RELIABILITY INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Independent Registered Public Accounting Firms PCAOB ID NO: 820 40 Audited Consolidated Financial Statements of Reliability, Inc. Consolidated Balance Sheets as of December 31, 2022 and 2021 42 Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 43 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022 and 2021 44 Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 45 Notes to Consolidated Financial Statements 47 39 18012 Sky Park Circle, Suite 200 Irvine, California 92614 tel 949-852-1600 fax 949-852-1606 www.rjicpas.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Reliability Incorporated: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Reliability Incorporated and Subsidiary (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, changes stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Security and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit Committee of the Board of Directors and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate. Related Party Transactions and Recoverability of Notes Receivable from Related Parties As discussed in Notes 10 and 12 to the consolidated financial statements, the Company has significant related party transactions and arrangements with the majority owners of the Company and other companies owned by the majority owners. In addition to holding several receivable agreements, including notes receivable with these related parties, in 2022, an arbitrator issued an aware in favor of the Company against one of the majority owners and other companies owned by the majority owner. 40 We determined the (1) evaluation of the identification of related parties, (2) related party transactions and (3) collectability of notes receivable from related parties, collectively, as a critical audit matter. Auditor judgement was involved in assessing the sufficiency of the procedures performed to identify related parties, identify related party transactions and assess the collectability of the notes receivable from related parties. The following are the primary procedures we performed to address this critical audit matter. We performed the following procedures to evaluate the identification of related parties, related party transactions and the collectability of the notes receivable from related parties by the Company: ● Reviewed any new agreements and contracts between the Company and its related parties, noting none; ● Queried the accounts payable system for transactions with its related parties; ● Inspected director and officer questionnaires from the Company’s directors and officers; ● Evaluated the Company’s reconciliation of its applicable accounts to the related parties’ records of transactions and balances; ● Read the Company’s minutes from meetings of the Board of Directors and related committees; ● Inquired with executive officers and key members of management as to the collectability of these balances due from related parties; ● Reviewed public filings, external news, and research sources for information related to transactions between the Company and related parties; and ● Confirmed with the Company’s management and its outside counsel as to the award granted by the arbitrator. We have served as the Company’s auditor since 2009. Ramirez Jimenez International CPAs Irvine, California March 31, 2023 41 RELIABILITY INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (amounts in thousands, except per share data) 2022 2021 December 31, 2022 2021 ASSETS CURRENT ASSETS Cash and cash equivalents $ 227 $ 24 Trade receivables, net of allowance for doubtful accounts 6,337 6,405 Retention credit receivable 1,219 2,494 Notes receivable from related parties 5,251 4,985 Prepaid expenses and other current assets 430 331 Total current assets 13,464 14,239 Property, plant and equipment, net 26 49 Total assets $ 13,490 14,288 LIABILITIES AND STOCKHOLDER’S EQUITY CURRENT LIABILITIES Factoring liability $ 2,619 $ 946 Accounts payable 698 1,205 Accrued expenses 339 404 Accrued payroll 981 1,629 Deferred revenue 176 176 Income taxes payable 6 517 Other current liabilities - 1 Total current liabilities 4,819 4,878 Total liabilities - - Commitment and contingencies (Note 10) - - Subsequent events (Note 15) - - STOCKHOLDER’S EQUITY Common stock, without par value, 300,000,000 shares authorized, 300,000,000 issued and outstanding as of December 31, 2022 and 2021 - - Additional paid-in capital 750 750 Retained earnings 7,921 8,660 Total stockholder’s equity 8,671 9,410 Total liabilities and stockholder’s equity $ 13,490 $ 14,288 The accompanying notes to consolidated financial statements are an integral part of these financial statements. 