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. 18 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 June 30, 2022, was $6,481, which was $1,407 or 27.7% greater than for the same period in 2021 with second quarter revenue at $5,074. EOR grew by $1,534 or 38.5% to $5,515, which represented 85.1% of second quarter revenue. Staffing grew $86 to $898 in the second quarter of 2022, but approximately $106 of this total was based on two reassignments of specific US government projects from Video Production to Media Staffing. Media Staffing, a subset of Staffing, grew beyond benefitting for $106 in reclassed Video Production project revenue from a year ago, with second quarterly revenues of $824 compared to $676 a year ago, an increase of $148. The reclass was merely taking recurring non project revenue previously classified as Video Production and reassigning it appropriately to Media Staffing. The impact in 2022 was $106 in the second quarter. IT Staffing, the other subset, declined comparatively in the second quarter 2022 to 2021 by $62, garnering $74 in 2022. Video Production would have had a decline in revenue outside the $106 deemed not be staffing work, had remained, as that segment produced $68 in revenue compared to $250 in the second quarter 2021. Permanent Placement failed to post revenue in the quarter ending June 30, 2022. For the six months ended June 30, 2022, revenue totaled $12,264 compared to $10,868 in the same period a year ago, resulting in $1,396 in incremental revenue comparably. EOR revenues produced an even larger comparative gain in the first half of 2022 compared to 2021, with $10,288 for the six months ended June 30, 2022, compared to $8,478 a year ago. This is an increase of $1,810 or 21.3%, which represented 83.9% of the Company’s total year to date (YTD) revenue through June 30. Staffing increased as well when comparing six-month performance ending June 30, 2022, to same period in 2021, by $126 to a total of $1,822. This represented a 7.4% increase over 2021’s Staffing Revenue of $1,696 through the six months ending June 30, 2021. Media Staffing grew $397 to $1,683 with $206 attributable to the reassignment of two client projects previously credited to Video Production. Video Production revenue compared unfavorably to the same period in 2021, with revenues of $115 compared to $661 in 2021, a $546 drop. If adjusted for the reclassification of work credited to it in 2021, Video Production would have dropped by $340. Cost of Revenue / Gross Profit Gross profit for the three-month period ending June 30, 2022, was $887 representing 13.7% of revenues, which is a $169 improvement over the $718 in gross profit MMG earned in 2021’s second quarter when the gross margin reached 14.1%. 19 The quarter over quarter gross margin (“GM”) percentage drop can be partially attributed to the strength of the aforementioned EOR revenue increase of $1,534, which resulted in EOR dominating the four business segments by accounting for 85.1% of the business versus 78.5% in the second quarter 2021; as EOR business GM percentage was 11.7% to the rest which totaled 22.7%, the over quarterly average slipped from a year ago. However, EOR’s 11.7%, margin was strong compared with 10.4% in the first quarter 2022, 10.1% in the second quarter a year ago and a 9.8% average for all of 2021. This improvement can be attributed to some pricing changes negotiated with several key clients, and the client mix being favorable as clients with slightly higher margins contributed more heavily to the quarter. This is not expected to be the case throughout 2022. MMG’s Staffing gross profit grew modestly by $6 to $191, as volume had more to do with the growth than gross margin percentage as Staffing margins declined by 80 basis points to 20.7%. IT Staffing dropped approximately 1% in gross margin percentage to 27.8%. Year to date 2022, the Company’s gross profit improved by $153 or 10.5% to $1,616 compared to 2021. Gross margin percentage fell slightly to 13.2% from 13.5%. EOR experienced a margin boost year to date to 11.1% compared to 10.1% through June 30, 2021. Video Production’s YTD GM % also improved to 24.9% from 20.9% a year ago. Media Staffing GM % has slipped to 21.9% versus 24.5% in the six months ended June 30, 2021. Gross Profit in Media Staffing for the nine months ending June 30, however rose to $368 from $314 as volumes increased. General and Administrative (“G&A”) General and administrative (“G&A”) expenses for the three months ended June 30, 2022, were $1,097, as compared to $878 in the comparable period in 2021, representing a $220 or 25.1% increase. This increase was predominantly the result of having an estimated $107 in arbitration related costs, employee salaries and benefits ratcheting up by $64 or 9.4% from the second quarter 2021, and contracted labor and recruiting costs increasing by $33 comparatively from a year ago. For the six months ending June 30, 2022, G&A was $2,402 compared with $1,688 a year ago, an increase of $714 or 29.7%. However, the legal and consulting costs associated with our arbitration (See Note 1) represented $506 in totality, a $419 increase in like costs associated with the Vivos Matter from a year ago. MMG salaries and benefits increased $201 with sales and client services department non incentive based compensation increasing $127, as we increased our investment in these two vital groups. The other areas of spend increase were commissions to drive sales and recruiting totaling $33; bonus accrued at $72 as we move to tie more compensation to performance-based measures; commercial legal $19; recruiting software $15; and travel $11. Interest Expense The Company incurred $66 in interest charges for financing (factoring) its invoices in the first six months of 2022 compared with $63 in the same period a year ago, In the second quarter MMG incurred $36 in interest changes compared to $18 in the same period a year ago as MMG increased its average position under finance from $1.3M a year ago to $2.5M in the second quarter 2022. Other Income (Expense) MMG benefitted from $1 in corporate credit card rebate in the second quarter 2022. For the six months ended June 3, 2021, MMG had $0 in other income compared to a year ago when MMG earned $8,042 in other income courtesy of $5,273 in the PPP Forgiveness which included the recovery of accrued interest, and $2,769 In Employee Retention Credits (ERC). 20 LIQUIDITY AND CAPITAL RESOURCES Our working capital requirements are driven primarily 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 June 30, 2022, is at 64 comparable to 62 DSO for the trailing twelve months ending June 30, 2021. In 2021, a few of our large clients began demanding 90-day terms. Delays in receipt of purchase orders also has had an adverse impact on our DSO since 2019. Despite these challenges, our DSO in the second quarter ending June 30, 2022, improved to 65 from 80 in the first three months of 2022. When looking at A/R aging in relation to due date, as of June 30, 2022, 77.4% or $3,620 of our $4,668 in total trade receivables were < 31 days aged, compared to 97.6% a year ago. This has much to do with extended payment terms to our larger clients as well as delays of up to 30 days 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 has a balance of $92 at the end of the second quarter 2022, mainly because we deposited $725 for our 2021 expected tax liability. 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 experience an adverse cash flow impact 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 officers’ 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 June 30, 2022, had notes receivable totaling $5,094 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. 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. 21 Overall, these programs bolstered our working capital and enabled us to bring back employees and continue to serve our clients. As of June 30, 2022, our working capital was $8,608 compared to $9,361 on December 31, 2021, and compared to $9,361 on December 31, 2021. Our adjusted working capital at the end of June 2022, excluding the notes receivable related to the Vivos Debtors totals $3,514 compared to $3,605 a year earlier.