Reliability Inc 10-Q for FY2021 Q2
Reliability Inc (RLBY)
About this 10-Q
Reliability Inc filed this 10-Q on August 16, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $5.07M
- down 2.4% from $5.2M a year earlier
- Net income
- $7.27M
- compared with a net loss of $324K a year earlier
- Diluted EPS
- $0.02
- compared with $0.00 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| (Mark One) | |
| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For
the quarterly period ended | |
| or | |
| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from ___________to ____________. | |
Commission
File Number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| ||
| (Address of principal executive offices) | (Zip Code) |
| (Registrant’s telephone number, including area code) |
| (Former name, former address and former fiscal year, if changed since last report) |
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | Trading Symbol(s) | Name each exchange on which registered | ||
| OTC Pink Sheets |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ ☐ NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ ☐ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | ||
| Smaller
reporting company |
|||
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ YES ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: shares of Common Stock, no par value, as of June 30, 2021.
RELIABILITY INCORPORATED
Quarterly Report on Form 10-Q
As of and For the Three and Six Months Ended June 30, 2021
INDEX
| 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
| 2021 | 2020 | |||||||
| June 30, December 31, | ||||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade receivables, net of allowance for doubtful accounts | ||||||||
| Notes receivable from related parties | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Other intangible assets, net | ||||||||
| Goodwill | ||||||||
| Total assets | $ | |||||||
| LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Factoring | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Accrued payroll | ||||||||
| Deferred revenue | ||||||||
| Income taxes payable | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| PPP loan payable | - | |||||||
| Total liabilities | ||||||||
| Commitment and contingencies (Note 6) | ||||||||
| Subsequent events (Note 10) | ||||||||
| SHAREHOLDER’S EQUITY | ||||||||
| Common stock, without par value, shares authorized, issued and outstanding as of June 30, 2021, and as of December 31, 2020 | - | - | ||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total shareholder’s equity | ||||||||
| Total liabilities and shareholder’s equity | $ | $ | ||||||
The accompanying notes are an integral part of these statements.
| 3 |
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
| 2021 | 2020 | |||||||
| For the Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenue earned | ||||||||
| Service revenue | $ | |||||||
| Cost of revenue | ||||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other Income (expense) | ( | ) | ||||||
| Income (loss) before income tax (expense) benefit | ( | ) | ||||||
| Income tax (expense) benefit | ( | ) | ||||||
| Consolidated net income (loss) | ( | ) | ||||||
| Less net income attributable to noncontrolling interest in consolidated affiliates | - | |||||||
| Net income (loss) attributable to Reliability Inc. | $ | ( | ) | |||||
| Net income per share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| Share used in per share computation: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these statements.
| 4 |
RELIABILITY INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
| 2021 | 2020 | |||||||
| For the Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenue earned | ||||||||
| Service revenue | $ | |||||||
| Cost of revenue | ||||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Operating income (loss) | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other (expense) | ( | ) | ||||||
| Income (loss) before income tax (expense) benefit | ( | ) | ||||||
| Income tax (expense) benefit | ( | ) | ||||||
| Consolidated net income (loss) | ( | ) | ||||||
| Net income (loss) attributable to noncontrolling interest in consolidated affiliates | - | |||||||
| Net income (loss) attributable to Reliability Inc. | $ | ( | ) | |||||
| Net income per share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| Share used in per share computation: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| 5 |
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGE IN EQUITY
For the Six Months Ended June 30, 2021, and 2020
(amounts in thousands, except per share data)
| Shares | Amount | Capital | Earnings | Total | Affiliates | Equity | ||||||||||||||||||||||
| Controlling Interest | Non-Controlling | |||||||||||||||||||||||||||
| Additional | Interest in | |||||||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Consolidated | Total | ||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Total | Affiliates | Equity | ||||||||||||||||||||||
| Balance, December 31, 2019 | - | ( | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| VIE consolidation | - | - | - | - | - | |||||||||||||||||||||||
| VIE disposal | - | - | - | ( | ) | ( | ) | - | ||||||||||||||||||||
| Balance, June 30, 2020 | - | - | ||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | - | $ | $ | - | |||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||
| Balance, June 30, 2021 | - | - | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these statements.
| 6 |
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
| 2021 | 2020 | |||||||
| For the Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | |||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ( | ) | ||||||
| Accrued interest | ( | ) | ||||||
| (Gain)/Loss on disposal of property and equipment | ||||||||
| Gain on forgiveness of PPP loan payable | ( | ) | ||||||
| Changes in operating assets and liabilities: | - | |||||||
| Trade receivables | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued payroll | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Other liabilities | ( | ) | ( | ) | ||||
| Income taxes payable | ( | ) | ||||||
| Net cash provided by operating activities | $ | |||||||
| Cash flows from investing activities: | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | $ | ( | ) | ( | ) | |||
| Cash flows from financing activities: | ||||||||
| Net borrowing/(repayment) of line-of-credit+ | ( | ) | ( | ) | ||||
| Proceeds from Long term debt (PPP) | ||||||||
| Repayment of note payable | ||||||||
| Borrowing of note payable | ( | ) | ||||||
| Repayment of notes receivable from related parties | ||||||||
| Net cash used in financing activities | $ | ( | ) | |||||
| Net decrease in cash and cash equivalents | ||||||||
| Cash and cash equivalents, beginning of year | ||||||||
| Cash and cash equivalents, end of year | $ | |||||||
The accompanying notes are an integral part of these statements.
| 7 |
RELIABILITY INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(amounts in thousands)
| For the Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| The Company received forgiveness from the SBA of its PPP loan payable | $ | $ | - | |||||
The accompanying notes are an integral part of these statements.
| 8 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(amounts in thousands, except per share data)
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Reliability,
Inc. is a leading provider of employer of record and temporary media and information technology (“IT”) staffing services
that operates, along with its wholly owned subsidiary, The Maslow Media Group, Inc (“MMG”), (collectively, “Reliability”
or the “Company”), primarily within the United States of America in four industry segments: Employer of Record (“EOR”),
Recruiting and Staffing, Permanent Placements, and Video and Multimedia Production which provides script to screen media talent. EOR,
which is a unique workforce management solution, represented
Reliability was incorporated under the laws of the State of Texas in 1953, but the then principal business of the Company started in 1971 was closed down in 2007. The Company completed a reverse merger with MMG (the “Merger”) on October 29, 2019.
Vivos
Holdings LLC, the previous sole shareholder of MMG and their transferees who were issued shares of Reliability Common Stock include Naveen
Doki, Silvija Valleru, Shirisha Janumpally (through Judos Trust and Federal Systems), and Kalyan Pathuri (through Igly Trust) together
own approximately
Mrs. Janumpally, Mr. Doki, and Mr. Pathuri 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”).
