RELIABILITY INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Independent Registered Public Accounting Firms PCAOB ID NO: 820 44 Audited Consolidated Financial Statements of Reliability, Inc. Consolidated Balance Sheets as of December 31, 2021, and 2020 46 Consolidated Statements of Operations for the years ended December 31, 2021, and 2020 47 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021, and 2020 48 Consolidated Statements of Cash Flows for the years ended December 31, 2021, and 2020 49 Notes to Consolidated Financial Statements 51 43 18012 Sky Park Circle, Suite 200 Irvine, California 92614 tel 949-852-1600 fax 949-852-1606 www.rjicpas.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Reliability Incorporated: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Reliability Incorporated and Subsidiary (the “Company”) as of December 31, 2021, and 2020, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and 2020, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the Company has experienced cash constraints and extended payment terms from its customers, has been unable to negotiate payments due on its related party receivables which are currently in default, is currently unable to access the capital markets, and believes the impact of the COVID 19 pandemic will continue to have a material impact on its business, operations and cash flows. These factors raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Security and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit Committee of the Board of Directors and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate. Related Party Transactions and Recoverability of Notes Receivable from Related Parties As discussed in Notes 10 and 12 to the consolidated financial statements, the Company has significant related party transactions and arrangements with the majority owners of the Company and other companies owned by the majority owners. In addition to holding several receivable agreements, including notes receivable with these related parties, the Company is currently involved in a lawsuit against one of the majority owners and other companies owned by the majority owner. We determined the (1) evaluation of the identification of related parties, (2) related party transactions and (3) collectability of notes receivable from related parties, collectively, as a critical audit matter. Auditor judgement was involved in assessing the sufficiency of the procedures performed to identify related parties, identify related party transactions and assess the collectability of the notes receivable from related parties. 44 The following are the primary procedures we performed to address this critical audit matter. We performed the following procedures to evaluate the identification of related parties, related party transactions and the collectability of the notes receivable from related parties by the Company: ● Reviewed any new agreements and contracts between the Company and its related parties, noting none; ● Queried the accounts payable system for transactions with its related parties; ● Inspected director and officer questionnaires from the Company’s directors and officers; ● Evaluated the Company’s reconciliation of its applicable accounts to the related parties’ records of transactions and balances; ● Read the Company’s minutes from meetings of the Board of Directors and related committees; ● Inquired with executive officers and key members of management as to the collectability of these balances due from related parties; ● Reviewed public filings, external news, and research sources for information related to transactions between the Company and related parties; and ● Confirmed with the Company’s management and its outside counsel as to the status of the lawsuits. We have served as the Company’s auditor since 2009. Ramirez Jimenez International CPAs Irvine, California March 31, 2022 45 RELIABILITY INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS 2021 2020 (amounts in thousands, except per share data) December 31 2021 2020 ASSETS CURRENT ASSETS Cash and cash equivalents $ 24 $ 70 Trade receivables, net of allowance for doubtful accounts 6,405 6,870 Retention credit receivable 2,494 - Notes receivable from related parties 4,985 4,258 Prepaid expenses and other current assets 331 289 Total current assets 14,239 11,487 Property, plant and equipment, net 49 76 Other intangible assets, net - 203 Goodwill - 518 Total assets $ 14,288 12,284 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Factoring liability $ 946 $ 2,999 Accounts payable 1,205 936 Accrued expenses 404 375 Accrued payroll 1,629 691 Deferred revenue 176 182 Income taxes payable 517 292 Other current liabilities 1 42 Total current liabilities 4,878 5,517 PPP loan payable - 5,250 Total liabilities 4,878 10,767 Commitment and contingencies (Note 12) - Subsequent events (Note 15) - STOCKHOLDERS’ EQUITY Common stock, without par value, 300,000,000 shares authorized, 300,000,000 issued and outstanding as of December 31, 2021, and 2020 - - Additional paid-in capital 750 750 Retained earnings 8,660 767 Total stockholders’ equity 9,410 1,517 Total liabilities and stockholders’ equity $ 14,288 $ 12,284 The accompanying notes to consolidated financial statements are an integral part of these financial statements. 