RELIABILITY INCORPORATED 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: the impact of the COVID-19 pandemic on us and our clients; 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
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.
Our financial information may not be indicative of our future performance.
30 EXECUTIVE OVERVIEW
2022 was a challenging year for Reliability and our wholly owned operational
entity
This consistent improvement of gross margins has been driven by renewal pricing increases, changes in volume discounts, billing for added overhead, equipment rental price increases, and client mix in which a greater share of our business has shifted to more favorable company terms.
The time, effort and expense put into the arbitration proceedings (see section1) in the first half of 2022 detracted from officer focus on sales, our strategic focus and thus distracted from our ability to fully drive stockholder value. In the fourth quarter, MMG made changes to the sales organization with the intent on driving more immediate new business. The arbitration award has assisted the Company in attracting many new additions to our corporate team. These additions to our team will assist us in strengthening client relationships while providing a better employee experience for our talent working in the field.
Demand for Maslow EOR services has not recovered to pre-2020 COVID 19 ("COVID")
levels as the Media business was profoundly impacted by the stay at home and
vaccination mandates. Maslow's clients have been slower to return to full
schedules even as federal, state and local governments have lifted COVID-19
restrictions. Some mask and vaccine mandates still impact the total number of
MMG employees assigned to our clients. Consequently, our business has been slow
to recover to 2019 levels when our revenues were
In addition to the impact of the pandemic, some of our larger clients have
experienced internal reorganization, show cancellations, and budget reductions
that have impacted their utility of our services. For instance, one client
cancelled two nationally syndicated shows that we had been staffing. Regardless,
COVID-19 and the response to the pandemic took its toll as the remaining three
quarters MMG saw quarterly 2020 declines of 46%, 38.5%, and 13.7% respectively
compared to 2019, and ended up 2020 with
In 2021 we realized an additional decline of revenue down 10.1% from 2020 levels
to
The final three quarters of revenue performance in 2021 were on par with 2020
with
In 2022, MMG seemed poised to be on pace to beat 2021's annual revenue total of
As a result, annual revenue slipped by
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However, despite the revenue decline in 2022 to 2021 year over year by 2%, MMG's
gross profit increased by
The improved EOR margins can be attributed to four factors, two within and two outside our control; changes in pricing upon client renewals, new pricing for equipment rentals, larger margin clients dominating the product mix, and greater use of W2 employees by our clients which yield on average 1.2% higher margins. It also helped that we maintained strong non-EOR margins at 22.3%. Thus, our annual gross margin percentage of 13.6% represented a fourth consecutive year of growth; comparing 12.4% and 11.9% in 2021 and 2020 respectively and 10.6% in 2019.
But what could not be managed proportionately in 2021 was our SG&A which rose
23.3% to
As far as cash is concerned, in 2022 our cash position remained strong due to
our receiving
Our working capital though has assumed repayment of Vivos Debtors which as of
2023 and Beyond
We are investing in new technologies and bringing on additional staffing professionals to grow the staffing side of our business in 2023. EOR has been the Company's primary focus for a long time and 2023 brings a focus on growing our Direct Hire, Staffing & Recruiting solutions. That said, our determination of what service to bring to each client depends on individual needs. But when it comes to non-media staffing, we certainly can focus more on IT and administrative opportunities with our existing customers while opening up new opportunities.
Once the Vivos Matter award has been settled the Company may contemplate moving forward with its original plans to increase outstanding shares by authorizing new ones or via a reverse split to acquire synergistic staffing companies to grow more quickly. The Company would also like to move to the OTCQB and or OTCQX on its way to eventually being listed on the NASDAQ Exchange. The Company continues to work towards meeting all of the requirements to pursue up listing the OTC-QB or OTC-QX exchanges. Once collection of the Vivos Debtors has taken place, MMG may consider moving forward with this initiative.
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 important factors when deciding on a company to work for. Considering the perks that remote working offers, and the keen interest shown by employees from different age groups, we believe that remote working will be prevalent in 2023 and beyond. This paradigm however should not adversely impact MMG, in that whether media jobs are filled virtually or not, MMG has the pipeline of talent to fill these diversified roles.
Furthermore, we believe given the changing nature in 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 off boarding employees as well as managing 1099 risk. As for media, IT and finance and accounting staffing is concerned, 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. While we will continue to focus on growing the contingent staffing side of our business, our splash into Direct Hire staffing, has opened up a new avenue in business of diversified relationships (Media, IT, and finance and administrative roles) that have strengthened our gross margins and has the potential to grow and flourish.
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Our focus on traditional staffing has resulted in some early success in filling
client Direct Hire needs, having added
This focus reflects our desire to shift our portfolio toward a higher margin, higher value proposition.
As a result, we have continued to move forward with our diversified offerings and future specialization staffing strategy, updating our already expert operating model and organizing our business to maximize acquisition and retention of client accounts.
One concern is the low probably of maintaining the
Although we staff other events for Client B, the loss of this programming could
impact MMG between
COMPANY OVERVIEW
Maslow is a national provider of employer of record, recruiting and staffing
services, consisting of media and IT resources. We provide services to client
primarily within
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.
Currently Media and Information Technology ("IT") encompass most of our
placements.
