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. 16 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 and Analysis 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 remained relevant during the three and six months ended June 30, 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. RESULTS OF OPERATIONS Revenues Revenue for the three months ended June 30, 2026 was $5,017, an increase of $299, or 6.3%, compared with $4,718 for the three months ended June 30, 2025. For the six months ended June 30, 2026, revenue increased $1,103, or 11.7% to $10,568 from $9,465 in the comparable 2025 period. For the second quarter, EOR revenue increased $300, or 8.4%, to $3,873 from $3,573 in the prior-year quarter. For the six-month period, EOR revenue increased $1,040, or 14.2%, to $8,378 from $7,328. The growth was concentrated in lower-margin EOR activity, including increased 1099 EOR volume. Staffing revenue decreased $6, or 0.5%, to $1,092 from $1,098 in the prior-year quarter. For the six-month period, Staffing revenue increased $59, or 2.9%, to $2,089 from $2,030. Video Production revenue increased $18, or 52.9%, to $52 from $34 in the prior-year quarter and increased $27, or 32.1%, to $111 from $84 for the six-month period. Direct Hire generated no revenue during the three or six months ended June 30, 2026, compared with $13 and $23 during the respective 2025 periods. Cost of Revenue / Gross Profit Three Months Ended June 30, 2026 vs. 2025 Gross profit for the three months ended June 30, 2026 decreased $21, or 2.9%, to $692 from $713, while gross margin declined 130 basis points to 13.8% from 15.1%. Although revenue increased, the revenue mix shifted toward lower-margin EOR business, particularly 1099 activity, which more than offset margin contributions from higher-margin EOR w2 and Staffing services. EOR gross profit declined by $41, or 9.3%, to $402 from $440 in the prior-year quarter, while gross margin declined to 10.4% from 12.3%, primarily reflecting higher benefit utilization and other employment-related costs. Staffing improved in both profit and margin with gross profit increasing $28, or 11.1%, to $280 from $252 in the prior-year quarter, while quarterly Staffing gross margin advanced to 25.6% from 23.0%. Video Production gross profit increased $3 to $11 from $8 in the prior-year quarter, while gross margin declined to 21.2% from 23.5%. Six Months Ended June 30, 2026 vs. 2025 For the six months ended June 30, 2026, gross profit increased $107, or 7.9%, to $1,462 from $1,355; however, gross margin declined approximately 50 basis points to 13.8% from 14.3%. EOR represented a greater proportion of consolidated revenue however its margin declined as w2 margins were negatively impacted by higher benefit, workers compensation and leave costs.,. For the six-month period, EOR gross profit declined by $11, or 1.2%, to $883 from $894, while EOR gross margin declined to 10.6% from 12.2%. The margin compression reflected both a higher concentration of lower-margin 1099 activity and volume-pricing structures associated with certain larger client engagements, and w2 compression caused by higher benefit utilization. Staffing gross profit increased $131, or 31.3%, to $550 from $419, while gross margin improved to 26.3% from 20.6%, reflecting stronger performance and higher-margin managed-service arrangements. For the six-month period, Video Production gross profit increased by $8 to $29 from $21 and gross margin improved to 26.1% from 25.0%. 17 General and Administrative (“G&A”) Selling, general and administrative (“SG&A”) expenses for the three months ended June 30, 2026 were $811, a decrease of $155, or 16.0%, compared with $966 in the same period of 2025. For the six-month period, SG&A decreased $323, or 16.2%, to $1,666 from $1,989. These reductions reflect cost-containment measures implemented during the second half of 2025 and second quarter 2026 resulting in lower recurring costs. Staff salaries and related benefit costs decreased approximately $133 during the quarter and $325 for the six-month period. Quarterly office payroll decreased approximately $128, with additional reductions in payroll taxes and benefits, partially offset by accrued leave expense and HRA contributions. Non-salary costs were down year over by $24 for the second quarter as savings were realized in legal fees, business insurance, payroll processing, communications, marketing and other administrative costs. These reductions were partially offset by an increase of approximately $27 in quarterly contract-services expense, principally reflecting the Company’s use of outsourced accounting resources following internal workforce reductions. Loaded salaries accounted for $325 (23.1%) of the savings, while non-salary expenses were reduced by $35. The paradigm was the same as far as where savings and increases lie, with contract services growing the most by $55, with approximately $57 of the increase in outsourced accounting services. Interest Expense Interest expense for the three months ended June 30, 2026 was $23, compared with $36 in the same