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, 2024, 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, 2024, 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 financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates are based on historical experience and other factors believed to be reasonable under the circumstances. Actual results could 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, 2024. Management’s Discussion included in the Form 10-K for the year ended December 31, 2024, 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 2025 operations; thus, the reader of this report should read Management’s Discussion included in Form 10-K for the year ended December 31, 2024. 16 RESULTS OF OPERATIONS Revenues Revenues for the three months ended September 30, 2025 were $5,417, a decrease of $813 or 13.1% compared to $6,230 in the third quarter of 2024. The decline was primarily attributable to our Employer of Record (EOR) segment, which generated $4,299 in revenue during the quarter, compared to $5,293 a year ago, a decrease of $994 or 18.8%. The shortfall exceeded the consolidated revenue decline by $186 or 22.9%, reflecting the segment’s disproportionate impact on overall performance. Two of the Company’s three largest EOR clients from the prior year experienced a combined $1,243 decrease in revenue, representing 124.7% of the total quarterly decline and 123.5% of the EOR-specific decline. One of these clients accounted for $967 (97.1%) of the total reduction, primarily due to decreased media spending in the off-cycle election year and further reductions linked to policy changes enacted by the Department of Government Efficiency (DOGE), which curtailed project funding and related staffing levels. Conversely, Staffing revenue grew for the third consecutive quarter, increasing $231 (28.1%) to $1,053 in the third quarter of 2025 compared to $822 in the same period 2024. The increase was primarily driven by two clients: ● The start of a newly won bid from a quasi-governmental organization initiating a managed services agreement in late July 2024, generating $212 more in revenue which was $56 more than it generated in the third quarter 2025. ● A long-standing private sector client that transitioned a portion of its EOR population to managed staffing services, contributing $244 to third quarter Staffing revenue. Video Production produced $65 in revenue compared to $87 in the third quarter 2024, a decrease of $22 (25.3%) from $87 in the prior-year quarter. Our Direct Hire business did not generate any revenue for the third quarter, a decrease of $28 compared to the same period in 2024. For the nine-month period ended September 30, 2025, revenues were $14,882, compared to $17,566 in the same period in 2024, a decline of $2,684 (15.3%), but a lower rate of decline than was seen a quarter ago when the year-to-date revenue comparison to 2024 was a negative 21.9%. Approximately $1,856 (47.5%) of the decrease was attributable to the aforementioned large media client that significantly reduced its spend due to 2025 being a non-election year and then experienced an unexpected cut in government-related funding. Additionally, a top client reduced spending by $423 in the nine months ending September 30 but indicated that they expect spending to restore to the pace it was on a year ago. A year ago, we ceased supporting one client engagement, and a portion of another, due to elevated risk exposure associated with their activities. This action resulted in an approximate loss of $541 in revenue over the none-month period, but it reflects our commitment to maintaining prudent operational oversight. Whereas EOR revenue over the nine months ending September 30, 2025 fell by $3,481 or 23.0%, our Staffing segment revenue improved by $881, increasing to $3,083 from $2,202 (40.0%). This growth was largely driven by the previously mentioned quasi-governmental client, which accounted for 59.3% of the year-over-year increase and a restructured contract with a major broadcasting client, transitioning it from EOR to a Managed Staffing Services model which began in April. Both Video Production and Direct Hire experienced modest declines over the nine-month period, falling by a combined $84 (32.8%). Direct Hire did not post revenue for the first time since the fourth quarter of 2022. Cost of Revenue / Gross Profit Three Months Ended September 30, 2025 vs. 2024 Gross profit for the three months ended September 30, 2025 was $749, a decrease of $85 (10.2%) from $834 in the prior year period. Despite the decline in absolute dollars, consolidated gross margin improved to 13.8% from 13.4% in 3Q24, reflecting an ongoing mix shift toward higher-margin services. Margin expansion moderated versus 15.1% in 2Q25 due to items noted below. Large EOR media project (contracted high-volume discounts). A $1.37 million EOR media project that started late September and concluded in early October was priced at high-volume, discounted markups. The project reduced 3Q25 margins by 80 basis points (“bps”). 