RELIABILITY INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. 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; our continued inability to issue additional shares of equity securities; 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 Annual Report, including the “Risk Factors” in Item 1A of this Annual Report 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 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 this Annual Report on Form 10-K. Our actual results may differ materially from those contained in any forward-looking statements. You should read the following discussion together with our audited consolidated financial statements and related notes thereto and other financial information included in this Annual Report on Form 10-K. Our financial information may not be indicative of our future performance. 30 EXECUTIVE OVERVIEW 2022 was a challenging year for Reliability and our wholly owned operational entity Maslow Media Group. Although our revenues declined by $521 or 2.1% to 2021 and by 12% or $3,507 to 2020; conversely though, our gross profits of $3,494 were $228 over 2021 and $20 over 2020’s totals. The more attractive gross profit on lower revenues is reflected by our ever-increasing gross margin which reached 13.6% in 2022 versus 12.4% in 2001 and 11.9% in 2020. This was the fourth consecutive year that MMG’s gross margin percentage has increased and represents an 8.7% compounded annual growth rate (CAGR) over the last three of those years. This consistent improvement of gross margins has been driven by renewal pricing increases, changes in volume discounts, billing for added overhead, equipment rental price increases, and client mix in which a greater share of our business has shifted to more favorable company terms. The time, effort and expense put into the arbitration proceedings (see section1) in the first half of 2022 detracted from officer focus on sales, our strategic focus and thus distracted from our ability to fully drive stockholder value. In the fourth quarter, MMG made changes to the sales organization with the intent on driving more immediate new business. The arbitration award has assisted the Company in attracting many new additions to our corporate team. These additions to our team will assist us in strengthening client relationships while providing a better employee experience for our talent working in the field. Demand for Maslow EOR services has not recovered to pre-2020 COVID 19 (“COVID”) levels as the Media business was profoundly impacted by the stay at home and vaccination mandates. Maslow’s clients have been slower to return to full schedules even as federal, state and local governments have lifted COVID-19 restrictions. Some mask and vaccine mandates still impact the total number of MMG employees assigned to our clients. Consequently, our business has been slow to recover to 2019 levels when our revenues were $38,444. In the first quarter of 2020 our performance, compared to the same period in 2019 saw an increase of $500 with $8,801 to $8,301 despite a swoon in the last two weeks of the quarter when stay at home orders from state and the Federal Government began taking effect. In addition to the impact of the pandemic, some of our larger clients have experienced internal reorganization, show cancellations, and budget reductions that have impacted their utility of our services. For instance, one client cancelled two nationally syndicated shows that we had been staffing. Regardless, COVID-19 and the response to the pandemic took its toll as the remaining three quarters MMG saw quarterly 2020 declines of 46%, 38.5%, and 13.7% respectively compared to 2019, and ended up 2020 with $29,202 in revenue. In 2021 we realized an additional decline of revenue down 10.1% from 2020 levels to $26,246. Besides the slower return to work nature of the media business, there was a mix of new and more active clients, and those who had large downward budget shifts. The final three quarters of revenue performance in 2021 were on par with 2020 with $20,452 realized over $20,401 in 2020, demonstrating the strength of the 2020 first quarter that was abruptly halted by the pandemic. So, in essence ¾ of 2021 revenue was on par with 2020. However, most of MMG’s larger clients were slow to ramp back up, and we suffered steep long-term revenue declines due to client attrition, internal reorganizations or budget cuts (i.e., Client A), an insourcing of their media needs, offshoring altogether, or cut altogether This paradigm has not allowed for revenues to begin returning to pre-COVID-19 2019 levels. The 6 largest attritted customers represented a $4,385 loss of revenue in 2021 over 2020, with Client B accounting for another $1,204. Client B had actually eliminated certain programming resulting in an estimated $4,000 loss in 2021 annual revenue. Client B’s 2021 to 2020 annual net revenue decline wound up being $1,204 as they increased revenue activity by $2,796 in other areas of their business. In 2022, MMG seemed poised to be on pace to beat 2021’s annual revenue total of $26,246, but an abrupt curtailment of staffing over the holidays lasting approximately 2 weeks by five of our top 6 clients, resulted in a steep decline in revenue especially when compared to the previous 2 years also making December of 2022 the lowest revenue month of 2022. MMG revenues in December 2022 comparative to 2021 were down $1,401 or 46% and $1,169 or 41% to December 2020. As a result, annual revenue slipped by $521 to $25,725 compared to $26,246 in the year ending December 31, 2021. 