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, 2025, 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, 2025, 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 its critical accounting policies and estimates from those disclosed in the Form 10-K for the year ended December 31, 2025. Management’s Discussion included in the Form 10-K discusses various factors and trends relating to the Company’s results of operations, liquidity and capital resources. Many of those factors and trends remain relevant to the Company’s operations and financial condition for the three months ended March 31, 2026. Accordingly, this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2025. 15 RESULTS OF OPERATIONS Revenues Revenues for the three months ended March 31, 2026 were $5,551, an increase of $805, or 17.0%, compared to $4,746 for the three months ended March 31, 2025. EOR revenue increased $740, or 19.7%, to $4,495 from $3,755 in the prior-year quarter. The increase was primarily driven by growth from our top client (A), which increased $1,096, or 94.0%. Staffing revenue increased $65, or 7.0%, to $997 from $932 in the prior-year quarter. The increase was primarily attributable to higher revenue from 2 of our top 10 clients, which increased revenue contributions by $96 (30.5%), and $68 (41.7%). These increases were partially offset by lower activity from certain other staffing clients. Video Production revenue increased $10, or 20.4%, to $59 from $49 in the prior-year quarter. The increase was primarily attributable to two new clients who accounted for $16 in revenue. Direct Hire revenue decreased $10 to $0 from $10 in the prior-year quarter, representing a 100% decrease. Cost of Revenue / Gross Profit Three Months Ended March 31, 2026 vs. 2025 Gross profit and margin both increased in the first quarter 2026 compared to the same period in the prior year. Gross profit increased $129, or 20.1%, to $770 from $641, while gross margin improved to 13.9% from 13.5%. The improvement reflected a more favorable client and service mix, pricing realization, and improved execution within certain managed service arrangements. Employer of Record (“EOR”) gross profit rose by $30 to $482 or 6.6% primarily driven by an $815 increase in 1099-related revenue, partially offset by a $60 decline in W-2 related revenue. As a result of the higher concentration of lower-margin 1099 labor, EOR gross margin decreased to 10.7% from 12.0% in the prior-year quarter. Margin compression was further impacted by discounted volume pricing structures associated with certain larger client engagements. Staffing gross profit and gross margins expanded significantly during the quarter. Staffing gross profit increased to $270 from $167 in the prior-year quarter, representing a 61.7% increase. Staffing gross margin increased to 27.1%, compared to 17.9% in the prior-year quarter, representing the segment’s highest quarterly gross margin in more than ten years. The improvement was primarily driven by higher-margin managed service arrangements and improved delivery efficiencies. Managed service engagements generated approximately $669 in revenue and $199 in gross profit, representing gross margins of approximately 29.8%. Additionally, certain client engagements benefited from lower-than-anticipated delivery costs and improved resource utilization. One newer client engagement generated approximately $21 in revenue with gross margins approaching 35.7%. Video Production gross profit improved to $18 from $13 in the prior-year quarter, resulting in gross margin expansion to 30.5% from 26.5%. The increase primarily reflected strategic pricing initiatives and improved execution efficiencies. 16 General and Administrative (“G&A”) General and administrative (“G&A”) expenses for the three months ended March 31, 2026 were $856, a decrease of $167, or 16.3%, compared to $1,023 in the same period of 2025. The decrease was primarily attributable to cost reduction measures implemented during the fourth quarter of 2025, which were fully realized during the first quarter of 2026. Loaded salaries, including payroll taxes and benefits, decreased $164 year-over-year, primarily driven by a $102 reduction in wages and a $17 reduction in payroll taxes and benefits. In addition, the prior-year quarter included bonus accruals of $45, which were subsequently reversed later in 2025, compared to no bonus accruals in the current-year quarter. Additional savings were realized in liability insurance, marketing, payroll processing, and administrative fees, which collectively declined by approximately $40 compared to the prior-year quarter. These reductions were partially offset by a $28 increase in contract services expense, reflecting the Company’s strategic use of lower-cost outsourced resources to support operations following workforce reductions. Interest Expense Interest expense for the three months ended March 31, 2026 was $20, compared to $52 in the same period of 2025. The decrease primarily reflected lower borrowing costs associated with the Company’s receivables purchase programs and a decline in market interest rates. During the quarter, approximately 30% of the Company’s accounts receivable were funded through structured receivables purchase arrangements, which reduced the need to factor funds, resulting in lower interest and factoring fees. Other Income (Expense) Other expense totaled $76 during the three months ended March 31, 2026, consisting primarily of $43 of legal expenses related to the Vivos matter. The remaining $33 was attributable to the losses on sale of receivables associated with the Company’s receivables purchase programs. Although the volume of receivables sold was comparative to the prior year period, the Company’s overall cost of capital declined due to lower prime rates and comparatively favorable rates available under the receivables purchase programs. By comparison, other expense totaled $26 during the three months ended March 31, 2025, consisting primarily of $23 related to the Vivos matter and $3 associated with the disposal of technology-related assets. Management currently expects legal expenses associated with the Vivos matter to substantially conclude during the second quarter of 2026. 