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 condensed 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 condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed 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. 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. 16 RESULTS OF OPERATIONS Revenues Revenues for the three months ending September 30, 2024, were $6,230, which represented an increase of $889 over the $5,341 generated in the third quarter of 2023. This was the first time we have enjoyed three quarters of consecutive revenue beats on comparative periods to a year ago since 2019. Our top four clients all had increases in revenue when compared to the third quarter of a year ago of $1,394. Our EOR segment continues to drive this year-over-year growth with third quarter revenue of its own of, which was $826 or.18.5% over 2023’s third quarter EOR revenue of $4,467. Our top four revenue producing clients overall contributed $4,255 or 80.4% of EOR quarterly revenue compared to $2,926 a year ago in the period ending September 30, 2023. The EOR segment revenue quarterly increase from these four clients was a combined $1,329. Staffing revenue at $822 increased over its performance a year ago by $112 or 15.8%, when the period ended September 30, 2023, resulted in $710. One new client was the catalyst, adding $156 for the quarter. Otherwise, if one declining account is omitted, 13 clients were up $20 over the same period a year ago. Our Video Production and Direct Hire segments were down comparatively to the third quarter of 2023 as revenue in the third quarter 2024 was $87 and $28, respectively, to $100 and $64 in revenue, respectively, in 2023. Thus, Video Production was down 13.7% and Direct Hire 57%. Revenues at $17,566 grew $1,574 for the nine-month period ending September 30, 2024, versus the same period in 2023 with a total of $15,992. The increase was driven by our top four revenue producers amassing $12,172 in the nine months ending September 30, 2024, which represents 69.3% of our total revenue and a $3,542 increase over their revenue contributions in the same nine-month period ending September 30, 2023. The aforementioned four clients have each surpassed the million-dollar mark year to date. EOR drove the nine-month growth with $15,108 in revenue which was $1,868, or 14.1% more than this business garnered in the same period 2023 when it produced $13,240 in revenue. Otherwise, in the nine-month period ending September 30, 2024, Staffing at $2,202 was off 2023’s third quarter pace by $136, or 5.8%, which was about 5.7% better than the gap in the second quarter 2024. Video Production at $177 was $122 or 40.9% away from 2023’s nine-month revenue of $299. Finally, Direct Hire revenue at $79 was $36 off the pace of where it was to the same nine-month period in 2023 at $115. Cost of Revenue / Gross Profit For the three-month period ended September 30, 2024, gross profit at $834 saw a $62 or 8.0% improvement comparatively to the three-month period ended September 30, 2023, when gross profit landed on $772. Gross margins, however, at 13.4% were not as strong as they were a year ago at 14.5%. Several factors contributed to the margin drop, including the higher margin Direct Hire revenue being down by $36, our EOR business increasing by 1.3% to 85.0% of revenue at 12.1% margins vs. 12.5% which was caused by a shift in our labor from W2 to lower margin 1099. The shift of revenue concentration by 1.3% to EOR at 12.1% margins alone resulted in a loss of gross profit by approximately $44 or seventy basis points (.7). In terms of gross profit, EOR and Staffing saw increases of $83 and $13 in the third quarter of 2024 compared to 2023, while Video Production and Direct Hire were off the mark by $1 and $33, respectively. For the nine-month period ended September 30, 2024, gross profit at $2,346 improved by $123 or 5.5% over the $2,223 earned comparatively to the nine-month period ended September 30, 2023. Gross margins for the nine-month period ended September 30, 2024, were 13.4%, versus 13.9% where margins stood a year ago at the end of September 2023. The paradigm causing the deficiency is the same as the third quarter, as the nine-month revenue mix weighed heavier to EOR as the business unit grew in gross profit by $201 while the other three declined by a combined gross margin of $125. This phenomenon alone caused margins to compress by 42 basis points which explains 79% of the 53-basis point spread (13.4 to 13.95%). EOR margins declined 20 basis points (12.3% to 12.1%) in the nine months ending September 30, 2024 when compared to the same period in 2023, as a heavier use of 1099 labor of almost $1,500 at a 2.5% lower margin more than offset a W2 margin increase by 30 basis points. When extending EOR contracts we continue to incorporate reasonable pricing markup increases which slowly should improve margins. Additionally, our customer mix continues to be more weighted to clients that have favorable pricing terms than those that previously dominated sales. This is why our EOR business is now seeing 12.1% margins