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. The uncertainties surrounding the impact of the
COVID-19 pandemic continues to make forward looking assumptions and estimates
very volatile. Moreover, the continued contradictory advice between the federal
and state governments regarding such matters as reopening schools, social
distancing and mask requirements make it even more difficult to predict the
timing of a return to pre-pandemic levels, particularly in the media production
space. The current potential for a surge of cases heading into the late fall,
winter period could also impact the accuracy of 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 continuing
impact of the COVID-19 pandemic on us and our clients including renewed
lock-downs that may be required if a surge levels are not contained; 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
Shareholders 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, 2019 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, 2019 as filed 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.
19
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.
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 from those
disclosed in its Form 10-K for the year ended December 31, 2019.
Management's Discussion included in the Form 10-K for the year ended December
31, 2019 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 2020 operations; thus
the reader of this report should read Management's Discussion included in Form
10-K for the year ended December 31, 2019.
RESULTS OF OPERATIONS
Effects of COVID-19 Pandemic
In December 2019, a novel strain of coronavirus was reported to have surfaced in
Wuhan, China. In January 2020, this coronavirus spread to other countries,
including the United States, and efforts to contain the spread of this
coronavirus intensified. On March 30, 2020, Maryland governor Larry Hogan issued
a stay at home order which resulted in the Company moving to a work from home
model. We reacted as soon as March 20, 2020 when we instituted furloughs and cut
administrative pay by 10% and executive pay by 15%. Other non-essential costs
were reduced or eliminated. Whereas we were prepared for this situation and were
able to adapt quickly, our business began to suffer from companies and governors
in the other 49 states simultaneously or subsequently issuing similar orders.
Much of our billable workforce began working from home dependent on client
instructions. Some IT staffing clients in the healthcare space were still able
to have employees and contractors come to their facilities due to essential
service exceptions. However, we still began to observe stronger negative impact
in the media space as our client partners demand began to wane in all segments.
In April and May combined, we saw a 49% decline in revenue when compared to same
periods in 2019.
On April 29, 2020 we were formally approved by TBK bank and the SBA for Payroll
Protection (PPP) lending. With the board approving the loan provisions in the
loan documents presented to us on the same day, May 4th, the proceeds totaling
$5,216 were then released on May 5, 2020.
As of September 30, 2020, we had deployed all $5,216 in PPP funds. The Company
believes that 99% of the PPP funds deployed have been for eligible payroll per
the SBA regulations governing fund eligibility for fund use and forgiveness.
However, there is no certainty that any of or all the PPP funds will ultimately
be forgiven.
Because our administrative staff continued to be productive using our web-based
applications from the safety of their homes, management decided to terminate its
lease at 22 Baltimore Road with Vivos Real Estate, affording Vivos Real Estate
30 days of notice prior to the effective termination date of April 30, 2020. And
because our lease was on a month to month basis, there was no penalty or
negative consequences associated with this action. We do not believe our work
from home protocols have materially adversely impacted our internal controls,
financial reporting systems or our operations.
During this period, our critical priorities continue to be the health and safety
of our team members, field talent, candidates, and client partners.
20
The extent to which the coronavirus impacts our results will depend on future
developments, which are uncertain and cannot be predicted, including new
information which may emerge concerning the severity of the coronavirus and the
actions to contain the coronavirus or treat its impact, circumstances permitting
people to return to work, among others. A surge in cases during the fall and
winter could result in additional shutdowns or protocols that could adversely
impact the Company.
We expect that the social distancing measures, the reduced operational status of
our client partners, reductions in production at certain client partners
facilities, and general business uncertainty will continue to significantly
effect demand in all our segments throughout the remainder of 2020, and possibly
beyond.
In the last two months of the third quarter our customers began to reengage in
their media activities due in part to a relaxation of state COVID-19 measures,
and because customers had instituted safe policies and procedures for their and
our employees to return to work. In addition, media coverage of the national
election and return of the National Football League in September, propelled
business from its COVID-19 lows but not to the levels of 2019. Due to the many
uncertainties at this time, no assurance can be given that this trend will
continue at its current pace.
Revenues
Revenues for the three months ended September 30, 2020 was $ 6,201, an increase
of $1,004 or 19% over the quarter ending June 30, 2020 but a decrease of $3,874
or 38% to same quarter ending September 30, 2019. The comparable drop to 2019
was predominantly due to reduced demand for services resulting from the COVID-19
pandemic. EOR revenue dropped 47% and Video and Multimedia production declined
by 48%, as clients continued to curtail studio and on-site productions due
mostly to stay at home / shelter in place state orders. Staffing Revenues
however increased 4% due to IQS IT staffing which was not in place a year ago.
