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: our ability to access the capital markets by pursuing additional debt and equity financing to fund our business plan and expenses; 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. 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, 2023. 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 June 30, 2024 were $6,041, which represented an increase of $589 over the $5,452 tallied in the second quarter of 2023. This was the first time we have had consecutive revenue beats on comparative periods a year ago since 2019. Our top four clients all had increases in revenue when compared to the second quarter a year ago by $1,445. Our EOR segment drove this year-over-year growth with $5,243 revenue in all, which was $744 or 16.5% over 2023’s second quarter EOR revenue of $4,499. The top three revenue producing clients overall contributed $3,809 or 68% of EOR quarterly revenue compared to $2,401 a year ago in the period ending June 30, 2023. The EOR segment revenue increase from these three clients was $1,388. Staffing, however, saw a dip in revenue by $150 or 17.4% from $863 to $713 in the period ending June 30, 2023 to 2024. Three clients caused the dip: one being a lost client (to the bidding process conducted at the end of their contract) for $108 of the $150 negative variance; an account that had curtailed their media spending steeply post COVID and who converted 10 of our employees to their own a year ago, accounted for $73; and one client contracted their list of IT resource vendors, having a $57 negative impact. Otherwise, 10 of 13 active staffing clients had increased staffing revenues totaling $105. Our Direct Hire business garnered $27 in revenue which was $5 greater than the same period ending June 30, 2023. Video Production saw a $10, or 14.7% decline in the second quarter comparative revenue going from $68 a year ago to $58. Revenues grew $685 for the six-month period ending June 30, 2024 with a total of $11,336 versus $10,651 in the same period 2023. The increase was driven by our top 3 revenue producers who amassed $6,741 in the six months ending June 30, 2024 which is 59.5% of our total revenue and a $1,906 increase over their revenue contributions in the same 6-month period ending June 30, 2023. EOR drove the six-month growth with $9,815 in revenue which was $1,042, or 11.9% more than this business garnered in the same period 2023, when it produced $8,773 in revenue. Otherwise, in the six-month period ending June 30, 2024, Direct Hire revenue was identical to the same period 2023 at $51, Staffing at $1,380 was off 2023’s second quarter pace by $248, or 15.2%, and Video Production at $90 was $109 or 54.8% away from 2023’s six-month revenue of $199. Cost of Revenue / Gross Profit For the three-month period ended June 30, 2024, gross profit at $804 saw a $64 or 8.6% improvement comparatively to the three-month period ended June 30, 2023, when gross profit landed on $740. Gross margins, however, slipped from a year ago to 13.3% from 13.6% as our EOR revenue mix increased to 86.9% of all quarterly revenue from 82.5% in the same period 2023. EOR revenue increasing by $744 coupled with almost twice the weighting toward lower margin 1099 COR at 28% versus 12.5% in the second quarter 2023, had the greatest impact on the gross margin slipping by thirty basis points. 17 Meanwhile, Staffing gross profit declined by $12 from $155 to $143 in the second quarter 2024 compared to 2023. Whereas revenue for staffing was down 17.4%, gross margin was up 4.8% to 44.7%, thus softening the 7.7% gross profit decline. Direct Hire gross profit improved by $10 even though revenue increased by $5 as margins were 92.4% in the second quarter 2024 versus 69.3% in the same period ending June 30, 2023. Our searches required less recruiting software time allocation, hence the higher margin. Video Production had $8 in gross profit in the second quarter ending June 30, 2024, compared to $20 in the same period in 2023. Gross Profit grew $61 or 4.2% to $1,512 in the six months ending June 30, 2024 versus $1,451 in the same period a year ago but not quite at the same 6.4% rate that revenue increased. This is because the $1,512 represented 13.3% in gross margin versus the 13.6% in the second quarter 2023. The six-month revenue mix weighted heavier to EOR by $1,041 in the six months ending June 30, 2024 when compared to a year ago, accounted for 30 basis points despite EOR gross margins dropping only .1% from 12.2% to 12.1% year over year. EOR margins would have ordinarily increased but a heavier use of 1099 labor at a 2.6% lower margin offset a W2 margin increase. When extending EOR contracts we continue to incorporate reasonable