NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2022
(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 Direct Placements, and Video and Multimedia Production which provides script to screen media talent.
Our Staffing segment provides skilled field talent on a nationwide basis for Media, IT and finance and accounting client partner projects.
Our Staffing segment occasionally received requests for (direct) placements. Because of an uptick in direct hire requests in 2021, factoring
in the much higher margins that business derives, MMG decided to add Permanent (Direct) Placement as a stand-alone business segment.
Video Production involves assembling and providing crews for special projects that can last anywhere from a week to 6 months.
Reliability
was incorporated under the laws of the State of Texas in 1953, but the then principal business of the Company started in 1971 was closed
down in 2007. The Company completed a reverse merger with MMG (the “Merger”) on October 29, 2019.
Company
Background
On
November 9, 2016, Linda Maslow sold the business to Vivos Holdings, LLC (“Vivos Holdings”) owned by Dr. Naveen
Doki (“Dr. Doki”) and Silvija Valleru (“Ms. Valleru”).
In
2018, Vivos Holdings and several other Vivos companies, (“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 MMG for other
Vivos companies were Shirisha Janumpally (“Mrs. Janumpally”),
wife of Dr. Doki, and Kalyan Pathuri (“Mr. Pathuri”), husband of Silvija Valleru.
These
4 individuals, Dr. Doki, Mrs. Janumpally, Mr. Pathuri, and Mrs. Valleru also have common ownership combinations in a number of
other entities [Vivos Holdings, LLC. Vivos Real Estate Holdings, LLC (“VREH”), Vivos Holdings, Inc., Vivos Group, Vivos Acquisitions,
LLC., and Federal Systems, LLC], (collectively referred to herein as “Vivos Group”).
The
reverse merger was consummated on October 29, 2019. As a result of the Merger, the Vivos Group (Vivos Holdings LLC, officially)
acquired approximately 84%
of the issued and outstanding shares of Reliability which were distributed by Vivos Holdings LLC.
On
October 29, 2019, MMG became a wholly owned subsidiary of Reliability by merging R-M Merger Sub, Inc., a Virginia corporation and a wholly
owned subsidiary of Reliability, with and into Maslow, with MMG being the surviving corporation (the “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 MMG following the Merger. The acquisition of MMG also resulted in a “change
in control” of Reliability.
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 Dr. Doki (collectively “Vivos Debtors”), to enforce Maslow’s
rights under certain promissory notes and a personal guarantee made by the Dr. Doki. On or about May 6, 2020, the Defendants filed a
counterclaim and third-party complaint for Damages, declaratory and injunctive Relief and jury Demand (the “Counterclaim”).
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2022
(amounts
in thousands, except per share data)
The
Company also began pursuing arbitration in New York in 2020 which was the contractual remedy for breaches of the Merger agreement between
MMG and Reliability. It is the Company’s contention that the Vivos Group failed to disclose several material pieces of information
to Reliability management pre-merger as was required by the Merger agreement. Additionally, the Vivos Group declined to honor a number
of commitments made to Reliability including a $3,000 promissory note and an agreement to shield the Company from their personal debt
per the “Liquidation Agreement” (See 1A and Item 3). Per the Merger Agreement, these breaches can lead to a loss of up to
all shares in Reliability for the Vivos group.
On
December 23, 2020, at a hearing in the Maryland Circuit Court of Montgomery County, Maryland, a motion by the Vivos Group to compel a
shareholder meeting was summarily dismissed. On January 20, 2021, Defendants and Counter/Third-Party Plaintiffs, Vivos, VREH, Dr.
Doki, Mr. Pathuri, Igly, Judos, by counsel, filed a Notice of Appeal on the dismissal. However, the deadline to pursue the
appeal lapsed absent additional filings by the Vivos Group.
On
July 21, 2021, MMG settled the obligation which with it had been committed by Vivos Holdings, LLC in July 2018, with Libertas Funding,
LLC and Kinetic for $475. This debt belonged to Vivos Holdings LLC, and the aforementioned Liquidation Agreement, had been created as
a safeguard to shelter MMG should Vivos Holdings, LLC default, which actually transpired prior to the Merger closing in October 2019.
(See Section 1A).
On
September 7, 2021, the Company entered to Arbitration and Tolling Agreements with the (the “Agreements”) Vivos Group and
all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before
the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing
to resolve their disputes before a single arbitrator in Maryland.
On
March 21, 2022, the Company began its arbitration proceedings against the Vivos Group. MMG contends the Vivos Group committed merger
violations which could result in relinquishment in whole or in part shares of Company common stock received by the Respondents in connection
with the Merger. We anticipate an arbitration decision in the third quarter 2022.