? 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: Also referred to as Direct Hires, we strategically recruit and
fill a variety of fulltime roles for our customers which is only limited by
our recruiting capabilities which are diversified.
The Company's subsidiary,
RESULTS OF OPERATIONS
Maslow had revenues totaling
Overall, Maslow lost
Conversely, we added
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From a revenue contribution standpoint our top 10 clients represented
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 have been derived from our consolidated financial statements.
December 31,
2022 2021
Revenue $ 25,725 26,246
Cost of services $ 22,231 $ 22,980
Gross profit 3,494 3,266Selling, general and administrative expenses 4,400 3,567 Operating loss
(906 ) (301 )
Interest income 53 -
Interest income from related parties 232 274
Interest expense (171 ) (39 )
Impairment of goodwill and intangibles - (688 )
Other income (expense) 223 9,631
Income/(loss) before taxes (569 ) 8,877
Income tax benefit (expense) (170 ) (984 )
Net Income (Loss) (739 ) 7,893
Revenues: By Segment
% %
2022 of Revenue 2021 of Revenue
EOR $ 21,894 85.1 % $ 21,346 81.3 %
Recruiting and Staffing 3,468 13.5 % 3,613 13.8 %
Video and Multimedia Production 264 1.0 % 1,121 4.3 %
Direct Hire (Formerly Permanent
Placement) 99 0.4 % 166 0.6 %
Total Revenue $ 25,725 100 % $ 26,246 100 %
Employer of Record (EOR) Revenues: EOR represented 85.1% of our revenue in 2022
as opposed to 81.3% in 2021 and 80.8% in 2020. The 2020 to 2022 EOR increase in
revenue contribution can be attributed to this business segment showing signs of
returning to pre COVID-19 levels and a lack of growth in our Staffing, Video
Production, and Direct Hire performance. Client A had the largest EOR revenue
decline of any client at
Recruiting and Staffing Revenues: Staffing revenues declined by
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Video and Multimedia Production Revenues: Video Production, which includes
managed services and project freelance work, was down sharply in revenue in
2022, garnering
This business was hurt by loss of a customer which provided
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, recruiting software license fees and reimbursable costs for out-of-pocket items.
Our Gross Profits rose in 2022 by
Our gross margin is the percentage of revenue after Cost of Revenue (COR). Gross margins increasing to 13.6% in 2022 from 12.4% in 2021 was the catalyst of our gross profit growth. This was the fourth consecutive year in which MMG has been able to increase its gross margins, with the compounded annual growth rate (CAGR) of such increases being 7.2%. Since 2019, the CAGR is 8.6%.
Our margin improvement was driven entirely by our EOR margins increasing 2.2 points to 12% from 9.8% in 2021. The only other business segment margin improvement was Video Production moving to 23.7% from 19.4%, but this was because of exodus of account revenue to staffing described above; with the overall impact not being significant because the Video Production contribution to revenue is only 1%.
EOR margins which were 9.2% in 2020, have risen to 12% due to price changes to
large clients at their contract renewal, a mix in client revenue favoring those
with higher contractual margins, increased use of higher margin W2 over 1099
workers, and equipment rental pricing change which enabled our gross profits to
increase by
Our Media Staffing, however, saw its gross margins decline 2 points from 22.3%
to 20.3% as a consequence of having taken on over
Selling, General and Administrative Expenses ("SG&A"): SG&A expenses increased
Corporate non-operational costs inclusive of the
Salaries, inclusive of commissions, payroll tax, and bonus rose
The only other notable variances were commercial legal were up by
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Operational SG&A costs in 2022 were
Interest Income: Interest income from related parties decreased by
Other Income (Expense): Other income was
Interest Expense: Interest expense, increased
Income Taxes: Income tax expense in 2022 was
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
Our primary sources of liquidity are cash generated from operations via accounts
receivable and borrowings under our Factoring Facility with
Our primary uses of cash are for payments to field talent, corporate and staff employees, related payroll liabilities, operating expenses, 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 other borrowing interest; cash taxes; and debt payments.
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 have 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.
Vivos Debtors as of
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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
Over the past three years MMG received eligible forgiven PPP Loan totaling
As of
We anticipate approximately
A summary of our operating, investing and financing activities are shown in the
following table:
December 31,
2022 2021
Net cash provided by (used in) operating activities
(9 ) (7 )
Net cash provided by financing activities 1,639 (2,544 )
Net change in cash and cash equivalents $ 203 $ (46 )
Operating Activities
Cash employed by operating activities consists of net income (loss), adjusted for non-cash items, including depreciation and amortization, and the effect of working capital changes. The primary drivers of cash inflows and outflows are factoring, accounts receivable and accrued payroll and expenses.
During 2022, net cash provided by operating activities was (
Investing Activities
Cash used in investing activities consists primarily of cash paid for capital expenditures.
Financing Activities
Cash used in financing activities in 2022 was
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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 and 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 (Formerly referred to as Permanent Placement) 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 on the consolidated statements of operations represent services rendered to client less variable consideration, such as sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and equivalent amounts of reimbursable expenses 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.
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 (formerly referred to as Permanent Placement) 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 90 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 that 90-day period. As such, the Company's performance obligations are satisfied upon commencement of employment, at which point control has transferred to the customer.
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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.
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