10-Q: Reliability Inc. Q3 2025: Revenue Declines Amid Legal Battle

Reliability Incorporated reported a significant revenue decline and increased net losses in Q3 2025, primarily due to its EOR segment, while actively pursuing an $8.65 million arbitration award against the Vivos Group.

Summary

• Consolidated service revenue decreased by 13.1% to $5,417k for the three months ended September 30, 2025, compared to $6,230k in the prior year period.
• Year-to-date service revenue declined by 15.3% to $14,882k for the nine months ended September 30, 2025, from $17,566k in the prior year.
• The company reported a consolidated net loss of $(203)k for Q3 2025, a significant increase from $(66)k in Q3 2024, and a year-to-date net loss of $(742)k compared to $(334)k in the prior year.
• Gross margin improved to 13.8% in Q3 2025 from 13.4% in Q3 2024, and to 14.1% year-to-date 2025 from 13.4% year-to-date 2024, driven by a shift towards higher-margin Staffing services.
• The Employer of Record (EOR) segment revenue declined by 18.8% in Q3 and 23.0% year-to-date, primarily due to reduced media spending by large clients and government policy changes.
• The Staffing segment showed strong growth, with revenue increasing by 28.1% in Q3 and 40.0% year-to-date, alongside significant gross margin expansion to 25.2% in Q3 and 22.2% year-to-date.
• Net cash provided by operating activities significantly improved to $1,922k for the nine months ended September 30, 2025, compared to net cash used of $(1,192)k in the prior year period.
• The company continues to pursue collection of an arbitration award totaling approximately $8,649k against the Vivos Group, with a written ruling from the arbitrator expected in 2025.
• Working capital, adjusted for notes receivable from related parties, stood at $337k as of September 30, 2025, down from $1,449k at December 31, 2024.

Sentiment

Score: 4

Explanation: While there are some operational improvements like gross margin expansion and positive operating cash flow, the significant revenue decline, increased net losses, and ongoing legal uncertainties with capital raise implications weigh heavily on the sentiment. The company faces substantial headwinds despite strategic adjustments.

Positives

• Consolidated gross margin improved to 13.8% in Q3 2025 (from 13.4% in Q3 2024) and to 14.1% year-to-date 2025 (from 13.4% year-to-date 2024), reflecting a favorable mix shift towards higher-margin services.
• The Staffing segment demonstrated strong growth, with revenue increasing by 28.1% in Q3 2025 to $1,053k and by 40.0% year-to-date 2025 to $3,083k.
• Staffing segment gross margin significantly expanded to 25.2% in Q3 2025 (from 17.4% in Q3 2024) and to 22.2% year-to-date 2025 (from 18.5% in Q3 2024).
• Net cash provided by operating activities was $1,922k for the nine months ended September 30, 2025, a substantial improvement from net cash used of $(1,192)k in the prior year period.
• The company's cash conversion cycle improved, with Days Sales Outstanding (DSO) decreasing to 47 days for the trailing twelve months ended September 30, 2025, from 52 days in the prior year.
• Factoring liability significantly decreased to $157k as of September 30, 2025, from $2,375k as of December 31, 2024, indicating reduced reliance on this financing method.
• New receivables purchase programs with JPMorgan and Mitsubishi UFJ Financial Group offer lower effective interest rates (e.g., 4.78% for JPM) compared to the company's average factoring rate (10.5%).
• Management believes the company will continue as a going concern and meet its financial obligations through November 30, 2026, based on sufficient liquidity and working capital resources.
• The company has a strong long-term credit performance, with total bad debt amounting to only $180 over the past five years.

Negatives

• Consolidated service revenue decreased by $813k (13.1%) to $5,417k for Q3 2025 and by $2,684k (15.3%) to $14,882k for the nine months ended September 30, 2025, compared to prior year periods.
• Consolidated net loss increased to $(203)k in Q3 2025 from $(66)k in Q3 2024, and to $(742)k year-to-date 2025 from $(334)k in the prior year.
• Operating loss widened to $(228)k in Q3 2025 from $(124)k in Q3 2024, and to $(863)k year-to-date 2025 from $(545)k in the prior year.
• The Employer of Record (EOR) segment, the largest revenue contributor, experienced an 18.8% revenue decline in Q3 2025 and a 23.0% decline year-to-date, with its gross margin also decreasing.
• The Direct Hire business generated no revenue in Q3 2025, a decrease of $28k compared to Q3 2024.
• Interest expense increased to $(43)k in Q3 2025 from $(27)k in Q3 2024, and to $(131)k year-to-date 2025 from $(62)k in the prior year, primarily due to financing bi-weekly payroll obligations.
• Working capital, adjusted for notes receivable from related parties, decreased to $337k as of September 30, 2025, from $1,449k as of December 31, 2024.
• High client concentration persists, with two clients accounting for 56.4% of total revenue for the nine months ended September 30, 2025.
• The ongoing legal dispute with the Vivos Group continues to incur legal costs and distract management, with no assurance as to the timing or form of recovery of the $8,649k arbitration award.
• The initial portion of the recovered arbitration award is highly likely to be in shares of common stock rather than cash, which could negatively impact the company's liquidity and working capital.