We
refer below to the disputes between Reliability and the Vivos Group as the “Vivos Matter.”
“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.”
Basis
of presentation
The
unaudited condensed consolidated interim financial statements include the accounts of the Company and all wholly owned divisions, including
its 100% owned subsidiary, MMG. All significant intercompany accounts and transactions have been eliminated in consolidation.
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States and the rules of the SEC and should be read in conjunction with the audited financial statements and notes thereto
contained in our Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for
a fair presentation of financial position and the results of operations for the periods presented have been reflected herein. The results
of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
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, 2021.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2022
(amounts
in thousands, except per share data)
Concentration
of Credit Risk
For
the three months ended March 31, 2022, 24.2%
of revenue came from AT&T Services, Inc. (inclusive of its DirecTV division) (“AT&T”), 21.4%
from Goldman Sachs, and 11.2%
from Janssen Pharmaceuticals (which includes workforce partners Ortho McNeil and Johnson & Johnson). Combined, this totals 56.8%
of revenue. AT&T, Goldman Sachs, Janssen, and
Morgan Stanley accounted for 24.6%,
15.4%,
9.2%
and 13.6%,
respectively, in revenue for the same period ended March 31, 2021. No
other client has exceeded 10% of revenues in 2022
or 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;
| ● | Uncertainty
in outcome of the arbitration hearing with Vivos Group which will likely have decision rendered
in the third quarter 2022; |
| ● | Operating
loss of approximately $575 for the quarter ending March 31, 2022; |
| ● | The
slow-moving rebound of client demand for our services to pre-pandemic levels; |
| ● | Difficulties
in raising cash via public markets for organic and inorganic growth, due to lack of unissued
authorized shares available for Company use; |
| ● | Inability
to realize approximately $5M in notes receivables from Vivos Group; |
| ● | Commitments
And Contingencies, described further in Note 6. |
All
these conditions noted and factored in above with the prevailing risk being that the arbitration (see Item 1) outcome is not in the Company’s
favor, and the $5,039 in notes receivable is not realized in full, part, or all, creates substantial doubt about the Company’s
ability to continue as a going concern.
Additionally,
from an operational view the underlying business has yet to fully recover from COVID-19 with current quarterly comparative revenue levels
down as much as 47% from 2019 standards.
Therefore,
there can be no assurances that the Company will be successful in managing the impact of the foregoing or its ability to maintain sufficient
liquidity over a period of time that will allow it to continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome from these uncertainties.
The
Company is quoted on the OTC Marketplace under the symbol “RLBY”.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2022
(amounts
in thousands, except per share data)
NOTE
3. ACCOUNTS RECEIVABLE
Accounts
Receivable can be broken down as follows
SCHEDULE
OF ACCOUNTS RECEIVABLE
| | |
3/31/2022 | | |
12/31/ 2021 | |
| Accounts Receivable | |
| | | |
| | |
| Trade receivables | |
$ | 4,657 | | |
| 5,592 | |
| Unbilled receivables | |
| 387 | | |
| 813 | |
| Less allowance for doubtful accounts | |
| - | | |
| - | |
| Total Trade Accounts Receivable | |
| 5,044 | | |
| 6,405 | |
NOTE
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Adopted
Accounting Pronouncements
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity
no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting
unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments
in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount
to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments
in this update will be effective for the Company beginning with fiscal year 2023, with early adoption permitted. The Company adopted
this during 2021 resulting in an impairment charge as stated in the financial statements.
The
Company does not believe any other recently issued but not yet effective accounting pronouncement, if adopted, would have a material
effect on its present or future consolidated financial statements.
NOTE
5. 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 $215 estimated annual impact per year for 4 years
which was accounted for in subsequent tax returns through 2019. In 2021 MMG completed settlement of the estimated $860 tax liability
caused by the Vivos Group in 2017, paying the final estimated portion of $300 in 2021.
As
of March 31, 2022, the Company’s overall tax liability was $688 compared to $517 at end of same period in 2021.
Factoring
Facility
Triumph
Business Capital
On
November 4, 2016, the Company entered into a factoring and security agreement with Triumph Business Capital (“Triumph”).
Pursuant to the agreement, the Company received advances on its accounts receivable (i.e., invoices) through Triumph to fund growth
and operations. The proceeds of this agreement were used to pay operating costs of the business which include employee salaries,
vendor payments and overhead expenses. On January 5, 2018, the agreement was amended to lower the factoring fee and interest rate
for a term of one year.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2022
(amounts
in thousands, except per share data)
The
agreement was amended again on January 19, 2018, to increase the maximum advance rate to $5,500. In January 2020, a new agreement was
negotiated with Triumph lowering advance rate from 18 basis points to 15 and the interest rate from prime plus 2.5% to prime plus 2%.
