RELIABILITY INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Independent Registered Public Accounting Firms PCAOB ID NO: 820 39 Audited Consolidated Financial Statements of Reliability, Incorporated. Consolidated Balance Sheets as of December 31, 2023 and 2022 41 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 42 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2023 and 2022 43 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 44 Notes to Consolidated Financial Statements 46 38 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, 2023 and 2022, 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, 2023 and 2022, 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 was 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. 39 Recoverability of Notes Receivable from Related Parties As discussed in Notes 9 and 11 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 award in favor of the Company against one of the majority owners and other companies owned by the majority owner. We determined the recoverability of the related party notes receivable (recoverability of RP notes) as a critical audit matter. Auditor judgment was involved in assessing the sufficiency of the procedures performed to 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 recoverability of the RP notes by the Company: ● Sent and inspected questionnaires from the Company’s officers; ● Evaluated and reviewed the Company’s reconciliation of the notes receivable from related parties; ● Read the Company’s minutes from meetings of the Board of Directors; ● Reviewed public filings, external news, and research sources for information related to transactions between the Company and related parties; ● Confirmed with the Company’s management and its outside counsel as to the award granted by the arbitrator; and ● Reviewed management’s assessment of the collectability of these balances due from related parties. We have served as the Company’s auditor since 2009. Ramirez Jimenez International CPAs Irvine, California April 1, 2024 40 RELIABILITY INCORPORATED AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (amounts in thousands, except per share data) December 31, 2023 2022 ASSETS CURRENT ASSETS Cash and cash equivalents $ 822 $ 227 Trade receivables, net of allowance for credit losses 2,993 6,337 Retention credit receivable 10 1,219 Notes receivable from related parties 5,501 5,251 Prepaid expenses and other current assets 442 430 Total current assets 9,768 13,464 Other intangible assets, net 3 - Property, plant and equipment, net 15 26 Total assets $ 9,786 $ 13,490 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Factoring liability $ 174 $ 2,619 Accounts payable 548 698 Accrued expenses 290 339 Accrued payroll 637 981 Deferred revenue 206 176 Income taxes payable - 6 Total current liabilities 1,855 4,819 Total liabilities 1,855 4,819 Commitment and contingencies (Note 9) - - Subsequent events (Note 14) - - STOCKHOLDERS’ EQUITY Common stock, without par value, 300,000,000 shares authorized, 300,000,000 issued and outstanding as of December 31, 2023 and 2022 - - Additional paid-in capital 750 750 Retained earnings 7,181 7,921 Total stockholders’ equity 7,931 8,671 Total liabilities and stockholders’ equity $ 9,786 $ 13,490 The accompanying notes to consolidated financial statements are an integral part of these financial statements. 41 RELIABILITY INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share data) For the Years Ended December 31, 2023 2022 Revenue earned Service revenue $ 21,451 $ 25,725 Cost of revenue Cost of revenue 18,412 22,231 Gross profit 3,039 3,494 Selling, general and administrative expenses 3,788 4,400 Operating loss ( 749 ) ( 906 ) Other income (expense): Interest income from related parties 269 232 Interest income 25 53 Interest expense ( 92 ) ( 171 ) Other income (expense) ( 179 ) 223 Loss before income tax expense ( 726 ) ( 569 ) Income tax expense ( 14 ) ( 170 ) Consolidated net loss $ ( 740 ) $ ( 739 ) Net loss per share: Basic $ 0.00 $ 0.00 Diluted $ 0.00 $ 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. 42 RELIABILITY INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS’ EQUITY For the years ended December 31, 2023 and 2022 (amounts in thousands, except per share data) Additional Common Stock Paid-in Retained Total Shares Amount Capital Earnings Equity Balance, January 1, 2022 300,000,000 $ - $ 750 $ 8,660 $ 9,410 Net loss - - - ( 739 ) $ ( 739 ) Balance, December 31, 2022 300,000,000 $ - $ 750 $ 7,921 $ 8,671 Balance 300,000,000 $ — $ 750 $ 7,921 $ 8,671 Net loss - $ - $ - $ ( 740 ) $ ( 740 ) Balance, December 31, 2023 300,000,000 $ - $ 750 $ 7,181 $ 7,931 Balance 300,000,000 $ — $ 750 $ 7,181 $ 7,931 The accompanying notes to consolidated financial statements are an integral part of these financial statements. 