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, 2020, 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, 2020, 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.
21
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, 2020.
Management's Discussion included in the Form 10-K for the year ended December
31, 2020, 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 2021 operations; thus,
the reader of this report should read Management's Discussion included in Form
10-K for the year ended December 31, 2020.
RESULTS OF OPERATIONS
Revenues
Revenues for the three months ended September 30, 2021, was $6,941 which was
$740 or 12% greater than for the same period in 2020 which was $6,201. EOR led
the revenue uptick by delivering $5,705 or 82% of the quarterly revenue. This
was a $831 or 17%, improvement over the third quarter in 2020. IQS the Company's
IT staffing division saw a revenue decline of $410 or 82% from the same period a
year ago which offset the improvement in revenue by the Media Staffing division
which was up $267 or 44% from the same period a year ago. Permanent Placement
which was not an earning center in 2020 contributed $38 which was $8 more than
the second quarter. Although IT staffing revenues do not include IT direct
placements made by the Company, which are considered Permanent Placement these
are among the diverse resources we provide clients along with finance and
accounting, and Media. The Company expects an increase in this activity as
certain new clients are asking us for this service.
Video Production's $236 in revenue was $21 higher than the third quarter in 2020
as new clients more than filled the void of those with declining demand due to
COVID-19.
For the nine months ended September 30, revenue totaled $17,809 which was $2,390
less than a year ago, or a 12% decrease when compared to the prior year.
Business segments with the largest declines in the nine-month period ending
September 30, 2021, when compared to a year earlier, were EOR at $1,678 or 11%
and IQS which derived $1,593 less, a 76% decline. EOR was largely negatively
impacted by COVID-19, which has seen some of our larger clients not yet return
to full strength on site. IQS's experienced the loss of its largest customer
Lifetouch, which informed the Company in the fall of 2020 that it had decided to
offshore their IT software quality assurance professionals effective January 1,
2021, resulting in declines of revenue of $874 year to date, when compared to
same period in 2020. Meanwhile Tapfin, which is the vendor management solution
for Abbott Labs, has converted a number of IQS's employees to their staff and
have not renewed other employee resulting in a year-to-date loss of revenue of
$380. In order to offset these lost revenues, the Company has begun focusing
business development resources on growing the IT staffing business in the second
half of 2021.
Conversely, Media Staffing has increased its nine-month revenue to $2,158 from
$1,445, a $713 or 49% improvement. This is due to the acquisition of 7 new
clients by our revamped 6-month-old sales team, which added $546 and an
increased demand for this service ($167) by our existing clients, driven by our
expertise in delivering top rated media talent to our customers.
Video Production's nine-month revenue performance also saw an improvement to the
same period a year ago by $101, with revenues totaling $897.
Cost of Revenue / Gross Profit
Gross profit for the three-month period ending September 30, 2021, was $803
representing 11.6% of revenues, which was $149 greater than in 2020's third
quarter when the gross margin was at 10.5%.
Media Staffing which saw a 44.2% increase in revenue had strong margins at
21.1%, while Permanent Placement margins were greater than 90%. EOR margins were
compressed by just over 1 point to 9.1% due to contractual incentives given to
certain clients for reaching predetermined revenue levels, and a high level of
sick leave paid by the company to its outsourced employees.
Year to date 2021, the Company's gross margin percentage improved to 12.7% from
11.9% which can be attributed mainly to Media and IT Staffing margins being >
21% and Permanent Placement which so far have enjoyed margins north of 90%.
Absent our Media Staffing year over year Growth and Permanent Placement Revenue,
our margins year to date for the period ending September 30, 2021, would be half
a point lower at 12.2%.
22
Overall margin improvement in EOR, Media Staffing and Video Production year over
year contributed $82 in gross profit, representing 4.7% of 2020 first half gross
profit.
