitive date by which it will receive the supplemental award identified in the Arbitration Award dated August 31, 2022, but hopes it will be received before the end of the second quarter 2023.
The following legal proceedings where Vivos Group borrowings impacting MMG:
On August 2, 2022, VREH filed for Chapter 11 Bankruptcy in the U.S. Bankruptcy Court for the District of Maryland. The Automatic stay imposed by bankruptcy law prevented the Arbitrator from providing any ruling relating to Note II in the arbitration case at the time of his award.
On August 24, 2022, the Company filed a motion to modify the automatic stay in the VREH Bankruptcy case filing to allow the Arbitrator to rule on the Company’s claims against VREH. The Court granted the motion to modify the stay on September 16, 2022, after the initial award by the Arbitrator. The parties submitted material for clarification of the Award on March 7, 2023, and March 20, 2023, which included proposed language for an award to be entered against VREH, in light of the bankruptcy court order lifting the stay.
In September 2022 MMG learned that Vivos IT, LLC lawsuit against Second Wind Consultants (“SWC”) in May 2019 included MMG as a plaintiff. The lawsuit brought claims of Fraud in the inducement, unjust enrichment and other monetary claims against SWC. The 5 parties suing SWC, included Vivos IT, LLC, Maslow Media Group, Suresh Venkat Doki, Naveen Doki and Silvija Valleru The lawsuit related to a debt restructuring services agreement secured by Suresh Doki, Naveen Doki and Silvija Valleru to assist the following then owned Vivos entities: Maslow Media Group, Inc., Health Care Resources Network, Inc., Mettler & Michael, Inc., 360 IT Professionals, Inc. and US IT Solutions, Inc., SWC countersued all plaintiffs on September 30th, 2019 seeking to collect the balance of $403 not paid by the Vivos Group. This was not disclosed to Maslow Management or to Reliability before the Merger closed on October 29, 2019.
Maslow has retained Counsel and has filed a motion to include all original parties to the SWC agreement, as two of the original parties were not in the original filings (HCRN & Media Solutions). Counsel for SWC requested an extension to the deadline to respond to this motion but has failed to respond before the extension deadline received. The motion is currently being considered by the court.
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 2022 and 2021 are set forth below. High and Low price is based on the last trading day of quarter.
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|||||||||||||
| 2022 | ||||||||||||||||
| High | $ | .0570 | $ | .0659 | $ | .1250 | $ | .0769 | ||||||||
| Low | $ | .0230 | $ | .0400 | $ | .0440 | $ | .0420 | ||||||||
| 2021 | ||||||||||||||||
| High | $ | .0900 | $ | .0900 | $ | .3760 | $ | .1095 | ||||||||
| Low | $ | .0462 | $ | .0281 | $ | .0160 | $ | .0310 | ||||||||
The Company paid no cash dividends in 2021 or 2022.
As of March 22, 2023, the last reported sales price for Company Common Stock was $ .0505 per share.
As of March 22, 2023, there were 523 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 2022 and 2021 and the balance sheet data as of December 31, 2022 and 2021 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: | 2022 | 2021 | ||||||
| Working capital | $ | 8,645 | $ | 9,361 | ||||
| Total assets | $ | 13,490 | $ | 14,288 | ||||
| Total outstanding borrowings, net | $ | 2,619 | $ | 946 | ||||
| Total other long-term liabilities | $ | - | $ | - | ||||
| Stockholders’ equity | $ | 8,671 | $ | 9,410 | ||||
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| December 31, | ||||||||
| Statement of Operation Data: | 2022 | 2021 | ||||||
| Revenues | $ | 25,725 | $ | 26,246 | ||||
| Gross profit | $ | 3,494 | $ | 3,266 | ||||
| Selling, general and administrative expenses | $ | 4,400 | $ | 3,567 | ||||
| Operating loss | $ | (906) | $ | (301 | ) | |||
| Interest income | $ | 53 | $ | - | ||||
| Interest income from related parties | $ | 232 | $ | 274 | ||||
| Interest expense | $ | (171) | $ | (39 | ) | |||
| Impairment of goodwill and other intangible assets | $ | - | (688 | ) | ||||
| Other income (expense) | $ | 223 | $ | 9,631 | ||||
| Income (loss) before income taxes | $ | (569) | $ | 8,877 | ||||
| Income tax benefit (expense) | $ | (170) | $ | (984 | ) | |||
| Net income (loss) | $ | (739) | $ | 7,893 | ||||
| December 31, | ||||||||
| Net Income (Loss) Per Share: | 2022 | 2021 | ||||||
| Net income (loss) per share – basic | $ | .00 | $ | .03 | ||||
| Net income (loss) per share – diluted | $ | .00 | $ | .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: | 2022 | 2021 | ||||||
| OIBITDA (1) | $ | 577 | $ | 674 | ||||
(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.
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The use of OIBITDA has limitations as analytical tools, and you should not consider these performance measures in isolation from, or as an alternative to, GAAP measures such as net income (loss). OIBITDA is not a measure of liquidity under GAAP or otherwise and is not an alternative to cash flow from continuing operating activities. Our presentation of OIBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. The limitations of OIBITDA include: (i) it does not reflect our corporate expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) it does not reflect the cash requirements necessary to service interest or principal payments associated with indebtedness.
To properly and prudently evaluate our business, we encourage you to review our consolidated financial statements included elsewhere in this Annual Report on Form 10-K and the reconciliation to OIBITDA from net income (loss), the most directly comparable financial measure presented in accordance with GAAP, set forth in the following table. All the items included in the reconciliation from net income (loss) to OIBITDA are either (i) corporate costs or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect on-going operating performance.