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.
On or about February 17, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Debtors. (“Vivos Default Claim”) See Note 6.
On or about May 6, 2020, the Vivos Debtors and other Vivos Group members, specifically. Kaylan Pathuri (“Pathuri”), Judos Trust by Shirisha Janumpally, its trustee (“Judos”) and Igly Trust by Kaylan Pathuri, its trustee, (“Igly”) responded to the Vivos Default Claim with a Counterclaim and Third-Party Complaint (the “Vivos Default Counterclaim”).
On June 5, 2020, Reliability commenced an arbitration seeking to address purported merger violations before the American Arbitration Association (“AAA”) in New York, New York (the “Merger Arbitration”), as permitted by the Merger Agreement against Mr. Doki; Mrs. Valleru; Mrs. Janumpally (individually and in her capacity as trustee of Judos Trust); Mr. Pathuri (individually in his capacity as trustee of Igly Trust) and Federal Systems (the “Merger Respondents”). Although the Merger Respondents filed a counterclaim, Merger Respondents have not paid the AAA’s fees, and ultimately refused to participate in the arbitration. Thereafter, Reliability petitioned the state court in New York to compel arbitration, but this action was removed to federal court, where it has been pending for several months awaiting court action. The Company is seeking damages which if granted will likely be the remedy set forth within the Merger agreement which is primarily the relinquishment in whole or in part shares of Company Common Stock received by the Merger Respondents in connection with the Merger.
On December 23, 2020, after an evidentiary hearing before the Circuit Court for Montgomery County, Maryland, a judge denied a motion by Vivos Holdings, LLC, VREH, Doki, Kaylan Pathuri (“Pathuri”), Judos Trust by Shirisha Janumpally, its trustee (“Judos”) and Igly Trust by Kaylan Pathuri, its trustee, (“Igly”) to compel a shareholder meeting based on the facts presented at trial. The judge also commented that, based on the evidence presented, management was performing its fiduciary duties to protect the Company despite adverse circumstances. This same judge has been assigned to preside over a full trial regarding Company’s lawsuit to enforce the repayment of notes and the Vivos Group counterclaim, over a two-week period starting on October 4, 2021, absent any COVID-19 disruptions that may affect scheduling.
On
May 27, 2021, MMG filed a 941X refund request for $
On
June 10, 2021, MMG received notification by the Small Business Administration (“SBA”) of forgiveness of its PPP 2020 Loan
totaling $The forgiveness included the deferred interest
of $
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, asserting that the Respondents breached the Merger Agreement in a number of significant respects and potentially committed fraud in connection with the Merger.
| 9 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(amounts in thousands, except per share data)
Basis of presentation
The
unaudited condensed consolidated interim financial statements include the accounts of the Company and all wholly owned divisions, including
its
For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2020.
Concentration of Credit Risk
For
the six months ended June 30, 2021,
NOTE 2. LIQUIDITY AND GOING CONCERN
Going Concern
Management considers on a regular basis, the Company’s ability to continue as a going concern. The factors which have impacted the business and our liquidity are;
| ● | Notification
from the SBA on June 10, 2021, that our PPP Loan totaling $ | |
| ● | Eligibility
for Employee Retention Credits (“ERC”) resulting in a refund in April 2021 in the amount of $ | |
| ● | Continued
eligibility for ERCs in the second quarter resulting in additional credits of $ | |
| ● | Operating
loss of approximately $ | |
| ● | Operating
loss of $ | |
| ● | The pandemic resulting decline in client demand for our services continuing through the present; | |
| ● | Difficulties in raising cash via public market for organic and inorganic growth, due to lack of unissued authorized shares available for Company use, despite having public company cost structure; | |
| ● | Inability
to realize approximately $ | |
| ● | Contingent liabilities, described further in Note 6. |
| 10 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(amounts in thousands, except per share data)
All these conditions noted above, most notably the adverse impact of COVID 19 on sales and a scenario where the presumption is all debts come due with an inability to raise cash through equity given the unavailability of unissued authorized shares, raise substantial doubt about the Company’s ability to continue as a going concern. There can be no assurances that the Company will be successful in managing the impact of the foregoing or its ability to maintain sufficient liquidity over a period of time that will allow it to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liability that may result from the possible inability of the Company to continue as a going concern.
The Company’s ongoing liquidity position is facing pressures due to the loss of business resulting from the COVID-19 pandemic as well as increased pressure to make cash payments, which ultimately took place on July 21, 2021, (See Note 10: Subsequent Events) pursuant to the Settlement Agreements (filed as exhibits 10.4, 10.5 and 10.6 the Company’s Current Report on Form 8-K filed on October 30, 2019) prior to the Company’s anticipated liquidation of the shares of Company Common Stock pledged pursuant to the Agreement for the Contingent Liquidation of the Common Stock of Reliability Incorporated (as successor in interest to MMG Media Group, Inc.), dated October 28, 2019 (the “Liquidation Agreement”) (filed as exhibit 10.30 to the Company’s Current Report on Form 8-K filed on October 30, 2019). The Vivos Group that are the counterparties to the Liquidation Agreement are not cooperating with the Company to liquidate the shares subject thereto as contemplated thereby. No assurance can be given that the Company will return to its pre-pandemic revenue levels, and how long it will take to enforce the requirements of the Liquidation Agreement. As a result, the Company faces hurdles to maintaining sufficient liquidity to continue to operate, in which case the Company might be forced to liquidate or seek to reorganize under applicable bankruptcy statutes.
The Company is quoted on the OTC Marketplace under the symbol “RLBY”.
NOTE 3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred loss methodology with an expected credit loss model that requires consideration of a broader range of information to estimate credit losses over the lifetime of the asset, including current conditions and reasonable and supportable forecasts in addition to historical loss information, to determine expected credit losses. Pooling of assets with similar risk characteristics and the use of a loss model are also required. Also, in April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, to clarify the inclusion of recoveries of trade receivables previously written off when estimating an allowance for credit losses. The amendments in this update were required to be applied using the modified retrospective method with an adjustment to retained earnings and were effective for us beginning with fiscal year 2020, including interim periods. The adoption of the amendments in this update as of January 1, 2020, did not have a material impact on our accounts receivable, retained earnings, as well as our results of operations for the year ended December 31, 2020.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement, to improve the fair value measurement reporting of financial instruments. The amendments in this update require, among other things, added disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update eliminate, among other things, disclosure of the reasons for and amounts of transfers between Level 1 and Level 2 for assets and liabilities that are measured at fair value on a recurring basis and an entity’s valuation processes for Level 3 fair value measurements. The amendments in this update were effective for us
| 11 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(amounts in thousands, except per share data)
beginning with fiscal year 2020. Retrospective application is required for all amendments in this update except the added disclosures, which should be applied prospectively. The adoption of the amendments in this update did not have a material impact on our consolidated financial position and results of operations as of and for the year ended December 31, 2020.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles–Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, to provide additional guidance on the accounting for costs of implementing cloud computing arrangements that are service contracts. The amendments in this update require the capitalization of implementation costs during the application development stage of such hosting arrangements and amortization of the expense over the term of the arrangement, including any option to extend reasonably certain to be exercised or option to terminate reasonably certain not to be exercised. Capitalized implementation costs and amortization thereof are also required to be classified in the same line item in the statements of financial position, operations and cash flows associated with the hosting service fees. The amendments in this update were effective for us beginning with fiscal year 2020. Entities may select retrospective or prospective application to all implementation costs incurred after the adoption date. We selected prospective application to all implementation costs incurred after the adoption date. The adoption of the amendments in this update did not have a material impact on our property and equipment, net and results of operations as of and for the year ended December 31, 2020.
