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, 2021, 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, 2021, 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. 17 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, 2021. Management’s Discussion included in the Form 10-K for the year ended December 31, 2021, 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 2022 operations; thus, the reader of this report should read Management’s Discussion included in Form 10-K for the year ended December 31, 2021. RESULTS OF OPERATIONS Revenues Revenues for the three months ended March 31, 2022, was $5,783 which was $11 or 0.2% less than for the same period in 2021 with revenue at $5,794. Video Production and IT staffing had the greatest negative impact, falling $218 (comparatively) and $209 in year over year quarterly revenue. EOR grew, delivering $4,773 versus $4,500 in the first quarter ending March 31, 2021. The $273 or 6.1% increase resulted in EOR revenue garnering 82.5% of the quarterly revenue, which was consistent with its fourth quarter 2021 performance. Our designated Video Production revenues formerly included adhoc freelance production/media staffing. With our staffing solutions expanding in 2022, we now separate all staffing solutions into its respective category. Video production will now only consist of project-based services. These solutions include global crewing, production management to include in studio and on location projects as well as postproduction services. This change which had an estimated $145 impact in the first quarter contributed to a $363 decline in Video Production revenue, to a total of $48, in the first quarter 2022 to its first quarter comparative of $411 in 2021. Conversely, Media Staffing revenue grew $250 or 41% to $860 in the first quarter 2022. Permanent Placement, which became a new segment in the second quarter 2021, posted $39 in revenue in the quarter ending March 31, 2022. Cost of Revenue / Gross Profit Gross profit for the three-month period ending March 31, 2022, was $730 representing 12.6% of revenues, which was $17 lower from the $747 in gross profit MMG earned in 2021’s first quarter when the gross margin was at 12.9%. Permanent Placement margins were at 89%, IT Staffing at 19.4%, Media Staffing at 23%, and EOR at 10.4%. Lower comparative margin can be attributed to a loss of an estimated $69 in IT staffing gross profit due to the segment’s decline in business. EOR increasing its share of revenue from 77.7% to 82.5%; at a lower-than-average margin of 10.4%, also attributed to the slight year over year margin contraction. EOR margins tend to be stronger at the beginning of the year before volume incentives kick in for a few of our larger clients thus causing some relational margin compression. Video Production which saw a number of its 2021 clients or work portions moved appropriately over to Media Staffing, had a negative margin on only $47 in revenue due to a cost overrun on a job order. General and Administrative (“G&A”) General and administrative expenses for the three months ended March 31, 2022, were $1,305, as compared to $810 in the comparable period in 2021, representing a $495 or 61.1% increase. This increase was predominantly the result of having an estimated $350 in arbitration related costs. Employee salaries and benefits were comparatively up approximately $137 to a year ago as both the sales and client services departments were bolstered with new talent. Sales added two heads resulting in $76 in additional salaries and commissions when comparing first quarter 2022 to 2021. Client Services new hires added $36 in comparative salary in the quarter ending March 31, 2022, to the same period in 2021. Thus, those two cost increases make up $487 of the $495 year over year variance. 18 Interest Expense The Company incurred $29 in interest charges for financing (factoring) it’s invoices in the first quarter 2022 compared with $45 in the same period a year ago. MMG has been in a better cash position hence a reduced need to rely on factoring. Other Income (Expense) MMG made a charitable contribution of $3 in the first quarter 2022. 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 Triumph, whereas Triumph 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%. Our Days Outstanding (DSO) for the trailing 12 months ending March 31, 2022, is at 61 comparable to 60 DSO for the trailing twelve months ending March 31, 2021. In 2019 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. This seems to affect MMG in the first quarter as for the 3 months ending March 31, 2022, our DSO improved 54 to 53 compared to the same 3-month period in 2021. When looking at A/R aging in relation to due date, as of March 31, 2022, 88.2% of our $4,660 in total trade A/R was < 31 days aged, compared to 97.6% a year ago. This has much to do with larger clients delaying payments and up to 30 days delay on receiving purchase orders after the invoice has been prepared. MMG management is working on ways to speed back up the cash conversion process outside of financing. Our Federal and state tax liability increased to $688. 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 March 31, 2022, had notes receivable totaling $5,039 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 Dr. 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. 19 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 Because our first three-quarter revenues in 2021 were 80% or less than they were in 2019, the Company was eligible for the Employee Retention Credit. Consequently, MMG received $155 in direct payroll credits from the IRS via its payroll provider Paycom in the late 2 nd quarter and $1,086 in the third quarter. MMG returned $842 to the IRS for payroll credits received in the 4 th quarter once the program ended retroactively in mid-November 2021.This payment was made to the IRS through Paycom, the Company’s payroll provider in January 2022. Overall, these programs bolstered our working capital and enabled us to bring back employees and continue to serve our clients. As of March 31, 2022, our working capital was $8,815, compared to $5,971 at the end of March 2021. Our adjusted working capital at the end of March 2022, excluding the notes receivable related to the Vivos Debtors totals $3,776 compared to 1,663 a year earlier.