RELIABILITY INC 10-Q

Item 1. Financial Statements RELIABILITY INCORPORATED AND SUBSIDIARY UNAUDITED CONSOLIDATED BALANCE SHEETS (amounts in thousands, except per share data) June 30, December 31, 2024 2023 ASSETS CURRENT ASSETS Cash and cash equivalents $ 271 $ 822 Trade receivables, net of credit losses 3,742 2,993 Other receivables 14 10 Notes receivable from related parties 5,766 5,501 Prepaid expenses and other current assets 182 442 Total current assets 9,975 9,768 Other intangible assets, net 3 3 Property, plant and equipment, net 69 15 Total assets $ 10,047 $ 9,786 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Factoring liability $ 217 $ 174 Accounts payable 747 548 Accrued expenses 234 290 Accrued payroll 985 637 Deferred revenue 200 206 Total current liabilities 2,383 1,855 Total liabilities 2,383 1,855 Commitment and contingencies (Note 6) - Subsequent events (Note 10) - SHAREHOLDERS’ EQUITY Common stock, without par value, 300,000,000 shares authorized, 300,000,000 issued and outstanding as of June 30, 2024 and as of December 31, 2023 - - Additional paid-in capital 750 750 Retained earnings 6,914 7,181 Total shareholders’ equity 7,664 7,931 Total liabilities and shareholders’ equity $ 10,047 $ 9,786 The accompanying notes are an integral part of these statements. 3 RELIABILITY INCORPORATED AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share data) 2024 2023 For the Three Months Ended June 30, 2024 2023 Revenue earned Service revenue $ 6,041 $ 5,452 Cost of revenue Cost of revenue 5,237 4,712 Gross profit 804 740 Selling, general, and administrative expenses 986 911 Operating loss ( 182 ) ( 171 ) Other income (expense) Interest income from related parties 210 66 Interest income 1 6 Interest expense ( 20 ) ( 22 ) Other expense ( 136 ) ( 119 ) Income (loss) before income tax expense ( 127 ) ( 240 ) Income tax expense ( 7 ) - Consolidated net loss $ ( 134 ) $ ( 240 ) Net income 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 are an integral part of these statements. 4 RELIABILITY INC. AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share data) 2024 2023 For the Six Months Ended June 30, 2024 2023 Revenue earned Service revenue $ 11,336 $ 10,651 Cost of revenue Cost of revenue 9,824 9,200 Gross profit 1,512 1,451 Selling, general, and administrative expenses 1,933 1,844 Operating loss ( 421 ) ( 393 ) Other income (expense) Interest income from related parties 280 131 Interest income 16 14 Interest expense ( 35 ) ( 65 ) Other income (expense) ( 229 ) ( 119 ) Loss before income tax (expense) benefit ( 389 ) ( 432 ) Income tax (expense) benefit 122 ( 3 ) Consolidated net loss $ ( 267 ) ( 435 ) Net loss per share: Basic $ 0.00 $ 0.00 Diluted $ 0.00 $ 0.00 Shares used in per share computation: Basic 300,000,000 300,000,000 Diluted 300,000,000 300,000,000 The accompanying notes are an integral part of these statements. 5 RELIABILITY INCORPORATED AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the Six Months Ended June 30, 2024 and 2023 (amounts in thousands, except per share data) Shares Amount Capital Earnings Equity Additional Common Stock Paid-in Retained Total Shares Amount Capital Earnings Equity Balance, December 31, 2022 300,000,000 $ - $ 750 $ 7,921 $ 8,671 Net loss - - - ( 435 ) ( 435 ) Balance, June 30, 2023 300,000,000 $ - $ 750 $ 7,846 $ 8,236 Balance, December 31, 2023 300,000,000 $ - $ 750 $ 7,181 $ 7,931 Balance 300,000,000 $ - $ 750 $ 7,181 $ 7,931 Net loss - - - ( 267 ) ( 267 ) Balance, June 30, 2024 300,000,000 $ - $ 750 $ 6,914 $ 7,664 Balance 300,000,000 $ - $ 750 $ 6,914 $ 7,664 The accompanying notes are an integral part of these statements. 6 RELIABILITY INCORPORATED AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) 2024 2023 For the Six Months Ended June 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 267 ) $ ( 435 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 4 10 Accrued interest ( 265 ) ( 131 ) Changes in operating assets and liabilities: Trade receivables ( 749 ) 3,856 Retention credit receivable - 1,209 Other receivables ( 5 ) ( 14 ) Prepaid expenses and other current assets 260 119 Accounts payable 199 ( 403 ) Accrued payroll 349 ( 50 ) Accrued expenses ( 56 ) ( 19 ) Deferred revenue ( 6 ) - Income taxes payable - ( 1 ) Net cash provided by (used in) operating activities ( 536 ) 4,141 Cash flows from Investing activities: Purchase of fixed assets ( 58 ) - Net Cash used in investing activities ( 58 ) - Cash flows from financing activities: Net borrowing/(repayment) of line-of-credit 43 ( 2,542 ) Advances to related parties - 34 Net cash used in financing activities 43 ( 2,508 ) Net increase (decrease) in cash and cash equivalents ( 551 ) 1,633 Cash and cash equivalents, beginning of period 822 227 Cash and cash equivalents, end of period $ 271 $ 1,860 The accompanying notes are an integral part of these statements. 