46 RELIABILITY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share data) 2021 2020 For the Years Ended December 31 2021 2020 Revenue earned Service revenue $ 26,246 $ 29,202 Cost of revenue Cost of revenue 22,980 25,728 Gross profit 3,266 3,474 Selling, general and administrative expenses 3,567 4,462 Operating income (loss) ( 301 ) ( 988 ) Other income (expense) Interest income from related parties 274 112 Interest income - 8 Interest expense ( 39 ) ( 281 ) Impairment of goodwill and other intangible assets ( 688 ) - Other income (expense) 9,631 ( 1 ) Income (loss) before income tax benefit / (expense) 8,877 ( 1,150 ) Income tax benefit/(expense) ( 984 ) 230 Consolidated net income (loss) 7,893 ( 920 ) Less net (income) loss attributable to noncontrolling interest in consolidated affiliates - 131 Net income (loss) attributable to Reliability Inc. $ 7,893 $ ( 789 ) Net income per share: Basic $ 0.03 $ 0.00 Diluted $ 0.03 $ 0.00 Share used in per share computation: Basic 300,000,000 300,000,000 Diluted 300,000,000 300,000,000 The accompanying notes to consolidated financial statements are an integral part of these financial statements. 47 RELIABILITY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS’ EQUITY For the year ended December 31, 2021 and 2020 (amounts in thousands, except per share data) Shares Amount Capital Earnings Total Affiliates Equity Controlling Interest Add- Non - Controlling itional Interest in Common Stock Paid-in Retained Consolidated Total Shares Amount Capital Earnings Total Affiliates Equity Balance, January 1, 2020 300,000,000 - 750 1,840 2,590 ( 313 ) 2,277 Net income (loss) - - ( 971 ) ( 971 ) 182 ( 789 ) VIE Disposal - - ( 102 ) ( 102 ) 131 29 Balance, December 31, 2020 300,000,000 - 750 767 1,517 - 1,517 Net income - - - 7,893 7,893 - 7,893 Balance, December 31, 2021 300,000,000 - 750 8,660 9,410 - 9,410 The accompanying notes to consolidated financial statements are an integral part of these financial statements. 48 RELIABILITY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) 2021 2020 For the Years Ended December 31, 2021 2020 Cash flows from operating activities: Net income (loss) $ 7,893 $ ( 789 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 72 79 (Gain)/loss on disposal of property and equipment ( 4 ) ( 176 ) Accrued interest ( 274 ) ( 68 ) Loss on impairment of goodwill and other intangible assets 688 - Gain on forgiveness of PPP loan payable and interest ( 5,250 ) - Changes in operating assets and liabilities: Trade receivables 464 159 Retention credit receivable ( 2,494 ) - Prepaid expenses and other current assets ( 42 ) 27 Accounts payable 270 ( 151 ) Accrued payroll 939 ( 217 ) Accrued expenses 28 ( 142 ) Deferred revenue ( 6 ) ( 166 ) Other liabilities ( 4 ) ( 101 ) Income taxes payable 225 ( 525 ) Net cash provided by (used in) operating activities 2,505 ( 2,070 ) Cash flows from investing activities: Purchase of fixed assets ( 7 ) ( 50 ) Net cash used in investing activities ( 7 ) ( 50 ) Cash flows from financing activities: Net borrowing/(repayment) of line-of-credit ( 2,053 ) ( 2,509 ) Proceeds from long-term debt (PPP) - 5,216 Repayment of notes ( 37 ) - Advances to related parties ( 454 ) 61 Repayment of long-term debt - ( 853 ) Net cash used in financing activities ( 2,544 ) 1,915 Net (decrease) in cash and cash equivalents ( 46 ) ( 205 ) Cash and cash equivalents, beginning of year 70 275 Cash and cash equivalents, end of year $ 24 $ 70 The accompanying notes to consolidated financial statements are an integral part of these financial statements. 49 RELIABILITY INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS, continued (amounts in thousands) For the years ended December 31, Supplemental disclosures of cash flow information: 2021 2020 Cash paid during the year for: Interest $ 39 $ 275 Income taxes $ 969 $ 301 Supplemental disclosures of non-cash investing and financing activities: PPP Loan and interest forgiveness $ 5,250 $ - VIE net asset consolidated (unconsolidated) $ - $ ( 1,790 ) VIE liabilities consolidated (unconsolidated) $ - $ ( 1,790 ) The accompanying notes to consolidated financial statements are an integral part of these financial statements. 50 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 1 - NATURE OF OPERATIONS Reliability, Inc. is a leading provider of employer of record and temporary media and information technology (“IT”) staffing services that operates, along with its wholly owned subsidiary, The Maslow Media Group, Inc., (collectively, “Reliability” or the “Company”), primarily within the United States of America in three industry segments: Employer of Record (“EOR”), Recruiting and Staffing and Video and Multimedia Production which provides script to screen media talent. EOR which is a unique workforce management solution, represented 80.8 % of the revenue in 2021. Our Staffing segment provides skilled field talent on a nationwide basis for IT and finance and accounting client partner projects. Our Staffing includes revenue derived from permanent placement. Video Production involves assembling and providing crews for special projects that can last anywhere from a week to 6 months. On October 29, 2019, Maslow Media Group (“Maslow” or “MMG”) became a wholly owned subsidiary of Reliability via a reverse merger (the “Merger”). On December 1, 2019, the Company acquired the customer contracts and trade receivables and assumed certain liabilities of Intelligent Quality Solutions, Inc. (“IQS”). IQS operates as a division of MMG. In 2021 MMG began building its direct hire business as a separate business segment titled Permanent placement. This division added $ 167 in revenue and $ 164 in gross profit in 2021. NOTE 2 - LIQUIDITY AND GOING CONCERN During the years ended December 31, 2021, and 2020, we had an operating loss