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. 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, 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 September 30, 2023 were $5,341, which was $1,123 or 17.4% less than for the same period in 2022 with revenue at $6,464. 18.7% or $1,027 of the drop can be attributed to the EOR business segment as its third quarter revenues dropped to $4,467 from $5,494. The primary reasons for the EOR downturn were four clients that were down $1,339 in aggregate revenue for reasons of: one losing a high-profile sports television rights to a competitive bid process, one converting more than ten of our employees from our payroll to theirs, and two reducing their programming due to budgetary reasons. Recruiting and Staffing revenues dipped by $138 from $848 in the period ending September 30, 2022 to $710 comparatively in 2023, while Video Production and Direct Hire revenues were up a combined $42 in the quarter ending September 30, 2023 to the comparable period a year ago. IT Staffing was up $10 to $83 while Media Staffing dipped $148 to $627 in the third quarter 2023. The Media Staffing decline was related in part to the EOR client fall off and the loss of a client with whom we acted in a subcontractor capacity, when our client, the incumbent, failed to win a renewal bid by the end customer. For the nine-month period ending September 30, 2023, revenues at $15,992 in 2023 are $2,737 or 14.6% off of 2022’s nine-month $18,729 performance. The decline paradigm has been somewhat consistent throughout the year as the reasons cited for the third quarter variance can be cited with the programming declines by most corporate clients widened. Overall, seven larger clients accounted for a 2023 year-to-date negative revenue variance of $3,162 due to the combination of employee conversions, lost programming and decisions to reduce same, and in one case a lost bid by the primary. Although for the nine-month period ending September 30, 2023, EOR and Staffing revenues were down comparatively to the same period in 2022, by $2,543 and $33, respectively, Video Production revenues have increased by $123 to $299 or 69% and Direct Hire by $16 to $115 or 16.8%. Both increases have played a part in the continuing increase in the overall business’ gross margin as explained in the next section. Cost of Revenue / Gross Profit Gross profit for the three-month period ending September 30, 2023 was $772 representing 14.5% of revenues, which was $119 lower than the $891 in gross profit MMG earned in 2022’s third quarter when the gross margin was at 13.8%. The margin improvement can be attributed to EOR client mix increasing its contribution percentage, several Staffing clients delivering over twice their normal volume of business at 24% margins, and the overall mix shifted to Media and IT Staffing as opposed to EOR, which has peaked at 12.5% for the quarter. Year-to-date through September 30, 2023, our gross profit margins exceed those of 2022 over the same period 13.9% to 13.4% for a variety of reasons. Renewed agreements have enabled pricing increases, especially impacting EOR which YTD is up to 12.2% as compared with 11.6% through the first nine months a year ago. 19 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 compressing margins. EOR margins tend to increase throughout the year as these variable costs are exhausted. This coupled with EOR segment mix decline means a higher percentage of our revenue is subject to the higher margin Media and IT Staffing, Video Production, and Direct Hire businesses. Both Video Production and Direct Hire combine for $33 in year-to-date improvement in gross profit in 2023 over 2022, garnering an average of 39.8% in gross margin percentage in 2023. General and Administrative (“G&A”) General and administrative expenses for the three months ended September 30, 2023 were $998 compared to $941 in the same period in 2022, representing a $57 or 6.1% increase. Loaded salaries had an $84 unfavorable comparison to Q3 2022. Commissions, however, were down $14. $35 of the $84 wage increase is in the area of Sales where we have bolstered our team. The other force driving an increase in payroll is bonus accruals, which are artificially higher because a year ago at this time, we credited back $62 in over accrued bonuses from 2021. Otherwise, non-salary SG&A total of $168 was $25 favorable (14%) to $193 a year ago. The most significant positive variance in the third quarter 2023 versus 2022 were legal expenses, which were down by $32. In the nine months ended September 30, 2023, SG&A costs are $2,842, which are $501 (15%) lower than they were in the same period in 2022 when they landed on $3,343. The cost savings of $501 were derived mostly as a result of the reduction in arbitration related costs by $452. Other major favorable variances were loaded wages $80, with $87 coming from a lower bonus accrual in part because of write back of over accrued 2022 bonuses, and $35 derived from our business insurance package. Conversely, there were cost increases of $69 for a mostly marketing related