The amount of an invoice eligible for sale to Triumph went from 90% to 93%. The agreement which previously renewed annually, is now month
to month. The Company continues to be obligated to meet certain financial covenants in respect to invoicing and reserve account balance.
In
accordance with the agreement, a reserve amount is required for the total unpaid balance of all purchased accounts multiplied by a percentage
equal to the difference between one hundred percent and the advanced rate
percentage.
As of March 31, 2022, the required amount was 10%. Any excess of the reserve amount is paid to the Company on a weekly basis, as requested.
If a reserve shortfall exists for a period of ten-days, the Company is required to make payment to the financial institution for the
shortage.
Accounts
receivables were sold with full recourse. Proceeds from the sale of receivables were $2,811 for the three-month period ending March 31,
2022, compared to $1,332 for the same period ending on March 31, 2021. The total outstanding balance under the recourse contract was
$1,590 on March 31, 2022, compared to $946 as of December 31, 2021, and $592 on March 31, 2021.
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 three months ended March 31,
2022, and 2021 totalled $29 and $32 respectively.
NOTE
6. COMMITMENTS AND CONTINGENCIES
There
are a number of debts and confessions of judgement (“COJ”) related to the Vivos Group that included MMG 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.
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. MMG leased this space on market terms. This
obligation had not been included in Maslow’s financial statements and were not separately disclosed prior to the Merger.
On
March 3, 2022, MMG received a notice of default, acceleration, and demand for payment in full, from FVCBank due to incurable events of
default on behalf of Borrower, Vivos Real Estate Holdings LLC. Per the default notice, “As of March 2, 2022, the total indebtedness
due and owing under the Loan (the ‘‘Debt’’) is $1,743 consisting of an unpaid principal balance in the amount
of $1,703 accrued and unpaid interest in the amount of $7, deferred payments in the amount of $20 and late fees in the amount of $12
plus prepayment penalties and attorneys’ fees, costs and expenses,” less setoff fees of $16. MMG believes it has grounds
to contest it being a guarantor on the loan.
Credit
Cash: MMG has not been formally notified of an obligation to pay Credit Cash due to a now known default on Vivos Group’s COJ.
On
October 9, 2018, Maslow Media Group, Inc. was named as a defendant in an Affidavit of COJ filed in the Supreme Court of the State of
New York in relation to a case brought by Hop Capital against members of the Vivos Group, which had collectively agreed to pay a sum
of $400 to HOP Capital. Maslow Media Group, Inc. is named as one defendant among six other defendants. The claim brought by HOP
Capital against the defendants in this case is in relation to a Merchant Agreement dated October 4, 2018, to which Maslow Media
Group, Inc. was
not a party. As such, MMG contends that being named in the Affidavit of COJ as a defendant was made in error and is currently seeking
to have its name removed from Affidavit of COJ as a defendant. As of March 24, 2022, we have not been contacted again on this matter,
nor have we been notified on any developments.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2022
(amounts
in thousands, except per share data)
On
February 28, 2020, Healthcare Resource Network, LLC filed a complaint against MMG in the Circuit Court of Montgomery County, Maryland
alleging that MMG participated with 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.
On
or about May 6, 2020, the Vivos Debtors and other Vivos Group members, specifically. Mr. Pathuri, Judos, and Igly responded to
the Vivos Default Claim with the “Vivos Default Counterclaim”. The Company continues to believe that the Counterclaim has
no merit and is vigorously defending itself and its indemnified officers, directors and other parties as permitted by the Company’s
organizational documents, via a March 2022 arbitration hearing which both parties agreed on September 7, 2021, to resolve their disputes
before a single arbitrator in Maryland. The hearing portion began on March 21 and has since concluded. There are other phases in progress.
A decision isn’t anticipated until the third quarter, 2022.
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
7. EQUITY
The
Company’s authorized capital stock consists of 300,000,000 shares of common stock, with no par value. All authorized shares of
Company Common Stock are issued and outstanding.