of $ 301 and $ 988 , respectively. Management considers on a regular basis, the Company’s ability to continue as a going concern. The factors which have impacted the business and our liquidity are; ● Uncertainty in outcome of arbitration hearing with Vivos Group which will likely not have decision rendered until approximately the end of the second quarter; ● Operating loss of approximately $ 301 for the year ending December 31, 2021; ● Payment of $ 475 plus $ 3 in associated legal costs on July 21, 2021, to satisfy a Vivos Group debt that was supposed to have been paid by the Vivos Group and covered by the Liquidation Agreement but Vivos Group refuses to cooperate; ● The pandemic-resulting decline in client demand for our services continuing through the present; ● Difficulties in raising cash via public markets for organic and inorganic growth, due to lack of unissued authorized shares available for Company use, despite having public company cost structure; ● Inability to realize approximately $ 5 M in notes receivables from Vivos Group; ● Contingent liabilities, described further in Note 10 All these conditions noted and factored in above with the prevailing risk being that the arbitration (see Item 1) outcome is not in the Company’s favor, and the $ 4,985 in notes receivable are 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 2021 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. 51 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Company’s consolidated financial statements reflect the financial position and operating results of Reliability, Inc. including its wholly owned subsidiary, Maslow. All intercompany transactions and balances have been eliminated in consolidation. Fiscal Year The Company’s fiscal year is from January 1 st through December 31 st . Management Estimates The consolidated financial statements and related disclosures are prepared in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The Company must make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to revenue recognition, allowances for doubtful accounts, recoverability of notes receivable, goodwill and intangible assets, useful lives for depreciation and amortization, loss contingencies, valuation allowances for deferred income taxes, and the assumptions used for web site development cost classifications. Actual results may be materially different from those estimated. In making its estimates, the Company considers the current economic and legislative environment. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of 90-days or less to be cash equivalents. Concentration of Credit Risk For the year ended December 31, 2021, the Company’s top 10 clients generated over 85 % of the revenue. A large portion of our business comes from two clients, AT&T Services, Inc. (inclusive of its DirecTV division) (“AT&T”) and Janssen Pharmaceuticals (which includes workforce partners Johnson & Johnson). AT&T accounted for 28 % and 29 % of revenue in 2021 and 2020, respectively. AT&T comprised approximately 41 % and 49 % of the accounts receivable balance as of December 31, 2021, and 2020, respectively. Janssen Pharmaceuticals (which includes workforce partners Johnson & Johnson) accounted for approximately 15 % and 11 % of our total revenues for the years ended December 31, 2021, and 2020, respectively. Janssen Pharmaceuticals comprised approximately 33 % and 18 % of accounts receivable as of December 31, 2021, and 2020, respectively. Morgan Stanley and Goldman Sachs receivables were 6.4 % and 5.5 % of receivables respectively. No other client exceeded 10% of revenues . Financial instruments, which potentially subject the Company to concentrations of credit risk, are primarily cash and accounts receivable. The Company performs continuing credit evaluations of its customers and does not require collateral. The Company has not experienced significant losses related to receivables. Accounts Receivable, Contract Assets, and Contract Liabilities (Deferred Revenue) Receivables represent both trade receivables from customers in relation to fees for the Company’s services and unpaid amounts for benefit services provided by third-party vendors, such as healthcare providers for which the Company records a receivable for funding until the payment is received from the customer and a corresponding customer obligations liability until the Company disburses the balances to the vendors. The Company provides for an allowance for doubtful accounts by specifically identifying accounts with a risk of collectability and providing an estimate of the loss exposure. Management considers all contract receivables as of December 31, 2021, and 2020 to be fully collectible, therefore an allowance for doubtful accounts is not provided for. 52 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) The Company records accounts receivable when its right to consideration becomes unconditional. Contract assets primarily relate to the Company rights to consideration for services provided that they are conditional on satisfaction of future performance obligations. The Company holds customer deposits of certain customers related to its EOR business to minimize cash flow impact and reduces risks of uncollectible trade receivables. The Company records contract liabilities (deferred revenue) when payments are made or due prior to the related performance obligations being satisfied. The current portion of the Company contract liabilities is included in accrued liabilities in its consolidated balance sheets. The Company does not have any