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 (which has concluded as of early April), and the timing of collections on client accounts receivable. Because client payments, on average, lag field talent payroll by approximately 60 days (not adjusted for invoice purchase programs), working capital demands can fluctuate and occasionally present short-term challenges. 17 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. Our principal sources of liquidity include cash generated from operations via accounts receivable collections, borrowings under our Factoring Facility with Gulf, and two separate receivables purchase arrangements. These arrangements function similarly to factoring but operate through supplier payment programs facilitated by client-affiliated financial institutions. 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. Several larger clients previously extended payment terms from approximately 30 days to between 60 and 90 days, increasing working capital demands and lengthening the Company’s cash conversion cycle. To mitigate the impact of these extended payment terms, the Company utilized lower cost receivables purchase programs with MUFG and JPMorgan, in addition to its factoring facility and client prepayment arrangements, which currently average approximately $25 biweekly. Collectively, these programs materially improved liquidity and accelerated cash conversion. As a result, trailing twelve months Days Sales Outstanding (DSO) improved from 50 days at the end of March 2025 to 29 days by March 31, 2026. Receivables Financing and Factoring Arrangements The Company maintains a receivables factoring facility with Gulf to provide working capital liquidity. Under this arrangement, eligible invoices are sold or advanced at a specified percentage of face value, with fees based on advance rates and interest spreads above prime. Factoring provides immediate liquidity but requires settlement upon ultimate client payment, and the effective cost of capital is influenced by client payment timing. In 2025, the Company also began utilizing receivables purchase programs administered by JPMorgan (“JPM”) and MUFG Bank Ltd. (“MUFG”) for certain invoices related to a large enterprise client. Under the JPM arrangement, invoices are purchased at a discount based on a rate at approximately 80 basis points over SOFR for the expected collection period, typically ranging from 100 to 105 days. In the first quarter 2026 the SOFR rate average was 3.66%, resulting in our average basis being 4.46% APR. Under the MUFG arrangement invoices are purchased at a discount based on a rate of approximately 235 basis points over SOFR for the expected collection period, typically at 60 days. With SOFR averaging 3.66% in the first quarter, our MUFG average rate was 6.01%. Compared to traditional factoring, both the JPM and MUFG programs provide a lower cost of capital for these receivables but typically result in funding within five to ten days after invoice approval rather than immediate advance. The Company evaluates funding alternatives based on cost of capital, timing requirements, and concentration exposure. 18 Trade Receivables As of March 31, 2026, 90.9% of accounts receivable were current or less than 30 days past due, compared to 96.3% a year earlier. Our long-term credit performance remains strong, with total bad debt over the past seven years amounting to just over two thousand three hundred dollars. Capital Structure and Strategic Flexibility Following the MMG–Reliability merger, all 300 million authorized shares of the Company’s common stock had been issued in connection with the transaction and related matters. Effective April 2, 2026, pursuant to the previously disclosed settlement with the Vivos Group, 253,292,210 shares of the Company’s common stock were transferred to the Company. On April 7, 2026, the Company was notified by Equiniti Shareholder Services, LLC, its transfer agent, that the transfers had been completed effective April 2, 2026. Following the transfer, the shares were no longer outstanding. The reduction in outstanding shares provides the Company with increased flexibility to pursue future capital raising activities, mergers and acquisitions, investments in business development and technology infrastructure, other strategic transactions and growth-oriented initiatives, and general working capital purposes. As of March 31, 2026, working capital totaled $6,532, compared to $6,646 as of December 31, 2025 and $6,966 as of March 31, 2025. Excluding the related-party notes receivable associated with the Vivos Group, which were subsequently satisfied through the share transfer completed effective April 2, 2026, adjusted working capital would have been $110 as of March 31, 2026, compared to $290 as of December 31, 2025 and $993 as of March 31, 2025. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.