17 Employer of Record (EOR) EOR gross profit declined $170 year-over-year, and unit margin fell to 11.0% (from 12.1% in 3Q24). The decrease reflects (i) the discounted media project noted above and (ii) client volume rebates contractually triggered at spend thresholds. Additionally, mix pressure from reduced volumes at certain higher-margin EOR clients accounted for roughly 20 basis points of the year-over-year margin decline. Staffing Staffing gross profit increased $121 to $265 (up 84.0%) from $144 in 3Q24, exceeding the 2Q25 year-over-year increase of $109 (from $143 to $252, up 76.2%). Staffing gross margin rose to 25.2% from 17.5% in 3Q24. The improvement was driven by, (a) lower-than-anticipated direct delivery costs against a stable revenue base at a single client and (b) a media client that migrated from an EOR delivery model to a managed service in April. Together, these two client streams represented approximately 43.3% of Staffing revenue in the quarter and produced ~35.8% margins. Prospectively, we expect normalized margins of approximately 25% on these streams; if all else were equal to 3Q25, overall Staffing margin would be approximately 20.5%. Video Production & Direct Hire Video Production generated $13 of gross profit on $65 of revenue (19.8% margin) versus $23 of gross profit on $87 of revenue (26.4% margin) in 3Q24. Direct Hire generated no gross profit in 3Q25 compared with $26 in 3Q24, which reduced consolidated gross margin by approximately 50 basis points year-over-year. Nine Months Ended September 30, 2025 vs. 2024 Gross profit for the nine-month period ended September 30, 2025 was $2,103, a decrease of $243 (10.4%) from $2,346 in the prior-year period. Despite the lower gross profit, consolidated gross margin improved by 70 basis points to 14.1% from 13.4% in the nine months ended September 30, 2024, reflecting a favorable mix shift of lower margin Employer of Record (“EOR”) to stronger Staffing segment profitability. The mix shift toward higher-margin Staffing revenue, coupled with Staffing gross margin expansion to 22.2% from 18.6%, contributed approximately $109 in incremental gross profit year-over-year. Absent this mix/margin lift, gross profit would have been roughly $111 lower. Employer of Record (EOR) EOR gross profit declined $462 (25.3%) to $1,365 from $1,827 in the prior year period. EOR gross margin decreased to 11.7% from 12.1%. Key drivers were: ● Lower spend from two of the three largest 2024 EOR clients and attrition at one account; ● Rebates that are earned by clients that hit revenue thresholds; ● Reduced volumes at several higher-margin EOR clients; ● A media client’s transition to a managed-service model; and ● A large project that lifted revenue but had lower contracted markups. Staffing Margins have also expanded much for the same reasons cited in the quarterly performance with the nine-month GM reaching 22.2% compared to 18.6% a year ago. This improvement has been partly attributable to a short-term fixed-fee client arrangement that temporarily lowered our delivery costs, adding an estimated $96 to gross profit and 175 basis points to the segment margin. Excluding this temporary benefit, Staffing gross margin would have approximately 20.5%. Notably, three key clients now on fixed-fee arrangements account for approximately 63.4% of Staffing revenue and are averaging 20.9% margin year-to-date, versus two clients comprising approximately 44.2% in 2024 at an 18.4% margin. Video Production & Direct Hire Video Production gross profit at $34 is $1 better than a year ago, with gross margins improving to 22.8% from 18.6% as 2024’s gross margin was handicapped largely due to a one-time credit adjustment extended to a top-tier client as a goodwill gesture early last year. Direct Hire gross profit at $21 through nine months is $54 or 72.0% lower from this point a year ago. Margins have declined by 5.5 basis points to 90.0% due to a new policy in 2025 which applies a flat recruiting software allocation versus the estimated percentage of use previously employed. 18 General and Administrative (“G&A”) General and administrative (“G&A”) expenses for the three months ended September 30, 2025 were $977, an increase of $19 or 19.8% compared to $958 in the same period of 2024. The increase was primarily attributable to a one-time $125 accrual related to a legal settlement recognized in September, along with $21 in related legal fees. Excluding these items, G&A expenses would have been approximately $122 lower year-over-year, representing a 13.2% decrease. Salary-related costs declined $100 (16.8%), driven by a $45 bonus reversal, $39 in lower wages from the first phase of headcount reduction, and $19 in lower health and welfare benefits. Non-salary expenses increased $124, reflecting the settlement accrual and incremental legal costs. For the nine months ended September 30, 2025, G&A expenses were $2,966, an increase of $75 or 2.6% compared to $2,891 in the prior-year period. Loaded salaries decreased $125, driven by $77 in eliminated 2025 bonus accruals, $16 in lower wages, $30 in reduced benefits, and $13 in lower accrued leave. Within non-salary costs (excluding the legal settlement impact), payroll fees rose $33 due to a prior-year first-quarter fee holiday, and business license and non-income taxes increased $16 following the initiation of these charges in mid-2024. In addition, recruiting software expenses rose $10, and enterprise software costs increased $12, reflecting higher subscription pricing and reinstated sales-prospecting SaaS tools. These increases were partially offset by a $21 reduction in contract services compared to 2024, when an external recruiting contractor was engaged. Legal expenses related to the settlement totaled $161 out of $176 in total legal costs for the year. Excluding the settlement accrual and related fees, G&A expenses would have declined by approximately $86 or 3.0% year-over-year. Interest Expense The Company incurred $43 in interest expense during the three months ended September 30, 2025, compared to $27 for the same period in 2024. For the nine months ended September 30, 2025, total interest expense was $131, up from $62 in the prior-year period. These amounts reflect charges related to financing, invoice factoring, and the use of an advance rate (BIP) program against client receivables. The year-over-year increase in interest expense is primarily attributable to the need to finance a greater portion of bi-weekly payroll obligations through external sources. While the volume of factored invoices rose, the Company’s average cost of capital declined during 2025, due to a lower