material contract assets or long-term contract liabilities. As of December 31, 2021, and 2020, the Company’s deferred revenue totaled $ 176 and $ 182 respectively. Fair Value Measurements The Company measures fair value based on the price that the Company would receive upon selling an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. Various inputs are used in determining the fair value of assets or liabilities. Inputs are classified into a three-tier hierarchy, summarized as follows: ● Level 1 – Quoted prices in active markets for identical assets or liabilities; ● Level 2 – Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the assets or liabilities; ● Level 3 – Significant unobservable inputs for the assets or liabilities. When Level 1 inputs are not available, the Company measures fair value using valuation techniques that maximize the use of relevant observable inputs (Level 2) and minimizes the use of unobservable inputs (Level 3).The carrying amounts reported as of December 31, 2021 and 2020 for cash and cash equivalents, trade receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, and factoring liability approximate their fair values due to the short-term nature of these instruments or are based on interest rates available to the Company that are comparable to current market rates. The estimated fair value of the Company’s PPP loan payable approximated its carrying value as the rate on this debt was determined by the U.S. government which was offered to all participating companies under the CARES Act. It is not practicable to estimate the fair value of the notes receivable from related parties due to their related party nature. Property and Equipment Property and equipment are stated at cost and are depreciated using primarily the straight-line method over the following estimated useful lives: furniture, fixtures, and computer equipment — three to seven years; leasehold improvements — over the shorter of the estimated useful life of asset or the lease term . Expenditures for renewals and betterments are capitalized whereas expenditures for repairs and maintenance are charged to income as incurred. Upon sale or disposition of property and equipment, the difference between the unamortized cost and the proceeds is recorded as either a gain or a loss. Depreciation and amortization expense for the years ended December 31, 2021, and 2020 totaled $ 38 and $ 46 , respectively. Long-Lived Assets The Company reviews its long-lived assets, primarily fixed assets, intangible assets and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. The Company recorded an impairment loss in the amount of $ 688 for goodwill and intangible assets in 2021. 53 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) Intangible Assets The Company held intangible assets with finite lives. Intangible assets with finite useful lives were amortized over their respective estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible asset is realized. For the years ended December 31, 2021, and 2020, amortization expense was $ 34 for both years prior to taking impairment on the remaining intangible value. Identifiable intangible assets recognized in conjunction with acquisitions are recorded at fair value. Significant unobservable inputs are used to determine the fair value of the identifiable intangible assets based on the income approach valuation model whereby the present worth and anticipated future benefits of the identifiable intangible assets were discounted back to their net present value. The Company evaluates the recoverability of intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. The Company annually evaluates the remaining useful lives of all intangible assets and goodwill to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company determined that there was impairment needed for these assets during the year ended December 31, 2021, and thus impaired $ 170 in remaining carrying value of IQS based intangible assets. Goodwill Goodwill represents the difference between the enterprise value/cash paid less the fair value of all recognized net asset fair values including identifiable intangible asset values in a business combination. The Company reviews goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Based on annual testing, the Company has determined that there was goodwill impairment during the year ended December 31, 2021. Thus, the Company recorded a goodwill impairment adjustment of $ 518 upon finalizing the detailed step two impairment analysis for the IQS segment that led to a decrease in revenue ($ 2,000 ) in 2021 from 2020. Revenue Recognition The Company derives its revenues from three segments: EOR, Recruiting and Staffing, and Video and Multimedia Production. The Company provides temporary staffing and permanent placement services. Revenues are recognized when promised services are delivered to client, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues as presented on the consolidated statements of operations represent services rendered to clients, less sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and the related amounts of reimbursable expenses are included in cost of services. Temporary staffing revenues - Field talent revenues from contracts with clients are recognized in the amount to which the Company has a right to invoice when the services are rendered by the Company’s field talent. Permanent placement staffing revenues - Permanent placement staffing revenues are recognized when employment candidates start their permanent employment. The Company estimates the effect of permanent placement candidates who do not remain with its client through the guarantee period (generally 90 days) based on historical experience. Allowances, recorded as a liability, are established to estimate these losses. Fees to client are generally calculated as a percentage of the new worker’s annual compensation. No fees for permanent placement services are charged to employment candidates. Refer to Note 14 for disaggregated revenues by segment. 