NOTE
8. RELATED PARTY TRANSACTIONS
Stock
Purchase Agreement
On
November 9, 2016, Vivos Holdings LLC, the former owner of MMG, acquired 100% of MMG through a stock acquisition exchange for a
purchase price of $1,750, of which: (i) $1,400 was paid at settlement with proceeds from MMG and (ii) a promissory note to pay the
remaining $350 (“Vivos/MMG Purchase Agreement”). The promissory note was to be paid in twenty-four equal installments,
including interest at 4.5%, in the amount of approximately $15, commencing six months after closing, with the last payment on March
1, 2019. These payments were paid by the MMG on behalf of the Vivos Debtors. The Vivos Debtors subsequently entered into a
promissory note receivable with the MMG, described below, for the full stock purchase price. No payment has ever been made against
this note and between 2018 to present, there has been $2,503 in additional borrowing.
Notes
Receivable
The
Company has notes receivable from Vivos Holdings, LLC and VREH, a member of Vivos Group, both related party affiliates due to their ownership
percentage in the Company. In January 2021, MMG began applying the legal minimum rate of interest which per Virginia statute is 8.0%
on two of the three defaulted notes receivable below. Per the 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 that the two
notes had clauses capping the default interest at 4.5% and 5.5% respectively. The rate adjustment for the allowed periods were made using
the eligible agreement rates.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2022
(amounts
in thousands, except per share data)
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 $1,400. As defined by the Vivos/MMG Purchase Agreement, the loan consists of two periods, whereby the
first period from November 15, 2016, until September 30, 2018, no principal or interest payments were required. Interest would
accrue monthly and a new loan in the amount of $1,773 would be subject to a second loan period. During the second loan period,
interest shall be paid in 20 equal consecutive payments, quarterly. Principal plus any unpaid interest is due September 20, 2023.
Interest during both loan periods accrues at a rate of 2.5%. Additionally, monthly payments of $15 are made on behalf of Vivos
Holdings, Inc. to the seller by MMG. These payments, plus any other payments made by MMG on behalf of Vivos Holdings, LLC, are added
to the principal balance of the promissory note receivable (“Vivos/MMG Purchase Agreement Note Receivable”). In 2018,
all quarterly interest payments to be made in phase 2 were offset by the management fees due to Vivos Holdings. As of March 31,
2022, the total outstanding balance on this note was $3,420 which includes accrued interest for period of $38.
On
November 15, 2017, MMG executed an intercompany promissory note receivable with VREH in the amount of $772. As defined by the agreement,
the loan consists of two periods, whereby the first period from November 15, 2017, until September 30, 2018, no principal or interest
payments are required. During the first loan period, interest accrued monthly and a new loan amount of $781 will be subject to a second
loan period. During the second period, interest is payable in 20 equal consecutive instalments and the principal balance plus accrued
and unpaid interest is due September 30, 2023. Interest during both periods accrues at a rate of 3.5% annually. In 2018, all quarterly
interest payments to be made in Phase 2 were offset by the management fees due to Vivos Holdings, LLC. In addition, principal payments
totaling $30 were made by the Vivos Group. As of March 31, 2022, the total outstanding balance was $823 which includes accrued interest
for period of $11.
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 $3,000 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 5% or greater beneficial holder of Company Common
Stock, and therefore is a related party.
As
of February 2020, the Company filed a lawsuit against the majority shareholder, pursuant to the personal guaranty agreement for defaulting
on the outstanding notes receivables.
In
summary, the Vivos Group receivable totaled $4,258 on December 31, 2020, which included $2,007 of additional borrowings over the period
between November 2016 and December 31, 2019. As of March 31, 2022, and December 31, 2021, the receivable totaled $5,039 and $4,985, respectively.
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 $750.
The note bears interest at 2.5%
per year and requires the Vivos Group to make monthly payments to MMG of $10
beginning December 1, 2019, with balance due
and payable on November
1, 2026. Upon an event of default, which occurs
upon failure of Vivos to make any monthly payment due under the terms of the note, MMG has the right to declare the entire unpaid balance
of the note due and payable. The note is secured by 30,000,000
shares of Company Common Stock, which is due
and payable upon a default by Vivos, which occurs upon failure of Vivos to make any monthly payment due under the terms of the note.
In addition, both Dr. Doki and Silvija Valleru personally guaranty the repayment of the note by the Vivos Group. Dr. Doki
and Silvija Valleru were beneficial owners of Vivos and are also 5% or greater beneficial owners of Company Common Stock, which is qualified
by the Merger Arbitration complaint. On December 31, 2021, the total outstanding balance was $790,
which includes interest for period of $5.
As of March 31, 2021, the total outstanding balance was $795,
which includes interest for period of $5.
Debt
Settlement Agreements
On
July 21, 2021, MMG settled the obligation which Vivos Holdings, LLC had obligated MMG to in July 2018, with Libertas Funding, LLC and
Kinetic for $475.
