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 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. 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; 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 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.
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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 as 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 June 30, 2020, we had deployed $2.390 in PPP funds, and had $2.826
remaining 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.
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.
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.
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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.
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.
Revenues
Revenues for the three months ended June 30, 2020 was $5,197, a decrease of
$4,420 or 46%, due to reduced demand for services resulting from the COVID-19
pandemic. EOR revenue dropped 56% and Video and Multimedia production declined
by 44%, as clients curtailed studio and on-site productions due mostly to stay
at home / shelter in place state orders. Staffing Revenues however increased
136% due to IQS IT staffing which was not in place a year ago. IQS staffing
revenues when compared to its pre-acquisition records as a stand-alone company,
declined in the second quarter by $283 from $926 to $643, or 30.5%
Revenue for the first two quarters ending June 30, 2020, totaled $13,998 was 22%
off the pace of a year ago when it was $17,917 due to the causes stated above
which began in mid-March 2020.
Cost of Revenue / Gross Profit
The decrease in gross profit for the quarter ended June 30, 2020 was $346 or a
32% decrease in gross profit compared to a year ago. IQS contribution to gross
profit was at $216 which represents 29.9% of the Company's 2nd quarter gross
profit.
IQS's margin at approximately 34% led the improvement in overall gross margin to
13.9%, an improvement over IQS's 2019's second quarter gross margin of 11.1%
which was before the acquisition of IQS. IQS gross margin improvement from 31%
gross margin in the same period in 2019 to 34%, can mostly be attributed to
Maslow's benefit structure that is less costly.
Gross profit for the six months ended June 30, 2020, of $1,755 was not nearly as
pronounced at $151 or 7.9% less than it was a year ago at $1,906. The gross
profit decline was not as steep due to IQS which had strong YTD margins of 32%
while representing a much higher percentage of the overall business due to the
COVID-19 decline levels suffered by the EOR segment.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses for the three months ended
June 30, 2020 were $1,240 as compared to $662 in 2019. The increase is due to
costs associated with being a public company and higher legal costs which
totaled approximately $343 and $69 respectively or $412 of the of the $578
difference. The other major SG&A increase of $168 comes from IQS administrative
salaries and other IQS operating costs such as rent.
For the six months ending June 30, 2020, SG&A expenses of $2,352 were $1,036
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 $674 and $143 respectively for a total of $817 of the $1,036
difference. The remaining $219 increase can be attributed to in incremental IQS
administrative salaries and other costs offset by a reduction in other general
and administrative spending.
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Interest Expense
The Company recognized interest expense in the amount of $114 during the three
months ended June 30, 2020, compared to $91 in 2019. The decrease was
attributable to the $850 in convertible notes being carried 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 six months ending June 30, 2020, interest expense increased to $253
compared with $174 in 2019 primarily due to the $850 in convertible notes the
Company took on mostly in the third quarter of 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 $458 from May 1 through
July 6, 2020.
Net Income (Loss)
The Company incurred a net loss in the quarter ending June 30, 2020 of $324
compared to net profit in the same period 2019 of $286.
The $346 decrease in gross profit coupled with corporate costs much of which are
public company related ($343, see G&A) totaling $459 exceed the $599 variance by
$203 where the Company was able to reduce costs.
For the six months ended June 30, 2020, the net loss was $561 versus a profit of
362 in the same period in 2019. The $923 variance can be attributed less to the
$151 reduction in gross profit and more to the $842 in additional corporate
costs, $673 of which were public company related and $142 for legal fees.
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 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, 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 6 to the Financial Statements above, Vivos Holdings
LLC has defaulted its secured promissory note that would have paid $10 per month
to Company.
In June, the Company made required repayments of principal and interest of
approximately $140 pursuant to the convertible notes described in Note 4 above.
Payments under the remaining outstanding notes with an aggregate value
of approximately $952 will be made over a 4-month period, including $588 having
been paid by August 3rd, as these notes reach maturity.
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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 $395K.
Cash employed to repay the convertible notes (see Note 4) in the second quarter
totaled $140 and will require disbursement in the third quarter of $700, and a
fourth quarter principal and interest payments of $112. Although the outlay of
the $812 in the third and early fourth quarter will have 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 six months ended June 30,
2020 was $2,054 compared to $1,395 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.
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