54 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) Payment terms in our contracts vary by the type and location of our client partner and the services offered. The term between invoicing and when payment is due is not significant. There were no unsatisfied performance obligations as of December 31, 2021. There were no revenues recognized during years ended December 31, 2021, and 2020 related to performance obligations satisfied or partially satisfied in previous periods. There are no contract costs capitalized. The Company did no t recognize any contract impairments during the years ended December 31, 2021, and 2020. Advertising The Company recognizes marketing and promotion expense in selling, general and administrative expenses as the services are incurred. Total marketing and promotion expense for the years ended December 31, 2021, and 2020 was $ 23 and $ 24 , respectively. Earnings (Loss) Per Share Basic earnings (loss) per common share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Income Taxes The Company accounts for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and net operating loss and tax credit carry forwards, using enacted tax rates and laws that are expected to be in effect when the differences reverse. A valuation allowance is recorded against deferred tax assets in these cases when management does not believe that the realization is more likely than not. While management believes that its judgements and estimates regarding deferred tax assets and liabilities are appropriate, significant differences in actual results may materially affect the Company’s future financial results. The Company recognizes any uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained . The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2021, and 2020, the Company did not record any accruals for interest and penalties. The Company does not foresee material changes to its uncertain tax positions within the next twelve months. The Company’s tax years are subject to examination for 2018 and forward for U.S. Federal tax purposes and for 2017 and forward for state tax purposes . Recently Issued Accounting Pronouncements 55 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments. This ASU was issued to address the day-one loss issue related to a lessor’s accounting for certain leases with variable lease payments. Under the update, a lessor will classify a lease with variable lease payments that do not depend on an index or a rate as operating if the following two conditions are met: the lease would be classified as sales-type or direct financing lease and doing so would result in recognizing a selling loss. Fixed lease payments will be recognized in income on a straight-line basis and any variable payments will continue to be recognized when the changes in facts and circumstances on which those variable payments are based occur. ASU 2021-05 if effective for all companies in fiscal year starting after December 15, 2021. Public companies are required to adopt this ASU in interim periods during the fiscal year starting after December 15, 2021, which other entities will adopt in interim periods starting after December 2022. Early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements and related disclosures. In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs. This ASU provides more detailed explanation on the subsequent measurement of callable debt and whether callable debt falls within the scope of paragraph 310-20-35-33. ASU 2020-08 applies to all entities with callable debt and is effective for public business entities for fiscal years beginning after December 15, 2020, with early adoption not permitted. The Company’s adoption of this ASU did not have a material impact on its consolidated financial position and results of operations for the year ending December 31, 2021. In August 2018, the FASB issued ASU No. 2018-15, Intangibles–Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract , to provide additional guidance on the accounting for costs of implementing cloud computing arrangements that are service contracts. The amendments in this update require the capitalization of implementation costs during the application development stage of such hosting arrangements and amortization of the expense over the term of the arrangement, including any option to extend reasonably certain to be exercised or option to terminate reasonably certain not to be exercised. Capitalized implementation costs and amortization thereof are also required to be classified in the same line item in the statements of financial position, operations and cash flows associated with the hosting service fees. The amendments in this update were effective for us beginning with fiscal year 2020. Entities may select retrospective or prospective application to all implementation costs incurred after the adoption date. We selected prospective application to all implementation costs incurred after the adoption date. The adoption of the amendments in this update did not have a material impact on our property and equipment, net and results of operations as of and for the year ended December 31, 2021 In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes , to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update will be effective for us beginning with fiscal year 2021, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of the amendments did have a material impact on our consolidated financial position and results of operations as of and for the year ended December 31, 2021. 