as opposed to the 9.8% it did, four years ago. 17 General and Administrative (“G&A”) General and administrative expenses for the three months ending September 30, 2024 were $958 compared to $998 in the same period in 2023, representing a $40 or 4.0% favorable result. The decrease in spending when compared to 2023’s second quarter was rooted in $71 in lower legal costs than a year ago, $23 of which were reimbursed outside counsel fees for an employee matter that a client agreed to take responsibility. Base salaries, payroll tax and benefits were higher by $44, and benefits by $30 in the third quarter 2024 compared to the same period 2023. Bonus and Commissions, though, saw reductions of $65. General and administrative expenses for the nine months ending September 30, 2024, were $2,891 compared to $2,843 a year ago, resulting in $48 or 1.7% more in costs 2024 when compared to the same year to date period ending September 30, 2023. Loaded Payroll was $221 higher with a $168 increase in salaries as we have continued to bolster our sales and client services departments. A continued increase in our health insurance benefits and higher usage of our subsidy resulted in a $47 increase in the nine months ending September 2024 compared to 2023. Non-salary SG&A costs $173 or 18.5% favorable as approximately $97 of $103 in Legal cost savings were reclassed or booked in 2024 to Other (See last paragraph of this section below for further details). Otherwise, cost savings were realized in Contract Services by $77, Staff Events which were scaled back by $39, Payroll fees by $14, and Travel and Meals and Entertainment by $9. Unfavorable changes in SG&A expenses by category were Recruiting Software costs $34 (these are allocated to COR if associated with Staffing or Direct Hire fulfillment), Business Insurance at $15, Communications at $8, and Business License and Taxes at $10 which now consist of state minimum tax and franchise fees to states that are not deemed to be state income taxes. Prior to 2024, we were booking these taxes and fees to state income taxes. 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 in the second quarter. This practice continues, which lowers costs associated with non-operational legal obligations. Interest Expense In the three-month period ending September 30, 2024, the Company incurred $27 in interest charges for financing, factoring, and paying an advance rate (BIP) against its invoices compared with $12 in the same period a year ago. In the nine-month period ending September 30, 2024, the Company incurred $62 in interest charges for financing, factoring, and paying an advance rate (BIP) against its invoices compared with $77 in the same period a year ago. Other Income (Expense) These non-operational costs, in the third quarter totaled $68 including $32 in Receiver and arbitration award related legal costs. This represented $55 more than the $13 we incurred in the third quarter of 2023. In the three-month period ending September 30, 2024, we incurred $30 more in legal costs related to the SWC matter (see Note 6), and another $25 for a settlement with HCRN. We began booking these non-operational fees to Other Income (Expense) last year in the second quarter. For the nine months ended September 30, 2024, Other Expense was $297, which was $164 greater than a year ago when Other Expenses tallied $133. Because approximately $97 of the $297 were Receiver related costs, the normalized Other Expense increase year to date in 2024 versus 2023 would have been $68. 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 10.6% based on the current prime rate of 8%. 18 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 strong for the trailing twelve months ending September 30, 2024, at 49 compared to a 53 DSO for the trailing twelve months ended September 30, 2023. These programs, plus the portion of our business in which the client has elected or is required to pay in advance of payroll, approximately $198 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 September 30, 2024, 98.7% was < 31 days aged, 93.3% a year ago, respectively. 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 our client biweekly prepayments (drawdowns) to $198 from $159, over the past 12 months, have been catalysts to our cash conversion success measured by our DSO improving from 66 at the start of 2023 to 49 at the end of June and carried over to September 2024. 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 September 30, 2024, had notes receivable totaling $5,827, 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 September 30, 2024, our working capital was $7,536 compared to $7,592 on June 30, 2024, $7,783 at the end of March 2024, to $7,913 at end of December 2023 and compared $8,040 at the end of September 2023. Our adjusted working capital, as of September 30, 2024, excluding the notes receivable related to the Vivos Debtors, totals $1,709, compared to 1,826 compared at the end of June 2024, compared to 2,212 at the end of the first quarter, to $2,412 at the end of 2023, and finally compared to 2,623 at the end of September 2023.