For the nine months ending September 30, 2020 revenues were $20,199, which was
$7,807 or 27.9% less than the nine-month period ending September 30, 2019. This
variance can also be attributed to reduced demand for workforce services due to
COVID-19 pandemic.
IQS staffing revenues when compared to its pre-acquisition records as a
stand-alone company, declined in the third quarter by $283 from $926 to $643, or
31%
IQS IT staffing Revenue for the three-month period ending September 30, 2020,
totaled $624 which was 27% off the pace of a year ago when it was $855 due to
the causes stated above which although began in mid-March 2020, did not affect
this IT business as much until the end of the second quarter.
IQS IT staffing Revenue for the nine-month period ending September 30, 2020,
totaled $2,066 which was 11.7% off the pace of a year ago when it was $2,340.
Cost of Revenue / Gross Profit
The Company's gross margin in the third quarter was $654 or 10.5% which was well
short of our second quarter performance of $723 and 13.9% respectively. This was
caused by 2 factors: i) an arrangement MMG made with one of our customers to
employ our PPP funds directly for a limited number of resources assigned to this
client. Hence, we returned up to 14 media specialists, so far, to work and
billed our client only the gross profit portion and not approximately $116 in
payroll costs. Although we still had PPP funds when this arrangement commenced,
it has continued several weeks past the point when we exhausted the PPP funds
for its intended use. Because PPP fund forgiveness and accounting use has not
been finalized, we could not apply these funds as a subsidy to amply offset our
cost of revenue for this project. Otherwise our gross margin would have been
$770 and 12.4% for quarter and our gross profit total would have exceeded our
second quarter total of $723 by $47; ii) the other reason for the margin decline
was that our EOR business, which is our lowest margin segment, improved in a
greater proportion to the other two segments, with EOR representing 73% of the
revenue in the second quarter to 79% in the third. In contrast the IQS business,
our highest margin declined by 3% in revenue when comparing the third quarter
2020 to the second.
21
When comparing gross profit performance for the quarter ended September 30, 2020
to its 2019 counterpart, the third quarter 2020 yielded $654 or a 39% decrease
in gross profit compared to a year ago. IQS contribution to gross profit was at
$262 which represents 28.5% of the Company's third quarter gross profit.
IQS IT staffing's gross margin was 30% for the quarter ending September, and
year to date is now at 31%. A change in client composition has compacted margins
from 34% to 31%.
IQS IT staffing's operating income for the nine-month period ending September
30, 2020 was $182 compared to a loss of ($21) a year ago. This is due to our
ability to take on this business and manage with existing organizational
structure resulting in an elimination of redundancies.
Company gross profit for the nine months ended September 30, 2020, of $2,409 was
$570 less or 19% less than it was a year ago at $2,979. September's revenue at
$2,542 represented 41% of our third quarter revenue and was a 43% improvement
over the average of the 5 preceding months beginning in April and ending in
August. This improvement can be attributed to increases in EOR services demand
by AT&T, Janssen, and WETA which began increasing their media resources to
percentages approaching pre-COVID 19 levels.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the three months ended
September 30, 2020 were $1,086 as compared to $724 in 2019. The increase is due
to costs associated with being a public company and higher legal costs which
totaled approximately $214 and $131, respectively, or $345 which exceeds the
$314 difference. The other major SG&A increase in comparing 2020 third quarter
to a year ago is $128 comes from IQS administrative salaries. So, when comparing
MMG operating costs in the third quarter 2020 to 2019, costs were reduced by
$159, representing a 21% improvement.
For the nine months ending September 30, 2020, SG&A expenses of $3,438 were
$1,398 greater than 2019 with an identical paradigm to the quarter with cost
associated with being a public company and higher legal costs being the drivers,
totaling approximately $868 and $333, respectively, for a total of $1,201 of the
$1,398 difference.
Interest Expense
The Company recognized interest expense in the amount of $30 during the three
months ended September 30, 2020, compared to $100 in 2019. The decrease was
attributable to interest on the $850 in convertible notes and offset by a large
reduction in use of factoring which was due to the reduction of revenues and the
PPP funds which do not necessitate immediate borrowing for working capital.