42 RELIABILITY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share data) 2022 2021 For the Years Ended December 31, 2022 2021 Revenue earned Service revenue $ 25,725 $ 26,246 Cost of revenue Cost of revenue 22,231 22,980 Gross profit 3,494 3,266 Selling, general and administrative expenses 4,400 3,567 Operating loss ( 906 ) ( 301 ) Other income (expense): Interest income from related parties 232 274 Interest income 53 - Interest expense ( 171 ) ( 39 ) Impairment of goodwill and other intangible assets - ( 688 ) Other income (expense) 223 9,631 Income (loss) before income tax expense ( 569 ) 8,877 Income tax expense ( 170 ) ( 984 ) Consolidated net income (loss) ( 739 ) 7,893 Net income per share: Basic $ 0.00 $ 0.03 Diluted $ 0.00 $ 0.03 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. 43 RELIABILITY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS’ EQUITY For the year ended December 31, 2022 and 2021 (amounts in thousands, except per share data) Add- itional Common Stock Paid-in Retained Total Shares Amount Capital Earnings Equity Balance, January 1, 2021 300,000,000 - 750 767 1,517 Net income - - - 7,893 7,893 Balance, December 31, 2021 300,000,000 - 750 8,660 9,410 Balance, value 300,000,000 - 750 8,660 9,410 Net loss - - - ( 739 ) ( 739 ) Net income (loss) - - - ( 739 ) ( 739 ) Balance, December 31, 2022 300,000,000 - 750 7,921 8,671 Balance, value 300,000,000 - 750 7,921 8,671 The accompanying notes to consolidated financial statements are an integral part of these financial statements. 44 RELIABILITY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) 2022 2021 For the Years Ended December 31, 2022 2021 Cash flows from operating activities: Net income (loss) $ ( 739 ) $ 7,893 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 32 72 (Gain) on disposal of property and equipment - ( 4 ) Accrued interest ( 232 ) ( 274 ) 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 39 464 Retention credit receivable 1,304 ( 2,494 ) Prepaid expenses and other current assets ( 99 ) ( 42 ) Accounts payable ( 507 ) 270 Accrued payroll ( 648 ) 939 Accrued expenses ( 65 ) 28 Deferred revenue - ( 6 ) Other liabilities ( 1 ) ( 4 ) Income taxes payable ( 511 ) 225 Net cash provided by (used in) operating activities ( 1,427 ) 2,505 Cash flows from investing activities: Purchase of fixed assets ( 9 ) ( 7 ) Net cash used in investing activities ( 9 ) ( 7 ) Cash flows from financing activities: Net borrowing/(repayment) of line-of-credit 1,673 ( 2,053 ) Repayment of notes payable - ( 37 ) Advances to related parties ( 34 ) ( 454 ) Net cash provided by (used in) financing activities 1,639 ( 2,544 ) Net increase (decrease) in cash and cash equivalents 203 ( 46 ) Cash and cash equivalents, beginning of year 24 70 Cash and cash equivalents, end of year $ 227 $ 24 The accompanying notes to consolidated financial statements are an integral part of these financial statements. 45 RELIABILITY INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS, continued (amounts in thousands) For the years ended December 31, Supplemental disclosures of cash flow information: 2022 2021 Cash paid during the year for: Interest $ 150 $ 39 Income taxes $ 681 $ 969 Supplemental disclosures of non-cash investing and financing activities: PPP loan and interest forgiveness $ - 5,250 The accompanying notes to consolidated financial statements are an integral part of these financial statements. 46 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 1 - NATURE OF OPERATIONS Reliability, Inc. is a workforce management solutions company that has for 30 years focused primarily on the media industry. In servicing its clients, Reliability provides a variety of staffing services which include employer of record, temporary media and information technology (“IT”) staffing services, and direct hire. Reliability operates, along with its wholly owned subsidiary, The Maslow Media Group, Inc., (collectively, “Reliability” or the “Company”), primarily within the United States of America in four industry segments: Employer of Record (“EOR”), Recruiting and Staffing, Video and Multimedia Production resources, and Direct Hire. EOR which is a unique workforce management solution, represented 85.1 % of our revenue in 2022. Our Staffing segment provides skilled field talent on a nationwide basis for IT and finance and accounting client partner projects. Video Production involves assembling and providing crews for special projects that can last anywhere from a week to 6 months. In 2021, MMG began building its direct hire business as a separate business segment originally titled permanent placement. We now refer to this earning center as Direct Hire. This division added $ 99 and $ 167 in revenue and $ 89 and $ 164 in gross profit in 2022 and 2021 respectively. On October 29, 2019, Maslow Media Group (“Maslow” or “MMG”) became a wholly owned subsidiary of Reliability via a reverse merger (the “Merger”). On December 1, 2019, the Company acquired the customer contracts and trade receivables and assumed certain liabilities of Intelligent Quality Solutions, Inc. (“IQS”). IQS operates as a division of MMG. NOTE 2 - MANAGEMENT’S PLAN Although the Company has experienced operating losses in the years ended December 31, 2022 and 2021, of $ 