In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting, that provides optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR), which will be discontinued by the end of 2021. Also, in January 2021, the FASB issued ASU No. 2021-01 Reference Rate Reform (Topic 848)—Scope, to clarify that cash flow hedges are eligible for certain optional expedients and exceptions for the application of subsequent assessment methods to assume perfect effectiveness as previously presented in ASU 2020-04. The amendments in this update are effective for us immediately and may be applied through December 31, 2022. The adoption of this update is not expected to have a material impact on our consolidated financial position and results of operations.
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes, to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendment in this update is effective for us beginning with fiscal year 2021, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of the amendments in this update did not have a material impact on the Company’s consolidated financial position and results of operations.
In October 2020, the FASB issued ASU No. 2020-10 Codification Improvements, to make incremental improvements to U.S. GAAP and address stakeholder suggestions, including, among other things, clarifying that the requirement to provide comparative information in the financial statements extends to the corresponding disclosures section. The amendment in this update is effective for the Company beginning with fiscal year 2021, with early adoption permitted. The amendments in this update should be applied retrospectively and at the beginning of the period that includes the adoption date. The adoption of the amendments in this update did not have a material impact on the Company’s consolidated financial position and results of operations.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this update will be effective for the Company beginning with fiscal year 2023, with early adoption permitted. The adoption of the amendments in this update is not expected to have a material impact on our consolidated financial position and results of operations.
| 12 |
RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(amounts in thousands, except per share data)
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. DEBT
On
June 10, 2021, the SBA notified MMG that it’s Paycheck Protection Program (“PPP”) loan of $
Convertible Debt
The
Company had notes payable in the amount of $
Warrants
can only be redeemable if the proceeds of $
Tax Liabilities
When
MMG was initially acquired by Vivos Holdings, LLC in December 2016, MMG’s corporate status was changed from an S Corp to a C
Corp due to its new ownership structure.
Factoring Facilities
Triumph Business Capital
On
November 4, 2016, the MMG entered into a factoring and security agreement with Triumph Business Capital (“Triumph”).
Pursuant to the agreement, MMG received advances on its accounts receivable (i.e., invoices) through Triumph to fund growth and
operations. The proceeds of this agreement were used to pay operating costs of the business which include employee salaries, vendor
payments and overhead expenses. On January 5, 2018, the agreement was amended to lower the factoring fee and interest rate for a
term of one year. The agreement was amended again on January 19, 2018, to increase the maximum advance rate to $
In accordance with the agreement, a reserve amount is required for the total unpaid balance of all purchased accounts multiplied by a percentage equal to the difference between one hundred percent and the advanced rate percentage. As of June 30, 2021, the required amount was 10%. Any excess of the reserve amount is paid to MMG on a weekly basis, as requested. If a reserve shortfall exists for a period of ten-days, MMG is required to make payment to the financial institution for the shortage.
Accounts
receivable (A/R) were sold with full recourse. Proceeds from the sale of receivables were $
The
Factoring Facilities are collateralized by substantially all the assets of MMG. In the event of a default, the Factor may demand that
the Company repurchase the receivable or debit the reserve account. Total finance line fees for the three months ended June 30, 2021,
and 2020 comparatively totaled $
NOTE 5. VARIABLE INTEREST ENTITY (“VIE”)
In December 2019, the Company’s executive management learned that prior to the Merger, in January 2017, one of the Company’s related parties, on behalf of MMG, executed a guarantee of obligations of Vivos Real Estate Holdings, LLC (“VREH”), under a mortgage loan for the purchase of the property at 22 Baltimore Rd., Rockville, Maryland. MMG leased this space on market terms. MMG challenges its status as a guarantor on the building.
Although the Company has neither any decision-making authority over VREH, nor financial interest in the operations of VREH, the Company was required to consolidate its financial statements with those of VREH as it was considered the primary beneficiary of the VIE. As a result of the Company terminating the lease on April 30, 2020, VREH was no longer to be considered a VIE after April 30, 2020.
The
potential financial exposure to loss as a guarantor could equal all the book value of the related party mortgage loan payable, a total
of approximately $
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is engaged from time to time in legal matters and proceedings arising out of its normal course of business, and currently also is involved in litigation outside of the normal course of business. The Company establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of the loss can be made.
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(amounts in thousands, except per share data)
On September 28, 2018, Credit Cash filed a complaint against MMG, Vivos Holdings LLC, Vivos Acquisitions, LLC, Dr. Doki, Dr. Valleru (the “Credit Cash Defendants”) and other defendants in the United States Circuit Court of Montgomery County, Maryland for the District of New Jersey for, among other things, breach of contract of the MMG and HCRN Credit Facilities and their respective guaranties in relation to the November 15, 2017, agreement (the “Credit Cash Complaint”). On October 30, 2018, Credit Cash filed a motion to intervene in an action pending in New York State, Monroe County, filed by HCRN and LE Finance, LLC against the Credit Cash Defendants, and other defendants (“NY State Action”). On December 10, 2018, the Credit Cash Defendants entered into a settlement agreement for the purpose of settling certain claims related to the Credit Cash Complaint only. Pursuant to the settlement agreement, certain repayment terms were agreed upon between Credit Cash and the Credit Cash Defendants, but Credit Cash did not relinquish the right to pursue any claims related to the NY State Action, nor to pursue any remedies against any of the Credit Cash Defendants in relation to the November 15, 2017, agreement. Naveen Doki, Kalyan Pathuri, Shirisha Janumpally, and Federal Systems, LLC, (“Credit Cash Vivos Group”) executed and delivered to MMG that certain Agreement for the Contingent Liquidation of the Common Stock of MMG , dated as of October 28, 2019 (the “Liquidation Agreement”), pursuant to which the Credit Cash Vivos Group pledged to MMG the shares of Company Common Stock they received in the Merger to provide the capital required to satisfy the Credit Cash Defendants’ obligations under the Settlement Agreements. Members of the Credit Cash Vivos Group misrepresented upon the execution of the Liquidation Agreement the status of its obligations under the Settlement Agreement, which were, in fact, then in default. To date the Credit Cash Vivos Group have not cooperated with the Company to monetize those shares as contemplated by the Liquidation Agreement. The Company will take appropriate action to enforce its rights under the Liquidation Agreement, which actions will be dictated in part by the outcome of the Merger Arbitration wherein relinquishment of shares for certain claims may be an applied remedy. On or about March 16, 2020, Credit Cash entered its New Jersey confession of judgment with the Circuit Court of Montgomery County, Maryland.