56 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment , to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this update will be effective for the Company beginning with fiscal year 2023, with early adoption permitted. The Company adopted this during 2021 resulting in an impairment charge as stated in the financial statements. The Company does not believe any other recently issued but not yet effective accounting pronouncement, if adopted, would have a material effect on its present or future consolidated financial statements. NOTE 4 – TRADE RECEIVABLES SUMMARY OF CONTRACT RECEIVABLES 2021 2020 Contract receivables consist of the following as of: 2021 2020 Billed receivables $ 4,646 $ 3,630 Unbilled receivables 813 241 Accounts receivable, factored 946 2,999 Total $ 6,405 $ 6,870 All of the net trade receivables are pledged as collateral on a loan agreement. NOTE 5 – PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of December 31, 2021, and 2020 consists of the following: SUMMARY OF PROPERTY, PLANT AND EQUIPMENT 2021 2020 Office equipment 51 63 Computer software 110 107 Operating lease asset - 18 Property, plant and equipment, gross 161 188 Accumulated depreciation ( 112 ) ( 112 ) Property, plant and equipment, net $ 49 $ 76 NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS The Company acquired intangible assets as part of the IQS acquisition in 2019. The Company recorded $ 518 of goodwill and $ 240 of intangibles from this acquisition. In the fourth quarter of 2021, the Company determined through testing using guidance from ASU 2017-04 that the goodwill of $ 518 and remaining $ 170 in intangible assets made up of the IQS trade name and customer base had been fully impaired and were written off. 57 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 7 - ACCRUED EXPENSES Accrued expenses consist of the following as follows: SUMMARY OF ACCRUED EXPENSES 2021 2020 December 31, 2021 2020 Accrued vendor costs $ 182 166 Financed insurance payable 176 133 Other 46 76 Accrued expenses $ 404 $ 375 NOTE 8 - INCOME TAXES Income tax expense (benefit) for the years ended December 31, 2021, and 2020 are comprised of the following: SUMMARY OF INCOME TAX EXPENSE 2021 2020 Current federal income tax $ 743 $ ( 276 ) Current state income tax 241 46 Deferred income tax (benefit) - - Income tax expense (benefit) $ 984 ( 230 ) Significant components of the Company’s deferred income tax assets (liabilities) are as follows at: SUMMARY OF DEFERRED INCOME TAX ASSETS (LIABILITIES) 2021 2020 December 31 2021 2020 Deferred tax assets (liabilities): Employee accruals $ 16 $ 70 Cash to accrual - ( 15 ) Accrued workers’ compensation and other 18 26 State deduction 41 - Sec. 163(j) interest limitation - 38 Federal and State net operating loss carry forwards 94 79 Deferred tax liabilities: Intangibles - ( 5 ) Fixed assets ( 9 ) ( 19 ) Deferred income taxes, net 160 174 Valuation allowance ( 160 ) ( 174 ) Deferred tax assets (liabilities) $ - $ - The income tax provision, reconciled to the tax computed at the statutory federal rate, is as follows: SCHEDULE OF INCOME TAX PROVISION, RECONCILED TO TAX COMPUTED AT STATUTORY FEDERAL RATE December 31 2021 2020 Tax expense at federal statutory rate $ 1,874 21 % $ ( 214 ) 21 % State income taxes, net 165 1.8 % ( 54 ) 5.3 % Meals and entertainment - - % 1 - 0.1 % Forgiveness of PPP Loan - Federal ( 1,095 ) - 12.3 % - - Valuation allowance ( 13 ) - 0.2 % 88 - 8.7 % Other, net 53 0.2 % ( 51 ) 6.2 % Income tax expense $ 984 11.03 % $ ( 230 ) 22.58 % 58 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 9 - DEBT Convertible Debt Tax Liabilities When MMG was initially acquired by Vivos Holdings, LLC in December 2016, the Company’s corporate status was changed from an S Corp to a C Corp due to its new ownership structure. This triggered an accelerated tax event, a $ 215 estimated annual impact per year for 4 years which was accounted for in subsequent tax returns through 2019. In 2021 Maslow 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 December 31, 2021, the Company’s overall tax liability was $ 517 compared to $ 292 at the end of 2020. Factoring Facility Triumph Business Capital On November 4, 2016, the Company entered into a factoring and security agreement with Triumph Business Capital (“Triumph”). Pursuant to the agreement, the Company received advances on its accounts receivable (i.e., invoices) through Triumph to fund growth and operations. The proceeds of this agreement were used to pay operating costs of the business which include employee salaries, vendor payments and overhead expenses. On January 5, 2018, the agreement was amended to lower the factoring fee and interest rate for a term of one year. The agreement was amended again on January 19, 2018, to increase the maximum advance rate to $ 5,500 . In January 2020, a new agreement was negotiated with Triumph lowering advance rate from 18 basis points to 15 and the interest rate from prime plus 2.5 % to prime plus 2 %. The amount of an invoice eligible for sale to Triumph went from 90% to 93% . The agreement which previously