RELIABILITY INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. 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; our continued inability to issue additional shares of equity securities; 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 Annual Report, including the “Risk Factors” in Item 1A of this Annual Report 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 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 this Annual Report on Form 10-K. Our actual results may differ materially from those contained in any forward-looking statements. You should read the following discussion together with our audited consolidated financial statements and related notes thereto and other financial information included in this Annual Report on Form 10-K. All dollar amounts presented in this Form 10-K, unless otherwise specified, are expressed in thousands. Our financial information may not be indicative of our future performance. EXECUTIVE OVERVIEW 2024 Financial Performance Overview In 2024, MMG achieved improvements across key financial metrics, including revenue, gross profit, operating income, and net income. Revenue led the way with an increase of $2,531 (11.8%) over 2023, while gross profit rose by $153 (5.0%) to $3,192. For the second consecutive year, operating income improved, with operating loss narrowing to $707 from $749 in the prior year. Selling, General, & Administrative (SG&A) expenses increased by $111 reaching in 2024 $3,899 from $3,788 in 2023. Interest income of $470, in 2024 exceeded interest expense of $108. Other income (expense) totaled $249 including $379 in legal costs related to non-operational matters, most of which were settled by year-end. The $379 was offset by a $127 refund of overpaid federal taxes and $3 credit card rebate. These factors contributed to a net loss of $594, an improvement of $146 from 2023’s net loss of $740. Enterprise Client Performance Our top five enterprise clients remained highly active in 2024, leveraging our personnel across various projects. Each generated at least $1,000 in revenue, with our largest client reaching a record $6,453 - an increase of $1,058 (19.6%) in their EOR business. Our second-largest client expanded by $2,171 (66.8%) to $5,420, while our third-largest client grew by $1,416 (71.7%) to $3,391, driven largely by broadcasting election-related events, which likely contributed to over half of its 2024 growth. 30 Gross Profit and Margin Analysis Despite the increase in gross profit, our gross margin declined from 14.2% in 2023 to 13.3% in 2024. This was driven by three key factors: 1. Revenue Mix Shift Toward EOR Business: Nearly all revenue growth ($2,531) came from our EOR segment, which increased by $2,554 in 2024. Since EOR margins are the lowest among our business segments, this shift weighed down overall gross margins. 2. Increased Utilization of Lower-Margin 1099 Contractors: EOR revenue was disproportionately allocated to 1099 contractors at a lower rate, with a change of $2,172 since 2023 or a 8.1% margin—one of the lowest possible levels. 3. Decline in Direct Hire Revenue: Direct Hire revenue fell by $104 (52.3%) from 2023. The impact of this decline impacted the overall GM by 50 basis points. Over the past seven years, MMG steadily improved gross margins, growing from 10.3% in 2018 to a peak of 13.3% in 2024. This progress was driven by enhancements in EOR margins, which increased from 8.9% to 12.2% over the same period, along with growth in higher-margin staffing business. Non-Operational Challenges and Future Outlook In 2024, we continued to incur non-operational legal expenses and allocate executive resources to Vivos Group matters. Other Income (Expense) in total was $249 (see Results of Operations). In 2025, we expect legal costs relative to award collections to be lower than 2024. As a standalone entity, Maslow has remained profitable for the past seven years, as reflected in our OIBITDA, which was $2 in 2024 and $57 in 2023 (see Item 6). We remain committed to accelerating growth in 2025 and beyond, with a focus on operational efficiency, client expansion, and profitability improvements. 