43 RELIABILITY INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) For the Years Ended December 31, 2023 2022 Cash flows from operating activities: Net loss $ ( 740 ) $ ( 739 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 18 32 Accrued interest ( 284 ) ( 232 ) Changes in operating assets and liabilities: Trade receivables 3,344 39 Retention credit receivable 1,209 1,304 Prepaid expenses and other current assets ( 13 ) ( 99 ) Accounts payable ( 149 ) ( 507 ) Accrued payroll ( 344 ) ( 648 ) Accrued expenses ( 49 ) ( 65 ) Deferred revenue 30 - Other liabilities - ( 1 ) Income taxes payable ( 6 ) ( 511 ) Net cash provided by (used in) operating activities $ 3,016 $ ( 1,427 ) Cash flows from investing activities: Purchase of fixed assets ( 9 ) ( 9 ) Net cash used in investing activities $ ( 9 ) ( 9 ) Cash flows from financing activities: Proceeds from the factoring facility 3,768 13,972 Repayments to the factoring facility ( 6,214 ) ( 12,299 ) Advances to related parties 34 ( 34 ) Net cash provided by (used in) financing activities $ ( 2,412 ) 1,639 Net increase in cash and cash equivalents 595 203 Cash and cash equivalents, beginning of year 227 24 Cash and cash equivalents, end of year $ 822 $ 227 The accompanying notes to consolidated financial statements are an integral part of these financial statements. 44 RELIABILITY INCORPORATED AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS, continued (amounts in thousands) For the years ended December 31, Supplemental disclosures of cash flow information: 2023 2022 Cash paid during the year for: Interest $ 92 $ 150 Income taxes $ 20 $ 681 The accompanying notes to consolidated financial statements are an integral part of these financial statements. 45 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 1 - NATURE OF OPERATIONS Reliability Incorporated operates, along with its wholly owned subsidiary, The Maslow Media Group, Inc. (“MMG” or “Maslow”), (collectively, “Reliability” or the “Company”) as a workforce management solutions company. MMG has for over 30 years focused primarily on the media industry. That changed in late 2019 when MMG began providing staffing services in the area of IT. Now MMG fills roles in a variety of business functional areas, including administrative, IT, accounting and finance, HR, and sales. In servicing its clients, Reliability provides a variety of staffing services which include employer of record, temporary staffing services, and direct hire, 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 83.1 % of our revenue in 2023. Our Staffing segment provides skilled field talent on a nationwide basis for client partner projects. Video Production, for one, 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, which added $ 199 and $ 99 in revenue and $ 181 and $ 89 in gross profit in 2023 and 2022 respectively. NOTE 2 - MANAGEMENT’S PLAN Although the Company has experienced net losses before taxes in the years ended December 31, 2023 and 2022 of $ 726 and $ 569 , respectively, management believes it has the ability to continue as a going concern and meet its financial obligation as they become due in 2024 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 April 1, 2024; ● The expected reductions in continuing legal fees in 2024 given the Company has collectible judgments which the Receiver is now eligible to pursue; ● An expectation that the notes receivable from related parties will be renumerated in cash and or stock and that stock will provide capital market access; ● Expected progress in sales, newer agreements that will begin fulfillment, and current larger clients who have indicated increases in media activity for 2024; 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 11, 2024, was $ 2,623 . 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. 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, including its wholly owned subsidiary, MMG. 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 46 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) 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 credit losses, and 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, 2023, the Company’s top 10 clients generated over 86.4 % of the revenue. A substantial portion of our business tends to come from three or four clients. In 2023, Clients C, D, and F accounted for 49.5 % of the revenue. Only Clients C and D accounted for 10% or more of the revenue with the two totaling 25.1 % and 15.1 %, respectively, or 40.3 % combined. Comparatively, for the year ended December 31, 2022, Clients A, B, C, and D, all of which contributed 10% or more of the revenue, accounted for a combined 58.8 % with Client C leading again with 19.6 %. From an accounts receivable perspective, on December 31, 2023, we had three clients whose balances represented 10% or greater than the total balance of $ 2,993 . Clients D, C, and A had 42.2 %, 19.9 % and 12.3 %, respectively, of the accounts receivable balance, aggregating to 74.4 %. 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 an allowance for credit losses 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, 2023 and 2022 to be fully collectible, therefore an allowance for credit losses is not provided for. The Company records accounts receivable when its right to consideration becomes unconditional. Contract assets primarily relate to the Company’s 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 Company does not have any material contract assets or long-term contract liabilities. As of December 31, 2023, the Company’s deferred revenue totaled $ 206 , whereas it was $ 176 at the end of 2022. Fair Value Measurements 47 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) 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, 2023 and 2022 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, 2023 and 2022 totaled $ 18 and $ 32 , 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. 