prime rate environment and the favorable impact of structured receivables purchase programs. Other Income (Expense) These non-operational one time or short-term costs, in the third quarter totaled $62 consisting solely of Receiver costs versus $68 which included restructuring-based employee matters and other Vivos related legal charges, in the same period 2024. A year ago, there were Receiver and arbitration award related costs being reclassed from SG&A legal. In the fourth quarter of 2024, we closed out the employee and the SWC matters. The most recent employee-related settlement was booked to G&A legal. For the nine months ended September 30, 2025, Other Expense was $132 consisting exclusively of receivership activities, compared to $297 which consisted of SWC, and employee severance and related legal fees. LIQUIDITY AND CAPITAL RESOURCES Our working capital requirements are driven primarily by payroll for Employer of Record (EOR) field talent, general and administrative (G&A) salaries, public company expenses, interest on financing arrangements, legal fees related to the enforcement of arbitration awards against the Vivos Group, and the timing of collections on client accounts receivable. Because client payments, on average, lag field talent payroll by approximately 47 days, working capital demands can fluctuate and occasionally present short-term challenges. Our principal sources of liquidity include cash generated from operations via accounts receivable collections, borrowings under our Factoring Facility with Gulf, and, more recently, three separate receivables purchase arrangements. These arrangements function similarly to factoring but operate through supplier payment programs facilitated by client-affiliated financial institutions. Several of our larger clients over the past few years have adopted extended payment terms, 60 to 90 days. amounting to unilateral term extensions of 30 to 60 days. To mitigate the impact of these changes, we adopted Receivable Purchase Programs with MUFG and JPMorgan. Combined with our factoring facility and biweekly prepayments (averaging approximately $62 every two weeks), these programs have materially improved our cash conversion cycle. Our Days Sales Outstanding (DSO) improved from 66 days at the beginning of 2023 to 49 days by March 2024 and has averaged 50 days since. For the trailing twelve months ended September 30, 2025, our DSO remained strong at 47 compared to 52 in the prior year period. 19 The Receivable Purchase Programs enable MMG to receive payment for 100% of client-approved invoices, net of a flat interest rate. Under the MUFG program, rates vary based on daily invoice volume, with higher volume reducing the effective rate. The JPM agreement, executed on April 23, 2025, purchases invoices from one of the Company’s largest client’s and provides payment within 15 days of approval, at the Secured Overnight Financing Rate (SOFR) plus 80 basis points. Based on a SOFR of 3.98% as of November 12, 2025, the effective annualized rate is approximately 4.78%, substantially below the Company’s average 10.5% factoring rate (tied to the 7.00% prime rate as of November 14, 2025). Our factoring facility with Gulf advances 93% of eligible receivables, subject to a 15-basis point advance fee and an interest rate of prime plus 2%, with a floor prime rate of 4%. These financing arrangements, combined with the portion of client business that pays in advance of payroll (approximately $56 every two weeks), help offset the impact of approximately 32% of our revenue coming from clients on 90-day terms, some of which involve delayed issuance of purchase orders. As of September 30, 2025, 99.1% of accounts receivable were current or less than 30 days past due, compared to 98.7% a year earlier. Our long-term credit performance remains strong, with total bad debt over the past five years amounting to just one hundred and eighty dollars. Our primary uses of cash include payments to field talent, corporate and staff employee payroll and related liabilities, operating expenses, public company costs (including D&O and general liability insurance premiums, SEC filing and audit fees, legal and professional services, stock transfer agent costs, and board compensation), as well as factoring and borrowing-related interest, taxes, and debt service. Due to the nature of our EOR business, where most contracted talent are W-2 employees paid known amounts on varying schedules, cash inflows from clients often do not align with required payroll disbursements. This mismatch necessitates our use of factoring and receivables financing to ensure timely fulfillment of payroll and other obligations. As of September 30, 2025, the Vivos Debtors owed the Company $6,228 in notes receivable, which includes a $3,000 defaulted promissory note and a $750 unpaid tax obligation dating back to December 2019. Following the Maslow–Reliability merger, the Company anticipated accessing capital markets and using its common stock as acquisition currency. However, all 300 million authorized shares of common stock were issued in connection with the merger. No additional shares are expected to become available until the legal dispute with the Vivos Debtors and the broader Vivos Group is resolved. Once resolved, the Company may pursue either an increase in authorized shares or a reverse stock split to create capacity for future capital raises or acquisitions. There is no assurance as to the timing of such actions. As of September 30, 2025, our working capital totaled $6,565, compared to $7,296 as of December 31, 2024 and $7,536 on September 30, 2024. Adjusting for the notes receivable related to the Vivos Debtors, our working capital stood at $337, compared to $1,449 as of December 31, 2024 and $1,709 on September 30, 2024. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.