Risks

• Ability to access capital markets by pursuing additional debt and equity financing to fund business plans and expenses.
• Negative outcome of pending and future claims and litigation, particularly the Vivos Matter, and the ability to comply with contractual covenants, including debt.
• Potential loss of clients and possible rejection of the business model and/or sales methods.
• Weakness in general economic conditions and levels of capital spending by customers in the industries served.
• Weakness or volatility in the financial and capital markets, potentially leading to postponement or cancellation of customer projects or inability of customers to pay fees.
• Delays or reductions in U.S. government spending, including impacts from directives like those issued by the Department of Government Efficiency (DOGE).
• Credit risks associated with customers, especially given the high client concentration.
• Competitive market pressures in the EOR, staffing, and video production segments.
• The availability and cost of qualified labor, impacting the ability to fulfill client demands.
• Ability to attract, train, and retain 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.
• Possibility of incurring liability for business activities, including those of temporary employees.
• Performance on customer contracts, which can affect revenue and profitability.
• Government policies, legislation, or judicial decisions adverse to the company's businesses.
• Uncertainty regarding the ultimate collection of cash and shares from the Vivos Group, despite a favorable arbitration outcome.
• The collection process for the Vivos arbitration award is complex, has caused, and could continue to cause significant costs and distract management over an extended period.
• The initial portion of the recovered arbitration award is highly likely to be in shares of common stock rather than cash, which could negatively impact the company's liquidity and working capital.
• Federal agency budget reviews and directives, such as those from DOGE, may adversely impact the business by reducing or reallocating client spending.
• Indirect impact from the imposition of tariffs or other trade restrictions that affect clients' operations and profitability, potentially leading to reduced discretionary expenditures.
• Reductions in federal funding to client programs, which could similarly affect other client budgets and, in turn, revenue.

Future Outlook

Management expects legal expenses related to non-operational activities to continue decreasing in 2025 and 2026. They anticipate that notes receivable from related parties will be settled through a combination of cash and stock over the next several months, which is expected to provide additional liquidity and potential access to capital markets. The company projects normalized Staffing segment margins of approximately 25% on certain client streams. A written ruling from the arbitrator regarding the Vivos matter is expected in 2025. Once the Vivos dispute is 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, though the timing of such actions is uncertain.

Management Comments

• Management believes it is probable the Company will continue as a going concern and meet its financial obligations through November 30, 2026, thereby alleviating substantial doubt.
• This conclusion reflects management's view that the Company has sufficient liquidity and working capital resources to fund operations for at least the next 52 weeks, as well as the ability to take actions, if necessary, to align costs with revenue fluctuations.
• Management anticipates that notes receivable from related parties will be settled through a combination of cash and stock, providing additional liquidity and potential access to capital markets over next several months.
• Prospectively, we expect normalized margins of approximately 25% on these streams [Staffing client streams].

Industry Context

The company's performance reflects a challenging environment for media-related services, particularly those tied to government spending, as evidenced by the decline in EOR segment revenue due to an 'off-cycle election year' and 'policy changes enacted by the Department of Government Efficiency (DOGE).' This suggests broader industry pressures on discretionary media budgets. The strategic shift towards managed staffing services and the adoption of receivables purchase programs indicate an adaptation to evolving client demands for extended payment terms and a focus on improving cash flow efficiency in a competitive landscape. The growth in the Staffing segment, especially with quasi-governmental and broadcasting clients, suggests resilience and opportunity in specialized niches within the broader staffing and media services industry.

Corporate Governance

Legal Proceedings

• Ongoing legal actions and arbitration with the Vivos Group, which began in February 2020, concerning alleged merger agreement violations and undisclosed debt obligations.
• Arbitration awards were granted in favor of the Company and MMG on August 31, 2022, with supplemental awards on May 17, 2023, October 10, 2023, and October 27, 2023, including findings of fraud damages.
• The total aggregate amount of the awards, including principal and interest, is approximately $8,649k as of September 30, 2025, which includes $1,209k for attorneys' fees and expenses and $1,000k in contract damages to be satisfied by the transfer of Vivos Group's common stock.
• A Receiver was appointed on May 17, 2023, to collect the contract and fraud damages, including costs, expenses, and fees.
• All three arbitration awards were entered as final judgments by the Circuit Court for Montgomery County, Maryland, on December 29, 2023, becoming effective on January 29, 2024, and are enforceable for 12 years.
• A non-evidentiary hearing was held on October 24, 2025, regarding the Receiver's proposed order, with a written ruling from the arbitrator expected in 2025.
• There is no assurance as to the timing or amount of any recovery, or whether such recovery will be in cash, equity, or other assets.
• An immaterial legal settlement of $125k was recognized in operating expenses for the quarter ended September 30, 2025, following court approval on October 9, 2025, with payment scheduled over the next 5 months.