On
October 9, 2018, MMG was named as a defendant along with six other defendants, all of which are entities related to the Vivos Group,
in an Affidavit of Confession of Judgment (COJ) filed in the Supreme Court of the State of New York in relation to a case brought by
Hop Capital, wherein the defendants collectively agree to pay a sum of $
On or about February 17, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and Naveen Doki (“Vivos Debtors”), to enforce MMG’s rights under certain promissory notes and a personal guarantee made by the Vivos Debtors (“Vivos Default Claim”). The case is proceeding. Although there are no certainties or guarantees, the Company believes that it will be granted a judgment in its favor as it vigorously pursues this litigation.
On February 28, 2020, Healthcare Resource Network, LLC (“HCRN”) filed a complaint against MMG in the Circuit Court of Montgomery County, Maryland alleging that Maslow participated with members of the Vivos Group to financially harm the plaintiff. The plaintiff has not specified any alleged damage caused by MMG and the Company believes any claims are without merit. The Company will defend itself from this case.
On March 16, 2020, CC Business Solutions, a division of Credit Cash NJ, LLC domesticated a foreign judgement in the Montgomery County Circuit Court system against Health Care Resources Network (“HCRN”), MMG, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Naveen Doki and Silvija Valleru. This foreign judgement relates to Vivos Holdings adding Maslow Media Group as a guarantor on a loan made to Health Care Resources Network which is in default by HCRN and Vivos Holdings. Foreign judgement total is $. This judgement relates to the default on the settlement agreement dated referenced above in the Credit Cash Complaint.
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(amounts in thousands, except per share data)
On May 5, 2020, Libertas Funding, LLC (“Libertas”) domesticated a foreign judgement in the Montgomery County Circuit Court system against HCRN, MMG, Vivos Holdings, LLC, Vivos Acquisitions, LLC, Vivos IT, LLC, Vivos Global Services, LLC, Alliance Micro, Inc. and Naveen Doki. This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding MMG additional collateral. This loan is currently in default. Foreign Judgement total is $.
On
May 5, 2020, Kinetic Direct Funding (Kinetic”) domesticated a foreign judgement in the Montgomery County Circuit Court system against
HCRN, MMG, US IT Solutions Inc., 360 IT Professionals, Alliance Micro, Inc. and Naveen Doki. This foreign judgement from the State of
New York relates to loans the Vivos Group took out by adding MMG as additional collateral. This loan is currently in default. Foreign
Judgement total is $. There were 4 total loans in the settlement, with the 3 domesticated judgements in Montgomery County circuit
court relating to MMG totaling $
On or about May 6, 2020, the Vivos Debtors and other Vivos Group members, specifically. Kaylan Pathuri (“Pathuri”), Judos Trust by Shirisha Janumpally, its trustee (“Judos”) and Igly Trust by Kaylan Pathuri, its trustee, (“Igly”) responded to the Vivos Default Claim with a Counterclaim and Third-Party Complaint (the “Vivos Default Counterclaim”). The Company believes that the Counterclaim has no merit. The Company continues to vigorously defend itself and its indemnified officers, directors and other parties as permitted by the Company’s organizational documents. Trial on this matter is scheduled to begin on October 4, 2021.
On or about June 5, 2020, the Company submitted a Claimant’s Notice of Intention to Arbitrate and Demand for Arbitration (the “Merger Arbitration”) with the American Arbitration Association in New York, and to the Respondents thereto: Naveen Doki; Silvija Valleru; Shirisha Janumpally (individually and in her capacity as trustee of Judos Trust); Kalyan Pathuri (individually in his capacity as trustee of Igly Trust) and Federal Systems (the “Merger Respondents”). The Merger Arbitration alleges that the Merger Respondents breached the Merger Agreement in a number of significant respects and may have committed fraud in connection with the Merger. The Company is seeking damages, which if granted will likely be the remedy set forth within the Merger Agreement which is in whole or in part shares of Company Common Stock received by the Merger Respondents in connection with the Merger. The Company has brought a motion to compel the Arbitration which is currently being decided by the Federal Courts in New York. The Company believes a strong basis for the motion exists, but no assurance can be given that it will be granted. Regardless, the Company intends to pursue claims under the Merger Agreement in whatever venue is required.
On June 12, 2020, Igly Trust, a Vivos entity, asked the Texas court for an injunction requiring the Company to provide a shareholder list and to hold a shareholder meeting. On October 20, 2020, the Texas court denied the injunction but, incongruously, dismissed all the Vivos plaintiffs for lack of personal jurisdiction. The Company appealed the dismissal because the court had jurisdiction over Igly Trust once it made affirmative claims in Texas and because the Court’s order denying the injunction is an important precedent for establishing that the directors under Texas law retain control of shareholder lists and determining the timing of shareholder meetings.
On December 23, 2020, at a hearing in the Maryland Circuit Court of Montgomery County, Maryland, a motion by the Vivos Group to compel a shareholder meeting was summarily dismissed. This same judge is scheduled to preside over a full trial on the Vivos Default Claim and Vivos Default Counterclaim in October 2021, absent any disruptions that could affect scheduling. On January 20, 2021, Defendants and Counter/Third-Party Plaintiffs, Vivos Holdings, LLC (“Vivos”), Vivos Real Estate Holdings, LLC (“VREH”), Dr. Naveen Doki (“Doki”), Kaylan Pathuri (“Pathuri”), Igly Trust (“Igly”), Judos Trust (“Judos”), by counsel, filed a Notice of Appeal on the dismissal.
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(amounts in thousands, except per share data)
On
July 21, 2021, Maslow settled the obligation which with it had been committed by Vivos Holdings, LLC in July 2018, with Libertas and
Kinetic for $
NOTE 7. EQUITY
The Company’s authorized capital stock consists of shares of common stock, with par value. All authorized shares of Company Common Stock are issued and outstanding.