906 and $ 301 , respectively, management believes it has the ability to continue as a going concern and meet its financial obligation as they become due in 2023 and beyond. The factors impacting this view include, but are not limited to, the following: ● Cash flow forecast showing sufficient cash and working capital 52 weeks from March 5 th , 2023; ● The prospect of receiving the amounts awarded in the arbitration hearing in 2023, which include the $ 5,251 in notes receivable from related parties, plus awards for fraud for $ 4,327 , contract damages of $ 1,000 , and additional interest, and legal fees, after the receiver has been selected; ● The expected receipt of approximately $ 1,219 in the form of a retention credit receivable, with additional interest from the IRS for the second quarter 2021; ● The expected reductions in continuing legal fees in 2023 given the Company is past the preparation and arbitration proceedings; ● Significant reduction of approximately $ 500 in federal and state tax payments made in 2022, based on 2021’s taxable earnings; ● Addition of a new Vice President of Sales recently hired with experience and success in managing contingent and direct hire staffing organizations; and ● The Company has additional availability to use its factoring line to extend borrowing of up to 93 % of unfactored invoices which as of March 19, 2023, was $ 2,141 ; As a result of the foregoing, the Company believes that it has sufficient cash to meet its financial obligations for the next 12 months and beyond as they become due. 47 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Company’s consolidated financial statements reflect the financial position and operating results of Reliability, Inc., including its wholly owned subsidiary, Maslow. All intercompany transactions and balances have been eliminated in consolidation. Fiscal Year The Company’s fiscal year is from January 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, useful lives for depreciation and amortization, loss contingencies, and the valuation allowances for deferred income taxes. Actual results may be materially different from those estimated. In making its estimates, the Company considers the current economic and legislative environment. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of 90-days or less to be cash equivalents. Concentration of Credit Risk For the year ended December 31, 2022, the Company’s top 10 clients generated over 86 % of the revenue. A sizable portion of our business tends to come from three or four clients. In 2022, Client A (inclusive of its Client B division) (“Client AA”), Client C, and Client D accounted for 58.8 % of total revenue. Client AA accounted for 26.3 % and 27.9 % of revenue in 2022 and 2021, respectively. Client AA comprised approximately 47.4 % and 41.1 % of the accounts receivable balance as of December 31, 2022 and 2021, respectively. Client C delivered 19.6 % of revenue in 2022 compared to 14.9 % in 2021. Client D accounted for approximately 12.9 % and 14.5 % of our total revenues for the years ended December 31, 2022 and 2021, respectively. Client D comprised approximately 22.4 % and 32.9 % of accounts receivable as of December 31, 2022 and 2021, 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. 48 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) The Company provides for an allowance for doubtful accounts by specifically identifying accounts with a risk of collectability and providing an estimate of the loss exposure. Management considers all contract receivables as of December 31, 2022 and 2021 to be fully collectible, therefore an allowance for doubtful accounts is not provided for. The Company records accounts receivable when its right to consideration becomes unconditional. Contract assets primarily relate to the Company rights to consideration for services provided that they are conditional on satisfaction of future performance obligations. The Company holds customer deposits of certain customers related to its EOR business to minimize cash flow impact and reduces risks of uncollectible trade receivables. The Company records contract liabilities (deferred revenue) when payments are made or due prior to the related performance obligations being satisfied. The current portion of the Company contract liabilities is included in accrued liabilities in its consolidated balance sheets. The Company does not have any material contract assets or long-term contract liabilities. As of December 31, 2022 and 2021, the Company’s deferred revenue totaled $ 176 . Fair Value Measurements The Company measures fair value based on the price that the Company would receive upon selling an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. Various inputs are used in determining the fair value of assets or liabilities. Inputs are classified into a three-tier hierarchy, summarized as follows: ● Level 1 – Quoted prices in active markets for identical assets or liabilities; ● Level 2 – Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the assets or liabilities; ● Level 3 – Significant unobservable inputs for the assets or liabilities. When Level 1 inputs are not available, the Company measures fair value using valuation techniques that maximize the use of relevant observable inputs (Level 2) and minimizes the use of unobservable inputs (Level 3).The carrying amounts reported as of December 31, 2022 and 2021 for cash and cash equivalents, trade receivables, prepaid expenses and other current assets, accounts payable and accrued expenses, and factoring liability approximate their fair values due to the short-term nature of these instruments or are based on interest rates available to the Company that are comparable to current market rates. It is not practicable to estimate the fair value of the notes receivable from related parties due to their related party nature. Property and Equipment Property and equipment are stated at cost and are depreciated using primarily the straight-line method over the following estimated useful lives: furniture, fixtures, and computer equipment — three to seven years; leasehold improvements — 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, 2022 and 2021 totaled $ 32 and $ 72 , respectively. 49 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) Long-Lived Assets The Company reviews its long-lived assets, primarily fixed assets, intangible assets and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. The Company recorded an impairment loss in the amount of $ 688 for goodwill and intangible assets in 2021. Intangible Assets The Company held intangible assets with finite lives. Intangible assets with finite useful lives were amortized over their respective estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible asset is realized. For the year ended December 31, 2021, amortization expense was $ 34 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 were used to determine the fair value of the identifiable intangible assets based on the income approach valuation model whereby the present worth and anticipated future benefits of the identifiable intangible assets were discounted back to their net present value. The Company evaluated the recoverability of intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. The Company annually evaluates the remaining useful lives of all intangible assets and goodwill to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company determined that there was impairment needed for these assets during the year ended December 31, 2021, and thus impaired $ 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. Revenue Recognition The Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligation(s) in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation. The Company derives its revenues from three segments: EOR, Recruiting and Staffing, and Video and Multimedia Production. The Company provides temporary staffing and Direct Hire services. Revenues are recognized when promised services are delivered to the client, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues as presented on the consolidated statements of operations represent services rendered to clients, less sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and the related amounts of reimbursable expenses are included in cost of revenue. 50 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) Temporary staffing revenues - Field talent revenues from contracts with clients are recognized in the amount to which the Company has a right to invoice when the services are rendered by the Company’s field talent. Direct Hire staffing revenues - Direct Hire staffing revenues are recognized when employment candidates start their permanent employment. The Company estimates the effect of Direct Hire candidates who do not remain with its client through the guarantee period (generally 90 days) based on historical experience. Allowances, recorded as a liability, are established to estimate these losses. Fees to clients are generally calculated as a percentage of the new worker’s annual compensation. No fees for Direct Hire services are charged to employment candidates. Refer to Note 14 for disaggregated revenues by segment. Payment terms in our contracts vary by the type and location of our client partner and the services offered. The term between invoicing and when payment is due is not significant. There were no unsatisfied performance obligations as of December 31, 2022. There were no revenues recognized during years ended December 31, 2022 and 2021 related to performance obligations satisfied or partially satisfied in previous periods. There are no contract costs capitalized. The Company did no t recognize any contract impairments during the years ended December 31, 2022 and 2021. Advertising The Company recognizes marketing and promotion expense in selling, general and administrative expenses as the services are incurred. The total marketing and promotion expense for the years ended December 31, 2022 and 2021 was $ 25 and $ 23 , 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. 