2025 and beyond While revenue growth was strong in 2024, margin compression due to increased reliance on EOR and 1099 contractors impacted profitability. Investments in sales, client services, and HR/payroll increased SG&A expenses, but cost savings in legal and corporate expenses helped offset some of these increases. Moving forward, strategic efforts will focus on continuing our revenue ascension, improving gross margins, diversifying revenue streams, and optimizing cost structures to enhance profitability. All indications are for two of our three largest clients to produce similar if not greater revenues in 2025, while the other won’t have quite the same business levels in 2025 since last year’s election spurred increased EOR. The additional staffing business development professionals we hired to grow the staffing side of our business saw progress in 2024 bringing in $822 in revenue from 10 new accounts. Additionally, we have several opportunities in the pipeline we expect to close in late first quarter or early second. We expect our Direct Hire business to grow in 2025 as a number of existing clients have taken advantage of our expertise and speed of filling roles outside the Media space. This success should enable us to fill even more diverse functional openings in 2025 and beyond. As we do the same for our other large clients, so should our opportunity to increase our requisition volume and convert to fills and revenue. EOR has been the Company’s primary revenue source for many years, and it represented 85.0% in 2024, an 1.9% increase from 83.2% in 2023. Our challenge over the past five years has been seeing several medium to large clients post COVID roll back their Media functions, activities and personnel. Economic conditions and specific esoteric issues affected at least one client, causing them to cease using outside media services altogether. Despite lower payrolls for some, the challenge with EOR is the complexity of managing HR and Payroll for a myriad group of clients who vary significantly in uniformity and have unique needs that absorb our staff’s attention. This client service intensity is somewhat unique to Media EOR than to other EOR providers due to the idiosyncratic ways that employee time is scheduled, tracked, recorded, and managed. This complexity is why we have added client service and HR personnel and technology to best service our gold star clients. 31 Hence, our goal is to maintain and build on our legacy client foundational relationships while putting our foot on the proverbial gas pedal to develop much more contingent contract staffing and direct hires. And in doing so, our goal is to increase our staffing business by supporting other functions outside of Media such as Administrative, Accounting and Finance, HR, and IT. To that end, we will add at least one more staffing-experienced sales representatives in the first half of 2025. Virtual staffing is no longer a limited niche for certain companies and certain positions. Virtual scenarios are also favored by Generation Z, which values work-life balance as one of the most crucial factors when deciding on a company for which to work. Considering the benefits that remote working offers, and the keen interest shown by employees from different age groups, we believe that remote working will be prevalent in 2024 and beyond. This paradigm, however, should not adversely impact MMG, in that whether jobs are filled virtually or not, MMG has the pipeline of talent to fill these diversified roles. Furthermore, we still believe given the changing nature of specialized staffing, there exists a greater opportunity to expand our EOR business as it offers businesses of all types and industries, more flexibility in on- and offboarding employees, as well as managing 1099 risk. As for staffing outside of Media, we believe it will grow, but there are also opportunities to get into staffing specialties which represent areas where we see the most rebound or a robust demand. This shift in focus to staffing will also have a positive impact on gross margins. We expect blended staffing rates to be in the high teens to low 20s in the future, which with volume will resume our ascent in converting a much higher percentage of our revenues to gross profit. As a result, we continued to move forward with our diversified offerings with an eye on our future specialization staffing strategy, updating our already expert operating model, and organizing our business to maximize acquisition and retention of client accounts. Once the Vivos Matter judgements are recovered, the Company may consider moving forward with its original plans to increase outstanding shares, either by authorizing new shares or executing a reverse split to facilitate the acquisition of synergistic staffing companies to accelerate growth. Additionally, the Company aims to transition to the OTCQB and/or OTCQX markets as a step toward an eventual listing on the NASDAQ Exchange. Efforts are ongoing to meet the necessary requirements for OTCQB or OTCQX listing. Following the successful collection of Vivos-related debts, MMG intends to hold a shareholder meeting to evaluate and potentially advance these strategic initiatives. COMPANY OVERVIEW Maslow is a workforce management solution provider with proven capabilities delivering employer of record (EOR), recruiting and staffing services, consisting of media, IT, and administrative resources. We provide services to client primarily within the United States of America. Our services consist of: ● Employer of Record (“EOR”): A unique workforce