FORWARD-LOOKING STATEMENTS
The following discussion and analysis of our results of operations and financial
condition should be read in conjunction with our unaudited 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: 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 on terms acceptable to the
Vivos Group or at all; 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, 2021, 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, 2021, 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 consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these unaudited 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.
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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, 2021.
Management's Discussion included in the Form 10-K for the year ended December
31, 2021, 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 2022 operations; thus,
the reader of this report should read Management's Discussion included in Form
10-K for the year ended December 31, 2021.
RESULTS OF OPERATIONS
Revenues
Revenues for the three months ended September 30, 2022, was $6,464, which was
$477 or 6.9% less than for the same period in 2021 with third quarter revenue at
$6,941. EOR declined by $211 or 3.7%, compared to the third quarter of 2021, to
$5,494, which represented 85% of third quarter 2022 revenue.
Staffing declined by $114 in the third quarter of 2022, or 11.9% to $848. This
consisted of Media Staffing, which declined $99 and IT staffing which was $15
off the mark of the third quarter comparative in 2021.
Video Production had a decline in revenue of $174, but Direct Placements
garnered $60 compared to $38 in revenue in the third quarter of 2021.
For the nine months ended September 30, 2022, revenue totaled $18,729 compared
to $17,809 year to date for the same period a year ago, resulting in $920 in
incremental revenue comparably.
EOR revenues through nine months ended September 30, 2022, have produced an even
larger comparative gain compared to 2021, with $15,783 compared to $14,186 a
year ago. This is an increase of $1,597 or 11.3%, which represented 84.3% of the
Company's total year to date (YTD) revenue through September 30.
Staffing is $13 ahead of last year's pace through the nine months ending
September 30, 2021, with $2,671 in revenue compared with $2,658 comparatively in
2021.
Media Staffing has grown $216 to $2,464 but this was almost completely offset by
IT Staff's $203 decline to $207 from $410 in the nine months ended September 30,
a year ago.
Video Production revenue has compared unfavorably to the same period in 2021,
declining $721 with revenues of $176 compared to $897 in 2021. This decline was
the result of three clients curtailing projects they had with us in 2021, the
loss of one client which changed its bid requirements, and tour reclassifying
certain work with clients as Media Staffing given its nature.
Our Direct Placement business through nine months in 2022 has $99 in revenue
compared to $68 over the same period in 2021, a $31 or 45.6% increase as we have
a few newer clients that focus on direct media placements only.
Cost of Revenue / Gross Profit
Gross profit for the three-month period ending September 30, 2022, was $891
representing 13.8% of revenues, which is an $88 improvement over the $803 in
gross profit MMG earned in 2021's third quarter when the gross margin reached
11.6%.
The overall quarterly gross margin ("GM") percentage improvement can be
attributed to the strength of the EOR margin reaching 12.4% in the third quarter
2022 and compared to 9.1% a year ago.
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The two catalysts for EOR margin lift are price increases, and heavier use of W2
resources vs. 1099 labor based on client mix. For example, lower revenues for
one large EOR client in '22 are highly weighted towards 1099s over W2. GP would
be approximately 20 basis points lower if those revenues still existed.
W2 workers in EOR represented 82% of labor compared to 74% in the third quarter
in 2021. On average in 2022, margins are 9%, 1.1% higher for EOR W2 labor than
1099.
MMG's Staffing gross profit margin slid from 20.1% to 16.7%, due to client mix,
however while overall non EOR total margin, including Video Production and
Direct Placements were at 21.9% in the 3 months ending September 30, 2022,
compared to 22.8% in the same period in 2021.
Year to date 2022, the Company's gross profit improved by $240 or 10.6% to
$2,507 compared to $2,267 over the first nine months in 2021.
Gross margin percentage rose from 12.7% in 2021 to 13.4% when comparing the nine
months ending September 30, 2022, to same period in 2021.
EOR experienced a year-to-date margin boost to 11.7% compared to 9.5% through
September 30, 2021. Thirty basis points were spurred by resources moved from
billable to indirect overhead. Increased use of W2 client mix and pricing
changes led to the additional spur in EOR margins. Media Staffing margins year
to date have held steady to where they were a year ago at declined to 19.9%
compared to 20.8% through three quarters in 2021, while Video Production's
nine-month gross profit margin has risen to 24.3% compared to 20.6% in nine
months ending September 30, 2022. However, the overall Video Production impact
on overall gross profit margin is nominal given it represents 1% of the business
revenue and 1.7% of gross profit.
General and Administrative ("G&A")
General and administrative ("G&A") expenses for the three months ended September
30, 2022, were $941, as compared to $866 in the comparable period in 2021,
representing a $75 or 8.7% increase. This increase was predominantly the result
of having increases in the following areas; $53 in legal, $37 in contract
services, $24 in employee health insurance related costs, and $21 in
commissions. Of the $53 in legal fees, $34 were arbitration related costs, as
were $9 of the $37 in contract services, for the three months ended September
30, 2022.
Arbitration related costs represented $43, an increase of $35 comparatively from
a year ago.
For the nine months ending September 30, 2022, G&A was $3,343 compared with
$2,554 a year ago, an increase of $789 or 30.9%. However, the legal and
consulting costs associated with our arbitration (See Note 1) represents $543 in
totality, a $525 increase in like costs associated with the Vivos Matter from a
year ago. MMG salaries and benefits increased $190, $69 of which are wages and
payroll taxes, $54 commissions, and $39 health insurance benefits for employees.
