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 September 30, 2022, was $6,464, which was $477 or 6.9% less than for the same period in 2021 with third quarter revenue at $6,941. EOR declined by $211 or 3.7%, compared to the third quarter of 2021, to $5,494, which represented 85% of third quarter 2022 revenue. Staffing declined by $114 in the third quarter of 2022, or 11.9% to $848. This consisted of Media Staffing, which declined $99 and IT staffing which was $15 off the mark of the third quarter comparative in 2021. Video Production had a decline in revenue of $174, but Direct Placements garnered $60 compared to $38 in revenue in the third quarter of 2021. For the nine months ended September 30, 2022, revenue totaled $18,729 compared to $17,809 year to date for the same period a year ago, resulting in $920 in incremental revenue comparably. EOR revenues through nine months ended September 30, 2022, have produced an even larger comparative gain compared to 2021, with $15,783 compared to $14,186 a year ago. This is an increase of $1,597 or 11.3%, which represented 84.3% of the Company’s total year to date (YTD) revenue through September 30. Staffing is $13 ahead of last year’s pace through the nine months ending September 30, 2021, with $2,671 in revenue compared with $2,658 comparatively in 2021. Media Staffing has grown $216 to $2,464 but this was almost completely offset by IT Staff’s $203 decline to $207 from $410 in the nine months ended September 30, a year ago. Video Production revenue has compared unfavorably to the same period in 2021, declining $721 with revenues of $176 compared to $897 in 2021. This decline was the result of three clients curtailing projects they had with us in 2021, the loss of one client which changed its bid requirements, and tour reclassifying certain work with clients as Media Staffing given its nature. Our Direct Placement business through nine months in 2022 has $99 in revenue compared to $68 over the same period in 2021, a $31 or 45.6% increase as we have a few newer clients that focus on direct media placements only. Cost of Revenue / Gross Profit Gross profit for the three-month period ending September 30, 2022, was $891 representing 13.8% of revenues, which is an $88 improvement over the $803 in gross profit MMG earned in 2021’s third quarter when the gross margin reached 11.6%. The overall quarterly gross margin (“GM”) percentage improvement can be attributed to the strength of the EOR margin reaching 12.4% in the third quarter 2022 and compared to 9.1% a year ago. 18 The two catalysts for EOR margin lift are price increases, and heavier use of W2 resources vs. 1099 labor based on client mix. For example, lower revenues for one large EOR client in ‘22 are highly weighted towards 1099s over W2. GP would be approximately 20 basis points lower if those revenues still existed. W2 workers in EOR represented 82% of labor compared to 74% in the third quarter in 2021. On average in 2022, margins are 9%, 1.1% higher for EOR W2 labor than 1099. MMG’s Staffing gross profit margin slid from 20.1% to 16.7%, due to client mix, however while overall non EOR total margin, including Video Production and Direct Placements were at 21.9% in the 3 months ending September 30, 2022, compared to 22.8% in the same period in 2021. Year to date 2022, the Company’s gross profit improved by $240 or 10.6% to $2,507 compared to $2,267 over the first nine months in 2021. Gross margin percentage rose from 12.7% in 2021 to 13.4% when comparing the nine months ending September 30, 2022, to same period in 2021. EOR experienced a year-to-date margin boost to 11.7% compared to 9.5% through September 30, 2021. Thirty basis points were spurred by resources moved from billable to indirect overhead. Increased use of W2 client mix and pricing changes led to the additional spur in EOR margins. Media Staffing margins year to date have held steady to where they were a year ago at declined to 19.9% compared to 20.8% through three quarters in 2021, while Video Production’s nine-month gross profit margin has risen to 24.3% compared to 20.6% in nine months ending September 30, 2022. However, the overall Video Production impact on overall gross profit margin is nominal given it represents 1% of the business revenue and 1.7% of gross profit. General and Administrative (“G&A”) General and administrative (“G&A”) expenses for the three months ended September 30, 2022, were $941, as compared to $866 in the comparable period in 2021, representing a $75 or 8.7% increase. This increase was predominantly the result of having increases in the following areas; $53 in legal, $37 in contract services, $24 in employee health insurance related costs, and $21 in commissions. Of the $53 in legal fees, $34 were arbitration related costs, as were $9 of the $37 in contract services, for the three months ended