solution for any organization who seeks efficiency in employee administrative management including payroll and benefits, labor risk associated with compliance with federal-state and local regulations including Fair Labor Standards Act (“FLSA”), in onboarding and offboarding employees, and in managing benefit costs. One major difference in this service offering is that our customers usually source the talent and MMG hires and leases the employees to our customers. ● Recruiting and Staffing: Staffing covering a wide variety of specialties: media, information technology (“IT”), accounting and finance, HR, marketing, sales, and other administrative personnel. ● Video and Multimedia Production: With 35 years of experience, the Company’s subsidiary, Maslow, offers script-to-screen expertise including producers, audio engineers, editors, broadcasters, makeup artists, camera crews, Gaffers and grips, drone operators, and more. ● Direct Hire: We strategically recruit and fill a variety of full-time roles for our customers which is only limited by our recruiting capabilities, which are already quite diverse. 32 The Company’s subsidiary, The Maslow Media Group, Inc., is currently the only operating entity for the business. After our Merger in October 2019, nonoperational expenses (e.g., public company fees, D&O insurance, investor relations, etc.) were assigned at the corporate level. This enables a more pristine, focused view of the operational side of the business we refer to as Operational Income Before Interest, Taxes, Depreciation, and Amortization (OIBITDA). RESULTS OF OPERATIONS Maslow generated revenues totaling $23,982 in 2024, reflecting an increase of $2,531 (11.8%) from $21,451 in 2023. This growth was primarily driven by three EOR clients whose increased activity contributed an additional $4,121 in revenue when compared to same period ending December 31, 2023. From a revenue concentration perspective, our top 10 clients accounted for $21,612 of revenues, representing 90.1% of the total $23,982 revenues in 2024. This was up from $18,526, or 86.4%, of the total $21,451 in 2023 revenues. The revenue share from these clients increased due to a higher level of engagement from our largest accounts. In December 2024, rebates were issued totaled $70, an increase of $36 compared to $32 in 2023. The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of revenues, and were derived from our consolidated financial statements. December 31, 2024 2023 Revenue $ 23,982 $ 21,451 Cost of services 20,790 18,412 Gross profit 3,192 3,039 Selling, general and administrative expenses 3,899 3,788 Operating loss (707 ) (749 ) Interest income 18 25 Interest income from related parties 452 269 Interest expense (108 ) (92 ) Other income (expense) (249 ) (179 ) Income/(loss) before taxes (594 ) (726 ) Income tax benefit (expense) - (14 ) Net Income (Loss) $ (594 ) $ (740 ) Revenues: By Segment 2024 % of Revenue 2023 % of Revenue EOR $ 20,382 85.0 % $ 17,828 83.1 % Recruiting and Staffing 3,301 13.7 % 3,098 14.4 % Video and Multimedia Production 204 0.9 % 326 1.6 % Direct Hire 95 0.4 % 199 0.9 % Total Revenue $ 23,982 100 % $ 21,451 100 % Employer of Record (EOR) Revenues : EOR revenue rebounded to 85.0% of total revenue in 2024, up from 83.1% in 2023. This increase was primarily driven by an additional $2,554 in EOR revenue. Our top three EOR clients contributed $4,645 in additional revenue, while revenue from the remaining 26 clients declined by $2,477. Overall, EOR revenue grew by 14.3% year-over-year. 33 Recruiting and Staffing Revenues : Staffing revenues increased by $203 (6.6%) reaching $3,301 in 2024 compared to $3,098 in 2023. Media Staffing at $3,227 represented 97.8% of all staffing revenue and 13.5% of total 2024 annual revenue, whereas it represented 88.8% of all staffing revenue and 12.8% of 2023 annual revenue. Video and Multimedia Production Revenues : Revenue from video production services, including managed services and project-based freelance work, declined by $122, from $326 in 2023 to $204 in 2024. This segment represented 0.9% of total revenue, a 44% decline in share from 2023. Gross Profit: Gross profit represents revenues from services less cost of services expenses also referred to as Cost of Revenue (COR), which consist of payroll, payroll taxes, benefits, payroll-related insurance, union benefits, field talent, and for Direct Hire, an allocation of recruiting Software as a Service (“SaaS”), and reimbursable costs for out-of-pocket items. Gross Profit in 2024 was $3,192, an improvement of $153 over 2023’s gross profit of $3,039. Our gross margin is the percentage of revenue after cost of revenue (COR). Gross margins declined by 90 basis points in 2024 to 13.3% from 14.2% in 2023, marking the first decrease in gross margin after five consecutive years of growth. The decline was attributable