31 However, despite the revenue decline in 2022 to 2021 year over year by 2%, MMG’s gross profit increased by $228 or 7% in the year ending December 31, 2022, compared to a year ago, as our margins continue to ascend to new heights on the strength of our EOR business that saw margins increase to 12% in the year ended December 31, 2022, from 9.8% in the year ended December 31, 2021. Since EOR revenue in 2022 of $21,894 represents 85.1% of our overall revenue, this business segment clearly drove our company margin improvement. The improved EOR margins can be attributed to four factors, two within and two outside our control; changes in pricing upon client renewals, new pricing for equipment rentals, larger margin clients dominating the product mix, and greater use of W2 employees by our clients which yield on average 1.2% higher margins. It also helped that we maintained strong non-EOR margins at 22.3%. Thus, our annual gross margin percentage of 13.6% represented a fourth consecutive year of growth; comparing 12.4% and 11.9% in 2021 and 2020 respectively and 10.6% in 2019. But what could not be managed proportionately in 2021 was our SG&A which rose 23.3% to $4,400 as corporate non-operational costs, consisting mostly of public company and legal costs added $1,451, which represented $548 of the $820 SG&A increase when comparing the year ending December 31, 2022, to the same period in 2021. Operationally SG&A at $2,949 was $285 over the $2,665 in SG&A spend in 2021. As far as cash is concerned, in 2022 our cash position remained strong due to our receiving $1,651 in Employee Retention Credits (ERC) from the first quarter of 2021. We are still due $1,174 from the second quarter 2021 that was filed via a 941X form and received by the IRS in December 2021. We accrued an additional $26 for interest using the IRS interest schedule. Our working capital though has assumed repayment of Vivos Debtors which as of December 31, 2022, was $8,645. Our adjusted working capital excluding the $5,251 in Vivos Debtor notes is $3,394. 2023 and Beyond We are investing in new technologies and bringing on additional staffing professionals to grow the staffing side of our business in 2023. EOR has been the Company’s primary focus for a long time and 2023 brings a focus on growing our Direct Hire, Staffing & Recruiting solutions. That said, our determination of what service to bring to each client depends on individual needs. But when it comes to non-media staffing, we certainly can focus more on IT and administrative opportunities with our existing customers while opening up new opportunities. Once the Vivos Matter award has been settled the Company may contemplate moving forward with its original plans to increase outstanding shares by authorizing new ones or via a reverse split to acquire synergistic staffing companies to grow more quickly. The Company would also like to move to the OTCQB and or OTCQX on its way to eventually being listed on the NASDAQ Exchange. The Company continues to work towards meeting all of the requirements to pursue up listing the OTC-QB or OTC-QX exchanges. Once collection of the Vivos Debtors has taken place, MMG may consider moving forward with this initiative. Virtual staffing is no longer a limited niche for certain companies and certain positions. Virtual scenarios are also favored by Generation Z which values work-life balance as one of the most important factors when deciding on a company to work for. Considering the perks that remote working offers, and the keen interest shown by employees from different age groups, we believe that remote working will be prevalent in 2023 and beyond. This paradigm however should not adversely impact MMG, in that whether media jobs are filled virtually or not, MMG has the pipeline of talent to fill these diversified roles. Furthermore, we believe given the changing nature in specialized staffing there exists a greater opportunity to expand our EOR business as it offers businesses of all types and industries, more flexibility in, on, and off boarding employees as well as managing 1099 risk. As for media, IT and finance and accounting staffing is concerned, we believe it will grow but there are also opportunities to get into staffing specialties which represent areas where we see the most rebound or a robust demand. While we will continue to focus on growing the contingent staffing side of our business, our splash into Direct Hire staffing, has opened up a new avenue in business of diversified relationships (Media, IT, and finance and administrative roles) that have strengthened our gross margins and has the potential to grow and flourish. 