NOTE 8. RELATED PARTY TRANSACTIONS
Stock Purchase Agreement
On
November 9, 2016, Vivos Holdings LLC, the former owner of MMG, acquired
Notes Receivable
The
Company has notes receivable from Vivos Holdings LLC and VREH, a member of Vivos Group, both related party affiliates due to their ownership
percentage in the Company. In January 2021, MMG began applying the legal rate of interest which per Virginia statute is
In
connection with the Vivos/MMG Purchase Agreement, on November 15, 2016, MMG executed a promissory note receivable with Vivos Holdings
LLC in the amount of $
In
January 2021, MMG began applying the legal rate of interest which per Virginia statute is
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(amounts in thousands, except per share data)
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 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.
In
summary, the Vivos Holdings receivable totaled $
On
September 5, 2019, MMG entered into a Secured Promissory Note agreement with Vivos, pursuant to which MMG issued a secured promissory
note to Vivos in the principal amount of $750. The note bears interest at
Debt Settlement Agreements
On
August 10, 2017, the Vivos Group executed a receivable advance agreement with Argus Capital Funding. MMG received a net advance of $
In
addition, pursuant to the same agreement, Credit Cash advanced to Healthcare Resource Network, a company owned by the Vivos Group (“HCRN”)
a credit facility in the principal amount of $
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(amounts in thousands, except per share data)
The Company has a binding and enforceable agreement with certain shareholders permitting Maslow to liquidate up to the full amount of Maslow equity held by such shareholders to satisfy the shareholders’ obligations under the Settlement Agreements. As of December 31, 2019, the Company had repaid the outstanding balance due for the Maslow Credit Facility under the settlement agreement in full.
MMG
was facing pressure to make cash payments pursuant to the Settlement Agreements prior to the Company’s anticipated liquidation
of the shares of Company Common Stock pledged pursuant to the Liquidation Agreement. So, on July 21, 2021, Maslow signed a settlement
agreement with Kinetic Direct Funding, LLC and Libertas Funding, LLC for $
The Vivos Group that are the counterparties to the Liquidation Agreement are not cooperating with the Company to liquidate the shares subject thereto as contemplated thereby. No assurance can be given how long it will take to enforce the requirements of the Liquidation Agreement. Having made the payment may at some point present a liquidity issue for the Company.
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 a post-Merger basis) shares of Company Common Stock and a convertible promissory note of same date in the initial
principal amount of $
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 a post-Merger basis) shares of MMG Common Stock and a convertible promissory note of same date in the initial
principal amount of $
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 (on a post-Merger basis) shares of the MMG Common Stock, and a Convertible Promissory Note of same date
in the initial principal amount of
$
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(amounts in thousands, except per share data)
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 RLBY as a result of the Merger. The terms of all Warrants
are the same other than as to the number of shares covered thereby. The Warrant may be exercised at any time or from time to time during
the period commencing at 10:00 a.m. Eastern time on first business day following the completion of the Qualified Financing (as defined
below) and expiring at 5:00 p.m. Eastern time on the fifth annual anniversary thereof (the “Exercise Period”). For purposes
herein, a “Qualified Financing” means the issuance by the Company, other than certain excluded issuances of shares of Common
Stock, in one transaction or series of related transactions, which transaction(s) result in aggregate gross proceeds actually received
by the Company of at least $
Convertible
note warrants were not valued and included as liability on balance sheet because of uncertainty around their pricing, value and low probability
at this juncture in receiving the $
In prior filings, when referencing these related party notes, we have defined the issuer as the Company, when we could have been more specific and referenced MMG or Reliability. For clarification purposes, any of the related party transactions entered into prior to the Merger on October 29, 2019, should refer to MMG and not Reliability.
NOTE 9. BUSINESS SEGMENTS
The
Company operates within
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RELIABILITY INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(amounts in thousands, except per share data)
The following table provides a reconciliation of revenue by reportable segment to consolidated results for the three months Ended June 30, 2021, and 2020, respectively:
SCHEDULE OF RECONCILIATION OF REVENUE AND OPERATING INCOME BY REPORTABLE SEGMENT TO CONSOLIDATED RESULTS
For the three months ended June 30:
| 2021 | 2020 | |||||||
| Revenue: | ||||||||
| EOR | $ | $ | ||||||
| Recruiting and Staffing | ||||||||
| Permanent Placement | ||||||||
| Video and Multimedia Production | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
For the six months ended June 30:
| 2021 | 2020 | |||||||
| Revenue: | ||||||||
| EOR | $ | $ | ||||||
| Recruiting and Staffing | ||||||||
| Permanent Placement | ||||||||
| Video and Multimedia Production | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
NOTE 10. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through August 15, 2021, the date on which the unaudited condensed consolidated financial statements were available to be issued. Based upon this evaluation, management has determined that no material subsequent events have occurred that would require recognition in or disclosures in the accompanying unaudited condensed consolidated financial statements, except as follows:
On
July 21, 2021, Maslow entered into a settlement agreement with Libertas and Kinetic, which resulted in MMG paying both parties $
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, asserting that the Respondents breached the Merger Agreement in a number of significant respects and potentially committed fraud in connection with the Merger.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
FORWARD-LOOKING STATEMENTS
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This section includes several forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect our current views with respect to future events and financial performance. All statements that address expectations or projections about the future, including, but not limited to, statements about our plans, strategies, adequacy of resources and future financial results (such as revenue, gross profit, operating profit, cash flow), are forward-looking statements. Some of the forward-looking statements can be identified by words like “anticipates,” “believes,” “expects,” “may,” “will,” “can,” “could,” “should,” “intends,” “project,” “predict,” “plans,” “estimates,” “goal,” “target,” “possible,” “potential,” “would,” “seek,” and similar references to future periods. These statements are not a guarantee of future performance and involve a number of risks, uncertainties and assumptions that are difficult to predict. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. Important factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to: the impact of the COVID-19 pandemic on us and our clients; our ability to access the capital markets by pursuing additional debt and equity financing to fund our business plan and expenses on terms acceptable to the Vivos Group or at all; negative outcome of pending and future claims and litigation and our ability to comply with our contractual covenants, including in respect of our debt; potential loss of clients and possible rejection of our business model and/or sales methods; weakness in general economic conditions and levels of capital spending by customers in the industries we serve; weakness or volatility in the financial and capital markets, which may result in the postponement or cancellation of our customers’ projects or the inability of our customers to pay our fees; delays or reductions in U.S. government spending; credit risks associated with our customers; competitive market pressures; the availability and cost of qualified labor; our level of success in attracting, training and retaining qualified management personnel and other staff employees; changes in tax laws and other government regulations, including the impact of health care reform laws and regulations; the possibility of incurring liability for our business activities, including, but not limited to, the activities of our temporary employees; our performance on customer contracts; and government policies, legislation or judicial decisions adverse to our businesses. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We assume no obligation to update such statements, whether as a result of new information, future events or otherwise, except as required by law. We recommend readers to carefully review the entirety of this Quarterly Report, the “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and the other reports and documents we file from time to time with the Securities and Exchange Commission (“SEC”), particularly our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K.