to: ● A shift in revenue mix toward EOR, which has lower margins (12.0% vs. 13.3% overall). ● Increased use of 1099 resources in EOR, with lower margins (9.4%) compared to W2 employees (13.0%). ● A 52.2% decline in Direct Hire revenue, which historically carries a 90% gross margin. EOR margins declined to 12.0% from 12.2% in 2023, primarily due to two gold star client’s increased reliance on 1099 contractors, whose share of EOR revenue rose from 17.3% in 2023 to 25.8% in 2024. Non-EOR gross margins declined to 20.7% in 2024 from 23.7% in 2023, primarily due to lower margins in Media Staffing and Video Production. Media Staffing margins decreased from 19.3% in 2023 to 18.5% in 2024, while Video Production margins fell 1.3 percentage points to 19.6%, despite a 37% increase in revenue. The decline was partially attributable to an approximate $10 credit issued to a client due to a procedural matter. Although Direct Hire margins improved by 3.8 percentage points to 94.7% from 91.0% in 2023, the revenue impact was limited, as Direct Hire revenue declined 52.3% to $95 in 2024 from $199 in 2023. Selling, General and Administrative Expenses (“SG&A”): SG&A expenses increased by $111 to $3,899 in 2024 compared to $3,788 in SG&A in 2023 driven by a $308 rise in loaded salaries and benefits, as the company expanded its sales, client services, and HR/payroll teams. Notable cost changes included: ● Wage and benefit costs increased by $308, with sales, client services, and HR/payroll accounting for $244 of the increase. ● Legal expenses declined by $165 to $26 due to the completion of restructuring and Vivos-related matters. ● Corporate non-operational costs decreased by $131 (16.7%) to $657. From an MMG operational perspective, SG&A was up $242 (7.5%) in 2024 from 2023. Salaries, inclusive of commissions, payroll tax, and bonus rose $229 in the year ending December 31, 2024 compared to same period in 2023. $221 of the increase was salary based as we bolstered our client services, sales, and HR/payroll departments. Operational nonwage and benefit costs were favorable in 2024 to 2023 by $51 as savings were derived in contract services by $76 as we curtailed part-time outsourced controller services and marketing support, commercial legal fees by $27 as $143 in Receiver related costs were booked to Other Expense, staff events by $39, dues and subscriptions by $21 and payroll fees by $4 as ADP incentive included a three-month holiday. Increases were seen in software by $54 as we added Concur ($12) and allocated all non-direct hire software charges to SG&A versus COR, state franchise and minimum taxes by $24, marketing programs by $14, and communications by $11 as we added Our People for internal messaging. 34 Interest Income : Interest income from related parties rose by $183, from $269 to $452, after applying a 10% interest rate to all notes receivable following their enrollment as court judgments on December 29, 2023, related to arbitration awards. This increase reflects a change in estimate based on the advice of MMG counsel, whose interpretation of the award led to MMG’s recalculation of accrued interest from August 31, 2022 to December 31, 2024, resulting in an approximate $132 reversal in interest. Maslow also earned $18 in other interest income - $14 from a federal tax refund (2016–2020) received in April 2024, and $4 from an FDIC-insured money market account. Other Income (Expense): In 2024, we incurred $249 in net other income/expenses, compared to $179 in 2023, reflecting a year-over-year increase of $70. Total expenses for 2024 were $379, offset by recovery of overpaid IRS interest and penalties of $127 and a $3 credit card rebate. In April 2024, MMG received the final payment of $288 from the IRS for overcharged penalties and interest and an uncredited payment that we contested in 2021, related to charges incurred between 2016 and 2021. Of this amount, $127 had been originally requested but not confirmed for credit by the IRS. Hence, we did not provision for the funds return. The $379 in nonoperational costs primarily consisted of legal fees and settlements related to receivership activities ($143), restructuring ($121), and the now-settled SWC matter ($115). Interest Expense: Interest expense rose by $16, from a low of $92 in 2023 to $108 as the need for using our Gulf Coast factoring facility increased. Also impacting rate percentages and higher interest costs to a small degree was that one of our clients left the Buyer Initiated Payment (“BIP”) program (explained in the Liquidity and Capital Resources section directly below), resulting in a higher APR for this client on 90-day terms. Income Taxes: Reliability did not have an income tax expense in 2024 compared to a $14 payment for the year ending December 31, 2023. In 2023 and prior we booked several state income taxes which had minimum