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 unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes or developments in the Company’s evaluation of the accounting estimates and the underlying assumptions or methodologies that it believes to be Critical Accounting Policies and Estimates as disclosed in its Form 10-K for the year ended December 31, 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 2024 operations; thus, the reader of this report should read Management’s Discussion included in Form 10-K for the year ended December 31, 2024. 15 RESULTS OF OPERATIONS Revenues Revenues for the three months ending March 31, 2025, totaled $4,746, representing a decrease of $549 over the $5,295 generated in the first quarter of 2024. Revenue from our EOR segment declined by $817 or 17.9% compared to $4,572 in the first quarter of 2024. This decline was primarily attributable to a $366 reduction in revenue from one of our top three clients in 2024 largely due to the absence of election-related activity in this non-election year. This client-specific reduction accounted for approximately 67% of the total revenue decline and 45% of the decline within the EOR segment. Offsetting this, our other top four revenue-generating clients contributed a combined $280 in incremental revenue compared to the same period last year. Staffing revenue increased to $932 a growth of $265 or 39.7%, from $667 in the prior-year period. A key contributor to this growth was a government agency client that accounted for $233, or approximately 88%, of the total increase in staffing revenue. Video Production revenue rose was up $17 with $49 compared to $32 in the first quarter of 2024. Conversely, our Direct Hire business generated $10 in revenue in the first quarter of 2025, a decrease of $14,000 from $24,000 in the prior-year period. Cost of Revenue / Gross Profit For the three-month period ended March 31, 2025, gross profit totaled $641, representing a decline of $68 or 9.6%, compared to $709 in the prior-year period. Despite the year-over-year decrease in gross profit, gross margins improved by 10 basis points to 13.5%, up from 13.4% in the first quarter of 2024. This marks the third increase in gross margin during the first quarter over the past four years. The shift in revenue mix positively influenced overall margins. Staffing revenue increased from 12.6% to 19.6% of total revenue, with a gross margin of 17.9%, contributing approximately 30 basis points of margin improvement. Additionally, Video Production delivered gains in both gross profit and margin, adding another 10 basis points. These improvements offset a combined 30 basis point negative impact from Direct Hire and EOR services. Comparatively year over year, Staffing gross margin fell to 17.9% from 18.4% in 2024, mostly because IT staffing revenue of 37 lifted margins by thirty basis points. In the first quarter 2025, all our staffing revenue were from media roles. EOR gross margin was 12.0%, just 10 basis points below the prior-year level of 12.2%. Given the trend that began in Q2 2024—where EOR margins declined modestly due to a heavier reliance on Maslow 1099 resources over W-2 employees, this limited margin compression in Q1 2025 was a positive indicator of stabilization. Direct Hire’s 20 basis point negative impact on margin was attributable to a decline in revenue compared to the prior year quarter. As Direct Hire typically generates gross margins of approximately 90%, even modest revenue shifts have a disproportionate effect on consolidated margin performance. General and Administrative (“G&A”) General and administrative expenses for the three months ended March 31, 2025, totaled $1,023, compared to $947 in the first quarter of 2024, representing an unfavorable variance of $76 or 8.0%. The year-over-year increase was primarily driven by higher loaded salaries, which rose by $37 or 4.9%, led by $20 increase in accrued leave. Wages increased by $15. Overall loaded salaries represented 48.6% of the overall $76 higher SG&A costs. Non-salary costs rose by $39 (51.4%), largely due to a $26 increase in ADP payroll processing fees. This increase was anticipated, as the first quarter of 2024 benefited from a one-time holiday incentive tied to our 2023 ADP servicing agreement. Other notable increases by account were non recruiting software at $10, and business taxes and licenses at $10 which consist of state minimum tax and franchise fees for states that are not deemed to be state income taxes. A year ago, in the first quarter of 2024, we were booking these taxes and fees to state income taxes. Otherwise, cost savings were realized in Legal by $11, as Receivership fees a year ago resided here, and recruiting software which a greater portion, was allocated to COR for staffing and Direct Hire searches. Interest Expense In the three-month period ending March 31, 2025, the Company incurred $52 in interest charges for financing, factoring, and paying an advance rate (BIP) against its invoices compared with $16 in the same period a year ago. 16 Other Income (Expense) On December 29, 2023, the Maryland Circuit Court certified the Company’s arbitration award as a judgment. Given that the associated legal costs relate primarily to collection and recovery efforts, the Company began reclassifying these non-core legal expenses to Other Expense starting in the second quarter of 2024. This practice has continued, effectively isolating non-operational legal obligations from operating expenses. Non-operational income and expenses totaled a net expense of $26 for the three months ended March 31, 2025, reflecting a $67 or 72.0%, decrease compared to $93 in the same period in 2024. The year-over-year decline was primarily due to a narrower scope of legal activity in the current quarter. In the first quarter of 2025, legal expenses were limited to matters involving the court-appointed receiver, whereas the prior-year period included additional legal costs related to restructuring activities and obligations associated with the non-award Vivos Group debt. The $26 net expense in the first quarter of 2025 also includes $1 in credit card rebate income. 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 49 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 have recently 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 Buyer-Initiated Payment (BIP) and Receivable Purchase Programs with American Express, MUFG, and JP Morgan. Combined with our factoring facility and biweekly prepayments (averaging approximately $56 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 March 31, 2025, our DSO remained strong at 49.5 compared to 49.2 in the prior-year period. These BIP and Receivable Purchase Programs allow MMG to receive payment for 100% of client-approved invoices, net of a flat interest rate. For Amex and MUFG programs, rates vary based on daily invoice volume, with higher volume reducing the effective rate. The JP Morgan agreement, executed on April 23, 2025, purchases one of our largest client’s invoices within 15 days of approval, using the Secured Overnight Financing Rate (SOFR) plus an 80-basis point program fee. Based on current rates, this results in an annualized cost of approximately 5.27%, significantly lower than our average factoring APR of 10.6%, which is based on a prime rate of 8%. 17 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 (~$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 March 31, 2025, 96.3% of accounts receivable were current (aged <31 days), compared to 96.5% 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 March 31, 2025, the Vivos Debtors owed the Company $5,973 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 March 31, 2025, our working capital totaled $6,966, compared to $7,296 as of December 31, 2024. Adjusting for the notes receivable related to the Vivos Debtors, our working capital stood at $993, compared to $1,449 as of December 31, 2024.