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
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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.
EXECUTIVE OVERVIEW
Demand for Maslow EOR services and field talent is dependent upon general
economic conditions and labor trends.
However, our fourth quarter revenue of
We are hopeful that the dissemination of vaccines will result in resumption of a normally functioning economy which will continue to enable our clients to return their payrolls to normal levels that in turn, will continue ours and an overall economic rebound. However, no assurance can be given on if and when this will happen or what impact it will have on our business.
As far as cash is concerned, in 2020 although COVID-19 exacerbated our already
precarious cash position as explained more thoroughly below (see Liquidity and
Capital Resources), we received a
Because our larger clients scaled back media related activities in 2020 due to
COVID-19, our revenue became more diverse as reliance on our top 2 clients
dropped from 49% in 2019 to 39% in 2020. Four clients with revenues greater than
Our working capital though has assumed repayment of
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From a technology perspective, we updated our finance and accounting system from Sage 50 which was a client server version, to Sage Intaact, a cloud-based application. We also bolstered our automated sales and marketing capabilities by adding SaaS applications Salesforce.com and ZoomInfo. So, although we still do not possess an integrated ERP, we improved our business intelligence, CRM, Finance and Accounting capabilities.
On
In
The Company's executives and its board of directors worked together on managing
costs and implementing measures to facilitate the rapid ramp-up of operations
once the governmental restrictions began being lifted in
Cash and working capital began stabilizing in late
2021 and Beyond
The continued impact of this pandemic cannot be precisely predicted. We believe that the short to mid-term impacts on how our clients conduct work will continue to be aligned with our strategic path.
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 more easily acquire and maintain client accounts.
We believe given the changing nature in specialized staffing due to the pandemic that there likes 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 far as staffing, media staffing, we believe it will grow but there are also opportunities to get into staffing specialties which represent areas where we see the most rebound for a robust demand. We will continue to focus on growing the contingent staffing side of our business. Our IT Staffing brand, Intelligent Quality Solutions, will be a primary focus moving forward. Bringing on new segments whether organically or through M&A reflect our desire to shift our portfolio toward a higher margin, higher value proposition.
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.
? 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 32 years of experience, the Company's
subsidiary, Maslow, offer script to screen expertise including producers,
audio engineers, editors, broadcasters, makeup artists, camera crews, Gaffers
and grips, drone operators and more.
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The Company's subsidiary,
RESULTS OF OPERATIONS
Maslow had revenues totaling
Overall, Maslow lost
If we assume that those clients who had revenues in 2019 and zero in 2020 and
include those with steep declines >
Overall, the 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
2020 2019
Revenue $ 29,202 $ 38,444
Cost of services 25,728 34,375
Gross profit 3,474 4,069
Selling, general and administrative expenses 4,462 2,985
Operating income (loss) (988 ) 1,084
Interest income 8 -
Interest income from related parties 112 68
Interest expense (281 ) (438 )
Other expense (1 ) (206 )
Income/(loss) before taxes (1,150 ) 508
Income tax benefit (expense) 230 (156 )
Non-controlling interest in consolidated affiliates 131 (157 )
Net income (loss) $ (789 ) $ 195 The 2019 consolidated statement of income includes only 1 month of IQS operations versus 12 months in 2020.
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Revenues: By Segment
% %
2020 of Revenue 2019 of Revenue
EOR $ 23,564 80.7 % $ 34,452 89.6 %
Recruiting and Staffing 4,478 15.3 % 2,190 5.7 %
Video and Multimedia Production 1,125 3.9 % 1,641 4.3 %
Other 35 .1 % 161 0.4 %
Total Revenue $ 29,202 100 % $ 38,444 100.0 %
Employer of Record (EOR) Revenues: EOR represented 80.7% of our revenue in 2020
as opposed to 89.6% in 2019. This can be attributed to this business segment
being hit the hardest by COVID-19 as our large corporate clients curtailed
non-essential media activities and AT&T announced the cancellation of two (2)
live anchor multiple hour DirecTV sports programs, which we estimate reduced
revenue by
Recruiting and Staffing Revenues: Staffing revenues buoyed by having a full year
of IT Staffing capabilities increased revenue by
IQS, our IT Staffing division although contributing
Video and Multimedia Production Revenues: Video Production by nature of the
freelance work our clients undertake, did see a decline in revenue by
Gross Profit: Gross profit represents revenues from services less cost of services expenses, which consist of payroll, payroll taxes, benefits, payroll-related insurance, union benefits, field talent and reimbursable costs for out-of-pocket items.