51 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) The Company recognizes any uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has 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, 2022 and 2021, 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 2019 and forward for U.S. Federal tax purposes and for 2018 and forward for state tax purposes. Recently Issued Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes , to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update will be effective for us beginning with fiscal year 2022, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of the amendments did not have a material impact on our consolidated financial position and results of operations as of and for the year ended December 31, 2022. In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment , to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this update will be effective for the Company beginning with fiscal year 2023, with early adoption permitted. The Company is currently evaluating the impact on its consolidated financial statements and related disclosures. The Company does not believe any other recently issued but not yet effective accounting pronouncement, if adopted, would have a material effect on its present or future consolidated financial statements. NOTE 4 – TRADE RECEIVABLES Contract receivables consist of the following as of December 31: SUMMARY OF CONTRACT RECEIVABLES 2022 2021 Billed receivables $ 3,131 $ 4,646 Unbilled receivables 587 813 Accounts receivable, factored 2,619 946 Total $ 6,337 $ 6,405 All of the net trade receivables are pledged as collateral on a loan agreement. 52 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 5 – PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of December 31, 2022 and 2021 consists of the following: SUMMARY OF PROPERTY, PLANT AND EQUIPMENT 2022 2021 Office equipment 54 51 Computer software 110 110 Operating lease asset - - Property, plant and equipment, gross 164 161 Accumulated depreciation ( 138 ) ( 112 ) Property, plant and equipment, net $ 26 $ 49 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. NOTE 7 - ACCRUED EXPENSES Accrued expenses consist of the following as follows: SUMMARY OF ACCRUED EXPENSES 2022 2021 December 31, 2022 2021 Accrued vendor costs $ 199 182 Financed insurance payable 124 176 Other 16 46 Accrued expenses $ 339 $ 404 53 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 8 - INCOME TAXES Income tax expense (benefit) for the years ended December 31, 2022 and 2021 are comprised of the following: SUMMARY OF INCOME TAX EXPENSE 2022 2021 Current federal income tax $ 113 $ 743 Current state income tax 57 241 Deferred income tax (benefit) - Income tax expense (benefit) $ 170 984 Significant components of the Company’s deferred income tax assets (liabilities) are as follows at: SUMMARY OF DEFERRED INCOME TAX ASSETS (LIABILITIES) 2022 2021 December 31, 2022 2021 Deferred tax assets (liabilities): Employee accruals $ 134 $ 16 Cash to accrual - Accrued workers’ compensation and other 8 18 State deduction 41 Sec. 163(j) interest limitation 44 - Federal and State net operating loss carry forwards 152 94 Other 1 - Deferred tax liabilities: Intangibles 14 - Fixed assets 22 ( 9 ) Deferred income taxes, net 375 160 Valuation allowance ( 375 ) ( 160 ) 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, 2022 2021 Tax expense at federal statutory rate $ ( 119 ) 21 % $ 1,874 21 % State income taxes, net 6 - 1 % 165 1.8 % Permanent Differences Forgiveness of PPP Loan - Federal - - % ( 1,095 ) - 12.3 % Effect of deferred rate change 14 - 2.5 % Historical Adjustments ( 45 ) 7.8 % Valuation allowance 215 - 37.8 % ( 13 ) -.2 % Other, net - 99 - 17.4 % 53 .2 % Income tax expense $ 170 - 29.9 % $ 984 11.03 % 54 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, 2022, the Company had a federal tax balance of $ 1 compared to $ 284 at the end of 2021. The state tax balance is $ 5 compared with $ 232 at the end of 2021. Factoring Facility Triumph Business Capital and Gulf Coast Bank and Trust On November 4, 2016, the Company entered into a factoring and security agreement with Triumph Business Capital (“TBC”), which was amended in January 2020. The current agreement has an advance rate of 15 basis points, and the interest rate is prime plus 2 %. The amount of an invoice eligible for sale to is 93%. The agreement is on month-to-month terms. On August 24, 2022, we were notified by TBC that our factoring arrangement had been sold to Gulf Coast Bank and Trust (“Gulf”), as TBC had decided to sell its non-transportation portfolio. The transition took place between August 26 th and 28 th with new financing coming from Gulf. However, a portion of unfactored receivables continue to be sent to TBC who routes them to MMG. The Company continues to be obligated to meet certain financial covenants in respect to invoicing and reserve account balance. In accordance with the agreement, a reserve amount is required for the total unpaid balance of all purchased accounts multiplied by a percentage equal to the difference between one hundred percent and the advanced rate percentage. As of December 31, 2022, the required amount was 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 $ 13,972 and $ 6,436 for the years ended December 31, 2022 and 2021, respectively. The total outstanding balance under the recourse contract was $ 2,619 and $ 946 as of December 31, 2022 and 2021, 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, 2022 and 2021 totaled $ 169 and $ 71 , respectively. 