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. 48 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification (“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 four segments: EOR, Recruiting and Staffing, Direct Hire and Video and Multimedia Production. Although Direct Hire is within the Recruiting and Staffing domain, we consider it as a separate business segment. 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, and media equipment rentals are also included in revenues, and the related amounts of reimbursable expenses are included in cost of revenue. Temporary staffing revenues - Field talent revenues from contracts with clients are recognized in the amount to which the Company has the 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. MMG 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 13 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, 2023. There were no revenues recognized during the years ended December 31, 2023 and 2022 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, 2023 and 2022. Advertising The Company recognizes marketing and promotion expense in selling, general and administrative expenses as the services are incurred. Total marketing and promotion expenses for the years ended December 31, 2023 and 2022 as $ 39 and $ 25 , 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 49 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) 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, 2023 and 2022, 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 2021 and forward for U.S. Federal tax purposes and for 2020 and forward for state tax purposes. Recently Issued Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments , which significantly changes how entities measure credit losses for most financial assets and certain other instruments. ASU 2016-13 introduces a new model for recognizing credit losses, known as the current expected credit loss (CECL) model, which is based on expected losses rather than incurred losses. Under the CECL model, entities will be required to estimate all expected credit losses over the life of the asset. This update applies to all entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. This ASU is effective for public business entities classified as smaller reporting companies for fiscal years beginning after December 15, 2022. The Company adopted the amendments during the current year and the adoption did not have a material impact on its consolidated financial statements and disclosures. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU enhances the disclosures related to segment reporting for public entities. It requires entities to disclose significant segment expenses for each reportable segment, providing greater transparency in segment performance. The ASU is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating how this ASU will impact its consolidated financial statements and disclosures. 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 were 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, 2023. On December 14, 2023, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09). The ASU focuses on income tax disclosures around effective tax rates and cash income taxes paid. ASU 2023-09 largely follows the proposed ASU issued earlier in 2023 with several important modifications and clarifications discussed below. ASU 2023-09 is effective for public business entities for annual periods beginning after Dec. 15, 2024 (generally, calendar year 2025) and effective for all other business entities one year later. Entities should adopt this guidance on a prospective basis, though retrospective application is permitted. The Company is currently evaluating how this ASU will impact its consolidated financial statements and disclosures. 50 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) 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 for the years ended December 31, 2023 and 2022 consist of the following: SCHEDULE OF CONTRACT RECEIVABLES 2023 2022 Accounts receivable, unfactored $ 2,819 $ 3,131 Unbilled receivables - 587 Accounts receivable, factored 174 2,619 Total $ 2,993 $ 6,337 All the net trade receivables are pledged as collateral on a loan agreement. NOTE 5 – PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment for the years ended December 31, 2023 and 2022 consist of the following: SUMMARY OF PROPERTY, PLANT AND EQUIPMENT 2023 2022 Office equipment $ 60 $ 54 Computer software 108 110 Property, plant and equipment, gross 168 164 Accumulated depreciation ( 153 ) ( 138 ) Property, plant and equipment, net $ 15 $ 26 NOTE 6 - ACCRUED EXPENSES Accrued expenses for the years ended December 31, 2023 and 2022 consist of the following: SUMMARY OF ACCRUED EXPENSES 2023 2022 2023 2022 Accrued vendor costs $ 152 $ 199 Financed insurance payable 127 124 Other 11 16 Accrued expenses $ 290 $ 339 NOTE 7 - INCOME TAXES Income tax expense (benefit) for the years ended December 31, 2023 and 2022 are comprised of the following: SUMMARY OF INCOME TAX EXPENSE 2023 2022 Current federal income tax $ - $ 113 Current state income tax 14 57 Deferred income tax (benefit) - - Income tax expense (benefit) $ 14 $ 170 51 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) Significant components of the Company’s deferred income tax assets (liabilities) are as