pricing markup increases which slowly 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 did, four years ago. As for our non-EOR business in the first six months of 2024, compared to 2023: Direct Hire margins improved 21.8% from 73.7% in the first six months of 2023 to 95.4% in 2024, due to lower use of fixed recruiting resources. Media Staffing margins also improved to 18.9% from 18.4% year-over-year. Video Production captured an 11.8% gross margin as opposed to a more traditional margin of 18.7% in the six months ending June 2023 due to our affording a large discount to one of our premier clients. General and Administrative (“G&A”) General and administrative expenses for the three months ended June 30, 2024 were $986 compared to $911 in the same period in 2023, representing an $75 or 8.2% increase. The increase in spending when compared to 2023’s second quarter was rooted in higher base salaries, payroll tax and benefits by $88. Sales headcount was increased from an average of 3 Full Time Equivalents (FTE) to 4.2 FTE leading to $39 higher in loaded salaries in the period ending June 30, 2024 compared to 2023. Operational non loaded salaries were higher by $6, in the second quarter 2024 compared to the same period 2023. A $36 reduction in contract services coupled with a favorable legal cost differential of $10 were overshadowed by higher software costs by $32 and payroll costs of $13. On December 29, 2023 we learned the Maryland Circuit court certified the arbitration award as a judgement. The costs related to the award are now centered on collection and recovery. Since we began separating non-core operational expenses in 2023 and recording them to Other Expense, MMG decided to begin recording all related Receiver expenses from SG&A (operational) legal to Other Expense. Thus $64 in legal costs for the first six months of 2024 were reclassed to Other Expense, creating a favorable legal cost comparison to the same period in 2023. Interest Expense The Company incurred $20 in interest charges for financing, factoring, and paying an advance rate (BIP) against its invoices in the second quarter 2024 compared with $22 in the same period a year ago. 18 Other Income (Expense) These mostly non-operational one time or short-term costs, in the second quarter totaled $136 including $64 in Receiver and arbitration award related costs being reclassed from SG&A legal. We closed out employee matters with $51 in costs for the second quarter but incurred $13 more costs related to the SWC matter (see Note 6). We began booking these non-operational fees to Other Income (Expense) last year in the second quarter, which consisted of all SWC and employment matters totaling $119. Thus, the increase in expenses in 2024 was $17. For the six months ended June 30, 2024, Other Expense was $229 which consisted of the following costs: $64 in aforementioned award recovery related costs, $68 in SWC, and $97 in employee severance and related legal fees. A year ago, we recorded $119 comparatively in the same period consisting of $66 in employment matters and $53 related to SWC. We have now incurred $110 in legal fees for the SWC matter since September 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 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) remained steady for the trailing twelve months ending June 30, 2024, is at 49 compared to a 58 DSO for the trailing twelve months ended June 30, 2023. These programs plus the portion of our business in which the client has elected or is required to pay in advance of approximately $168 every two weeks, counteract the approximate 32% 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 June 30, 2024, 91.8% of our $3,742 in total trade A/R was current and 97.6% was < 31 days aged, compared to 89.2% and 99.0% a year ago, respectively. Our > 60 days aged invoices totaling $57, represent 1% of our total A/R. We had only one hundred and eighty dollars in bad debt over the past five years. 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 $168 from $161, over the past 12 months, has been catalysts to our cash conversion success measured by DSO moving from 58 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. 19 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 June 30, 2024 had notes receivable totaling $5,766 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 June 30, 2024, our working capital was $7,592 compared to $7,913 at end of December 2023 and $7,783 at the end of March 2024, and $8,220 and the end of June 2023. Our adjusted working capital at the end of June 2024, excluding the notes receivable related to the Vivos Debtors, totals $1,826 compared to $2,412 at the end of 2023, 2,212 at the end of the first quarter 2024.