32 Our focus on traditional staffing has resulted in some early success in filling client Direct Hire needs, having added $167 in high margin revenue in 2022. This focus reflects our desire to shift our portfolio toward a higher margin, higher value proposition. As a result, we have continued to move forward with our diversified offerings and future specialization staffing strategy, updating our already expert operating model and organizing our business to maximize acquisition and retention of client accounts. One concern is the low probably of maintaining the National Football League’s (NFL) RedZone channel programming after this past season ended in January 2023. Client B, which had the rights to its own RedZone broadcast since 2005, lost those rights as a result of Google/YouTube’s $14 billion, 7-year deal for “Sunday Ticket” rights. Consequently, the NFL will only offer the version of the “NFL RedZone” channel produced by the NFL Network next season. Although we staff other events for Client B, the loss of this programming could impact MMG between $2-$3M in annual revenue. MMG will continue to pursue other opportunities at Client B and the continued staffing of sports programming of this type. COMPANY OVERVIEW Maslow is a national provider of employer of record, recruiting and staffing services, consisting of media and IT resources. We provide services to client primarily within the United States of America. Our services consist of: ● Employer of Record (“EOR”): A unique workforce solution for any organization who seeks efficiency in employee administrative management including payroll and benefits, labor risk associated with compliance with federal-state and local regulations including Fair Labor Standards Act (“FLSA”), in onboarding and offboarding employees, and in managing benefit costs. One major difference in this service offering is that our customers usually source the talent and MMG hires and leases the employees to our customers. ● Recruiting and Staffing: Staffing covering a wide variety of specialties. Currently Media and Information Technology (“IT”) encompass most of our placements. ● Video and Multimedia Production: With 35 years of experience, the Company’s subsidiary, Maslow offers script to screen expertise including producers, audio engineers, editors, broadcasters, makeup artists, camera crews, Gaffers and grips, drone operators and more. ● Direct Hire: Also referred to as Direct Hires, we strategically recruit and fill a variety of fulltime roles for our customers which is only limited by our recruiting capabilities which are diversified. The Company’s subsidiary, The Maslow Media Group, Inc. (“Maslow”) is currently the only operating entity for the business. After our Merger in October 2019, non-operational expenses (e.g., public company fees, D&O insurance, investor relations, etc.) were assigned at the corporate level. This enables a more pristine focused view of the operational side of the business we refer to as Operational Income Before Depreciation, Interest, and Amortization. RESULTS OF OPERATIONS Maslow had revenues totaling $25,725 in 2022, which was a 2% decrease over $26,246 in 2021. The $521 decline can be attributed to several factors including the slower return to normal work schedules for our media EOR and staffing customers from COVID-19 shutdowns and work from home mandates. Overall, Maslow lost $4,529 to 10 accounts with declining revenues => $100, which mostly declines in revenue by Client E as they moved their creative business to an overseas competitor and Client A, which scaled back and moved several EOR staff to the Client A payroll. Other clients scaled back their media budgets. Conversely, we added $4,290 from 8 accounts that had => $100 in revenue in 2022 from 2021. Client C stepped up their programs as did Client B, and several others in the insurance, education, and healthcare space. 33 From a revenue contribution standpoint our top 10 clients represented $22,940 which is 86.1% of 2022 revenues which is an increase in top 10 revenue reliance as in 2021 the top 10 represented 85.5%, or 21,628. 2020 saw a 78.4% top 10 reliance of revenue at $23,160. $31 in rebates were issued in December 2022 which was $2 less than a year ago when they were $33 in 2021. The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of revenues, and have been derived from our consolidated financial statements. December 31, 2022 2021 Revenue $ 25,725 26,246 Cost of services $ 22,231 $ 22,980 Gross profit 3,494 3,266 Selling, general and administrative expenses 4,400 3,567 Operating loss (906 ) (301 ) Interest income 53 - Interest income from related parties 232 274 Interest expense (171 ) (39 ) Impairment of goodwill and intangibles - (688 ) Other income (expense) 223 9,631 Income/(loss) before taxes (569 ) 8,877 Income tax benefit (expense) (170 ) (984 ) Net Income (Loss) (739 ) 7,893 Revenues: By Segment 2022 % of Revenue 2021 % of Revenue EOR $ 21,894 85.1 % $ 21,346 81.3 % Recruiting and Staffing 3,468 13.5 % 3,613 13.8 % Video and Multimedia Production 264 1.0 % 1,121 4.3 % Direct Hire (Formerly Permanent Placement) 99 0.4 % 166 0.6 % Total Revenue $ 25,725 100 % $ 26,246 100 % Employer of Record (EOR) Revenues : EOR represented 85.1% of our revenue in 2022 as opposed to 81.3% in 2021 and 80.8% in 2020. The 2020 to 2022 EOR increase in revenue contribution can be attributed to this business segment showing signs of returning to pre COVID-19 levels and a lack of growth in our Staffing, Video Production, and Direct Hire performance. Client A had the largest EOR revenue decline of any client at $1,427, which can be attributed to a slate of