renewed annually, is now month to month. The Company continues to be obligated to meet certain financial covenants in respect to invoicing and reserve account balance. In accordance with the agreement, a reserve amount is required for the total unpaid balance of all purchased accounts multiplied by a percentage equal to the difference between one hundred percent and the advanced rate percentage. As of December 31, 2021, 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 $ 6,436 and $ 13,787 for the years ended December 31, 2021, and 2020, respectively. The total outstanding balance under the recourse contract was $ 946 and $ 2,999 as of December 31, 2021, and 2020, respectively. The Factoring Facility is collateralized by substantially all the assets of the Company. In the event of a default, the Factor may demand that the Company repurchase the receivable or debit the reserve account. Total finance line fees for the years ended December 31, 2021, and 2020 totaled $ 71 and $ 65 respectively. PPP Loan Payable On June 10, 2021, MMG received notification by the Small Business Administration (“SBA”) of forgiveness of its PPP 2020 Loan totaling $ 5,216 . The forgiveness included the deferred interest of $ 59 totaling $ 5,275 in principal and interest. $ 57 of the $ 59 was booked as of June 10, 2021, which was the portion credited to interest expense. 59 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 10 – COMMITMENTS AND CONTINGENCIES There are a number of debts and confessions of judgement (“COJ”) related to the Vivos Group that included Maslow as a co-signer or guarantor at some stage in the Vivos Group debt process from November 2016 through October 29, 2019, when Vivos Holdings LLC owned Maslow. All known debts disclosed to Maslow management and Reliability prior to the merger were addressed by various safeguards such as the Liquidation Agreement, and the Naveen Doki personal guarantee described in Item 1. However, there were certain non-disclosures by Vivos Holdings, LLC that are included below which are completely covered in Note 12 and Item 3 Legal Proceedings. In December 2019, the Company’s executive management learned that prior to the Merger, in January 2018, one of the Company’s related parties, on behalf of Maslow, executed a guarantee of obligations of Vivos Real Estate Holdings, LLC (“VREH”), under a mortgage loan for the purchase of the property at 22 Baltimore Rd., Rockville, Maryland. Maslow leased this space on market terms. This obligation had not been included in Maslow’s financial statements and were not separately disclosed prior to the Merger. On March 3, 2022, Maslow received a notice of default, acceleration, and demand for payment in full from FVCBank due to incurable events of default on behalf of Borrower Vivos Real Estate Holdings LLC. Per the default notice, “As of March 2, 2022, the total indebtedness due and owing under the Loan (the ‘‘Debt’’) is $ 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 . Maslow may have grounds to contest it being a guarantor on the loan. Credit Cash: Maslow has not been formally notified of an obligation to pay Credit Cash due to a now known default on Vivos Group’s COJ. On October 9, 2018, Maslow Media Group, Inc. was named as a defendant in an Affidavit of COJ filed in the Supreme Court of the State of New York in relation to a case brought by Hop Capital against members of the Vivos group, which had collectively agreed to pay a sum of $ 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, Maslow Media Group, Inc. 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. On February 28, 2020, Healthcare Resource Network, LLC filed a complaint against Maslow in the Circuit Court of Montgomery County, Maryland alleging that Maslow participated with the Vivos Group to financially harm the plaintiff. The plaintiff has not specified any alleged damage caused by Maslow and the Company believes any claims are without merit. On or about May 6, 2020, the Vivos Debtors and other Vivos Group members, specifically. Pathuri, Judos, and Igly responded to the Vivos Default Claim with the “Vivos Default Counterclaim”. The Company continues to believe that the Counterclaim has no merit and is vigorously defending itself and its indemnified officers, directors and other parties as permitted by the Company’s organizational documents, via a March 2022 arbitration hearing which both parties agreed on September 7, 2021, to resolve their disputes before a single arbitrator in Maryland. The hearing began on March 21 and is set to conclude on March 30, 2022. A decision isn’t anticipated until sometime in the late second quarter. At the present time, the Company is uncertain as to whether any of the above items will have a material impact on their consolidated financial statements. 60 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 11 - EQUITY The Company’s authorized capital stock consists of 300,000,000 shares of common stock, with no par value. All authorized shares of Company common stock are issued and outstanding. NOTE 12 - RELATED PARTY TRANSACTIONS Stock Purchase Agreement On November 9, 2016, Vivos Holdings LLC, the former owner of MMG, acquired 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 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. 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. 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 installments 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 December 31, 2021, the total outstanding balance was $ 816 which includes accrued interest receivable of $ 64 . 