RELIABILITY INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This section includes several forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect our current views with respect to future events and financial performance. All statements that address expectations or projections about the future, including, but not limited to, statements about our plans, strategies, adequacy of resources and future financial results (such as revenue, gross profit, operating profit, cash flow), are forward-looking statements. Some of the forward-looking statements can be identified by words like “anticipates,” “believes,” “expects,” “may,” “will,” “can,” “could,” “should,” “intends,” “project,” “predict,” “plans,” “estimates,” “goal,” “target,” “possible,” “potential,” “would,” “seek,” and similar references to future periods. These statements are not a guarantee of future performance and involve a number of risks, uncertainties and assumptions that are difficult to predict. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. Important factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to: the impact of the COVID-19 pandemic on us and our clients; our ability to access the capital markets by pursuing additional debt and equity financing to fund our business plan and expenses on terms acceptable to the Vivos Group or at all; negative outcome of pending and future claims and litigation and our ability to comply with our contractual covenants, including in respect of our debt; potential loss of clients and possible rejection of our business model and/or sales methods; weakness in general economic conditions and levels of capital spending by customers in the industries we serve; weakness or volatility in the financial and capital markets, which may result in the postponement or cancellation of our customers’ projects or the inability of our customers to pay our fees; delays or reductions in U.S. government spending; credit risks associated with our customers; competitive market pressures; the availability and cost of qualified labor; our level of success in attracting, training and retaining qualified management personnel and other staff employees; changes in tax laws and other government regulations, including the impact of health care reform laws and regulations; the possibility of incurring liability for our business activities, including, but not limited to, the activities of our temporary employees; our performance on customer contracts; and government policies, legislation or judicial decisions adverse to our businesses. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We assume no obligation to update such statements, whether as a result of new information, future events or otherwise, except as required by law. We recommend readers to carefully review the entirety of this Quarterly Report, the “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and the other reports and documents we file from time to time with the Securities and Exchange Commission (“SEC”), particularly our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. The following discussion and analysis of our financial condition and results of operations, our expectations regarding the future performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors including those described in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, with the SEC. Our actual results may differ materially from those contained in any forward-looking statements. You should read the following discussion together with our financial statements and related notes thereto and other financial information included in this Quarterly Report on Form 10-Q. CRITICAL ACCOUNTING POLICIES AND COMMENTS RELATED TO OPERATIONS This discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. 21 There have been no material changes or developments in the Company’s evaluation of the accounting estimates and the underlying assumptions or methodologies that it believes to be Critical Accounting Policies and Estimates as disclosed in its Form 10-K for the year ended December 31, 2020. Management’s Discussion included in the Form 10-K for the year ended December 31, 2020, includes discussion of various factors and items related to the Company’s results of operations and liquidity. There have been no other significant changes in most of the factors discussed in the Form 10-K and many of the items discussed in the Form 10-K are relevant to 2021 operations; thus, the reader of this report should read Management’s Discussion included in Form 10-K for the year ended December 31, 2020. RESULTS OF OPERATIONS Revenues Revenues for the three months ended September 30, 2021, was $6,941 which was $740 or 12% greater than for the same period in 2020 which was $6,201. EOR led the revenue uptick by delivering $5,705 or 82% of the quarterly revenue. This was a $831 or 17%, improvement over the third quarter in 2020. IQS the Company’s IT staffing division saw a revenue decline of $410 or 82% from the same period a year ago which offset the improvement in revenue by the Media Staffing division which was up $267 or 44% from the same period a year ago. Permanent Placement which was not an earning center in 2020 contributed $38 which was $8 more than the second quarter. Although IT staffing revenues do not include IT direct placements made by the Company, which are considered Permanent Placement these are among the diverse resources we provide clients along with finance and accounting, and