costs, $56 for staff events and development, when comparing the period ending September 30, 2023 with the same period in 2022. We expect increases in payroll as certain roles have been contracted and Sales and Sales Support continue to evolve. Interest Expense The Company incurred $12 in interest charges for financing specific client invoices in the third quarter 2023 compared with $46 in factoring the same period a year ago. The Company satisfied its factoring obligations in early July, due to a strong cash position, but engaged the Buyer Initiated Payment Agreement (“BIP”) with American Express (“Amex”) because the average APR has been an estimated 6.8% (dependent on days clients actually pay their invoice) compared with the prime rate having risen to 8.5% and the factoring cost at a contractual 11.22%. For the nine months ended September 30, 2023, the combined interest and factoring costs are $77 compared with $111 a year ago. Other Income (Expense) Other Income/Expense in the third quarter was ($13) compared with $210 in the third quarter 2022. The $13 growth was due to legal expenses related to restructuring layoffs. Prior to the third quarter, $55 of the Other Expenses have been to contest the SWC lawsuit, and $65 to address another non-operating related legal matter that has now been settled. Thus, in the nine months ending September 30, 2023, Other Expenses total $133. Comparatively, a year ago when receiving the first quarter 2021 ERC payment, the Company recorded an additional $210 in what was thought to be an ineligible portion of the ERC calculation, which in fact was not and received by the IRS during the third 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 September 30, 2023 has improved to 53 compared to 57 in the second quarter 2022, and a DSO of 66 for the trailing twelve months ending March 31, 2022. 20 Our 12-month DSO has averaged 65 since June 2021 through the first quarter 2023, as some of our largest clients have 60 to 90-day terms. Delays in receipt of purchase orders also has had an adverse impact on DSO. However, in April 2023, we entered into a BIP with Amex which enables MMG to be advanced 100% of purchase order approved invoices minus a flat interest rate percentage that is based on that day’s submitted invoice volume. The greater the volume the lower the interest rate charged. Additionally, we have had an increase over the past 12 months in client advances which averaged approximately $211 a month. These events have a profound impact on improving our working capital and lowering our DSO which is now at 53, as this combination of pre-pays and arrangement enabling bank debits and credits to roll straight to A/R as opposed to credits to our factoring liability, have bolstered our quick and current ratios as well. The BIP program has also lowered our cost of capital in that our effective APR for the period ending September 30, 2023 was estimated at 6.8% versus the 11.22% Gulf can now charge on an annualized basis. When looking at A/R aging in relation to payments to due date, as of September 30, 2023, 78.6% of our $2,653 in total trade A/R was current and only 4.2% is past 60 days aged, compared to 73.6% and 8.7% a year ago, respectively. We continue to collect our aged invoices, not having to account for bad debt > $200 in the past 5 years. Our federal and state tax liability is $5 as of September 30, 2023 compared to $6 as of December 31, 2022. Our primary sources of liquidity are cash generated from operations via accounts receivable and borrowings under our BIP agreement with Amex and our Factoring Facility with Gulf enabling access to the 7% unfactored portion. The BIP agreement enables MMG to accelerate cash on accounts with 90-day terms. 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 Employer of Record 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. Vivos Debtors as of September 30, 2023 had notes receivable totaling $5,417, 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 Board and/or the shareholders 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. Under the Arbitration Award, it is possible that shares may be returned to MMG treasury which may give the Board greater flexibility in selling shares or using shares to acquire other businesses. No timetable has been set as to when any of these events might take place. Over the past three years MMG received eligible ERC cash of $4,676, which has bolstered working capital enabling us to invest in software and hire needed resources for operations. On April 29, 2023, we received our final ERC check from the IRS for $1,203 which was for our second quarter 2021’s eligible ERC 941X submission and eligible interest. Overall, these programs bolstered our working capital and enabled us to bring back employees and continue to serve our clients. 21 As of September 30, 2023, our working capital was $8,040, compared to $8,645 at the end of December 2022. Our adjusted working capital at the end of September 2023, excluding the notes receivable related to the Vivos Debtors totals $2,623 compared to 3,394 at the end of 2022.