OIBITDA calculation comparison for the years ended December 31, 2022 and 2021 is as follows:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating income (loss) | $ | (906 | ) | $ | (301 | ) | ||
| Depreciation and amortization | 32 | 72 | ||||||
| Sales, general, and administrative | 1,451 | 903 | ||||||
| $ | 577 | $ | 674 | |||||
Operational performance comparison for the years ended December 31, 2022 and 2021 is as follows:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 25,725 | $ | 26,246 | ||||
| Gross profit | $ | 3,494 | $ | 3,266 | ||||
| OIBITDA | $ | 577 | $ | 674 | ||||
| Net income (loss) | $ | (739) | $ | 7,893 | ||||
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.
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.
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EXECUTIVE OVERVIEW
2022 was a challenging year for Reliability and our wholly owned operational entity Maslow Media Group. Although our revenues declined by $521 or 2.1% to 2021 and by 12% or $3,507 to 2020; conversely though, our gross profits of $3,494 were $228 over 2021 and $20 over 2020’s totals. The more attractive gross profit on lower revenues is reflected by our ever-increasing gross margin which reached 13.6% in 2022 versus 12.4% in 2001 and 11.9% in 2020. This was the fourth consecutive year that MMG’s gross margin percentage has increased and represents an 8.7% compounded annual growth rate (CAGR) over the last three of those years.
This consistent improvement of gross margins has been driven by renewal pricing increases, changes in volume discounts, billing for added overhead, equipment rental price increases, and client mix in which a greater share of our business has shifted to more favorable company terms.
The time, effort and expense put into the arbitration proceedings (see section1) in the first half of 2022 detracted from officer focus on sales, our strategic focus and thus distracted from our ability to fully drive stockholder value. In the fourth quarter, MMG made changes to the sales organization with the intent on driving more immediate new business. The arbitration award has assisted the Company in attracting many new additions to our corporate team. These additions to our team will assist us in strengthening client relationships while providing a better employee experience for our talent working in the field.
Demand for Maslow EOR services has not recovered to pre-2020 COVID 19 (“COVID”) levels as the Media business was profoundly impacted by the stay at home and vaccination mandates. Maslow’s clients have been slower to return to full schedules even as federal, state and local governments have lifted COVID-19 restrictions. Some mask and vaccine mandates still impact the total number of MMG employees assigned to our clients. Consequently, our business has been slow to recover to 2019 levels when our revenues were $38,444. In the first quarter of 2020 our performance, compared to the same period in 2019 saw an increase of $500 with $8,801 to $8,301 despite a swoon in the last two weeks of the quarter when stay at home orders from state and the Federal Government began taking effect.
In addition to the impact of the pandemic, some of our larger clients have experienced internal reorganization, show cancellations, and budget reductions that have impacted their utility of our services. For instance, one client cancelled two nationally syndicated shows that we had been staffing. Regardless, COVID-19 and the response to the pandemic took its toll as the remaining three quarters MMG saw quarterly 2020 declines of 46%, 38.5%, and 13.7% respectively compared to 2019, and ended up 2020 with $29,202 in revenue.
In 2021 we realized an additional decline of revenue down 10.1% from 2020 levels to $26,246. Besides the slower return to work nature of the media business, there was a mix of new and more active clients, and those who had large downward budget shifts.
The final three quarters of revenue performance in 2021 were on par with 2020 with $20,452 realized over $20,401 in 2020, demonstrating the strength of the 2020 first quarter that was abruptly halted by the pandemic. So, in essence ¾ of 2021 revenue was on par with 2020. However, most of MMG’s larger clients were slow to ramp back up, and we suffered steep long-term revenue declines due to client attrition, internal reorganizations or budget cuts (i.e., Client A), an insourcing of their media needs, offshoring altogether, or cut altogether This paradigm has not allowed for revenues to begin returning to pre-COVID-19 2019 levels. The 6 largest attritted customers represented a $4,385 loss of revenue in 2021 over 2020, with Client B accounting for another $1,204. Client B had actually eliminated certain programming resulting in an estimated $4,000 loss in 2021 annual revenue. Client B’s 2021 to 2020 annual net revenue decline wound up being $1,204 as they increased revenue activity by $2,796 in other areas of their business.
In 2022, MMG seemed poised to be on pace to beat 2021’s annual revenue total of $26,246, but an abrupt curtailment of staffing over the holidays lasting approximately 2 weeks by five of our top 6 clients, resulted in a steep decline in revenue especially when compared to the previous 2 years also making December of 2022 the lowest revenue month of 2022. MMG revenues in December 2022 comparative to 2021 were down $1,401 or 46% and $1,169 or 41% to December 2020.
As a result, annual revenue slipped by $521 to $25,725 compared to $26,246 in the year ending December 31, 2021.
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However, despite the revenue decline in 2022 to 2021 year over year by 2%, MMG’s gross profit increased by $228 or 7% in the year ending December 31, 2022, compared to a year ago, as our margins continue to ascend to new heights on the strength of our EOR business that saw margins increase to 12% in the year ended December 31, 2022, from 9.8% in the year ended December 31, 2021. Since EOR revenue in 2022 of $21,894 represents 85.1% of our overall revenue, this business segment clearly drove our company margin improvement.