tax requirements and franchise fees to income tax. In 2024, those $27 cash and accrued costs were recorded in SG&A as Business Taxes. LIQUIDITY AND CAPITAL RESOURCES Our working capital requirements are driven predominantly by EOR field talent payments, SG&A salaries, public company costs, interest associated with factoring, legal costs associated with the Vivos Matter, and client accounts receivable receipts. Since receipts from client payments are on average 69 days behind payments to field talent, working capital requirements can be periodically challenged. We have a factoring facility with Gulf Coast Bank, which advances 93% of our eligible receivables at an advance rate of 15 basis points, an interest rate of prime plus 2%, with our prime floor rate at 4%. Additionally, in April 2024, we entered into a Buyer Initiated Payment (“BIP”) agreement with American Express (“Amex”) which 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. This has had a profoundly positive impact on our ability to accelerate cash conversion and lower DSO as well as our borrowing costs. As of December, 31, 2024, 80.9% of our $4,688 accounts receivable was current compared to 87.4% out of $2,993 on December 31, 2023. As of December 31, 2024, 1.7% between 31 and 60 days was past due versus 0.9% in 2023, and 0.2% between 60 and 90 days versus 0.6% at the end of 2023, and 0.1% for 90 days and greater past due which was 0.5% in 2023. Our primary sources of liquidity are cash generated from operations via accounts receivable and borrowings under our Factoring Facility with Gulf Bank (“Gulf”), and Amex’s BIP, with the former enabling access to the 7% unfactored portion. Because certain large clients a few years ago changed their payment practices announcing 60- and 90-day terms amounting to a unilateral extension to contractual terms by 30-60 days, we can be adversely impacted since Gulf no longer provides credit if an account obligor pays more than 120 days after the invoice date. However, since Gulf covers two of the companies that have moved to 90-day terms, it reduces that burden on us. Our primary uses of cash are for payroll to field talent, corporate and staff employees, related payroll liabilities, operating expenses, legal fees relating to the Vivos matter and the SWC lawsuit, 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 BIP borrowing interest; and cash taxes. As of March 31, 2024, we have approximately $46 in notes payable. 35 Since we are an EOR with the majority of contracted talent paid as W-2 employees who are paid known amounts on a consistent schedule, our cash inflows do not typically align with these required payments, resulting in temporary cash challenges, which is why in the past we employed factoring. Because we do also employ 1099 contracted firms and individuals with payments terms which vary from immediate to 30 days, our cash requirements can be quite variable. As of December 31, 2024, of our $4,688 in billed trade receivables, $2,375 was subject to interest by Gulf for factoring, representing 51%. (See Net Factoring total on line 1 of Current Liabilities on Balance Sheet). Vivos Debtors as of December 31, 2024 had notes receivable totaling $5,847, 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. In April 2023, we received our final ERC payment of $1,209 as the ERC did help bolster our cash reserves over the past three years. As of December, 31, 2024, our working capital was $7,296 compared to $7,913 on December 31, 2023. In 2025, we do anticipate approximately $500 in incremental SG&A, as our 2024 loaded salary run rate will alone have a $126 impact and we will continue to invest for growth in technology, heads, as well as an expected increase in legal fees associated with the receiving process. We also factored in price increases due to inflation but at a lower rate than a year ago. For 2024, a summary of our operating, investing, and financing activities is shown in the following table: December 31, 2024 2023 Net cash provided by (used in) operating activities $ (2,587 ) $ 3,016 Net cash used in investing activities (68 ) (9 ) Net cash provided by (used in) financing activities 2,355 (2,412 ) Net change in cash and cash equivalents $ (300 ) $ 595 Operating Activities Cash flows from operating activities primarily consist of net income (loss), adjusted for non-cash items such as depreciation and amortization, as well as changes in working capital. The key factors influencing cash inflows and outflows include factoring, accounts receivable, and accrued payroll and expenses. In 2024, net cash used in operating activities was $2,587, representing a decrease of $5,603 compared to net cash provided of $3,016 in 2023. This decline was primarily driven by a $5,130 increase in trade receivables over cash converted and accrued party-related interest adverse cash change of $168. These cash decreases were partially offset by increases in cash flows from net income by $168, accounts payable at $335, accrued payroll at $275, and accrued expenses at $46. 