employees moving from our payroll to Client A’s. However, Client C and Client B increased their EOR revenue by a combined $1,878. This $451 revenue variance among the three clients makes up 78.7% of the year over year EOR revenue increase 2022 over 2021. Recruiting and Staffing Revenues : Staffing revenues declined by $145 or 4.2% to $3,468. IT Staffing declined by $287 while our Media Staffing division increased revenues by $1436 over its 2021 performance. Thus, Media Staffing at $3,176 represented 12.3% of total 2022 annual revenue, whereas it represented 11.6% of 2021 annual revenue and 6.5% of 2020 revenue. The Media Staffing increase, however, was driven to a degree by our reclassing staffing activities to Video Production clients after 2021. We believe the approximate impact of this change was $383. If we look at performance in that light, our Media Staffing declined by an equal amount to IT at $287 in the year ended December 31, 2022, to the same period a year ago. One notable lost account was one which hired us to staff a government contract it elected not to rebid on. This led to a $131 loss in 2022 revenue when compared to 2021. 34 Video and Multimedia Production Revenues : Video Production, which includes managed services and project freelance work, was down sharply in revenue in 2022, garnering $264 against $1,121 a year earlier. However, if we factor the estimated $383 that was reclassed to Media Staffing in 2022, the revenue would have been recorded as $648 and the decline to 2021 revenue would be $473 versus $856. This business was hurt by loss of a customer which provided $119 in revenue in 2021, and reduced demand for production activities by the U.S. Environmental Protection Agency (EPA) and The US House of Representatives with the former revenues at $90 for year ending December 31, 2022, from $270 in same period 2021, and the latter down 19% from $457 in 2021 to $370 in 2022. Gross Profit: Gross profit represents revenues from services less cost of services expenses also referred to as Cost of Revenue (COR), which consist of payroll, payroll taxes, benefits, payroll-related insurance, union benefits, field talent, recruiting software license fees and reimbursable costs for out-of-pocket items. Our Gross Profits rose in 2022 by $228 or 7% to $3,494 from $3,266 in the year ended December 31, 2021. Our gross margin is the percentage of revenue after Cost of Revenue (COR). Gross margins increasing to 13.6% in 2022 from 12.4% in 2021 was the catalyst of our gross profit growth. This was the fourth consecutive year in which MMG has been able to increase its gross margins, with the compounded annual growth rate (CAGR) of such increases being 7.2%. Since 2019, the CAGR is 8.6%. Our margin improvement was driven entirely by our EOR margins increasing 2.2 points to 12% from 9.8% in 2021. The only other business segment margin improvement was Video Production moving to 23.7% from 19.4%, but this was because of exodus of account revenue to staffing described above; with the overall impact not being significant because the Video Production contribution to revenue is only 1%. EOR margins which were 9.2% in 2020, have risen to 12% due to price changes to large clients at their contract renewal, a mix in client revenue favoring those with higher contractual margins, increased use of higher margin W2 over 1099 workers, and equipment rental pricing change which enabled our gross profits to increase by $51 making up 22% of our $228 gross profit improvement 2022 over 2021. Our Media Staffing, however, saw its gross margins decline 2 points from 22.3% to 20.3% as a consequence of having taken on over $600 in Video Production revenue at lower margins, and the roles being filled in 2022 having tighter margins. IT Staffing also saw a decline to 21.4% in 2022 from 26.9% in 2021. But this was the result of far few resources being brought to bear at lower price points leading to margin compression. This paradigm can reverse itself as this business becomes revitalized. Selling, General and Administrative Expenses (“SG&A”) : SG&A expenses increased $833 to $4,400 from $3,567 largely because of $605 in legal and other professional service fees associated with the Vivos Matter and Arbitration. Corporate non-operational costs inclusive of the $605 were $1,451, were $548 greater in 2022 than in the same period ending December 31, 2021. $343 of the $1,451 were public company related costs. Salaries, inclusive of commissions, payroll tax, and bonus rose $110 in the year ending December 31, 2022, compared to same period in 2021. Salary increases by department were driven by client service salaries up $55 as we added headcount and leadership to enable sales to focus on customer acquisition solely. Human resource (HR) department, which includes field support rose $19 and the executives by $35. Conversely sales and marketing salaries were down by $32 and accounting and finance down $15. Staff health benefits were up $81 due to rising premium costs and because we had a large credit for unused portion of our 2020 subsidy booked in 2021. The only other notable variances were commercial legal were up by $46 in 2022 over 2021, mainly due to union negotiations, recruiting costs; software subscriptions up $35 and recruiting costs increasing by $32. The greatest cost decrease was amortization, down $34 since there were no longer any intangible assets to amortize as the balance was written off entirely in 2021. 