The following discussion and analysis of our financial condition and results of operations, our expectations regarding the future performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors including those described in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, with the SEC. Our actual results may differ materially from those contained in any forward-looking statements. You should read the following discussion together with our financial statements and related notes thereto and other financial information included in this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING POLICIES AND COMMENTS RELATED TO OPERATIONS
This discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
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There have been no material changes or developments in the Company’s evaluation of the accounting estimates and the underlying assumptions or methodologies that it believes to be Critical Accounting Policies and Estimates as disclosed in its Form 10-K for the year ended December 31, 2020.
Management’s Discussion included in the Form 10-K for the year ended December 31, 2020, includes discussion of various factors and items related to the Company’s results of operations and liquidity. There have been no other significant changes in most of the factors discussed in the Form 10-K and many of the items discussed in the Form 10-K are relevant to 2021 operations; thus, the reader of this report should read Management’s Discussion included in Form 10-K for the year ended December 31, 2020.
RESULTS OF OPERATIONS
Revenues
Revenues For the three months ended June 30, 2021, was $5,074 which was $123 lower than for the same period in 2020 which was $5,197. IQS the Company’s IT staffing division had a revenue decline of $542 or 80% from the same period a year ago which offset the improvement in revenue by EOR $3,981 for quarter, up $174 or 4.6% and Media Staffing $676 up $210 or 45%, and $30 in revenue from a Permanent Placement
IT staffing revenues do not include an IT permanent placement for $30 in the quarter and expect an increase in this activity as certain new clients are asking us for this service. The Company will be treating Permanent Placement revenue as a separate business segment as reflected above in Note 9.
For the six months ended June 30, revenue totaled $10,868 which was $3,130 less than a year ago. 42% of the revenues for the 6-month period totaling $13,998 a year ago, were earned prior to any impact by Covid 19. Business segments with the largest declines in the six-month period ending June 30, 2021, when compared to a year earlier, were EOR at $2.481 or 22.6% and IQS which derived $1,058 less, a 72% decline. EOR was largely negatively impacted by COVID-19 which has seen some of our larger clients not yet return to full strength on site. IQS’s experienced the loss of its largest customer Lifetouch, which informed the Company in the fall of 2020 that it had decided to offshore their IT software quality assurance professionals effective January 1, 2021, resulting in declines of revenue of $595 year to date, when compared to same period in 2020. Meanwhile Tapfin, which is the vendor management solution for Abbott Labs, has converted a number of IQS’s employees to their staff and have not renewed other employee resulting in a year-to-date loss of revenue of $201. In order to offset these lost revenues, the Company will focus business development resources on growing the IT staffing business in the second half of 2021.
Media Staffing however has increased its 6-month revenue to 1,286 from $965, a $321 or 33% improvement. This is due to the acquisition of 6 new clients which added $231 and an increased demand for this service ($90) by our existing clients, driven by our expertise in delivering top rated media talent to our customers.
Video Production’s 6-month revenue performance also saw an improvement to the same period a year ago by $80, totaling $661.
Cost of Revenue / Gross Profit
Gross Profit for the three-month period ending June 30, 2021, was $718 representing 14.2% of revenues, which was $28 below the gross profit of $723 in the first quarter of 2021 and $5 below the gross profit for the same period in 2020.
Although the revenue from Q1 declined by 2.4% from Q1 2020, lower cost of revenue resulted in a gross margin decline of just over a half a point (.6%). Thus, gross profit at $718 was only $5 less than a year ago at $723. Quarterly Margin improvement from 13.9% to 14.2% was driven by Permanent Placement revenue of $30 with gross margin at 96.4%; resulting in overall gross margin improvement by half a point from 13.7 to 14.2%. Otherwise, quarterly comparative gross margin would have been slightly lower by 20 basis points than it was a year ago.
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Year to date 2021, the Company’s gross margin percentage improved to 13.5% from 12.5% which can be attributed to EOR margin reaching 10% on gross profit of $856 in 2021, compared to 9.3% on $1,018 in same period in 2020.
EOR and Media Staffing margin boosts (.07% and .06% respectively) coupled with Permanent Placement margin of $29 (96.4%) offset the steep decline in IQS higher margin gross profit which saw a year over year decline by $334 or 73% from $458 to $124.
Overall margin improvement in EOR, Media Staffing and Video Production year over year contributed $82 in gross profit, representing 4.7% of 2020 first half gross profit.
General and Administrative (“G&A”)
General and administrative expenses for the three months ended June 30, 2021, were $878, as compared to $1,240 in the comparable period in 2020, representing a 28.6% reduction. The $362 decrease in comparative three-month periods is due to reductions in salary and benefit costs by $180, outside legal costs $79, and rent costs by $66. Over the 6-month period ending June 30, 2021, management has trimmed $657 or 28% of G&A costs, as they represented 15.6% of revenue as opposed to 16.8% a year ago. The reduction was achieved while increasing the costs of sales G&A year over year for the quarter ending June 30, 2021, by $74 or 45%.
Interest Expense
The Company recognized interest expense in the amount of $18 during the three months ended June 30, 2021, compared to $114 during the prior year period. The $96 (84.5%) decrease is directly attributed to a significantly reduced reliance on the factoring line that had an outstanding ending Q2 2021 balance of $86 compared to $1,043 at conclusion of second quarter 2020.
Other Income (Expense)
Spurred by the PPP forgiveness principal of $5,216, a reversal on PPP interest $59, and ERC totaling $2,767, other income totaled $8,042 resulting in the Company experiencing second quarter net earnings of $7,942 compared to a $324 net loss a year earlier and net earnings of $7,240 during the six months ended June 30, 2021, compared to a loss of $561 in the comparable period of the prior year.