Media. The Company expects an increase in this activity as certain new clients are asking us for this service. Video Production’s $236 in revenue was $21 higher than the third quarter in 2020 as new clients more than filled the void of those with declining demand due to COVID-19. For the nine months ended September 30, revenue totaled $17,809 which was $2,390 less than a year ago, or a 12% decrease when compared to the prior year. Business segments with the largest declines in the nine-month period ending September 30, 2021, when compared to a year earlier, were EOR at $1,678 or 11% and IQS which derived $1,593 less, a 76% decline. EOR was largely negatively impacted by COVID-19, which has seen some of our larger clients not yet return to full strength on site. IQS’s experienced the loss of its largest customer Lifetouch, which informed the Company in the fall of 2020 that it had decided to offshore their IT software quality assurance professionals effective January 1, 2021, resulting in declines of revenue of $874 year to date, when compared to same period in 2020. Meanwhile Tapfin, which is the vendor management solution for Abbott Labs, has converted a number of IQS’s employees to their staff and have not renewed other employee resulting in a year-to-date loss of revenue of $380. In order to offset these lost revenues, the Company has begun focusing business development resources on growing the IT staffing business in the second half of 2021. Conversely, Media Staffing has increased its nine-month revenue to $2,158 from $1,445, a $713 or 49% improvement. This is due to the acquisition of 7 new clients by our revamped 6-month-old sales team, which added $546 and an increased demand for this service ($167) by our existing clients, driven by our expertise in delivering top rated media talent to our customers. Video Production’s nine-month revenue performance also saw an improvement to the same period a year ago by $101, with revenues totaling $897. Cost of Revenue / Gross Profit Gross profit for the three-month period ending September 30, 2021, was $803 representing 11.6% of revenues, which was $149 greater than in 2020’s third quarter when the gross margin was at 10.5%. Media Staffing which saw a 44.2% increase in revenue had strong margins at 21.1%, while Permanent Placement margins were greater than 90%. EOR margins were compressed by just over 1 point to 9.1% due to contractual incentives given to certain clients for reaching predetermined revenue levels, and a high level of sick leave paid by the company to its outsourced employees. Year to date 2021, the Company’s gross margin percentage improved to 12.7% from 11.9% which can be attributed mainly to Media and IT Staffing margins being > 21% and Permanent Placement which so far have enjoyed margins north of 90%. Absent our Media Staffing year over year Growth and Permanent Placement Revenue, our margins year to date for the period ending September 30, 2021, would be half a point lower at 12.2%. 22 Overall margin improvement in EOR, Media Staffing and Video Production year over year contributed $82 in gross profit, representing 4.7% of 2020 first half gross profit. General and Administrative (“G&A”) General and administrative expenses for the three months ended September 30, 2021, were $866, as compared to $1,086 in the comparable period in 2020, representing a 20.3% reduction. This was also a reduction of $12 from our prior quarter ending on June 30, 2021. The $220 decrease in comparative three-month periods can be attributed directly to savings in salary and benefit costs by $109, and outside legal costs of $111. Over the nine-month period ending September 30, 2021, management has trimmed $884 or 25.7% of G&A costs, as they represent 14.3% of revenue as opposed to 17% a year ago. The reduction was achieved while increasing the sales portion of G&A in the last 6 months ending September 30, 2021 by $174 as the Company has added additional sales resources. Interest Expense The Company recognized interest expense in the amount of $15 during the three months ended September 30, 2021, compared to $30 or 50% during the same prior year period. For the nine-month period ending September 30, 2021, MMG interest costs were $78 compared to $283 for the same nine-month period a year earlier, representing a $205, or 72% savings. This cost reduction is directly attributed to a significantly reduced reliance on the factoring line that had an outstanding ending Q3 2021 balance of $939 compared to $1,043 at conclusion of second quarter 2020. The reduced reliance on factoring is attributed to the Earned Income Credit (“ERC”) which enabled the Company to reduce its payroll cost obligations by $1,156 during the third quarter. However, when compared to the second quarter 2021, MMG’s $939 factoring balance was $853 higher. This was largely because of our need to finance $475 to pay Vivos Group outside debt. The other factor was that the $86 balance at the end of June 2021 was exceedingly low as our average year to date balance had been around $530. Other Income (Expense) Spurred by ERC other income for the three-month period ending September 30, 2021, which totaled $1,813 resulting in the Company experiencing third quarter pre-tax net income of $1,816 compared to a $429 pre-tax net loss a year earlier. Over the nine-month period ending September 30, 2021, the PPP forgiveness of $5,216 and the ERC’s totaling $4,674 enabled the Company to experience