35 Operational SG&A costs in 2022 were $2,949 which was $284 greater or 10.7% than the $2,665 operational SG&A costs in 2021. The largest increase in spend was on health benefits for all SG&A employees at $81. Operational salaries (inclusive of payroll taxes, leave and bonus only) were $24 higher in 2022 over 2021. Interest Income : Interest income from related parties decreased by $42 from $274 to $232, as a result of last year’s accrued interest income including adjustments to prior periods based on the proper default rates and dates. Maslow earned an additional $23 mostly for the delay in first quarter ERC receipts which were not paid until August 31, 2022, accrued another $3 for a miscalculation of interest owed and $26 to cover the earned portion through December 31, 2022, for the second quarter 2021 ERC for $1,174 that we still await payment. Other Income (Expense): Other income was $223 as the catalyst was the Company receiving $211 in additional ERC funds from our 941X submission for the first quarter 2021, that we thought to be ineligible when it was filed. In the year ending December 31, 2021, MMG booked $9,681 in Other Income (Expense) as combined PPP loan forgiveness and ERC refunds minus $688 for writing down goodwill and remaining intangible asset for IQS were aggregated. Interest Expense: Interest expense, increased $132 from $39 to $171 as our borrowing base was higher in 2022 versus 2021, our factoring interest rate rose from 6% to 9.5% over the course of 2022, and last year our interest expense total included $35 in accrued PPP interest credit. Thus, the adjusted increase in cost variance interest in 2022 would be $97. Income Taxes: Income tax expense in 2022 was $170 compared to $984 a year ago for the year ending December 31, 2021. Despite the Net Loss of $739, taxes were posted for additional taxes owed the federal and state governments for 2021’s tax returns which were not filed until mid-October 2022. There were also penalties and interest charged on the late portion of what was owed the IRS. LIQUIDITY AND CAPITAL RESOURCES Our working capital requirements are driven predominantly by EOR field talent payments, SG&A salaries, public company costs, interest associated with factoring, legal costs associated with the Vivos Matter, and client accounts receivable receipts. Since receipts from client payments are on average 69 days behind payments to field talent, working capital requirements can be periodically challenged. We have a Factoring Facility with Gulf Coast Bank which advances 93% of our eligible receivables at an advance rate of 15 basis points, an interest rate of prime plus 2%., with our prime floor rate at 4%. As of December 31, 2022, 66.3% of our $5,750 in accounts receivable was current compared to 70% out of $5,592 which was current in on December 31, 2021. As of December 31, 2022, 21.2% is 1 to 30 days past due compared to 17.9% a year ago, 11.6% between 31 and 60 days past due versus 4.7% in 2021, and 1% greater than 60 days versus 3.6% at the end of 2021. Our primary sources of liquidity are cash generated from operations via accounts receivable and borrowings under our Factoring Facility with Gulf Bank (“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 be adversely impacted since TBC no longer provides 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 in the past we have employed factoring. Because we do also employ 1099 contracted firms and individuals with payments terms which vary from immediate to 30 days, our cash requirements can be quite variable. Vivos Debtors as of December 31, 2022, had notes receivable totaling $5,251, including default on a $3,000 promissory note and on a $750 tax obligation in December 2019. 36 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. Over the past three years MMG received eligible forgiven PPP Loan totaling $5,216, ERC cash of $3,501 out of eligible $4,676, which has bolstered working capital enabling us to invest in software, build A/R reserves, and hire needed resources for operations. As of December 31, 2022, our working capital was $8,645 compared to $9,361 in 2021 and $5,970 at the end of 2020. Once the $1,174 in ERC is fully refunded, the Company will have more sufficient capital resources, but these are based on government stimulus programs. We anticipate approximately $350 in incremental SG&A costs in 2023 as we invest in growth as heads will be added for sales, recruiting and marketing as well as a new system to improve lifecycle management of payroll and benefits for our clients. We expect these incremental costs to exceed the reduction in legal fees which in 2023 will not be nearly as intensive as they were in 2022 when we prepared and participated in a multi week arbitration. We also expect costs in service areas to be up based on inflation. A summary of our operating, investing and financing activities are shown in the following table: December 31, 2022 2021 Net cash provided by (used in) operating activities $ (1,427 ) $ 2,505 Net cash used in investing activities (9 ) (7 ) Net cash provided by financing activities 1,639 (2,544 ) Net change