Related Party Transactions

• On November 9, 2016, Vivos Holdings, LLC, the former owner of MMG, acquired 100% of MMG for $1,750k, with $1,400k paid from MMG proceeds, leading to a promissory note receivable from the Vivos Debtors.
• Between 2018 and the present, there were $2,217k in additional borrowings from the Vivos Group.
• As of September 30, 2025, the Vivos Group (Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC, Dr. Naveen Doki, Shirisha Janumpally, Kalyan Pathuri, Igly Trust, and Judos Trust) has notes receivable totaling $6,228k.
• The total liability from the arbitration award against the Vivos Group, including awarded legal fees and the fraud award, aggregates to $8,649k as of September 30, 2025.
• Approximately $41k in Q2 2025 and $68k for the nine months ended September 30, 2025, within 'Other Expense' were exclusively for receivership-related costs for recovery of the arbitration award related to the Vivos Group.
• On October 29, 2019, Naveen Doki and Silvija Valleru became beneficial owners of approximately 69% and 17%, respectively, of the Company's Common Stock after the merger. The Vivos Group's shares are currently restricted from voting.

Stakeholder Impact

• Shareholders: Face increased net losses and uncertainty regarding the timing and form of recovery from the Vivos arbitration award. The inability to raise capital via equity due to all authorized shares being issued also limits growth opportunities. The voting rights of the Vivos Group shareholders are currently restricted.
• Employees: The company's working capital requirements are driven primarily by payroll for field talent and G&A salaries. Headcount reduction was mentioned as a factor in lower salary-related costs, indicating potential job impacts. The company uses factoring and receivables financing to ensure timely payroll disbursements.
• Customers: Several large clients have adopted extended payment terms (60 to 90 days), necessitating the company's use of receivables purchase programs to manage cash flow. High client concentration (two clients account for 56.4% of YTD revenue) poses a risk if a major client reduces spending or is lost.
• Creditors: The company relies on a factoring facility and receivables purchase programs for liquidity. The factoring facility is collateralized by substantially all company assets, indicating a secured position for that creditor. The company's ability to meet financial obligations is tied to its cash flow and successful collection of the Vivos award.

Next Steps

• Issuance of a written ruling from the arbitrator regarding the Receiver's proposed order is expected in 2025.
• The company intends to hold an annual meeting of shareholders within a reasonable time after the final resolution of the underlying ownership and rights of certain shareholders (Vivos Matter).
• Management anticipates that notes receivable from related parties will be settled through a combination of cash and stock over the next several months.
• The company may pursue an increase in authorized shares or a reverse stock split to create capacity for future capital raises or acquisitions once the Vivos dispute is resolved.
• The company is currently evaluating how ASU 2024-03 (Disaggregation of Income Statement Expenses) will impact its year-end December 31, 2025, consolidated financial statements and disclosures.

Key Dates

Recommendation

While the company faces significant challenges including declining revenue, increased net losses, and a complex, ongoing legal battle with the Vivos Group that restricts its ability to raise capital, there are also signs of operational improvement. The positive shift in operating cash flow, improved gross margins driven by a favorable mix shift to higher-margin Staffing services, and a significantly improved cash conversion cycle (lower DSO) demonstrate management's efforts to stabilize the business. The reduction in factoring liability and adoption of lower-cost receivables financing are also positive for liquidity. However, the uncertainty surrounding the Vivos award collection (especially the likelihood of initial recovery in stock rather than cash) and the high client concentration present substantial risks. An investor should hold to monitor the resolution of the Vivos matter and the company's ability to leverage its operational improvements into sustained profitability and growth. A 'buy' would be premature given the current uncertainties and losses, while a 'sell' might overlook the underlying operational improvements and potential upside from the Vivos award resolution.

Keywords

Employer of Record, EOR, Staffing, IT Staffing, Media Staffing, Video Production, Direct Hire, SEC Filing, 10-Q, Financial Results, Quarterly Report, Arbitration Award, Vivos Group, Related Party Transactions, Liquidity, Cash Flow, Revenue Decline, Gross Margin, Working Capital, Receivables Financing, Corporate Governance