The ERC consisted of a second quarter request for a first quarter refund of $1,440. Subsequently the Company received $153 in ERC credits against the last two payrolls in June 2021 and has requested a refund of another $1,174 covering the remainder of the second quarter 2021. The Company qualified for the ERC in 2021 as its quarterly revenue was < 80% of its 2019 revenue for the same periods.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital requirements are driven predominantly by EOR field talent payments, G&A salaries, public company costs, interest associated with factoring, and client accounts receivable receipts. Since receipts from client payments are on average 70 days behind payments to field talent, working capital requirements can be periodically challenged. We have a Factoring Facility with Triumph Business Capital (“TBC”). TBC advances 93% of our eligible receivables at an advance rate of 15 basis points, an interest rate of prime plus 2%., and our prime floor rate at 4%. As a result of the impact of the COVID-19 pandemic, our clients may be more likely to be delinquent in their payments. However, to date, we have not seen any adverse change in our collections, with our Days Outstanding (DSO) for first half of the year at 63 comparable to the 68 DSO for period ending December 31, 2020. In 2020 our DSO increased in from 60 in 2019 to 68 as several of our large clients began demanding 60-to-90-day terms. Delays in receipt of purchase orders also had an adverse impact on DSO. However, as of June 30, 2021, only 2.4% of $3,303 in Accounts Receivable (“A/R”) was > 31 days past invoice due dates, with only .2% > 60.
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When looking at A/R aging in relation to invoice date, as of June 30, 2021, 61% of our $3,303 in total A/R was < 31 days, compared to 64% in the quarter ending March 31, 2021.
The Company has an additional $2,615 in other receivables associated with our ERC eligibility for first and second quarters 2021.
Our primary sources of liquidity are cash generated from operations via accounts receivable and borrowings under our Factoring Facility with Triumph enabling access to the 7% unfactored portion. Because certain large clients have changed their payment practices announcing 60- and 90-day terms amounting to a unilateral extension to contractual terms by 30-60 days, we can be adversely impacted since Triumph does not provide credit if an account obligor pays more than 120 days after the invoice date.
Our primary uses of cash are for payments to field talent, corporate and staff employees, related payroll liabilities, operating expenses, public company costs, including but not limited to, general and professional liability and directors and 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 we employ factoring.
Vivos Debtors as of June 30, 2021, had notes receivable totaling $4,387 including default on a $3,000 promissory note and on a $750 tax obligation in December 2019. After numerous failed collection attempts, on February 17, 2020, the Company initiated an action in the Circuit Court of Montgomery County Maryland against Naveen Doki and the Vivos Holdings for nonpayment.
It was also anticipated that following the Merger, the Company would both access the capital markets by selling additional shares of Company Common Stock and use shares of Company Common Stock as currency to acquire other business revenues. However, all 300 million authorized shares of Company Common Stock were issued in connection with the Merger. No shares are expected to become available to the Company until the legal dispute with the Vivos Debtors and Vivos Group is resolved. At that point, the Company can decide whether to amend the Company’s Certificate of Formation to increase the number of authorized shares of Company Common Stock or approve a reverse-split of the outstanding shares of Company Common Stock to provide additional shares for these purposes. No assurance can be given as to when this might take place.
On May 5, 2020, MMG received a $5,216 loan through the Paycheck Protection Program (the “PPP”) with a term of two (2) years and an interest rate of 1% per annum. The PPP provided that the Company be eligible for forgiveness if the loan proceeds were used for payroll and certain other specified operating expenses while maintaining specified headcount requirements. On June 10, 2021, the Company was informed by the SBA that it had met the requirements and that both the $5,216 and of accrued interest, through May 2021, totaling $57 were forgiven
The funds bolstered our working capital and enabled us to bring back employees and continue to serve our clients even though their requirements had lessened.
As of June 30, 2021, our working capital was $7,991, compared to $5,970 at the end of December 2020, and $6,152 the quarter ending June 30, 2020, approximately a month before the PPP funds were received. The PPP funds enabled the Company to build A/R reserves since PPP funds were employed to pay salaries of both outsourced and G&A employees during the covered 24-week period between May and October 2020. Working capital at the end of June 2021, excluding the notes receivable of $4,387, was $3,604.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Risk Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The President and Chief Financial Officer evaluated the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the President and Chief Financial Officer concluded that the disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the President and Chief Financial Officer to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal controls over financial reporting, known to the President and Chief Financial Officer that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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RELIABILITY INC.
OTHER INFORMATION
June 30, 2021
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a description of our legal proceedings, see Note 6, Commitments and Contingencies, of the Notes to Unaudited Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
From time to time, the Company 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 17, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings, LLC, VREH and Naveen Doki (the “Defendants”), to enforce MMG’s rights under certain promissory notes and a personal guarantee made by the defendants (the “Debt Collection Suit”). The aggregate amount of these obligations as of the balance sheet date is approximately $4,308. The case is proceeding. The Company believes that it will be granted a judgment in its favor. MMG has vigorously pursued this litigation and atrial on this matter is scheduled to begin in the Circuit Court of Montgomery County, Maryland, on October 4, 2021.
On or about May 6, 2020, the Defendants filed with the Circuit Court of Montgomery County, Maryland a Counterclaim and Third-Party Complaint for Damages, Declaratory and Injunctive Relief and Jury Demand (the “Vivos Default Counterclaim”), The Company believes that the Counterclaim has no merit. The Company continues to vigorously defended itself and its indemnified officers, directors and other parties as permitted by the Company’s organizational documents. The Company and the other Counterclaim defendants have moved to have the Debt Collection Suit and the Counterclaim stayed pending the outcome of the Arbitration described below in Intent to Arbitrate. A full trial covering the Vivos Group note defaults and the Vivos Group’s countersuit which was originally scheduled for March 2021, will take place starting on October 4, 2021.
On or about June 5, 2020, the Company submitted a Claimant’s Notice of Intention to Arbitrate and Demand For Arbitration (the “Arbitration”) with the American Arbitration Association in New York, and to the Respondents thereto: Naveen Doki; Silvija Valleru; Shirisha Janumpally (individually and in her capacity as trustee of Judos Trust); Kalyan Pathuri (individually in his capacity as trustee of Igly Trust) and Federal Systems (the “Respondents”). The Arbitration alleges that the Respondents breached the Merger Agreement in a number of significant respects and committed fraud in connection with the Merger. The Company is seeking damages which if granted will likely be the remedy set forth within the merger agreement which is in whole or in part shares of Company Common Stock received by the Respondents in connection with the Merger. The Company has brought a motion to compel the Arbitration which is currently being decided by the Federal Courts in New York. The Company believes a strong basis for the motion exists, but no assurance can be given that it will be granted. Regardless, the Company intends to pursue claims under the Merger Agreement in whatever venue is required.
On June 12, 2020, Igly Trust, a Vivos entity, asked the Texas court for an injunction requiring the Company to provide a shareholder list and to hold a shareholder meeting. On October 20, 2020, the Texas court denied the injunction but, incongruously, dismissed all the Vivos plaintiffs for lack of personal jurisdiction. The Company appealed the dismissal because the court had jurisdiction over Igly Trust once it made affirmative claims in Texas and because the Court’s order denying the injunction is an important precedent for establishing that the directors under Texas law retain control of shareholder lists and determining the timing of shareholder meetings.