The improved EOR margins can be attributed to four factors, two within and two outside our control; changes in pricing upon client renewals, new pricing for equipment rentals, larger margin clients dominating the product mix, and greater use of W2 employees by our clients which yield on average 1.2% higher margins. It also helped that we maintained strong non-EOR margins at 22.3%. Thus, our annual gross margin percentage of 13.6% represented a fourth consecutive year of growth; comparing 12.4% and 11.9% in 2021 and 2020 respectively and 10.6% in 2019.
But what could not be managed proportionately in 2021 was our SG&A which rose 23.3% to $4,400 as corporate non-operational costs, consisting mostly of public company and legal costs added $1,451, which represented $548 of the $820 SG&A increase when comparing the year ending December 31, 2022, to the same period in 2021. Operationally SG&A at $2,949 was $285 over the $2,665 in SG&A spend in 2021.
As far as cash is concerned, in 2022 our cash position remained strong due to our receiving $1,651 in Employee Retention Credits (ERC) from the first quarter of 2021. We are still due $1,174 from the second quarter 2021 that was filed via a 941X form and received by the IRS in December 2021. We accrued an additional $26 for interest using the IRS interest schedule.
Our working capital though has assumed repayment of Vivos Debtors which as of December 31, 2022, was $8,645. Our adjusted working capital excluding the $5,251 in Vivos Debtor notes is $3,394.
2023 and Beyond
We are investing in new technologies and bringing on additional staffing professionals to grow the staffing side of our business in 2023. EOR has been the Company’s primary focus for a long time and 2023 brings a focus on growing our Direct Hire, Staffing & Recruiting solutions. That said, our determination of what service to bring to each client depends on individual needs. But when it comes to non-media staffing, we certainly can focus more on IT and administrative opportunities with our existing customers while opening up new opportunities.
Once the Vivos Matter award has been settled the Company may contemplate moving forward with its original plans to increase outstanding shares by authorizing new ones or via a reverse split to acquire synergistic staffing companies to grow more quickly. The Company would also like to move to the OTCQB and or OTCQX on its way to eventually being listed on the NASDAQ Exchange. The Company continues to work towards meeting all of the requirements to pursue up listing the OTC-QB or OTC-QX exchanges. Once collection of the Vivos Debtors has taken place, MMG may consider moving forward with this initiative.
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 2023 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 Direct Hire staffing, 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.
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Our focus on traditional staffing has resulted in some early success in filling client Direct Hire needs, having added $167 in high margin revenue in 2022.
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 maximize acquisition and retention of client accounts.
One concern is the low probably of maintaining the National Football League’s (NFL) RedZone channel programming after this past season ended in January 2023. Client B, which had the rights to its own RedZone broadcast since 2005, lost those rights as a result of Google/YouTube’s $14 billion, 7-year deal for “Sunday Ticket” rights. Consequently, the NFL will only offer the version of the “NFL RedZone” channel produced by the NFL Network next season.
Although we staff other events for Client B, the loss of this programming could impact MMG between $2-$3M in annual revenue. MMG will continue to pursue other opportunities at Client B and the continued staffing of sports programming of this type.
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. | |
| ● | 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 35 years of experience, the Company’s subsidiary, Maslow offers script to screen expertise including producers, audio engineers, editors, broadcasters, makeup artists, camera crews, Gaffers and grips, drone operators and more. | |
| ● | Direct Hire: 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 operating entity for the business. After our Merger in October 2019, non-operational expenses (e.g., public company fees, D&O insurance, investor relations, etc.) were assigned at the corporate level. This enables a more pristine focused view of the operational side of the business we refer to as Operational Income Before Depreciation, Interest, and Amortization.
RESULTS OF OPERATIONS
Maslow had revenues totaling $25,725 in 2022, which was a 2% decrease over $26,246 in 2021. The $521 decline can be attributed to several factors including the slower return to normal work schedules for our media EOR and staffing customers from COVID-19 shutdowns and work from home mandates.
Overall, Maslow lost $4,529 to 10 accounts with declining revenues => $100, which mostly declines in revenue by Client E as they moved their creative business to an overseas competitor and Client A, which scaled back and moved several EOR staff to the Client A payroll. Other clients scaled back their media budgets.
Conversely, we added $4,290 from 8 accounts that had => $100 in revenue in 2022 from 2021. Client C stepped up their programs as did Client B, and several others in the insurance, education, and healthcare space.
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From a revenue contribution standpoint our top 10 clients represented $22,940 which is 86.1% of 2022 revenues which is an increase in top 10 revenue reliance as in 2021 the top 10 represented 85.5%, or 21,628. 2020 saw a 78.4% top 10 reliance of revenue at $23,160.
$31 in rebates were issued in December 2022 which was $2 less than a year ago when they were $33 in 2021.