follows at SUMMARY OF DEFERRED INCOME TAX ASSETS (LIABILITIES) 2023 2022 December 31, 2023 2022 Deferred tax assets (liabilities): Employee accruals $ 97 $ 134 Cash to accrual - Accrued workers’ compensation and other 3 8 State deduction - - Sec. 163(j) interest limitation - 44 Federal and State net operating loss carry forwards 401 152 Other 1 1 Deferred tax liabilities: Intangibles 13 14 Fixed assets ( 5 ) 22 Deferred income taxes, net 510 375 Valuation allowance ( 510 ) ( 375 ) 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, 2023 2022 Tax expense at federal statutory rate $ ( 147 ) 21.0 % $ ( 119 ) 21 % State income taxes, net ( 33 ) 2.6 % 6 - 1 % Permanent Differences 2 - 0.2 % - - Effect of deferred rate change 15 - 2.2 % 14 - 2.5 % Historical Adjustments 28 - 4.0 % ( 45 ) 7.8 % Valuation allowance 135 - 19.4 % 215 - 37.8 % Other, net 14 2.0 % - 99 - 17.4 % Income tax expense $ 14 - 0.1 % $ 170 - 29.9 % NOTE 8 - DEBT Tax Liabilities MMG has settled its past tax liabilities that began in 2017 and has approximately $ 138 in credits held by the IRS for negotiated abatements for additional interest and penalties MMG should not have been assessed. This total is included in our prepaid expense balance of $ 442 . Factoring Facility 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 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. The Company continues to be obligated to meet certain financial covenants in respect to invoicing and reserve account balance. 52 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) 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, 2023, 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 $ 3,768 and $ 13,972 for the years ended December 31, 2023 and 2022, respectively. Repayments totaled $ 6,214 and $ 12,299 for the years ending December 31, 2023 and 2022, respectively. Thus, the total outstanding balance under the recourse contract was $ 174 and $ 2,619 as of December 31, 2023 and 2022, 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, 2023 and 2022 totaled $ 92 a nd $ 171 , respectively. NOTE 9 – COMMITMENTS AND CONTINGENCIES From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these, or other matters may arise from time to time that may harm our business. Except as set forth below, we are not aware of any such legal proceedings or claims against the Company. A series of legal actions and hearings took place starting in March of 2020 with the Vivos Group over Merger agreement violations and Vivos Group debt obligations. Arbitration was agreed to in the fall of 2021 by both the Vivos Group and MMG with the proceedings commencing in February 2022. On August 31, 2022, the arbitrator issued the Award with the Company and MMG prevailing on their claims. The awards included citing of fraud damages. Supplemental awards were subsequently issued on May 17, 2023, October 10, 2023, and finally on October 27, 2023. Summarily, MMG was awarded the totals of all notes the Vivos Group had with MMG for its borrowings, the contracted interest, attorneys’ fees and expenses of $ 1,209, and a contract damage of $ 1,000 to be satisfied by the transfer of their shares of the Company Common Stock to the Company equal in value to $ 1,000 . The aggregate amount of the Awards totaled $ 7,710 . The May 17, 2023 award also appointed a Receiver whose primary function is to collect the contract and fraud damages, including costs, expenses, and fees provided in the awards. On December 29, 2023, the Circuit Court for Montgomery County, Maryland signed orders entering all three arbitration awards as judgments in Reliability’s case against the Vivos Group. These orders became final on January 29, 2024, when the appeal period expired for the defendants. The judgments are good for 12 years and can be enrolled in other states. Reliability has collectible judgments which the Receiver is now eligible to pursue. In September 2022, MMG learned that a Vivos IT, LLC lawsuit against SWC in May 2019 included MMG as a plaintiff. The lawsuit related to a debt restructuring services agreement secured by Suresh Doki, Naveen Doki, and Silvija Valleru to assist the following then owned Vivos entities: Maslow Media Group, Inc., Health Care Resources Network, Inc., Mettler & Michael, Inc., 360 IT Professionals, Inc., and US IT Solutions, Inc. SWC countersued all plaintiffs on September 30, 2019 seeking to collect the balance of $ 403 not paid by the Vivos Group. This was not disclosed to Maslow management or to Reliability before the Merger which closed on October 29, 2019. Maslow’s counsel filed a motion to include all original parties to the SWC agreement, as two of the original parties were not in the original filings. SWC filed a motion for summary judgement and Maslow responded on March 18, 2024 opposing the motion. At the present time, the Company is uncertain as to whether the above item will have a material impact on their consolidated financial statements. 