On
March 6, 2022, MMG 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.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2022
(amounts
in thousands, except per share data)
Related
Party Relationships
On
October 29, 2019, prior to the Merger, pursuant to the Merger Agreement, Dr. Doki and Silvija Valleru became beneficial owners
of 206,606,528
and 51,652,908
shares of RLBY Common Stock, respectively, equal
to 68.9%
and 17.2%
of the total number of shares of RLBY Common Stock outstanding after giving effect to the Merger, respectively. The Company is seeking
damages which if granted will likely be the remedy set forth within the Merger Agreement which is primarily the relinquishment in whole
or in part shares of Company Common Stock received by the Respondents in connection with the Merger.
On
June 27, 2019, prior to the Merger, 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 16,323 (on a post-Merger basis) shares of Company Common Stock, a warrant (as defined
below) for 81,616 (on a post-Merger basis) shares of Company Common Stock and a convertible promissory note of same date in the initial
principal amount of $50, in exchange for $50. The note bore interest at 12% per year, with the balance of $56 paid in full on June 26,
2020.
On
July 31, 2019, prior to the Merger, MMG entered into a Securities Purchase Agreement with Mr. Speck, the Company issued to this individual
a Warrant for 81,616 (on a post-Merger basis) shares of MMG Common Stock and a convertible promissory note of same date in the initial
principal amount of $50, in exchange for $50. The note bore interest at 12% per year, with balance of $56 paid in full on August 4, 2020.
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 32,646 (on a post-Merger basis) the shares of MMG Common Stock,
and a Warrant to purchase 16,323 (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
$100, in exchange for $100. The note bore interest at 12% per year, with balance of $112 becoming due and paid in full on July 31, 2020.
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 $75 with
the understanding that after the closing of the Merger, the LOI would be assigned to the Company and the Company would reimburse Hawkeye
for the deposit. On October 17, 2019, Hawkeye assigned, and MMG agreed to assume the LOI and reimbursed Hawkeye for the deposit. The
reimbursement took place on May 8, 2020, totalling $83.
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 $5,000. The exercise price per full share of the Company common stock shall be 120% of the
average sale price of the Company common stock across all transactions constituting a part of the Qualified Financing, with equitable
adjustments being made for any splits, combinations or dividends relating to the Company common stock, or combinations, recapitalization,
reclassifications, extraordinary distributions and similar events, that occur following one transaction constituting a part of the Qualified
Financing and prior to one or more other transactions constituting a part of the Qualified Financing (the “Exercise Price”).
Convertible note warrants were not valued and included as liability on balance sheet because of uncertainty around their pricing, value
and low probability at this juncture in receiving the $5,000 trigger.
RELIABILITY
INCORPORATED AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2022
(amounts
in thousands, except per share data)
On
September 7, 2021, the Company entered in Arbitration and Tolling Agreements with alleged shareholder Dr. Doki, 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.
NOTE
9. BUSINESS SEGMENTS
The
Company operates within four
industry segments: EOR, Recruiting and Staffing, Permanent
(Direct) Placements and Video and Multimedia Production. The EOR segment provides media field talent to a host of large corporate
customers in all 50 states. The Recruiting and Staffing segment provides skilled media and IT field talent on a nationwide basis for
customers in a myriad of industries. Permanent Placements was added as a segment in the second quarter 2021 as the Company began
to take on clients who desired the Company source candidates for permanent hire on a regular basis. The Video and Multimedia
Production segment provides Script to Screen services for corporate, government and non-profit clients, globally.
The
following table provides a reconciliation of revenue by reportable segment to consolidated results for the three months ended March 31,
2022, and 2021, respectively:
For
the three months ended March 31:
SCHEDULE
OF RECONCILIATION OF REVENUE AND OPERATING INCOME BY REPORTABLE SEGMENT TO CONSOLIDATED RESULTS
| |
|
|
2022 |
|
|
|
2021 |
|
| Revenue: |
|
|
|
|
|
|
|
|
| EOR |
|
$ |
4,773 |
|
|
$ |
4,497 |
|
| Recruiting
and Staffing |
|
|
923 |
|
|
|
884 |
|
| Permanent
Placement |
|
|
39 |
|
|
|
- |
|
| Video
and Multimedia Production |
|
|
48 |
|
|
|
413 |
|
| Total |
|
$ |
5,783 |
|
|
$ |
5,794 |
|
NOTE
10. SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through May 15, 2022, 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:
MMG
signed a 1-year extension with AT&T (until 3/31/2023) and a 2-year extension with DirecTV (until 3/31/2024).