For the nine months ending September 30, 2020, interest expense increased to
$283 compared with $273 in 2019 primarily due to the $725 in interest on the
convertible notes the Company in the third quarter of 2020 compared with $491 in
2019.
Our factoring costs decreased year over year as the necessity to factor invoices
was significantly diminished after receipt of the PPP funds. Prior to receipt of
the PPP funds, our average cash balance was $395, while employing 85-90% of
factoring capabilities. Use of PPP funds for payroll and rent enabled cash
reserves to be fortified as our average cash improved to $657 in the third
quarter 2020. Hence, our 2020 factoring costs (factoring fee plus interest) were
$8 compared to $79 in 2019.
Net Income (Loss)
The Company incurred a net loss during the three months ended September 30, 2020
of $192 compared to net profit in the same period 2019 of $157.
The $349 increase in net loss can be attributed to i) reduction in revenue by
$3,874 leading to gross profit decrease by $406 as a result of COVID-19 customer
reductions in force; ii) corporate costs much of which are public company
related ($214, see quarterly G&A results above) totaling $419 which include
legal costs associated with shareholder disputes totaling $131; iii) increase in
cost of revenue due to the customer subsidy described above totaling $116 iv)
additional losses were offset by income tax benefit of $237.
22
For the nine months ended September 30, 2020, the net loss was $753 versus a
profit of 533 in the same period in 2019. The $1,286 variance can be attributed
less to the same factors cited above which can be simplified by focusing on the
$570 gross profit deficit and corporate costs of $1,191 that were not necessary
a year ago. Those two changes alone account for a $1,762 reduction in
operational profit in the nine months ending on September 30 in 2020 to a year
ago offset by income tax benefit of $286.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash generated from operations via
traditional accounts receivable activities and via borrowings under our
Factoring Facility (up to 93%) with Triumph and receivables 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, and most other factoring institutions no longer provide credit after an
account obligor who pays 30 or more days from their contractual terms.
Our primary use 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
servicing payments.
The Company expected to have promissory note receivable for $3,000 repaid by
Naveen Doki at the end of 2019. In the first quarter of 2020, the Company
continued to pursue repayment as the impact of not having that cash returned to
the Company coupled with approximately $900 more a year in costs associated with
being a public company and the inability to tap the capital markets due to not
having any available shares, resulted in cash challenges.
Also, as described in Note 5 to the Financial Statements above, Vivos Holdings
LLC has defaulted its secured promissory note that would have paid $10 per month
to Company.
In the third quarter of 2020, the Company made required repayments of principal
and interest of approximately $806 pursuant to the convertible notes. This
completed the repayment of outstanding notes having an aggregate value of
principal and interest of approximately $946.
In March 2020, a national, lockdown began to unfold due to the COVID-19
pandemic. This resulted in a significant loss of business starting the last week
of March 2020, resulting in a reduction of billing by approximately 51% in the
combined months of April and May 2020.
On May 5, 2020, MMG received the PPP Loan. Subsequently, the Paycheck Protection
Flexibility Act, was passed by Congress and signed by the President on June 3,
2020, which among other changes and provisions, allowed for the funds to be
employed over a 24-week period versus 8. By utilizing these funds for their
intended purpose of payroll, with forgiveness potential over the first 24 weeks,
the Company has been able to free up cash to pay other expenses and obligations,
while also improving our non-PPP working capital. As stated above under
Interest, use of PPP funds for payroll and rent enabled cash reserves to be
fortified to average (Non PPP) working capital of $458 from May 1 through July
6, 2020, from a previous 4 month average of $395.
Cash employed to repay the convertible notes in the second quarter totaled $140
and required disbursement in the third quarter of $806. Although the outlay of
the $806 in the third quarter had a substantial impact on cash flows, the
Company expects to have sufficient working capital after making these payments.
Net cash provided by operating activities during the nine months ended September
30, 2020 was $586 compared to $136 in the comparable period of 2019. The change
was attributable to an increase in legal expenses and other costs associated
with being a public company.
In February 2020, Maslow took out a $250 6-month term loan from Triumph at 10%
APR, in order to meet its cash obligations. In early March 2020, the loan
principal was increased by $75 with the remaining term extended 26 weeks to
September 2020. On April 7, 2020, in the face of the COVID 19 lockdown, Triumph
offered a 2-month payment holiday and to extend the note payment to February
2021.
23
© Edgar Online, source Glimpses
RELIABILITY INCORPORATED 