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. 61 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) As of February 2020, the Company filed a lawsuit against the majority shareholder, pursuant to the personal guaranty agreement for defaulting on the outstanding notes receivables. In summary, the Vivos Group receivable totaled $ 4,258 on December 31, 2020, which included $ 2,007 of additional borrowings over the period between November 2016 and December 31, 2109. As of December 31, 2021, the receivable totaled $ 4,985 . 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 Naveen Doki and Silvija Valleru personally guaranty the repayment of the note by the Vivos Group. Naveen 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. As of December 31, 2021, the total outstanding balance was $ 790 , which includes interest of $ 20 . Debt Settlement Agreements On July 21, 2021, Maslow settled the obligation which Vivos Holdings, LLC had obligated Maslow to in July 2018, with Libertas Funding, LLC and Kinetic for $ 475 . (See Section 1A). On March 6, 2022, Maslow received a notice of default, acceleration, and demand for payment in full from FVCBank due to incurable events of default on behalf of Borrower Vivos Real Estate Holdings LLC. (See Note 10). Related Party Relationships On October 29, 2019, prior to the Merger, pursuant to the Merger Agreement, Naveen Doki and Silvija Valleru became beneficial owners of 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. 62 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) On June 27, 2019, prior to the Merger, MMG entered into a Securities Purchase Agreement with Hawkeye Enterprises, Inc., a company owned and controlled by Mark Speck (“Mr. Speck”), an officer and then director of Maslow. Pursuant to this agreement, MMG issued to Hawkeye Enterprises 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) 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, totaling $ 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. On September 7, 2021, the Company entered in Arbitration and Tolling Agreements with alleged shareholder Naveen Doki, M.D., and his affiliates and all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing to resolve their disputes before a single arbitrator in Maryland. The parties also agreed to maintain the status quo in corporate governance and related matters pending a final non-appealable judgment confirming any award in arbitration. The parties also signed a Tolling Agreement to toll the statute of limitations following the dismissal of a pending litigation. 63 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 13 - EMPLOYEE BENEFIT PLAN The Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible full-time employees. The 401(k) Plan allows employees to make contributions subject to applicable statutory limitations. The Company currently does not match employee contributions. NOTE 14 - BUSINESS SEGMENTS The Company operates within four industry segments: EOR, Recruiting and Staffing, Permanent Placement (Direct Hire) 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 Placement fulfils direct hire requests by MMG clients for a wide variety of posts, including administrative, media and IT professionals. The Video and Multimedia Production segment provides Script to Screen services for corporate, government and non-profit clients, globally. Segment operating income includes revenue and cost of services only. Currently, the Company is not allocating sales, general and administrative costs at the segment level. The following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results for the periods indicated: SCHEDULE OF RECONCILIATION OF REVENUE AND OPERATING INCOME BY REPORTABLE SEGMENT TO CONSOLIDATED RESULTS December 31 2021 2020 Revenue: EOR $ 21,346 $ 23,599 Recruiting and Staffing 3,613 4,478 Video and Multimedia Production 1,121 1,125 Permanent Placement 166 - Total $ 26,246 $ 29,202 NOTE 15- SUBSEQUENT EVENTS The Company has evaluated subsequent events after the balance sheet date of December 31, 2021, through March 31, 2021, the date on which the consolidated financial statements were available to be issued. Based upon this evaluation, management has determined that no material subsequent events have occurred that would require recognition in or disclosures in the accompanying consolidated financial statements, except as follows: On March 6, 2022, Maslow received a notice of default, acceleration, and demand for payment in full from FVCBank due to incurable events of default on behalf of Borrower Vivos Real Estate Holdings LLC. Per the default notice, “As of March 2, 2022, the total indebtedness due and owing under the Loan (the ‘‘Debt’’) is $ 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 . Notwithstanding, Maslow has grounds to protest its status as a guarantor on the loan and is pursuing this matter with FVCBank. No assurances can be made to guarantee that the outcome of this matter is in the Company’s favor. On March 21, 2022, the Company began its arbitration proceedings against the Vivos Group that is slated to run into the 2 nd quarter of 2022, with anticipation of a decision by July 7, 2022. Maslow contends the Vivos Group committed merger violations and continues to pursue the defaults on the related party notes receivable. The outcome of the arbitration could result in relinquishment in whole or in part shares of Company common stock received by the Respondents in connection with the Merger. 64 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.