General and Administrative ("G&A")
General and administrative expenses for the three months ended September 30,
2021, were $866, as compared to $1,086 in the comparable period in 2020,
representing a 20.3% reduction. This was also a reduction of $12 from our prior
quarter ending on June 30, 2021. The $220 decrease in comparative three-month
periods can be attributed directly to savings in salary and benefit costs by
$109, and outside legal costs of $111. Over the nine-month period ending
September 30, 2021, management has trimmed $884 or 25.7% of G&A costs, as they
represent 14.3% of revenue as opposed to 17% a year ago. The reduction was
achieved while increasing the sales portion of G&A in the last 6 months ending
September 30, 2021 by $174 as the Company has added additional sales resources.
Interest Expense
The Company recognized interest expense in the amount of $15 during the three
months ended September 30, 2021, compared to $30 or 50% during the same prior
year period. For the nine-month period ending September 30, 2021, MMG interest
costs were $78 compared to $283 for the same nine-month period a year earlier,
representing a $205, or 72% savings. This cost reduction is directly attributed
to a significantly reduced reliance on the factoring line that had an
outstanding ending Q3 2021 balance of $939 compared to $1,043 at conclusion of
second quarter 2020. The reduced reliance on factoring is attributed to the
Earned Income Credit ("ERC") which enabled the Company to reduce its payroll
cost obligations by $1,156 during the third quarter.
However, when compared to the second quarter 2021, MMG's $939 factoring balance
was $853 higher. This was largely because of our need to finance $475 to pay
Vivos Group outside debt. The other factor was that the $86 balance at the end
of June 2021 was exceedingly low as our average year to date balance had been
around $530.
Other Income (Expense)
Spurred by ERC other income for the three-month period ending September 30,
2021, which totaled $1,813 resulting in the Company experiencing third quarter
pre-tax net income of $1,816 compared to a $429 pre-tax net loss a year earlier.
Over the nine-month period ending September 30, 2021, the PPP forgiveness of
$5,216 and the ERC's totaling $4,674 enabled the Company to experience pre-tax
net earnings of $9,725 compared to a loss of $1,221 in the comparable period of
the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital requirements are driven predominantly by EOR field talent
payments, G&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
TBC, whereas TBC 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%. As a result of the impact of the COVID-19 pandemic, our clients may be more
likely to be delinquent in their payments. However, to date, we have not seen
any adverse change in our collections, with our Days Outstanding (DSO) for first
nine months of 2021 at 59 comparable to the 61 DSO for period ending December
31, 2020. By June 2020 our DSO increased to 67 from 60 in 2019 as several of our
large clients began demanding 60-to-90-day terms. Delays in receipt of purchase
orders also had an adverse impact on DSO. It appears the pendulum over the past
3 quarters has swung favorably as only 3.5% of $4,405 in Accounts Receivable
("A/R") was > 31 days past invoice due dates, with only 1% > 60.
23
When looking at A/R aging in relation to invoice date, as of September 30, 2021,
56.3% of our $4,405 in total A/R was < 31 days aged, compared to 49% a year ago.
The Company has an additional $3,221 in other receivables associated with our
ERC eligibility for the first three quarters of 2021. Conversely our Federal and
state tax liability has now increased to $1,030.
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 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 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 we employ factoring.
Vivos Debtors as of September 30, 2021, had notes receivable totaling $4,949
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 Naveen Doki and the Vivos Holdings for non-payment.
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.
On May 5, 2020, MMG received a $5,216 loan through the Paycheck Protection
Program (the "PPP") with a term of two (2) years and an interest rate of 1% per
annum. The PPP provided that the Company be eligible for forgiveness if the loan
proceeds were used for payroll and certain other specified operating expenses
while maintaining specified headcount requirements. On June 10, 2021, the
Company was informed by the SBA that it had met the requirements and that both
the $5,216 and of accrued interest totaling $57 were forgiven
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 September 30, 2021, our working capital was $9,417, compared to $5,970 at
the end of December 2020, $7,991 as of September 30, 2020, and $566 as of March
30, 2020, approximately one month before the PPP funds were received. The PPP
funds enabled the Company to build A/R reserves since PPP funds were employed to
pay salaries of both outsourced and G&A employees during the covered 24-week
period between May and October 2020. Our adjusted working capital at the end of
September 2021, excluding the notes receivable related to the Vivos Debtors
totaling $4,949, was $4,865.
24
© Edgar Online, source Glimpses