Overall, our gross profit declined
Selling, General and Administrative Expenses ("SG&A"): SG&A expenses increased
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Operational SG&A increases were in salary of
IQS salaries were trimmed to be in line with reduction in revenue, which
included a change in senior management. For the first 8 months of 2020, SG&A
salary, payroll tax and benefits averaged
Non-operational corporate costs for 2020 totaled
Depreciation and Amortization: Depreciation and amortization charges were
Interest Income: Interest income from related parties increased from
Other Expense: Other expenses decreased by
Interest Expense: Interest expense, decreased by
Income Taxes: Income tax expense improved from
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, 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
Our primary sources of liquidity are cash generated from operations via accounts receivable and borrowings under our Factoring Facility with Triumph 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 be adversely impacted since Triumph no longer provides 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 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.
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Vivos Debtors as of
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
On
On
On
On
The Company utilized PPP funds for their intended purpose, in this case for
payroll only following guidelines for wage earners >
The funds bolstered our working capital and enabled us to bring back employees and continue to serve our clients even though their requirements had lessened.
As of
We anticipate approximately
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A summary of our operating, investing and financing activities are shown in the
following table:
December 31
2020 2019
Net cash provided by (used in) operating activities $ (2,070 ) $ 1
Net cash used in investing activities (50 ) (39 )
Net cash provided by financing activities 1,915 284
Net change in cash and cash equivalents $ (205 ) $ 246
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 2020, net cash used in operating activities was (
Investing Activities
Cash used in investing activities consists primarily of cash paid for capital expenditures.
Financing Activities
Cash provided by financing activities in 2020 was
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, impairment of goodwill and intangible assets, contingencies, litigation, income taxes, stock option expense, 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.
40 REVENUE RECOGNITION
On
The Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligation(s) in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.
The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered.
We derive our revenues from three segments: EOR, Recruiting and Staffing, and Video and Multimedia Production. We provide temporary staffing and permanent placement services. Revenues are recognized when promised services are delivered to 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 is 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.
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 for 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 the employment, at which point control has transferred to the customer.
Allowances, recorded as a liability, are established to estimate these losses. Fees to client are generally calculated as a percentage of the new worker's annual compensation. No fees for permanent placement services are charged to employment candidates.
Video and Multimedia Production revenues from contracts with client are recognized in the amount to which we have a right to invoice when the services are rendered by our field talent.
41 INTANGIBLE ASSETS
The Company holds intangible assets with finite lives. Intangible assets with finite useful lives are amortized over their respective estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible asset is realized.
Identifiable intangible assets recognized in conjunction with acquisitions are recorded at fair value. Significant unobservable inputs are used to determine the fair value of the identifiable intangible assets based on the income approach valuation model whereby the present worth and anticipated future benefits of the identifiable intangible assets were discounted back to their net present value.
The Company evaluates the recoverability of intangible assets whenever events or
changes in circumstances indicate that an intangible asset's carrying amount may
not be recoverable. The Company annually evaluates the remaining useful lives of
all intangible assets to determine whether events and circumstances warrant a
revision to the remaining period of amortization. The Company determined that
there were no impairment indicators for these assets during the year ended
GOODWILL
The Company first evaluates qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the reporting unit is less than its carrying amount, including goodwill. If after qualitatively assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then further testing is unnecessary. If after assessing the totality of events or circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company then estimates the fair value of the reporting unit and compares the fair value of the reporting unit with its carrying amount, including goodwill, as discussed below.
In assessing whether it is more likely than not that an indefinite-lived intangible asset is impaired, the Company assesses relevant events and circumstances that could affect the significant inputs used to determine the fair value.
The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, the Company shall recognize an impairment loss in an amount equal to that excess.
The quantitative goodwill impairment test involves a two-step process. In the first step, the Company compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired, and no further testing is required. If the fair value of the reporting unit is less than the carrying value, The Company must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit's fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss.
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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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