September 30, 2022. Arbitration related costs represented $43, an increase of $35 comparatively from a year ago. For the nine months ending September 30, 2022, G&A was $3,343 compared with $2,554 a year ago, an increase of $789 or 30.9%. However, the legal and consulting costs associated with our arbitration (See Note 1) represents $543 in totality, a $525 increase in like costs associated with the Vivos Matter from a year ago. MMG salaries and benefits increased $190, $69 of which are wages and payroll taxes, $54 commissions, and $39 health insurance benefits for employees. $50 of the $69 in wage and payroll tax proliferation is attributed to a need to move certain billable resources from EOR clients to overhead as described above in the Gross Profit section. Departmentally, our Client Services group, which includes recruiters, has developed, resulting in increase of $60 of the $190. Interest Expense The Company incurred $111 in interest charges for financing (factoring) its invoices in the first nine months of 2022 compared with $78 in the same period a year ago. In the third quarter MMG incurred $46 in interest changes compared to $15 in the same period a year ago as MMG increased its average position under finance from $1,088 a year ago to $2,276 in the third quarter 2022. The cost of financing increased from a year ago when the prime rate was 3.25% in the third quarter 2021 with two increases in the third quarter 2022, ending at 6.25%. Thus, our borrowing rates were 6% in the third quarter 2021 and ranged from 7.5% to 8.25% in the third quarter 2022. Other Income (Expense) For the nine months ended September 30, 2022, MMG received $210 in other income by way of ERC funds compared to a year ago when MMG earned $9,855 in other income courtesy of $5,273 in the PPP Forgiveness which included the recovery of accrued interest, and $4,582 In Employee Retention Credits (ERC). The $210 was thought to be ineligible portion of 2021’s first quarter ERC, but it was deemed to be based on our payrolls, eligible per the IRS. Income Tax The Company has taken a tax loss of $117 over the nine months ending September 30, 2022, to record discrete tax items and true up of prior year returns. 19 LIQUIDITY AND CAPITAL RESOURCES Our working capital requirements are driven primarily by EOR field talent payments, G&A salaries, public company costs, attorney fees associated with the protracted Vivos Matter, 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 Gulf Coast Bank (“Gulf”), whereas Gulf 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 September 30, 2022, is at 66 comparable to 62 DSO for the trailing twelve months ending September 30, 2021. 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. 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. Thus, trailing twelve-month DSO ending September 30, 2022, was 66 from 62 in the first nine months of 2021. This has more to do with revenue mix to clients with whom have 60 and 90 day payment terms than delinquent accounts. However, our over 60 days past due represented 8.7% or $398 of our total A/R compared to 1% in the same nine-month period ending September 30, 2021.By October 31, $308 of the $398 had been collected. When looking at A/R aging in relation to due date, as of September 30, 2022, 73.6% or $3,370 of our $4,581 in total trade receivables were < 31 days aged, compared to 96.5% a year ago. Our over 60 days past due represented 8.7% or $398 of our total A/R compared to 1% in the same nine-month period ending September 30, 2021. By October 31, $308 of the $398 has been collected. Our Federal and state tax liability has a balance of $2 76 at the end of the third quarter 2022, this is mainly for state income taxes because we deposited $725 of our 2021 expected federal tax liability in the first quarter. Our primary sources of liquidity are cash generated from operations via accounts receivable and borrowings under our Factoring Facility with Gulf 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 Gulf 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 outlays, which is why we employ factoring. Vivos Debtors as of September 30, 2022, had notes receivable totaling $5,157 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. The Vivos Matter moved to arbitration where on August 31,2022 the Arbitrator issued an award (the “Award”) with the Company and MMG prevailing on their claims. This is not inclusive of the additional amounts awarded in the arbitration. 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. 20 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 September 30, 2022, our working capital was $8,725 compared to $9,417 a year ago and $9,361 on December 31, 2021. Our adjusted working capital at the end of September 2022, excluding the notes receivable related to the Vivos Debtors totals $3,568 compared to $4,468 a year earlier.