53 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 10 - 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 11 - 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 $ 1,400 was paid at settlement with proceeds from MMG. The Vivos Debtors subsequently entered into a promissory note receivable with MMG for the full stock purchase price. No payment has ever been made against this note and between 2018 to present and there has been $ 2,503 in additional borrowings. Related Party Notes Receivable The Company has several notes receivable from related parties. Prior to the Merger, Vivos Holdings collaborated on a share swap of Maslow for other Vivos companies with individuals who included, but were not limited to, Dr. Doki, Shirisha Janumpally (“Mrs. Janumpally”), wife of Dr. Doki, Kalyan Pathuri (“Mr. Pathuri”) husband of Silvija Valleru, Igly Trust, and Judos Trust. These parties also have common ownership combinations in a number of other entities [Vivos Holdings, LLC. Vivos Real Estate Holdings, LLC (“VREH”), Vivos Holdings, Inc., Vivos Group, Vivos Acquisitions, LLC., and Federal Systems, LLC], which are collectively referred to as the “Vivos Group.” The table below is a summary of Vivos Group related party notes receivable which as of December 31, 2023 total $ 5,501 . SCHEDULE OF RELATED PARTY NOTES RECEIVABLE Note Description Acquisition Loan to Vivos, LLC Interco Loan to Vivos Real Estate, LLC Tax Note Total Notes Receivable Origination date November 9, 2016 November 15, 2017 September 15, 2019 Original borrowed amount $ 1,400 $ 772 $ 750 $ - Balance on December 31, 2021 $ 3,383 $ 812 $ 790 $ 4,985 Additional borrowings 34 - - 34 Accrued interest 167 45 20 232 Balance on December 31, 2022 $ 3,584 $ 857 $ 810 $ 5,251 Repayments ( 19 ) - - ( 19 ) Accrued interest 200 49 20 269 Balance on December 31, 2023 $ 3,765 $ 906 $ 830 $ 5,501 54 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 . The $ 475 is included in the additional borrowings represented above. In June 2023, VREH was able to sell the property at 22 Baltimore Road, in Rockville, Maryland, leaving Maslow with no liability with respect to the building that MMG had been signed as a guarantor without management’s knowledge in 2017. The Company may be entitled to cash in the amount of up to $90 as a result of the bankruptcy proceedings and sale of the building. Such an amount would reduce Vivos debt to MMG by that amount. As of March 21, 2024, MMG has not learned of any proceeds granted by the court. Related Party Relationships On October 29, 2019, prior to the Merger, Naveen Doki and Silvija Valleru became beneficial owners of Company Common Stock, equal to approximately 69 % and 17 % of the total number of shares of the Company’s Common Stock outstanding after giving effect to the Merger, respectively. At the present time, the Vivos Group shall not be entitled to vote any of their shares in Reliability at any annual or special meetings of the shareholders. A Receiver is empowered to recover the awards by seizing shares of the Company held by Dr. Naveen Doki and his affiliates, the Vivos Group. Once the judgments in favor of Reliability are satisfied, the restrictions on the rights of the Vivos Group shareholders imposed by the Award shall be lifted. In the summer of 2019, prior to the Merger, MMG entered into a Securities Purchase Agreement with several parties including CEO Nick Tsahalis (“Mr. Tsahalis”), CFO Mark Speck (“Mr. Speck”), both officers and then directors of Maslow and Hawkeye Enterprises (“Hawkeye”) a company owned and controlled by Mr. Speck. The convertible promissory notes signed by Mr. Tsahalis and Mr. Speck afforded them both common shares of Reliability based on the initial principal amounts of $ 100 each. Mr. Tsahalis, Mr. Speck, and Hawkeye also received Warrants to purchase 16,323 , 81,616 , and 81,616 shares, respectively, (on a post-Merger basis) of the Company Common Stock. 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 on first business day following the completion of the Qualified Financing (as defined below) and expiring 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. 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. The five-year eligibility for all holders of these Warrants will expire in October 2024. NOTE 12 - 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. 55 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) NOTE 13 - 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 expenses at the segment level. The following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results for the years indicated: SCHEDULE OF RECONCILIATION OF REVENUE AND OPERATING INCOME BY REPORTABLE SEGMENT TO CONSOLIDATED RESULTS 2023 2022 December 31, 2023 2022 Revenue: EOR $ 17,828 $ 21,894 Recruiting and Staffing 3,098 3,468 Video and Multimedia Production 326 264 Direct Hire 199 99 Total $ 21,451 $ 25,725 NOTE 14- SUBSEQUENT EVENTS The Company has evaluated subsequent events after the balance sheet date of December 31, 2023 through April 1, 2024, 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 January 29, 2024, the three arbitration Awards entered as judgments in in Reliability’s case against Vivos, et. al., became final as the appeal period expired for the defendants. The judgments which are good for 12 years and can be enrolled in other states were signed by the Circuit Court for Montgomery County Maryland on December 29, 2023. Thus, Reliability has collectible judgments which the Receiver is now eligible to pursue. In March 2024, counsel for SWC filed a motion for Summary Judgement against Maslow. On March 18, 2024, Maslow filed its response opposing the motion. The court has not yet ruled on the motion. 56 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.