$50 of the $69 in wage and payroll tax proliferation is attributed to a need to
move certain billable resources from EOR clients to overhead as described above
in the Gross Profit section. Departmentally, our Client Services group, which
includes recruiters, has developed, resulting in increase of $60 of the $190.
Interest Expense
The Company incurred $111 in interest charges for financing (factoring) its
invoices in the first nine months of 2022 compared with $78 in the same period a
year ago. In the third quarter MMG incurred $46 in interest changes compared to
$15 in the same period a year ago as MMG increased its average position under
finance from $1,088 a year ago to $2,276 in the third quarter 2022. The cost of
financing increased from a year ago when the prime rate was 3.25% in the third
quarter 2021 with two increases in the third quarter 2022, ending at 6.25%.
Thus, our borrowing rates were 6% in the third quarter 2021 and ranged from 7.5%
to 8.25% in the third quarter 2022.
Other Income (Expense)
For the nine months ended September 30, 2022, MMG received $210 in other income
by way of ERC funds compared to a year ago when MMG earned $9,855 in other
income courtesy of $5,273 in the PPP Forgiveness which included the recovery of
accrued interest, and $4,582 In Employee Retention Credits (ERC). The $210 was
thought to be ineligible portion of 2021's first quarter ERC, but it was deemed
to be based on our payrolls, eligible per the IRS.
Income Tax
The Company has taken a tax loss of $117 over the nine months ending September
30, 2022, to record discrete tax items and true up of prior year returns.
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LIQUIDITY AND CAPITAL RESOURCES
Our working capital requirements are driven primarily by EOR field talent
payments, G&A salaries, public company costs, attorney fees associated with the
protracted Vivos Matter, interest associated with factoring, and client accounts
receivable receipts. Since receipts from client payments are on average 70 days
behind payments to field talent, working capital requirements can be
periodically challenged. We have a Factoring Facility with Gulf Coast Bank
("Gulf"), whereas Gulf advances 93% of our eligible receivables at an advance
rate of 15 basis points, an interest rate of prime plus 2%., and our prime floor
rate at 4%. Our Days Outstanding (DSO) for the trailing 12 months ending
September 30, 2022, is at 66 comparable to 62 DSO for the trailing twelve months
ending September 30, 2021. This has much to do with extended payment terms to
our larger clients as well as delays of up to 30 days on receiving purchase
orders after the invoice has been prepared. MMG management is working on ways to
speed back up the cash conversion process outside of financing.
In 2021, a few of our large clients began demanding 90-day terms. Delays in
receipt of purchase orders also has had an adverse impact on our DSO since 2019.
Thus, trailing twelve-month DSO ending September 30, 2022, was 66 from 62 in the
first nine months of 2021. This has more to do with revenue mix to clients with
whom have 60 and 90 day payment terms than delinquent accounts. However, our
over 60 days past due represented 8.7% or $398 of our total A/R compared to 1%
in the same nine-month period ending September 30, 2021.By October 31, $308 of
the $398 had been collected.
When looking at A/R aging in relation to due date, as of September 30, 2022,
73.6% or $3,370 of our $4,581 in total trade receivables were < 31 days aged,
compared to 96.5% a year ago.
Our over 60 days past due represented 8.7% or $398 of our total A/R compared to
1% in the same nine-month period ending September 30, 2021. By October 31, $308
of the $398 has been collected.
Our Federal and state tax liability has a balance of $276 at the end of the
third quarter 2022, this is mainly for state income taxes because we deposited
$725 of our 2021 expected federal tax liability in the first quarter.
Our primary sources of liquidity are cash generated from operations via accounts
receivable and borrowings under our Factoring Facility with Gulf enabling access
to the 7% unfactored portion. Because certain large clients have changed their
payment practices announcing 60- and 90-day terms amounting to a unilateral
extension to contractual terms by 30-60 days, we can experience an adverse cash
flow impact since Gulf does not provide credit if an account obligor pays more
than 120 days after the invoice date.
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 officers' 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
outlays, which is why we employ factoring.
Vivos Debtors as of September 30, 2022, had notes receivable totaling $5,157
including default on a $3,000 promissory note and on a $750 tax obligation in
December 2019. After numerous failed collection attempts, on February 17, 2020,
the Company initiated an action in the Circuit Court of Montgomery County
Maryland against Dr. Doki and the Vivos Holdings for non-payment. The Vivos
Matter moved to arbitration where on August 31,2022 the Arbitrator issued an
award (the "Award") with the Company and MMG prevailing on their claims. This is
not inclusive of the additional amounts awarded in the arbitration.
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.
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Because our first three-quarter revenues in 2021 were 80% or less than they were
in 2019, the Company was eligible for the Employee Retention Credit.
Consequently, MMG received $155 in direct payroll credits from the IRS via its
payroll provider Paycom in the late 2nd quarter and $1,086 in the third quarter.
MMG returned $842 to the IRS for payroll credits received in the 4th quarter
once the program ended retroactively in mid-November 2021.This payment was made
to the IRS through Paycom, the Company's payroll provider in January 2022.
Overall, these programs bolstered our working capital and enabled us to bring
back employees and continue to serve our clients.
As of September 30, 2022, our working capital was $8,725 compared to $9,417 a
year ago and $9,361 on December 31, 2021. Our adjusted working capital at the
end of September 2022, excluding the notes receivable related to the Vivos
Debtors totals $3,568 compared to $4,468 a year earlier.
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