55 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 10 – COMMITMENTS AND CONTINGENCIES There are a number of debts and confessions of judgement (“COJ”) related to the Vivos Group that included Maslow as a co-signer or guarantor at some stage in the Vivos Group debt process from November 2016 through October 29, 2019, when Vivos Holdings LLC owned Maslow. All known debts disclosed to Maslow management and Reliability prior to the merger were addressed by various safeguards such as the Liquidation Agreement, and the Naveen Doki personal guarantee described in Item 1. However, there were certain non-disclosures by Vivos Holdings, LLC that are included below which are completely covered in Note 12 and Item 3 Legal Proceedings. In December 2019, the Company’s executive management learned that prior to the Merger, in January 2018, one of the Company’s related parties, on behalf of Maslow, executed a guarantee of obligations of Vivos Real Estate Holdings, LLC (“VREH”), under a mortgage loan for the purchase of the property at 22 Baltimore Rd., Rockville, Maryland. Maslow leased this space on market terms. This obligation had not been included in Maslow’s consolidated financial statements and was not separately disclosed prior to the Merger. On March 3, 2022, Maslow received a notice of default, acceleration, and demand for payment in full from FVCBank due to incurable events of default on behalf of Borrower VREH. Per the default notice, “As of March 2, 2022, the total indebtedness due and owing under the Loan (the ‘‘Debt’’) is $ 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. On July 12, 2022, MMG was advised that a foreclosure sale of the 22 Baltimore Road property was scheduled to take place on August 4, 2022, at Montgomery County Circuit Court in Rockville, Maryland. It was subsequently cancelled after VREH filed for bankruptcy on August 2, 2022. On August 2, 2022, VREH filed for Chapter 11 bankruptcy in the District Court of Maryland. Maslow has filed a Motion to Vacate Confessed Judgment entered against it by FVC Bank in the Circuit Court for Fairfax County. On November 17, 2022, FVC Bank and VREH entered into a Stipulation and Consent Order through the bankruptcy court that provides VREH to pay back taxes and interest, hire a new property manager and make repairs to the building, and work on a plan to refinance or sell the building. This automatic stay to the bankruptcy proceeding provides VREH until April 15 th , 2023, to either refinance or sell the building to prevent FVC Bank from foreclosing on the property and commencing action to sell the property. In September 2022, MMG learned that Vivos IT, LLC filed a lawsuit against Second Wind Consultants (“SWC”) in May 2019 included MMG as a plaintiff. The lawsuit included claims of fraud in inducement and unjust enrichment against SWC. The five parties suing SWC, included Vivos LLC, The Maslow Media Group, Suresh Venkat Doki, Naveen Doki and Silvija Valleru. The lawsuit related to a debt restructuring services agreement secured by Suresh Doki, Naveen Doki and Silvija Valleru to assist the following then owned Vivos entities: Maslow Media Group, Inc., Health Care Resources Network, Inc., Mettler & Michael, Inc., 360 IT Professionals, Inc. and US IT Solutions, Inc. SWC countersued all plaintiffs on September 30th, 2019, seeking to collect the balance of $ 402,500 not paid by the Vivos Group. These suits were not disclosed to Maslow Management or to Reliability before the merger closed on October 29, 2019. MMG is weighing its legal options at this time. 56 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) At the present time, the Company is uncertain as to whether any of the above items will have a material impact on their consolidated financial statements. NOTE 11 - EQUITY The Company’s authorized capital stock consists of 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 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 $ 2,537 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. Per Code of Virginia the legal rate of interest shall be implied when there is an obligation to pay interest and no express contract to pay interest at a specified rate. However, it was determined in 2021 that the two notes had clauses capping the default interest at 