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After an extension was granted to Reliability’s “reply brief,” on June 2nd, 2021, Reliability, Incorporated, Maslow Media Group, Inc, Nick Tsahalis and Mark Speck filed an appellant’s brief in the Fourteenth District of Texas, Houston Texas to challenge the court’s prior ruling granting a special appearance to Igly Trust and to the Doki Shareholders. A response to the filed appellant brief has not yet been received.
On December 23, 2020, after an evidentiary hearing before the Circuit Court for Montgomery County, Maryland, a judge denied a motion by Vivos Holdings, LLC, VREH, Doki, Kaylan Pathuri (“Pathuri”), Judos Trust by Shirisha Janumpally, its trustee (“Judos”) and Igly Trust by Kaylan Pathuri, its trustee, (“Igly”) to compel a shareholder meeting based on the facts presented at trial. The judge also commented that, based on the evidence presented, management was performing its fiduciary duties to protect the Company despite adverse circumstances. This same judge will be presiding over a full trial regarding Company’s lawsuit to enforce the repayment of notes and the Vivos Group counterclaim, in a trial starting on October 4, 2021.
On January 20, 2021, Defendants and Counter/Third-Party Plaintiffs, Vivos Holdings, LLC (“Vivos”), Vivos Real Estate Holdings, LLC (“VREH”), Dr. Naveen Doki (“Doki”), Kaylan Pathuri (“Pathuri”), Igly Trust (“Igly”), Judos Trust (“Judos”), by counsel, filed a Notice of Appeal with the Circuit Court for Montgomery County, Maryland denying their Motion for Preliminary Injunction signed on December 23, 2020.
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, asserting that the Respondents breached the Merger Agreement in a number of significant respects and potentially committed fraud in connection with the Merger.
The following legal proceedings where Vivos Group borrowings impacting MMG:
On September 28, 2018, Credit Cash filed a complaint against MMG, Vivos, Vivos Acquisitions, LLC, Dr. Doki, Dr. Valleru (the “Parties”) and other defendants in the United States Circuit Court of Montgomery County, Maryland for the District of New Jersey for, among other things, breach of contract of the MMG and HCRN Credit Facilities and their respective guaranties in relation to the November 15, 2017, agreement (the “DNJ Action”). On October 30, 2018, Credit Cash filed a motion to intervene in an action pending in New York State, Monroe County, filed by HCRN and LE Finance, LLC against the Parties, and other defendants (“NY State Action”). On December 10, 2018, the Parties entered into a settlement agreement for the purpose of settling certain claims related to the DNJ Action only. Pursuant to the settlement agreement, certain repayment terms were agreed upon between Credit Cash and the Parties, but Credit Cash did not relinquish the right to pursue any claims related to the NY State Action, nor to pursue any remedies against any of the parties in relation to the November 15, 2017, agreement. Certain of the Vivos Group executed and delivered to MMG that certain Agreement for the Contingent Liquidation of the Common Stock of Maslow Media Group, Inc., dated as of October 28, 2019 (the “Liquidation Agreement”), pursuant to which such Vivos Group pledged to MMG the shares of Company Common Stock they received in the Merger to provide the capital required to satisfy the Parties’ obligations under the Settlement Agreements. Vivos Group misrepresented upon the execution of the Liquidation Agreement to MMG the status of its obligations under the Settlement Agreement, which were, in fact, then in default. To date these Vivos Group have not cooperated with the Company to monetize those shares as contemplated by the Liquidation Agreement. The Company will take appropriate action to enforce its rights under the Liquidation Agreement, which actions will be dictated in part by the outcome of the Arbitration. On or about March 16, 2020, Credit Cash entered its New Jersey confession of judgment with the Circuit Court of Montgomery County, Maryland.
Healthcare Resource Network Complaint: On or about February 17, 2020, the Company, as plaintiff, filed a complaint with the Circuit Court of Montgomery County, Maryland against Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC and Mr. Naveen Doki, to enforce MMG’s rights under certain promissory notes and a personal guarantee made by the defendants. The case is proceeding. The Company believes that it will be granted a judgment in its favor. MMG intends to continue to vigorously pursue this litigation. On September 3, 2020, MMG and HCRN entered into a Tolling Agreement pursuant to which HCRN dismissed MMG from this litigation without prejudice and agreed to forebear filing a new complaint or initiating any lawsuit or other legal proceeding against MMG until January 31, 2022.
On or about May 5, 2020, Kinetic Direct Funding domesticated a foreign judgement in the Montgomery County Circuit Court system again Health Care Resources Network (HCRN), Maslow Media Group, US IT Solutions Inc., 360 IT Professionals, Alliance Micro, Inc. and Naveen Doki. This foreign judgement from the State of New York relates to loans the Vivos Group took out by adding Maslow Media Group as additional collateral. This loan is currently in default. Foreign Judgement total is $579.
On July 21, MMG came to an agreement with Kinetic and Libertas for $475 to release MMG from being obligated to this Vivos Group debt. (See Note 10).
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, asserting that the Respondents breached the Merger Agreement in a number of significant respects and potentially committed fraud in connection with the Merger.
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Item 1a. Risk Factors
In addition to the other information set forth in this Quarterly Report, shareholders should carefully consider the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2020, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
We are currently engaged in substantial and complex litigation and arbitration with the Vivos Group, the outcome of which could materially harm our business and financial results.
As more fully described in Note 6(Commitments and Contingencies) of the Notes to Unaudited Consolidated Financial Statements, we are currently engaged in litigation and arbitration with the Vivos Group. The litigation includes multiple complaints and counterclaims by us and the Vivos Group in venues in Maryland and Texas. The arbitration was brought by the Company to enforce its rights under the Merger Agreement.
The litigation and arbitration are substantial and complex, and they have caused and could continue to cause us to incur significant costs, as well as distract our management over an extended period. The litigation and arbitration may substantially disrupt our business and we cannot assure you that we will be able to resolve the litigation on terms favorable to us or that we will be successful in the arbitration.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits:
The following exhibits are filed as part of this report:
| 31.1 | CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | |
| 31.2 | CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | |
| 32.1 | CEO and CFO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RELIABILITY INCORPORATED (Registrant) | |
| August 16, 2021 | /s/ Nick Tsahalis |
| Reliability President and Maslow Chief Executive Officer | |
| /s/ Mark Speck | |
| Secretary and Chief Financial Officer |
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Index to Exhibits
| Exhibit No. | Description | |
| 31.1 | CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | |
| 31.2 | CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | |
| 32.1 | CEO and CFO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL). |
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections
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