36 Investing Activities Cash used in investing activities consisted of $52 for implementation of ADP Workforce Now and an additional $16 for in cash paid for laptops, accounting for $68 in total capital expenditures in 2024. This was $59 higher in capex than in 2023 when $9 was spent on laptops. Financing Activities Cash provided by financing activities was $2,355 in 2024 compared to cash used for a total of $2,412 in 2023. The $4,767 increase was due to higher borrowing levels, which totaled $9,132 in 2024. Repayments also increased by $716 reaching $6,930 in 2024. This increased financing activity reflects the company’s growing cash needs in line with revenue growth. In 2023, borrowing was $5,364 lower, as the company had sufficient cash on hand following the receipt of a final Employee Retention Credit (ERC) payment of $1,209 in April of 2023, which helped sustain liquidity for the remainder of the year. OFF-BALANCE SHEET ARRANGEMENTS We had no material off-balance sheet arrangements that have, or are likely to have, a current or future material effect on our operations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We have identified the policies listed below as critical to our business and the understanding of our results of operations. For a detailed discussion of the application of these and other accounting policies, see Note 3 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, collectability of accounts receivable, contingencies, litigation, income taxes, and other liabilities. Management based its estimates and judgments on historical experiences and on various other factors believed to be reasonable under the circumstances. Actual results under circumstances and conditions different than those assumed could result in differences from the estimated amounts in the consolidated financial statements. REVENUE RECOGNITION The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered. We derive our revenues from four segments: EOR, Recruiting and Staffing (temporary), Direct Hire and Video and Multimedia Production. Revenues are recognized when promised services are delivered to a client, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Revenues as presented in the consolidated statements of operations represent services rendered to client less variable consideration, such as sales adjustments and allowances. Reimbursements often related to out-of-pocket expenses, and equipment leasing are also included in revenues, and equivalent amounts of reimbursable expenses and leased costs are included in cost of services. We record revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. We have concluded that gross reporting is appropriate because we (i) have the risk of identifying and hiring qualified workers, (ii) have the discretion to select the workers and establish their price and duties and (iii) we bear the risk for services that are not fully paid for by client. 37 Temporary staffing revenues are accounted for as a single performance obligation satisfied over time because the customer simultaneously receives and consumes the benefits of the Company’s performance on an hourly basis. The contracts stipulate weekly billing, and the Company has elected the “as invoiced” practical expedient to recognize revenue based on the hours incurred at the contractual rate as we have the right to payment in an amount that corresponds directly with the value of performance completed to date. Direct Hire revenue is recognized on the date the candidate’s full-time employment with the customer has commenced. The customer is invoiced on the start date, and the contract stipulates payment due under varying terms, typically 30 days. The contract with the customer stipulates a guarantee period whereby the Company will replace the candidate free of charge if the employee is terminated within the first 90-day period. As such, the Company’s performance obligations are satisfied upon commencement of employment, at which point control is transferred to the customer. Allowances, recorded as a liability, are established to estimate these losses. Fees to clients are generally calculated as a percentage of the new worker’s annual compensation. No fees for Direct Hire services are charged to employment candidates. Video and Multimedia Production revenues from contracts with clients are recognized in the amount to which we have a right to invoice when the services are rendered by our field talent. RECENT ACCOUNTING PRONOUCEMENTS For a discussion of recent accounting pronouncements and their potential effect on our results of operations and financial condition, refer to Note 3 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.