7 RELIABILITY INCORPORATED AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued (amounts in thousands) For the Six Months Ended June 30, Supplemental disclosures of cash flow information: 2024 2023 Cash paid (received) during the year for: Interest $ 20 $ 65 Income taxes $ 7 $ 4 8 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 (amounts in thousands, except per share data) NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION Nature of Operations Reliability, Inc. is a leading provider of Employer of Record and temporary Media and Information Technology (“IT”) staffing services that operates, along with its wholly owned subsidiary, The Maslow Media Group, Inc (“MMG”), (collectively, “Reliability” or the “Company”), primarily within the United States of America in four industry segments: Employer of Record (“EOR”), Recruiting and Staffing, Direct Hire, and Video and Multimedia Production, which provides script-to-screen services. Our Staffing segment provides skilled field talent on a nationwide basis for Media, IT, and finance and accounting client partner projects. Video Production involves assembling and providing crews for special projects, webcasting, live events, post-production services, and production management. Reliability was incorporated under the laws of the State of Texas in 1953, but the then principal business of the Company started in 1971 was closed down in 2007. The Company completed a reverse merger with MMG (the “Merger”) on October 29, 2019. Company Background Linda Maslow founded MMG initially in 1988 and incorporated the firm under the name the Maslow Media Group Inc. in March 1992. On November 9, 2016, Linda Maslow sold the business to Vivos Holdings, LLC (“Vivos Holdings”) owned by Dr. Naveen Doki (“Dr. Doki”) and Silvija Valleru (“Ms. Valleru”). In 2019, Vivos Holdings collaborated on a share swap of MMG 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], (collectively referred to herein as “Vivos Group”). As a result of the Merger, on October 29, 2019, MMG became a wholly owned subsidiary of Reliability, and the Vivos Group (Vivos Holdings, LLC, officially) acquired approximately 84 % of the issued and outstanding shares of Reliability which were distributed by Vivos Holdings, LLC. Upon purchasing MMG and thereafter, the Vivos Group began borrowing monies from MMG starting with $ 1,400 in 2016, and by the end of 2019 the balance had reached $ 3,418 , which included a $ 3,000 guarantee from Dr. Doki. Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC, and Dr. Doki are collectively referred to as “Vivos Debtors.” Additionally, Reliability became aware of debt obligations that included MMG as a borrower or guarantor that the Vivos Group failed to disclose to Reliability. This and the attempted collection of the guarantee and debt from the Vivos Group set off a chain of legal events culminating in an arbitration hearing and award in 2022. We refer below to the disputes between Reliability and the Vivos Group as the “Vivos Matter.” A series of legal actions and hearings took place starting in March of 2020 through September of 2021, culminating in an agreement to settle through arbitration. On August 31, 2022, the arbitrator issued an award (the “Award”) with the Company and MMG prevailing on their claims. The awards included citing 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 . 9 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 (amounts in thousands, except per share data) The May 17, 2023 award also appointed a rehabilitative receiver (the “Receiver”) whose primary function is to collect the contract and fraud damages, including costs, expenses, and fees provided in the awards. With respect to the receivership, the Vivos Group owners or holders of all the shares of common stock of the Company were declared not be entitled to vote any of those shares at any annual or special meetings of the shareholders of the Company during the period of the receivership. On October 10, 2023, the Arbitrator issued a Supplemental Award appointing the Receiver to assist the Company in collecting the awarded amounts. In the award, the Arbitrator established the powers of the Receiver. 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. Per Maryland law, the enrolling of judgements enables MMG to apply 10 % interest to the Vivos Debtor balance beginning December 29, 2023. MMG began applying the additional interest in the second quarter 2024. Upon final resolution as to the underlying ownership and rights of certain shareholders, the Company intends to hold an annual meeting of shareholders within a reasonable time thereafter. As of June 30, 2024, the Vivos Debtor balance was $ 5,766 . The Award value in totality currently aggregates $ 7,975 , independent of legal fees after the award and interest. Basis of presentation The unaudited condensed consolidated interim financial statements include the accounts of the Company and all wholly owned divisions, including its 100 % owned subsidiary, MMG. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the SEC and should be read in conjunction with the audited financial statements and notes thereto contained in our Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented, have been reflected herein. The results of operations for the periods presented herein are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2023. Concentration of Credit Risk For the six months ended June 30, 2024, 27.2 % of revenue came from one customer, 21.7 % from a second customer and 13.5 % from a third. Combined, this totals 62.4 % of revenue. In 2023, the top two companies were the only ones above the 10% mark and accounted for 24.5 % and 13.6 %, respectively, which is 38.1 % combined. The aforementioned top three 2024 clients improved upon their combined concentration in 2023 when this group garnered 45.7 % share of the revenue. No other client has exceeded 10% of revenues for the three months ended June 30, 2024 or 2023. 10 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 (amounts in thousands, except per share data) NOTE 2. MANAGEMENT’S PLAN Although the Company experienced net losses after taxes for the six months ended June 30, 2024 and, in the years, ended December 31, 2023 and 2022 of $ 267 , $ 740 , and $ 739 , 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 August 3, 2024; ● The expected reductions in continuing legal fees in 2024 given the Company has collectible judgments that 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 over the long term; ● Expected progress in sales, newer agreements that will begin fulfillment, our current pipeline, and current larger clients who have indicated increases in media activity for 2024 which in the first six months of 2024, have been realized; and ● The Company has additional availability to use its factoring line to extend borrowing of up to 93 % of unfactored invoices which, as of August 3, 2024, was $ 3,278 . 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 In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. On December 14, 2023, the FASB issued 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 December 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. Adopted Accounting Pronouncements 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. 11 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 (amounts in thousands, except per share data) NOTE 4. ACCOUNTS RECEIVABLE Accounts receivable consist of the following: SCHEDULE OF ACCOUNTS RECEIVABLE June 30, 2024 December 31, 2023 Accounts receivable, unfactored $ 3,113 $ 2,819 Accounts receivable, factored 629 174 Total Accounts Receivable $ 3,742 $ 2,993 NOTE 5. DEBT Factoring Facility & Insurance Financing The Company is in a factoring and security agreement with Gulf Coast Bank and Trust (“Gulf”), which enables the Company to receive advances on its accounts receivable (i.e. invoices) through Gulf to fund growth and operations. The proceeds of this agreement are most frequently used to pay operating costs of the business, which include employee salaries, vendor payments, and overhead expenses. Our arrangement calls for interest at prime plus 2 % and includes an advance rate of 18 basis points. The amount of an invoice eligible for sale to Gulf is 93%. This agreement is month-to-month. The Company continues to be obligated to meet certain financial covenants in respect to invoicing and reserve account balance. Accounts receivables were sold with full recourse. Proceeds from the sale of receivables were $ 1,405 for the six-month period ended June 30, 2024, compared to $ 2,627 for the same period ended on June 30, 2023. The total outstanding balance under the recourse contract was $ 217 on June 30, 2024, compared to $ 174 as of December 31, 2023. 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. MMG also enters into short term 10-month loan agreements annually to finance advance payments on crime, E&O, and D&O insurances. In 2023, MMG entered into two loans totaling $ 143 with finance charges over 10 months totaling approximately $ 7 . Total finance fees for all loans for the three months ended June 30, 2024 and 2023 totaled $ 16 and $ 44 , respectively. The insurance portion of both periods was approximately $ 2 . NOTE 6. 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. 12 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 (amounts in thousands, except per share data) 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, which are now court judgements, totals $ 7,795 as interest continues to accrue on these awarded balances. 