period of 2025. For the six-month period, interest expense decreased to $44 from $88. The decreases reflected greater use of lower-cost receivables purchase programs, reduced reliance on traditional factoring for eligible receivables, and lower market interest rates. For the six months ended June 30, 2026, related-party interest income declined to $66 from $253, interest expense decreased to $44 from $88, and other expense increased to $136 from $70. Other income was $3 compared with $1 in 2025. The Company continued to use its receivables purchase programs to reduce the amount and duration of traditional factoring borrowings. Other Income (Expense) For the three months ended June 30, 2026, other income (credit card rebate) was $3 and other expense was $61 compared with no other income and other expense of $44 in the prior-year quarter. Loss on sales of receivables represented $27 of the $61. Related-party interest income decreased to zero from $127 following completion of the Vivos settlement. Including interest income and interest expense, total other expense, net, was $80 in the 2026 quarter, compared with total other income, net, of $48 in 2025. For the six months ended June 30, 2026, Other Expense totaled $136 which was $66 higher than $70 in same period a year ago, as legal fees concluding the Vivos Matter and $60 in l oss on receivable purchase agreements which were not in place a year ago. Operating Loss Operating loss improved by $134 to $119 for the second quarter of 2026 from $253 in the prior-year quarter. However, because of the loss of related-party interest income following the Vivos settlement and higher other expense, net loss was $206 compared with $205. For the six-month period, operating loss improved by $430 or 67.8% to $204 from $634 and net loss improved by $213 or 39.6% to $325 from $538. The settlement and related share transfer were completed during the second quarter of 2026. Although the Company incurred residual and other legal costs during the quarter, management expects expenses directly associated with enforcement of the Vivos awards and settlement to substantially conclude, apart from immaterial administrative or wind-down matters. LIQUIDITY AND CAPITAL RESOURCES Our working capital requirements are driven primarily by payroll for Employer of Record (“EOR”) field talent, corporate salaries, public-company costs, interest on financing arrangements, and the timing of collections on client accounts receivable. Enforcement activity related to the Vivos awards concluded following the settlement and share transfer completed in April 2026, although residual legal costs were incurred during the quarter. Because client payments, on average, lag field-talent payroll by approximately 60 days before considering receivables purchase programs, working capital demands can fluctuate and periodically create short-term liquidity pressure. 18 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 51 days at the end of June 2025 to 22 days by June 30, 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 of approximately 80 basis points over SOFR for the expected collection period, typically ranging from 100 to 105 days. During the six months ended June 30, 2026, the applicable SOFR rate averaged approximately 3.62%, resulting in an average annualized rate of approximately 4.42%. Under the MUFG arrangement, invoices are purchased at a discount based on a rate of approximately 235 basis points over SOFR for an expected collection period of approximately 60 days. During the six months ended June 30, 2026, the applicable SOFR rate averaged approximately 3.62%, resulting in an average annualized rate of approximately 5.97%. 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. 19 Trade Receivables As of June 30, 2026, 95.0% of accounts receivable were current compared to 96.8% a year earlier. Invoices aged 60 days or more represent 1.0% of our accounts receivable on June 30, 2026 compared to 3.2% a year ago. Our long-term credit performance remains strong, with total bad debt over the past seven years amounting to just $2. 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 June 30, 2026, the Company had cash of $470 and a working-capital deficit of $104, compared with working capital of $6,647 as of December 31, 2025. The decline in reported working capital primarily reflects the noncash settlement of $6,422 of related-party notes receivable. The Company’s liquidity position, however, was also adversely affected by $147 of cash used in operating activities during the six months ended June 30, 2026, together with the timing of accounts payable, accrued payroll and factoring obligations. During June 2026, the Company also received a board approved $110 unsecured advance from an officer to support short-term working-capital requirements. The Company continues to manage its liquidity through the collection of accounts receivable, availability under its factoring arrangement, management of operating expenditures and evaluation of additional financing alternatives. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.