10-Q: Reliability Inc. Reports Q1 2025 Results: Revenue Declines, Focus Remains on Vivos Group Debt Recovery

Reliability Inc. experienced a decrease in revenue for the first quarter of 2025, while continuing efforts to recover funds from the Vivos Group.

Summary

• Reliability Inc. reported a net loss of $333,000 for the three months ended March 31, 2025.
• Revenue decreased to $4.746 million from $5.295 million in the same period last year.
• The decline in revenue was primarily due to a reduction in revenue from one of the company's top clients in the EOR segment.
• Staffing revenue increased by $265,000, driven by a government agency client.
• Gross profit decreased to $641,000, but gross margins improved slightly to 13.5%.
• General and administrative expenses increased by $76,000 due to higher loaded salaries and ADP payroll processing fees.
• The company is pursuing the collection of notes receivable from related parties, specifically the Vivos Group, with an outstanding balance of $5.973 million.
• The total award value related to the Vivos Group is currently $8.333 million, excluding legal fees and interest.
• The company has implemented receivable purchase programs to improve its cash conversion cycle.
• Management believes the company will continue as a going concern and meet its financial obligations.
• The company is working to resolve the legal dispute with the Vivos Debtors and the broader Vivos Group.

Sentiment

Score: 4

Explanation: The sentiment is slightly negative due to the decrease in revenue and net loss, but there are some positive aspects such as improved gross margins and efforts to improve cash flow. The ongoing legal issues with the Vivos Group add uncertainty.

Positives

• Gross margins improved slightly to 13.5% from 13.4% in the first quarter of 2024.
• Staffing revenue increased by $265,000, driven by a government agency client.
• The company is actively pursuing the collection of $5.973 million in notes receivable from the Vivos Debtors.
• The company has implemented receivable purchase programs to improve its cash conversion cycle.
• A financing arrangement through JPMorgan for the company's second-largest client is expected to reduce the cash conversion cycle by approximately 90 days.
• The company has access to additional borrowing under its factoring facility of up to $1.5 million as of May 3, 2025.

Negatives

• Reliability Inc. reported a net loss of $333,000 for Q1 2025.
• Revenue decreased by $549,000 year-over-year to $4.746 million.
• EOR segment revenue declined by $817,000, primarily due to reduced activity from a top client.
• General and administrative expenses increased by $76,000 to $1.023 million.

Risks

• The company's ability to access capital markets is uncertain.
• The outcome of pending and future claims and litigation, particularly with the Vivos Group, could negatively impact the company.
• Potential loss of clients and rejection of the company's business model are risks.
• Weakness in general economic conditions and levels of capital spending by customers could affect the company.
• Delays or reductions in U.S. government spending could impact revenue.
• The company faces credit risks associated with its customers.
• Competitive market pressures could affect the company's performance.
• The availability and cost of qualified labor are potential risks.
• Changes in tax laws and other government regulations could impact the company.
• The company could incur liability for its business activities, including those of its temporary employees.
• Federal agency budget reviews and directives may adversely impact the business.
• The imposition of tariffs or other trade restrictions that impact clients' operations and profitability may indirectly affect the business.

Future Outlook

Management believes the Company will continue as a going concern and meet its financial obligations as they become due in 2025 and beyond, based on factors such as cash flow forecasts, reduction in legal fees, collection of notes receivable, client financing arrangements, factoring availability, and cost flexibility.

Management Comments

• Management believes the Company will continue as a going concern and meet its financial obligations as they become due in 2025 and beyond.
• 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.

Industry Context

The company operates in the Employer of Record (EOR), Recruiting and Staffing, Direct Hire, and Video and Multimedia Production segments, which are subject to economic conditions, government regulations, and competitive pressures. The company's performance is also affected by client spending and project timelines.

