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, 2023, 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, 2023, 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. 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, 2023. 15 Management’s Discussion included in the Form 10-K for the year ended December 31, 2023, 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 2024 operations; thus, the reader of this report should read Management’s Discussion included in Form 10-K for the year ended December 31, 2023. RESULTS OF OPERATIONS Revenues Revenues for the three months ended March 31, 2024 were $5,295, which represented an increase of $96 over the $5,199 tallied in the same period in 2023. Our top four clients all had increases in revenue when compared to the first quarter a year ago. Our EOR segment drove our year-over-year growth with $4,572 revenue in all, which was $299 over 2023’s first quarter EOR revenue of $4,273. Comparatively, the other three higher margin segments declined, with Staffing, Video Production, and Direct Hire revenues down by $98, $99, and $6, respectively, from the comparative first quarter 2023. Video Production enjoyed $131 in the first quarter ended March 31, 2023 versus the $32 it produced in the same period in 2024. This was due to some uplift in projects that were not repeated in the first quarter of 2024. Thus, the $99 relative decline in revenue from a year ago was not unexpected. $71 of a $98 decline in Recruiting and Staffing revenue in the first quarter 2024 compared to the same period a year ago was due to the loss of a client contract that went out to Request for Proposal (RFP) as part of the client’s process, and we did not win the renewal. Otherwise, we had 13 out of 23 staffing clients increase their business by $103 or 26%. This total, however, was offset by three larger clients that had certain contract roles not rollover, resulting in $118 in declines when compared to the first quarter of 2023. Cost of Revenue / Gross Profit Gross profit for the three-month period ended March 31, 2024, was $709, which was $2 less than the first quarter of 2023 and represented 13.4% in gross margin versus 13.7% in the first quarter 2023. The revenue mix being weighted heavier to EOR by $200 in the first quarter 2024 when compared to a year ago, accounted for 40 basis points despite EOR gross margins remaining at 12.2% where it ended in 2023, even though 2024 EOR margins are 30-basis point better than the first quarter 2023 when they were 11.9%. The other factors causing gross margins to dip were a 2.0% heavier use of 1099 labor at margins that were 2.6% lower than the use of W-2 labor and Staffing margins landing at 18.0% vs. 19.7% a year ago. These two factors had an estimated 15 and 20 basis point negative impact, respectively. 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. When extending EOR contracts we continue to incorporate slight pricing markup increases which improve margins. Additionally, our customer mix continues to be more weighted to clients that have more favorable pricing terms than those that previously dominated sales. This is why our EOR business is now seeing 12.2% margins as opposed to the 9.8% it once did, four years ago. As for our non-EOR business, comparatively, first quarter 2024 to 2023: Direct Hire margins improved 21.8% from 77.1% in the first quarter 2023 to 98.9% in 2024, due to lower use of fixed recruiting resources. Media Staffing margins, however, dipped to 18% compared to the 19.7% performance a year ago as taxes, resource, and client mix changes reduced the spreads temporarily. These margins are likely to rebound in part because certain state and local taxes are at high points at the beginning of the year. Video Production only captured 7.0% gross margins as opposed to more traditional margins of 18.7% in the first quarter of 2023. This was unusual in that we afforded a large discount to one of our top clients. 16 General and Administrative (“G&A”) General and administrative expenses for the three months ended March 31, 2024 were $947 compared to $933 in the same period in 2023, representing a $14, or 1.5%, increase. The marginal increase when compared to 2023’s first quarter was despite an increase of headcount and $80 in wages. Operationally, costs were down $54 in the first quarter 2024 compared to the same period 2023. $83 of the $64 negative variance to the first quarter 2023 was the result of over accrued 2022 bonuses that was reversed in the first quarter of 2023 as this amount was not earned. Overall, legal costs both commercial and related to the Vivos Matter were reduced by $27, Contract Services was curtailed by $46, Staff events by $26, and Payroll fees from new provider ADP which are on an agreed signing incentive of three month’s hiatus. Employee salaries and benefits were comparatively down $139 as the aforementioned 2022 bonus accrual of $83 was reversed in 2023 resulting in a credit balance of $33 as the first quarter 2023 accrual. Otherwise, only Staff Development cost have a comparative differential to a year ago greater than $10, as it was $13 favorable. We expect continued increases in payroll as certain roles have recently been filled, including a new VP of Sales, and there are a few open positions we expect to fill over the coming months. Interest Expense The Company incurred $16 in interest charges for financing, factoring, and paying an advance rate (BIP) against its invoices in the first quarter 2024 compared with $44 in the same period a year ago. Other Income (Expense) Other Expense in the first quarter was $93 due to legal fees associated with SWC matter and other employee matters, including a settlement on one matter at $50. We began booking these non-operational fees to Other last year in the second quarter, therefore we had no such costs in the first quarter of 2023. 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 financing, legal fees associated with the Vivos and related SWC matter and client accounts receivable receipts. Since receipts from client payments are on average 60 days behind payments to field talent, working capital requirements can be periodically challenged. To accelerate cash and ensure sufficient liquidity, we have both a Buyer Initiated Payment (“BIP”) agreement with American Express (“Amex”) and a Factoring Facility with Gulf Coast Bank (“Gulf”). Our BIP agreement with Amex 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. The implementation of this program in the second quarter of 2023 profoundly impacted our ability to accelerate cash conversion and lower DSO as well as our borrowing costs. Given our use of BIP is with 90-day terms clients , our approximate APR is 6.1% compared to Factoring average approximate APR rate of 11.1% based on the current prime rate of 8.5%. Gulf, on the other hand, 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 twelve months ended March 31, 2024, is at 49 compared to 66 DSO for the trailing twelve months ended March 31, 2023. These programs plus the portion of our business in which the client has elected or is required to pay in advance of approximately $173 every two weeks, counteract the approximate 26% of our revenue from clients that are on 90-day terms, some of which were demanded by larger clients, and have delays in providing receipt of purchase orders. When looking at A/R aging in relation to payments to due date, as of March 31, 2024, 87.1% of our $2,628 in total trade A/R was current and 96.5% was < 31 days aged, compared to 74.9% and 91.4% a year ago, respectively. Our > 60 days aged invoices totaling $60, represent 2.3% of our total A/R. We had only one hundred and eighty dollars in bad debt over the past five years. 17 Our Federal and state tax liability is $0 compared to $5 a year ago, and $0 as of December 31, 2023. 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 would otherwise be adversely impacted but not since we adopted Amex’s BIP program which coupled with an increase in prepayments to $173 from $100, over the past 12 months, has been catalysts to our cash conversion success measured by DSO moving from 66 a year ago to 49. 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. Vivos Debtors as of March 31, 2024 had notes receivable totaling $5,571 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. On April 22, 2024, MMG received a refund of $288 from the IRS. The proceeds were accrued in the first quarter since the credits were for past tax events. As of March 31, 2024, our working capital was 7,783 compared to $7,913 at end of December 2023 and $8,457 at the end of March 2023. Our adjusted working capital at the end of March 2024, excluding the notes receivable related to the Vivos Debtors, totals $2,212 compared to $2,412 at the end of 2023 and $3,130 a year earlier.