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 consisted of two periods, whereby the first period no principal or interest payments were required. During the second loan period, interest was supposed to have been paid in 20 equal consecutive payments, quarterly. Principal plus any unpaid interest is due September 20, 2023 . As of December 31, 2022, the total outstanding balance was $ 3,585 which includes accrued interest receivable of $ 168 . On November 15, 2017, MMG executed an intercompany promissory note receivable with VREH in the amount of $ 772 . There were two loan periods defined. During the first loan period, interest accrued monthly and a new loan amount of $ 781 was subject to a second loan period. As of December 31, 2022, the total outstanding balance was $ 859 which includes accrued interest receivable of $ 46 . 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. Over the period between November 2016 and December 31, 2022, the Vivos Group borrowed an additional $ 2,537 . which is included in the note receivable totaling $ 3,585 . 57 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) On September 5, 2019, MMG entered into a Secured Promissory Note agreement with Vivos, pursuant to which MMG issued a secured promissory note to the Vivos Group in the principal amount of $ 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 has occurred, MMG has the right to declare the entire unpaid balance of the note due and payable. The note was secured by 30,000,000 shares of Company Common Stock, was due and payable upon a default by Vivos. In addition, both Naveen Doki and Silvija Valleru personally guaranteed 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, 2022, the total outstanding balance was $ 810 , which includes 2022 interest of $ 20 . Debt Settlement Agreements On July 21, 2022, Maslow settled the obligation which Vivos Holdings, LLC had obligated Maslow to in July 2018, with Libertas Funding, LLC and Kinetic for $ 475 . (See Section 1A). The $ 475 is included in the additional borrowing cited above. 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. 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. 58 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) On September 18, 2019, in anticipation of the closing of the Merger and intending that it be assumed by MMG after the closing of the Merger, Hawkeye entered into a letter of intent (the “LOI”) regarding the potential acquisition of a complementary business. MMG was then prohibited from entering into the LOI directly. In connection with the LOI, Hawkeye paid a non-refundable deposit of $ 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, 2022, the Company entered in Arbitration and Tolling Agreements with alleged shareholder Naveen Doki, M.D., and his affiliates and all other persons who were parties to the pending litigation previously reported in the Texas, New York and Maryland courts and before the American Arbitration Association. The Agreements call for the stay or dismissal of the pending litigation, with the parties agreeing to resolve their disputes before a single arbitrator in Maryland. The parties also agreed to maintain the status quo in corporate governance and related matters pending a final non-appealable judgment confirming any award in arbitration. The parties also signed a Tolling Agreement to toll the statute of limitations following the dismissal of a pending litigation. The arbitration award was announced on August 31, 2022. NOTE 13 - EMPLOYEE BENEFIT PLAN The Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible full-time employees. The 401(k) Plan allows employees to make contributions subject to applicable statutory limitations. The Company currently does not match employee contributions. NOTE 14 - BUSINESS SEGMENTS The Company operates within four industry segments: EOR, Recruiting and Staffing, 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. Direct Hire fulfils direct placement 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. 59 RELIABILITY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) The following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results for the periods indicated: SCHEDULE OF RECONCILIATION OF REVENUE AND OPERATING INCOME BY REPORTABLE SEGMENT TO CONSOLIDATED RESULTS 2022 2021 December 31, 2022 2021 Revenue: EOR $ 21,894 $ 21,346 Recruiting and Staffing 3,468 3,613 Video and Multimedia Production 264 1,121 Direct Hire 99 166 Total $ 25,725 $ 26,246 R evenue $ 25,725 $ 26,246 NOTE 15- SUBSEQUENT EVENTS The Company has evaluated subsequent events after the balance sheet date of December 31, 2022, through March 31, 2023, the date on which the consolidated financial statements were available to be issued. Based upon this evaluation, management has determined that no material subsequent events have occurred that would require recognition in or disclosures in the accompanying consolidated financial statements. 60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.