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, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 25,725 | 26,246 | |||||
| Cost of services | $ | 22,231 | $ | 22,980 | ||||
| Gross profit | 3,494 | 3,266 | ||||||
| Selling, general and administrative expenses | 4,400 | 3,567 | ||||||
| Operating loss | (906 | ) | (301 | ) | ||||
| Interest income | 53 | - | ||||||
| Interest income from related parties | 232 | 274 | ||||||
| Interest expense | (171 | ) | (39 | ) | ||||
| Impairment of goodwill and intangibles | - | (688 | ) | |||||
| Other income (expense) | 223 | 9,631 | ||||||
| Income/(loss) before taxes | (569 | ) | 8,877 | |||||
| Income tax benefit (expense) | (170 | ) | (984 | ) | ||||
| Net Income (Loss) | (739 | ) | 7,893 | |||||
Revenues: By Segment
| 2022 | % of Revenue | 2021 | % of Revenue | |||||||||||||
| EOR | $ | 21,894 | 85.1 | % | $ | 21,346 | 81.3 | % | ||||||||
| Recruiting and Staffing | 3,468 | 13.5 | % | 3,613 | 13.8 | % | ||||||||||
| Video and Multimedia Production | 264 | 1.0 | % | 1,121 | 4.3 | % | ||||||||||
| Direct Hire (Formerly Permanent Placement) | 99 | 0.4 | % | 166 | 0.6 | % | ||||||||||
| Total Revenue | $ | 25,725 | 100 | % | $ | 26,246 | 100 | % | ||||||||
Employer of Record (EOR) Revenues: EOR represented 85.1% of our revenue in 2022 as opposed to 81.3% in 2021 and 80.8% in 2020. The 2020 to 2022 EOR increase in revenue contribution can be attributed to this business segment showing signs of returning to pre COVID-19 levels and a lack of growth in our Staffing, Video Production, and Direct Hire performance. Client A had the largest EOR revenue decline of any client at $1,427, which can be attributed to a slate of employees moving from our payroll to Client A’s. However, Client C and Client B increased their EOR revenue by a combined $1,878. This $451 revenue variance among the three clients makes up 78.7% of the year over year EOR revenue increase 2022 over 2021.
Recruiting and Staffing Revenues: Staffing revenues declined by $145 or 4.2% to $3,468. IT Staffing declined by $287 while our Media Staffing division increased revenues by $1436 over its 2021 performance. Thus, Media Staffing at $3,176 represented 12.3% of total 2022 annual revenue, whereas it represented 11.6% of 2021 annual revenue and 6.5% of 2020 revenue. The Media Staffing increase, however, was driven to a degree by our reclassing staffing activities to Video Production clients after 2021. We believe the approximate impact of this change was $383. If we look at performance in that light, our Media Staffing declined by an equal amount to IT at $287 in the year ended December 31, 2022, to the same period a year ago. One notable lost account was one which hired us to staff a government contract it elected not to rebid on. This led to a $131 loss in 2022 revenue when compared to 2021.
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Video and Multimedia Production Revenues: Video Production, which includes managed services and project freelance work, was down sharply in revenue in 2022, garnering $264 against $1,121 a year earlier. However, if we factor the estimated $383 that was reclassed to Media Staffing in 2022, the revenue would have been recorded as $648 and the decline to 2021 revenue would be $473 versus $856.
This business was hurt by loss of a customer which provided $119 in revenue in 2021, and reduced demand for production activities by the U.S. Environmental Protection Agency (EPA) and The US House of Representatives with the former revenues at $90 for year ending December 31, 2022, from $270 in same period 2021, and the latter down 19% from $457 in 2021 to $370 in 2022.
Gross Profit: Gross profit represents revenues from services less cost of services expenses also referred to as Cost of Revenue (COR), which consist of payroll, payroll taxes, benefits, payroll-related insurance, union benefits, field talent, recruiting software license fees and reimbursable costs for out-of-pocket items.
Our Gross Profits rose in 2022 by $228 or 7% to $3,494 from $3,266 in the year ended December 31, 2021.
Our gross margin is the percentage of revenue after Cost of Revenue (COR). Gross margins increasing to 13.6% in 2022 from 12.4% in 2021 was the catalyst of our gross profit growth. This was the fourth consecutive year in which MMG has been able to increase its gross margins, with the compounded annual growth rate (CAGR) of such increases being 7.2%. Since 2019, the CAGR is 8.6%.
Our margin improvement was driven entirely by our EOR margins increasing 2.2 points to 12% from 9.8% in 2021. The only other business segment margin improvement was Video Production moving to 23.7% from 19.4%, but this was because of exodus of account revenue to staffing described above; with the overall impact not being significant because the Video Production contribution to revenue is only 1%.
EOR margins which were 9.2% in 2020, have risen to 12% due to price changes to large clients at their contract renewal, a mix in client revenue favoring those with higher contractual margins, increased use of higher margin W2 over 1099 workers, and equipment rental pricing change which enabled our gross profits to increase by $51 making up 22% of our $228 gross profit improvement 2022 over 2021.
Our Media Staffing, however, saw its gross margins decline 2 points from 22.3% to 20.3% as a consequence of having taken on over $600 in Video Production revenue at lower margins, and the roles being filled in 2022 having tighter margins. IT Staffing also saw a decline to 21.4% in 2022 from 26.9% in 2021. But this was the result of far few resources being brought to bear at lower price points leading to margin compression. This paradigm can reverse itself as this business becomes revitalized.
Selling, General and Administrative Expenses (“SG&A”): SG&A expenses increased $833 to $4,400 from $3,567 largely because of $605 in legal and other professional service fees associated with the Vivos Matter and Arbitration.
Corporate non-operational costs inclusive of the $605 were $1,451, were $548 greater in 2022 than in the same period ending December 31, 2021. $343 of the $1,451 were public company related costs.
Salaries, inclusive of commissions, payroll tax, and bonus rose $110 in the year ending December 31, 2022, compared to same period in 2021. Salary increases by department were driven by client service salaries up $55 as we added headcount and leadership to enable sales to focus on customer acquisition solely. Human resource (HR) department, which includes field support rose $19 and the executives by $35. Conversely sales and marketing salaries were down by $32 and accounting and finance down $15. Staff health benefits were up $81 due to rising premium costs and because we had a large credit for unused portion of our 2020 subsidy booked in 2021.