pre-tax net earnings of $9,725 compared to a loss of $1,221 in the comparable period of the prior year. LIQUIDITY AND CAPITAL RESOURCES Our working capital requirements are driven predominantly by EOR field talent payments, G&A salaries, public company costs, interest associated with factoring, and client accounts receivable receipts. Since receipts from client payments are on average 70 days behind payments to field talent, working capital requirements can be periodically challenged. We have a Factoring Facility with TBC, whereas TBC advances 93% of our eligible receivables at an advance rate of 15 basis points, an interest rate of prime plus 2%., and our prime floor rate at 4%. As a result of the impact of the COVID-19 pandemic, our clients may be more likely to be delinquent in their payments. However, to date, we have not seen any adverse change in our collections, with our Days Outstanding (DSO) for first nine months of 2021 at 59 comparable to the 61 DSO for period ending December 31, 2020. By June 2020 our DSO increased to 67 from 60 in 2019 as several of our large clients began demanding 60-to-90-day terms. Delays in receipt of purchase orders also had an adverse impact on DSO. It appears the pendulum over the past 3 quarters has swung favorably as only 3.5% of $4,405 in Accounts Receivable (“A/R”) was > 31 days past invoice due dates, with only 1% > 60. 23 When looking at A/R aging in relation to invoice date, as of September 30, 2021, 56.3% of our $4,405 in total A/R was < 31 days aged, compared to 49% a year ago. The Company has an additional $3,221 in other receivables associated with our ERC eligibility for the first three quarters of 2021. Conversely our Federal and state tax liability has now increased to $1,030. Our primary sources of liquidity are cash generated from operations via accounts receivable and borrowings under our Factoring Facility with Triumph enabling access to the 7% unfactored portion. Because certain large clients have changed their payment practices announcing 60- and 90-day terms amounting to a unilateral extension to contractual terms by 30-60 days, we can be adversely impacted since Triumph does not provide credit if an account obligor pays more than 120 days after the invoice date. Our primary uses of cash are for payments to field talent, corporate and staff employees, related payroll liabilities, operating expenses, public company costs, including but not limited to, general and professional liability and directors and officer’s liability insurance premiums, legal fees, filing fees, auditor and accounting fees, stock transfer services, and board compensation; followed by cash factoring and other borrowing interest; cash taxes; and debt payments. Since we are an EOR with the majority of contracted talent paid as W-2 employees who are paid known amounts on a consistent schedule; our cash inflows do not typically align with these required payments, resulting in temporary cash challenges, which is why we employ factoring. Vivos Debtors as of September 30, 2021, had notes receivable totaling $4,949 including default on a $3,000 promissory note and on a $750 tax obligation in December 2019. After numerous failed collection attempts, on February 17, 2020, the Company initiated an action in the Circuit Court of Montgomery County Maryland against Naveen Doki and the Vivos Holdings for non-payment. It was also anticipated that following the Merger, the Company would both access the capital markets by selling additional shares of Company Common Stock and use shares of Company Common Stock as currency to acquire other business revenues. However, all 300 million authorized shares of Company Common Stock were issued in connection with the Merger. No shares are expected to become available to the Company until the legal dispute with the Vivos Debtors and Vivos Group is resolved. At that point, the Company can decide whether to amend the Company’s Certificate of Formation to increase the number of authorized shares of Company Common Stock or approve a reverse-split of the outstanding shares of Company Common Stock to provide additional shares for these purposes. No assurance can be given as to when this might take place. On May 5, 2020, MMG received a $5,216 loan through the Paycheck Protection Program (the “PPP”) with a term of two (2) years and an interest rate of 1% per annum. The PPP provided that the Company be eligible for forgiveness if the loan proceeds were used for payroll and certain other specified operating expenses while maintaining specified headcount requirements. On June 10, 2021, the Company was informed by the SBA that it had met the requirements and that both the $5,216 and of accrued interest totaling $57 were forgiven The funds bolstered our working capital and enabled us to bring back employees and continue to serve our clients even though their requirements had lessened. As of September 30, 2021, our working capital was $9,417, compared to $5,970 at the end of December 2020, $7,991 as of September 30, 2020, and $566 as of March 30, 2020, approximately one month before the PPP funds were received. The PPP funds enabled the Company to build A/R reserves since PPP funds were employed to pay salaries of both outsourced and G&A employees during the covered 24-week period between May and October 2020. Our adjusted working capital at the end of September 2021, excluding the notes receivable related to the Vivos Debtors totaling $4,949, was $4,865. 24