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 October 10, 2023, the Arbitrator issued a Supplemental Award appointing the Receiver to assist the Company in collecting the awarded amounts. In the award, the Arbitrator established the powers of the Receiver. 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 Second Wind Consulting (“SWC”), in May 2019 included MMG as a plaintiff. SWC effectually countersued plaintiffs Suresh Doki, Naveen Doki, and Silvija Valleru on September 30, 2019 seeking to collect the balance of $ 403 not paid by the Vivos Group. This was not disclosed to MMG management or to Reliability before the Merger which closed on October 29, 2019. MMG counsel filed a motion to add 4 parties to a counterclaim (HCRN, M&M, 360 IT and US IT). The court approved our motion, and all 4 parties were added. MMG has since released HCRN from the counterclaim. On July 24, 2024 the court denied SWC’s motion for summary judgement related to their counterclaim. To date MMG has $ 110 in legal fees associated with this matter that have been booked to Other Expense. At the present time, the Company is uncertain as to whether the above item will have a material impact on their consolidated financial statements. NOTE 7. EQUITY The Company’s authorized capital stock consists of 300,000,000 shares of common stock, with no par value. All authorized shares of Company Common Stock are issued and outstanding. NOTE 8. RELATED PARTY TRANSACTIONS Stock Purchase Agreement On November 9, 2016, Vivos Holdings, LLC, the former owner of MMG, acquired 100 % of MMG through a stock acquisition exchange for a purchase price of $ 1,750 , of which $ 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. Between 2018 to present there was $ 2,217 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 MMG 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.” 13 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 (amounts in thousands, except per share data) The table below is a summary of Vivos Group related party notes receivable which, as of June 30, 2024, totals $ 5,766 . 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 Accrued interest 191 46 43 280 Repayments ( 15 ) ( 15 ) Balance on June 30, 2024 $ 3,941 $ 952 $ 873 $ 5,766 Debt Settlement Agreements On July 21, 2021, MMG settled the obligation which Vivos Holdings, LLC had obligated MMG to in July 2018, with Libertas Funding, LLC and Kinetic for $ 475 . 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 the Company with no liability with respect to the building that MMG was 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 June 30, 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 the Company, 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. 14 RELIABILITY INCORPORATED AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 (amounts in thousands, except per share data) On July 31, 2024 approximately 77 % of the warrant value associated with 2019 convertible promissory notes expired. (See Subsequent Events). 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 in receiving the $ 5,000 trigger. The five-year eligibility for all holders of these Warrants will expire in October 2024. NOTE 9. BUSINESS SEGMENTS The Company operates within four industry segments: EOR, Recruiting and Staffing (“Staffing”), Direct Hire, and Video 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. The following tables provides a reconciliation of revenue by reportable segment to consolidated results for the three and six months ended June 30, 2024 and 2023, respectively: For the Three Months Ended June 30: SCHEDULE OF RECONCILIATION OF REVENUE BY REPORTABLE SEGMENT TO CONSOLIDATED RESULTS 2024 2023 Revenue: EOR $ 5,243 $ 4,499 Recruiting and Staffing 713 863 Direct Hire 27 22 Video and Multimedia Production 58 68 Total $ 6,041 $ 5,452 For the Six Months Ended June 30: 2024 2023 Revenue: EOR $ 9,815 $ 8,773 Recruiting and Staffing 1,380 1,628 Direct Hire 51 51 Video and Multimedia Production 90 199 Total $ 11,336 $ 10,651 NOTE 10. SUBSEQUENT EVENTS The Company has evaluated subsequent events through August 13, 2024, the date on which the unaudited condensed consolidated financial statements were available to be issued. Based upon this evaluation, management has determined that no material subsequent events have occurred that would require recognition in or disclosures in the accompanying unaudited condensed consolidated financial statements, except as follows: On July 24, 2024, the court denied SWC’s motion for summary judgement related to their counterclaim. On July 31, 2024, approximately 77 % of the warrant value associated with 2019 convertible promissory notes that were held by 7 entities including CEO Nick Tsahalis and CFO Mark Speck, expired. The remaining warrants will expire on October 4 th if the Company fails to enter a transaction or series of related transactions , resulting in aggregate gross proceeds to the Company of at least $ 5,000 . 15