The only other notable variances were commercial legal were up by $46 in 2022 over 2021, mainly due to union negotiations, recruiting costs; software subscriptions up $35 and recruiting costs increasing by $32. The greatest cost decrease was amortization, down $34 since there were no longer any intangible assets to amortize as the balance was written off entirely in 2021.
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Operational SG&A costs in 2022 were $2,949 which was $284 greater or 10.7% than the $2,665 operational SG&A costs in 2021. The largest increase in spend was on health benefits for all SG&A employees at $81. Operational salaries (inclusive of payroll taxes, leave and bonus only) were $24 higher in 2022 over 2021.
Interest Income: Interest income from related parties decreased by $42 from $274 to $232, as a result of last year’s accrued interest income including adjustments to prior periods based on the proper default rates and dates. Maslow earned an additional $23 mostly for the delay in first quarter ERC receipts which were not paid until August 31, 2022, accrued another $3 for a miscalculation of interest owed and $26 to cover the earned portion through December 31, 2022, for the second quarter 2021 ERC for $1,174 that we still await payment.
Other Income (Expense): Other income was $223 as the catalyst was the Company receiving $211 in additional ERC funds from our 941X submission for the first quarter 2021, that we thought to be ineligible when it was filed. In the year ending December 31, 2021, MMG booked $9,681 in Other Income (Expense) as combined PPP loan forgiveness and ERC refunds minus $688 for writing down goodwill and remaining intangible asset for IQS were aggregated.
Interest Expense: Interest expense, increased $132 from $39 to $171 as our borrowing base was higher in 2022 versus 2021, our factoring interest rate rose from 6% to 9.5% over the course of 2022, and last year our interest expense total included $35 in accrued PPP interest credit. Thus, the adjusted increase in cost variance interest in 2022 would be $97.
Income Taxes: Income tax expense in 2022 was $170 compared to $984 a year ago for the year ending December 31, 2021. Despite the Net Loss of $739, taxes were posted for additional taxes owed the federal and state governments for 2021’s tax returns which were not filed until mid-October 2022. There were also penalties and interest charged on the late portion of what was owed the IRS.
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, legal costs associated with the Vivos Matter, and client accounts receivable receipts. Since receipts from client payments are on average 69 days behind payments to field talent, working capital requirements can be periodically challenged. We have a Factoring Facility with Gulf Coast Bank which advances 93% of our eligible receivables at an advance rate of 15 basis points, an interest rate of prime plus 2%., with our prime floor rate at 4%. As of December 31, 2022, 66.3% of our $5,750 in accounts receivable was current compared to 70% out of $5,592 which was current in on December 31, 2021. As of December 31, 2022, 21.2% is 1 to 30 days past due compared to 17.9% a year ago, 11.6% between 31 and 60 days past due versus 4.7% in 2021, and 1% greater than 60 days versus 3.6% at the end of 2021.
Our primary sources of liquidity are cash generated from operations via accounts receivable and borrowings under our Factoring Facility with Gulf Bank (“Gulf”) 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 TBC 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, 2022, had notes receivable totaling $5,251, including default on a $3,000 promissory note and on a $750 tax obligation in December 2019.
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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.
Over the past three years MMG received eligible forgiven PPP Loan totaling $5,216, ERC cash of $3,501 out of eligible $4,676, which has bolstered working capital enabling us to invest in software, build A/R reserves, and hire needed resources for operations.
As of December 31, 2022, our working capital was $8,645 compared to $9,361 in 2021 and $5,970 at the end of 2020. Once the $1,174 in ERC is fully refunded, the Company will have more sufficient capital resources, but these are based on government stimulus programs.
We anticipate approximately $350 in incremental SG&A costs in 2023 as we invest in growth as heads will be added for sales, recruiting and marketing as well as a new system to improve lifecycle management of payroll and benefits for our clients. We expect these incremental costs to exceed the reduction in legal fees which in 2023 will not be nearly as intensive as they were in 2022 when we prepared and participated in a multi week arbitration. We also expect costs in service areas to be up based on inflation.
A summary of our operating, investing and financing activities are shown in the following table:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash provided by (used in) operating activities | $ | (1,427 | ) | $ | 2,505 | |||
| Net cash used in investing activities | (9 | ) | (7 | ) | ||||
| Net cash provided by financing activities | 1,639 | (2,544 | ) | |||||
| Net change in cash and cash equivalents | $ | 203 | $ | (46 | ) | |||
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 2022, net cash provided by operating activities was ($1,427), a decrease of $3,932 compared with $2,505 for 2021. This decrease is primarily attributable to net loss and decreases in accounts payable, accrued payroll, accrued expenses, and income tax payable. The holiday season impact on revenue also decreased the need for cash to pay 1099 and W2 workers.
Investing Activities
Cash used in investing activities consists primarily of cash paid for capital expenditures.
Financing Activities
Cash used in financing activities in 2022 was $1,639 as compared to cash employed for same purpose totaling ($2,544) in 2021. Borrowing swing of (3,726) was due to operational cash deficiencies cited above due predominantly legal costs for arbitration and now recovery of final award. A year ago, MMG received ERC cash support in the third and portion of the fourth quarter until the policy change led to our having to return $842 in January 2022. For the year, Maslow borrowed $13,972 but repatriated $11,342.
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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, contingencies, litigation, income taxes, 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.
REVENUE RECOGNITION
The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties and 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), Direct Hire (Formerly referred to as Permanent Placement) and Video and Multimedia Production. Revenues are recognized when promised services are delivered to a 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 are 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.
Direct Hire (formerly referred to as 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 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 employment, at which point control has transferred to the customer.