in cash and cash equivalents $ 203 $ (46 ) Operating Activities Cash employed by operating activities consists of net income (loss), adjusted for non-cash items, including depreciation and amortization, and the effect of working capital changes. The primary drivers of cash inflows and outflows are factoring, accounts receivable and accrued payroll and expenses. During 2022, net cash provided by operating activities was ($1,427), a decrease of $3,932 compared with $2,505 for 2021. This decrease is primarily attributable to net loss and decreases in accounts payable, accrued payroll, accrued expenses, and income tax payable. The holiday season impact on revenue also decreased the need for cash to pay 1099 and W2 workers. Investing Activities Cash used in investing activities consists primarily of cash paid for capital expenditures. Financing Activities Cash used in financing activities in 2022 was $1,639 as compared to cash employed for same purpose totaling ($2,544) in 2021. Borrowing swing of (3,726) was due to operational cash deficiencies cited above due predominantly legal costs for arbitration and now recovery of final award. A year ago, MMG received ERC cash support in the third and portion of the fourth quarter until the policy change led to our having to return $842 in January 2022. For the year, Maslow borrowed $13,972 but repatriated $11,342. 37 OFF-BALANCE SHEET ARRANGEMENTS We had no material off-balance sheet arrangements that have, or are likely to have, a current or future material effect on our operations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We have identified the policies listed below as critical to our business and the understanding of our results of operations. For a detailed discussion of the application of these and other accounting policies, see Note 3 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K. The preparation of consolidated financial statements in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, collectability of accounts receivable, contingencies, litigation, income taxes, and other liabilities. Management based its estimates and judgments on historical experiences and on various other factors believed to be reasonable under the circumstances. Actual results under circumstances and conditions different than those assumed could result in differences from the estimated amounts in the consolidated financial statements. REVENUE RECOGNITION The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties and payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered. We derive our revenues from four segments: EOR, Recruiting and Staffing (temporary), Direct Hire (Formerly referred to as Permanent Placement) and Video and Multimedia Production. Revenues are recognized when promised services are delivered to a client, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Revenues as presented on the consolidated statements of operations represent services rendered to client less variable consideration, such as sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and equivalent amounts of reimbursable expenses are included in cost of services. We record revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. We have concluded that gross reporting is appropriate because we (i) have the risk of identifying and hiring qualified workers, (ii) have the discretion to select the workers and establish their price and duties and (iii) we bear the risk for services that are not fully paid for by client. Temporary staffing revenues are accounted for as a single performance obligation satisfied over time because the customer simultaneously receives and consumes the benefits of the Company’s performance on an hourly basis. The contracts stipulate weekly billing, and the Company has elected the “as invoiced” practical expedient to recognize revenue based on the hours incurred at the contractual rate as we have the right to payment in an amount that corresponds directly with the value of performance completed to date. Direct Hire (formerly referred to as Permanent Placement) revenue is recognized on the date the candidate’s full-time employment with the customer has commenced. The customer is invoiced on the start date, and the contract stipulates payment due under varying terms, typically 90 days. The contract with the customer stipulates a guarantee period whereby the Company will replace the candidate free of charge if the employee is terminated within that 90-day period. As such, the Company’s performance obligations are satisfied upon commencement of employment, at which point control has transferred to the customer. 38 Allowances, recorded as a liability, are established to estimate these losses. Fees to clients are generally calculated as a percentage of the new worker’s annual compensation. No fees for Direct Hire services are charged to employment candidates. Video and Multimedia Production revenues from contracts with clients are recognized in the amount to which we have a right to invoice when the services are rendered by our field talent. RECENT ACCOUNTING PRONOUCEMENTS For a discussion of recent accounting pronouncements and their potential effect on our results of operations and financial condition, refer to Note 3 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.