Comparison to Industry Standards

• It's difficult to compare Reliability Inc.'s results directly to industry standards without knowing the specific sub-segments and geographic focus of its competitors.
• However, companies like Insperity (NSP), TriNet (TNET), and ADP (ADP) are major players in the EOR and HR solutions space.
• These companies typically have much larger revenue bases and more diversified client portfolios.
• In the staffing and video production segments, competition is more fragmented, with numerous smaller players.
• Reliability's reliance on a few key clients makes it more vulnerable to client-specific issues compared to larger, more diversified competitors.
• The ongoing legal dispute with the Vivos Group also presents a unique challenge not typically seen in comparable companies.

Legal Proceedings

• A series of legal actions and hearings took place starting in March of 2020 with the Vivos Group over Merger agreement violations and Vivos Group debt obligations.
• Arbitration was agreed to in the fall of 2021 by both the Vivos Group and MMG with the proceedings commencing in February 2022.
• On August 31, 2022, the arbitrator issued the Award with the Company and MMG prevailing on their claims.
• The awards included citing of fraud damages.
• Supplemental awards were subsequently issued on May 17, 2023, October 10, 2023, and finally on October 27, 2023.
• Summarily, MMG was awarded the totals of all notes the Vivos Group had with MMG for its borrowings, the contracted interest, attorneys fees and expenses of $1,209, and a contract damage of $1,000, to be satisfied by the transfer of their shares of the Company Common Stock to the Company equal in value to $1,000.
• The aggregate amount of the Awards totaled $8,333.
• The May 17, 2023 award appointed a Receiver whose primary function is to collect the contract and fraud damages, including costs, expenses, and fees provided in the awards.
• On December 29, 2023, the Circuit Court for Montgomery County, Maryland signed orders entering all three arbitration awards as judgments in Reliability's case against the Vivos Group.
• These orders became final on January 29, 2024, when the appeal period expired for the defendants.
• The judgments are good for 12 years and can be enrolled in other states.

Related Party Transactions

• On November 9, 2016, Vivos Holdings, LLC, the former owner of MMG, acquired 100 % of MMG through a stock acquisition exchange for a purchase price of $ 1,750 , of which $ 1,400 was paid at settlement with proceeds from MMG.
• The Vivos Debtors subsequently entered into a promissory note receivable with MMG for the full stock purchase price.
• The Company has several notes receivable from related parties.
• Prior to the Merger, Vivos Holdings collaborated on a share swap of MMG for other Vivos companies with individuals who included, but were not limited to, Dr. Doki, Shirisha Janumpally (Mrs. Janumpally), wife of Dr. Doki, Kalyan Pathuri (Mr. Pathuri) husband of Silvija Valleru, Igly Trust, and Judos Trust.
• These parties also have common ownership combinations in a number of other entities: Vivos Holdings, LLC, Vivos Real Estate Holdings, LLC (VREH), Vivos Holdings, Inc., Vivos Group, Vivos Acquisitions, LLC, and Federal Systems, LLC, which are collectively referred to as the Vivos Group.
• As of March 31, 2025, the Vivos Debtor balance was $ 5,973 .

Stakeholder Impact

• Shareholders: The net loss and revenue decline may negatively impact shareholder value.
• Employees: Cost flexibility measures, such as reducing personnel expenditures, could impact employees.
• Customers: The company's ability to provide services may be affected by its financial condition.
• Suppliers: The company's ability to pay suppliers may be affected by its financial condition.
• Creditors: The company's ability to meet its debt obligations is dependent on its financial performance.

Next Steps

• MMG expects the Receiver to make a recommendation to the arbitrator in May 2025.
• The Company intends to hold an annual meeting of shareholders within a reasonable time after final resolution as to the underlying ownership and rights of certain shareholders.
• The company will continue to pursue the collection of notes receivable from related parties, specifically the Vivos Group.
• The company will continue to implement receivable purchase programs to improve its cash conversion cycle.
• Reliability will launch the new Over-the-Counter Identification (OTCID) on July 1, 2025.

Key Dates

Keywords

Reliability Inc, financial results, Q1 2025, revenue, net loss, Vivos Group, receivables, factoring, EOR, staffing, legal proceedings