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Allowances, recorded as a liability, are established to estimate these losses. Fees to clients are generally calculated as a percentage of the new worker’s annual compensation. No fees for Direct Hire services are charged to employment candidates.
Video and Multimedia Production revenues from contracts with clients are recognized in the amount to which we have a right to invoice when the services are rendered by our field talent.
RECENT ACCOUNTING PRONOUCEMENTS
For a discussion of recent accounting pronouncements and their potential effect on our results of operations and financial condition, refer to Note 3 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks from transactions we enter in the normal course of business. Our primary market risk exposure relates to interest rate risk, which currently is tied to the Prime Interest rate.
INTEREST RATES
Our Factoring Facility is priced at a variable interest rate of prime plus 2% with a 15-basis point advance rate with a floor of 4%. Accordingly, future interest rate increases could potentially put us at risk for an adverse impact on future earnings and cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| Page | |
| Report of Independent Registered Public Accounting Firms PCAOB ID NO: |
40 |
| Audited Consolidated Financial Statements of Reliability, Inc. | |
| Consolidated Balance Sheets as of December 31, 2022 and 2021 | 42 |
| Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 | 43 |
| Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022 and 2021 | 44 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 | 45 |
| Notes to Consolidated Financial Statements | 47 |
| 39 |
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, 2022 and 2021, and the related consolidated statements of operations, changes 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, 2022 and 2021, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Security and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
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, in 2022, an arbitrator issued an aware in favor of the Company against one of the majority owners and other companies owned by the majority owner.
| 40 |
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.
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 award granted by the arbitrator.
We have served as the Company’s auditor since 2009.
March 31, 2023
| 41 |
RELIABILITY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade receivables, net of allowance for doubtful accounts | ||||||||
| Retention credit receivable | ||||||||
| Notes receivable from related parties | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Total assets | $ | |||||||
| LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Factoring liability | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Accrued payroll | ||||||||
| Deferred revenue | ||||||||
| Income taxes payable | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitment and contingencies (Note 10) | ||||||||
| Subsequent events (Note 15) | ||||||||
| STOCKHOLDER’S EQUITY | ||||||||
| Common stock, without par value, shares authorized, issued and outstanding as of December 31, 2022 and 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total stockholder’s equity | ||||||||
| Total liabilities and stockholder’s equity | $ | $ | ||||||
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
| 42 |
RELIABILITY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
| For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue earned | ||||||||
| Service revenue | $ | $ | ||||||
| Cost of revenue | ||||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Interest income from related parties | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Impairment of goodwill and other intangible assets | ( | ) | ||||||
| Other income (expense) | ||||||||
| Income (loss) before income tax expense | ( | ) | ||||||
| Income tax expense | ( | ) | ( | ) | ||||
| Consolidated net income (loss) | ( | ) | ||||||
| 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.
| 43 |
RELIABILITY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS’ EQUITY
For the year ended December 31, 2022 and 2021
(amounts in thousands, except per share data)
| Add- | ||||||||||||||||||||
| itional | ||||||||||||||||||||
| Common Stock | Paid-in | Retained | Total | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance, January 1, 2021 | ||||||||||||||||||||
| Net income | ||||||||||||||||||||
| Balance, December 31, 2021 | ||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| Balance, December 31, 2022 | ||||||||||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
| 44 |
RELIABILITY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
| For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| 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) 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 | ( | ) | ||||||
| Repayment of notes payable | ( | ) | ||||||
| Advances to related parties | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (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.
| 45 |
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: | 2022 | 2021 | ||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| PPP loan and interest forgiveness | $ | |||||||
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
| 46 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
NOTE 1 - NATURE OF OPERATIONS
Reliability,
Inc. is a workforce management solutions company that has for 30 years focused primarily on the media industry. In servicing its clients,
Reliability provides a variety of staffing services which include employer of record, temporary media and information technology (“IT”)
staffing services, and direct hire. Reliability 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 four industry segments: Employer
of Record (“EOR”), Recruiting and Staffing, Video and Multimedia Production resources, and Direct Hire. 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.
NOTE 2 - MANAGEMENT’S PLAN
Although
the Company has experienced operating losses in the years ended December 31, 2022 and 2021, of $
| ● | Cash flow forecast showing sufficient cash and working capital 52 weeks from March 5th, 2023; | |
| ● | The
prospect of receiving the amounts awarded in the arbitration hearing in 2023, which include the $ | |
| ● | The
expected receipt of approximately $ | |
| ● | The expected reductions in continuing legal fees in 2023 given the Company is past the preparation and arbitration proceedings; | |
| ● | Significant
reduction of approximately $ | |
| ● | Addition of a new Vice President of Sales recently hired with experience and success in managing contingent and direct hire staffing organizations; and | |
| ● | The
Company has additional availability to use its factoring line to extend borrowing of up to |
As a result of the foregoing, the Company believes that it has sufficient cash to meet its financial obligations for the next 12 months and beyond as they become due.
| 47 |
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, useful lives for depreciation and amortization, loss contingencies, and the valuation allowances for deferred income taxes. 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, 2022, 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.
| 48 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
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, 2022 and 2021 to be fully collectible, therefore an allowance for doubtful accounts is not provided for.
The Company records accounts receivable when its right to consideration becomes unconditional. Contract assets primarily relate to the Company rights to consideration for services provided that they are conditional on satisfaction of future performance obligations.
The Company holds customer deposits of certain customers related to its EOR business to minimize cash flow impact and reduces risks of uncollectible trade receivables.
