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, 2022, 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, 2022, 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. 16 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, 2022. Management’s Discussion included in the Form 10-K for the year ended December 31, 2022, 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 2023 operations; thus, the reader of this report should read Management’s Discussion included in Form 10-K for the year ended December 31, 2022. RESULTS OF OPERATIONS Revenues Revenues for the three months ended March 31, 2023, were $5,199 which was $584 or 10.1% less than for the same period in 2022 with revenue at $5,783. The EOR segment had the greatest negative impact, falling $500 to $2,273 from $4,773 in year over year quarterly revenue. One reason for the dip was that a year ago one client had a creative project that employed a significant number of freelance workers we provided. It was a project carried over from 2021 that ended in January 2022. Another reason was one client converted 7 of our employees from our payroll to theirs. Recruiting and Staffing revenues dipped by $158 from $923 in the period ending March 31, 2022, to $765 comparatively in 2023, while Direct Hire revenues were off the first quarter pace set in 2022 by $9 landing on $30 versus $39 a year ago. Video Production grew, however, delivering $131 in the first quarter 2023 versus $48 in the first quarter ending March 31, 2022, which was a $83 or 173% increase. It was the highest quarterly revenue total for Video Production since the quarter ending December 31, 2021, which this business segment then garnered $263 in revenue. Cost of Revenue / Gross Profit Gross profit for the three-month period ending March 31, 2023, was $711 representing 13.7% of revenues, which was $19 lower than the $730 in gross profit MMG earned in 2022’s first quarter when the gross margin was at 12.6%. The catalyst for the 110-basis point quarter over quarter jump was EOR, as first quarter margins increased from 10.4% in 2022 to 11.9% in 2023. Otherwise, comparatively, first quarter 2023 to 2022: Direct Hire margins were at 77.1% as opposed to 89.6%, as recruiting resources were required for a longer term than a year ago; IT Staffing was 22.6% vs. 19.4% in 2022; Media Staffing at 19.7% vs. 22.9%; and Video Production at 18.7% vs. a negative margin due to a cost overrun a year ago. EOR margins tend to be lower at the beginning of the year as variable costs such as federal and state unemployment taxes reset at the beginning of the year. EOR margins tend to increase throughout the year as these variable costs are exhausted throughout the year. In 2022 and early 2023 several EOR contracts were extended resulting in a slight improvement in margins and our customer mix continues to be more weighted to clients that have more favorable pricing terms than those that previously dominated sales. General and Administrative (“G&A”) General and administrative expenses for the three months ended March 31, 2023, were $933 compared to $1,305 in the same period in 2022, representing a $372 or 29% decrease. $309 of the $378 was a result in the reduction in arbitration related costs. Commercial legal dropped $21 as well. Employee salaries and benefits were comparatively down $135 as 2022 bonus accrual was $104 higher than approved for payment, loaded salaries (including benefits and taxes) were down $18 and commissions down $13 compared to a year ago. A savings of $17 was derived from our business insurance package as a new less costly D&O insurance policy with greater benefits was put into place. Conversely contract service cost increased by $50, Staff events by $26, staff development by $13 and recruiting software by $12. 17 We expect increases in payroll as certain roles have been contracted and sales and sales support had headcount changes in mid-March. Interest Expense The Company incurred $44 in interest charges for financing (factoring) its invoices in the first quarter 2023 compared with $29 in the same period a year ago, as the prime interest rate soared from 3.5% at the end of the first quarter 2022 to 8% by end of the first quarter 2023. Our interest rate is 2 points greater than prime, meaning comparatively our costs went from approximately 5.5% to 10%. Other Income (Expense) Other Income in the first quarter was under $1 compared with $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 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 March 31, 2023, is at 66 comparable to 61 DSO for the trailing twelve months ending March 31, 2022. This is because 53% of our revenue is from clients that over the past 3 years began demanding 90-day terms. Delays in receipt of purchase orders also has had an adverse impact on DSO. Alternatively, we have had an increase over the past 12 months in client advances which now average approximately $260 a month vs. $60 prior in 2022. When looking at A/R aging in relation to payments to due date, as of March 31, 2023, 74.9% of our $3,224 in total trade A/R was current and 91.4% was < 31 days aged, compared to 68.5% and 88.2% a year ago, respectively. Our > 60 days aged invoices represent $48 or 1.5% of our total A/R. Our Federal and state tax liability is $5 compared to $688 a year ago, and $6 as of December 31, 2022. 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 be adversely impacted 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 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, but on inconsistent schedules; our cash inflows do not typically align with these required payments, resulting in temporary cash challenges, which is why we employ factoring. 18 Vivos Debtors as of March 31, 2023, had notes receivable totaling $ 5,327 including default on a $3,000 promissory note and on a $750 tax obligation in December 2019. 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. On April 29, 2023, we received a check from the IRS for $1,203 to pay for our second quarter 2021’s eligible ERC 941X submission. Overall, these programs bolstered our working capital and enabled us to bring back employees and continue to serve our clients. As of March 31, 2023, our working capital was $8,457, compared to $8,815 at the end of March 2022. This includes the $1,174 in ERC principal and additional interest received on April 28, 2023. Our adjusted working capital at the end of March 2023, excluding the notes receivable related to the Vivos Debtors totals $3,130 compared to 3,776 a year earlier.