The Company records contract liabilities (deferred revenue) when payments are made or due prior to the related performance obligations being satisfied. The current portion of the Company contract liabilities is included in accrued liabilities in its consolidated balance sheets. The Company does not have any material contract assets or long-term contract liabilities.
As
of December 31, 2022 and 2021, 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, 2022 and 2021 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. 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 —
| 49 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
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 $
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 year ended December 31, 2021, amortization expense was $
Identifiable intangible assets recognized in conjunction with acquisitions are recorded at fair value. Significant unobservable inputs were 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 evaluated 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 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 derives its revenues from three segments: EOR, Recruiting and Staffing, and Video and Multimedia Production. The Company provides temporary staffing and Direct Hire services. Revenues are recognized when promised services are delivered to the 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 revenue.
| 50 |
RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
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.
Direct Hire staffing revenues - Direct Hire staffing revenues are recognized when employment candidates start their permanent employment. The Company estimates the effect of Direct Hire 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 clients are generally calculated as a percentage of the new worker’s annual compensation. No fees for Direct Hire services are charged to employment candidates.
Refer to Note 14 for disaggregated revenues by segment.
Payment
terms in our contracts vary by the type and location of our client partner and the services offered. The term between invoicing and when
payment is due is not significant. There were no unsatisfied performance obligations as of December 31, 2022. There were no revenues
recognized during years ended December 31, 2022 and 2021 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. The
total marketing and promotion expense for the years ended December 31, 2022 and 2021 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.
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RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
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
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 2022, 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 not have a material impact on our consolidated financial position and results of operations as of and for the year ended December 31, 2022.
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 is currently evaluating the impact on its consolidated financial statements and related disclosures.
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
Contract receivables consist of the following as of December 31:
| 2022 | 2021 | |||||||
| Billed receivables | $ | $ | ||||||
| Unbilled receivables | ||||||||
| Accounts receivable, factored | ||||||||
| Total | $ | $ | ||||||
All of the net trade receivables are pledged as collateral on a loan agreement.
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RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2022 and 2021 consists of the following:
| 2022 | 2021 | |||||||
| Office equipment | ||||||||
| Computer software | ||||||||
| Operating lease asset | ||||||||
| 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 $
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consist of the following as follows:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Accrued vendor costs | $ | |||||||
| Financed insurance payable | ||||||||
| Other | ||||||||
| Accrued expenses | $ | $ | ||||||
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RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
NOTE 8 - INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2022 and 2021 are comprised of the following:
| 2022 | 2021 | |||||||
| 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:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| 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 | ||||||||
| Other | ||||||||
| 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:
| December 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Tax expense at federal statutory rate | $ | ( | ) | % | $ | % | ||||||||||
| State income taxes, net | - | % | % | |||||||||||||
| Permanent Differences | ||||||||||||||||
| Forgiveness of PPP Loan - Federal | % | ( | ) | - | % | |||||||||||
| Effect of deferred rate change | - | % | ||||||||||||||
| Historical Adjustments | ( | ) | % | |||||||||||||
| Valuation allowance | - | % | ( | ) | % | |||||||||||
| Other, net | - | - | % | % | ||||||||||||
| Income tax expense | $ | - | % | $ | % | |||||||||||
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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 and Gulf Coast Bank and Trust
On
November 4, 2016, the Company entered into a factoring and security agreement with Triumph Business Capital (“TBC”), which
was amended in January 2020.
On August 24, 2022, we were notified by TBC that our factoring arrangement had been sold to Gulf Coast Bank and Trust (“Gulf”), as TBC had decided to sell its non-transportation portfolio. The transition took place between August 26th and 28th with new financing coming from Gulf. However, a portion of unfactored receivables continue to be sent to TBC who routes them to MMG. The Company continues to be obligated to meet certain financial covenants in respect to invoicing and reserve account balance.
In
accordance with the agreement, a reserve amount is required for the total unpaid balance of all purchased accounts multiplied by a percentage
equal to the difference between one hundred percent and the advanced rate percentage. As of December 31, 2022, the required amount was
Accounts
receivables were sold with full recourse. Proceeds from the sale of receivables were $
The
Factoring Facility is collateralized by substantially all the assets of the Company. In the event of a default, the Factor may demand
that the Company repurchase the receivable or debit the reserve account. Total finance line fees for the years ended December 31, 2022 and 2021 totaled $
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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 consolidated financial statements and was 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 VREH. Per the default notice, “As of March 2, 2022, the total indebtedness due and owing under
the Loan (the ‘‘Debt’’) is $
On July 12, 2022, MMG was advised that a foreclosure sale of the 22 Baltimore Road property was scheduled to take place on August 4, 2022, at Montgomery County Circuit Court in Rockville, Maryland. It was subsequently cancelled after VREH filed for bankruptcy on August 2, 2022.
On August 2, 2022, VREH filed for Chapter 11 bankruptcy in the District Court of Maryland.
Maslow has filed a Motion to Vacate Confessed Judgment entered against it by FVC Bank in the Circuit Court for Fairfax County.
On November 17, 2022, FVC Bank and VREH entered into a Stipulation and Consent Order through the bankruptcy court that provides VREH to pay back taxes and interest, hire a new property manager and make repairs to the building, and work on a plan to refinance or sell the building. This automatic stay to the bankruptcy proceeding provides VREH until April 15th, 2023, to either refinance or sell the building to prevent FVC Bank from foreclosing on the property and commencing action to sell the property.
In
September 2022, MMG learned that Vivos IT, LLC filed a lawsuit against Second Wind Consultants (“SWC”) in May 2019 included
MMG as a plaintiff. The lawsuit included claims of fraud in inducement and unjust enrichment against SWC. The five parties suing SWC,
included Vivos LLC, The Maslow Media Group, Suresh Venkat Doki, Naveen Doki and Silvija Valleru. The lawsuit related to a debt restructuring
services agreement secured by Suresh Doki, Naveen Doki and Silvija Valleru to assist the following then owned Vivos entities: Maslow
Media Group, Inc., Health Care Resources Network, Inc., Mettler & Michael, Inc., 360 IT Professionals, Inc. and US IT Solutions,
Inc. SWC countersued all plaintiffs on September 30th, 2019, seeking to collect the balance of $
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RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
At the present time, the Company is uncertain as to whether any of the above items will have a material impact on their consolidated financial statements.
NOTE 11 - EQUITY
The Company’s authorized capital stock consists of shares of common stock, with par value. All authorized shares of Company common stock are issued and outstanding.
NOTE 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. Per Code of Virginia the legal rate of interest shall be implied when there is an obligation to pay interest
and no express contract to pay interest at a specified rate. However, it was determined in 2021 that the two notes had clauses capping
the default interest at
In
connection with the Vivos/MMG Purchase Agreement, on November 15, 2016, MMG executed a promissory note receivable with Vivos Holdings
LLC in the amount of $
On
November 15, 2017, MMG executed an intercompany promissory note receivable with VREH in the amount of $
On June 12, 2019, MMG entered into a Personal Guaranty agreement with Dr. Doki, pursuant to which Dr. Naveen Doki personally guaranteed to MMG repayment of $ of the balance of the Promissory Note issued to Vivos Debtors on November 15, 2017, within the 2019 calendar year via cash, stock, or other business assets acceptable to the Company. Dr. Doki is a % or greater beneficial holder of Company Common Stock, and therefore is a related party.
As of February 2020, the Company filed a lawsuit against the majority shareholder, pursuant to the personal guaranty agreement for defaulting on the outstanding notes receivables.
Over
the period between November 2016 and December 31, 2022, the Vivos Group borrowed an additional $
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RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
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, 2022, 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
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
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RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
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, 2022, 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 arbitration award was announced on August 31, 2022.
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.
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RELIABILITY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
The following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results for the periods indicated:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue: | ||||||||
| EOR | $ | $ | ||||||
| Recruiting and Staffing | ||||||||
| Video and Multimedia Production | ||||||||
| Direct Hire | ||||||||
| Total | $ | $ | ||||||
NOTE 15- SUBSEQUENT EVENTS
The Company has evaluated subsequent events after the balance sheet date of December 31, 2022, through March 31, 2023, 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.
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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, 2022. Based on this evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of December 31, 2022, internal control over financial reporting was effective.
The consolidated financial statements of the Company for 2022 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 2022.
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: 43
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: 62
Director Since: 2020
Committees Served: Audit Committee, Compensation 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.
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John Chanaud
Independent Director
Age: 59
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 CPAs. He is a 1986 graduate of Towson University with a BS degree in Accounting.
Nick Tsahalis
Age: 45
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 | 45 | President and Chief Executive Officer | ||
| Mark Speck | 62 | 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.
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ITEM 11. EXECUTIVE COMPENSATION
Named Executive Officers
Our named executive officers for Fiscal 2022 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 2022, we had only two named executive officers, each of whom is set forth above.
Summary Compensation Table
The following table presents compensation information for our named executive officers with respect to Fiscal 2022 and 2021. 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 | 2022 | $ | 288 | $ | 72 | $ | 29 | $ | 389 | |||||||||||||||||||||||||||
| Executive Officer | 2021 | $ | 288 | $ | 95 | $ | 24 | $ | 407 | |||||||||||||||||||||||||||
| Mark Speck Chief Financial Officer and | 2022 | $ | 260 | $ | 72 | $ | 29 | $ | 361 | |||||||||||||||||||||||||||
| Secretary | 2021 | $ | 260 | $ | 75 | $ | 30 | $ | 365 | |||||||||||||||||||||||||||
| (*) | Salary represents the annualized contracted salary of the executive and not the earned salary over the fiscal year. | |
| (**) | Bonus amounts for 2022 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.
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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 also not 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.
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 24, 2023, 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 stockholder’s percentage ownership is based on 300,000,000 shares of Company common stock outstanding as of March 24, 2023.
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, 2023, 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 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. |
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| (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. | |
| (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 was awarded damages which if granted will require relinquishment of $1,000 of shares as set forth within the Merger Agreement, which is primarily 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) | 45 | President and Director | ||
| Mark Speck (2), (6) | 62 | Chief Financial Officer, Secretary | ||
| Hannah Bible (3), (4) | 43 | Chairwoman of the Board, Director | ||
| Louis Parks (5) | 62 | Director | ||
| John Chanaud (7) | 59 | 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 2022, Nick Tsahalis was appointed CEO of the Company. |
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| (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 |
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, 2022, the Company’s principal independent registered accountant was RJI International CPAs (“RJI”).
Aggregate fees billed or incurred related to the following years for fiscal 2022 and 2020 by RJI is set forth below.
| 2022 | 2021 | |||||||
| Audit Fees (1) | $ | 101 | $ | 100 | ||||
| Audit-Related Fees (2) | ||||||||
| Tax Fees | $ | 14 | $ | 14 | ||||
| All Other Fees | ||||||||
| Total | $ | 115 | $ | 114 | ||||
| (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 2022 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, 2023.
| 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, 2023.
| 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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