Executive Summary / Key Takeaways

• Reliability Incorporated (RLBY) operates in the specialized workforce solutions market, leveraging its Maslow Media Group subsidiary's expertise in Employer of Record (EOR), Staffing, Direct Hire, and Video Production, particularly for media and IT clients.
• Recent performance in Q1 2025 showed a revenue decline driven by reduced election-related EOR activity, but growth in Staffing, notably from a government client, and improved overall gross margins due to favorable segment mix.
• The ongoing legal resolution of the Vivos Matter, involving a significant arbitration award and related party notes receivable ($5.973M owed as of March 31, 2025), is critical for unlocking shareholder value and potentially enabling future capital markets access.
• RLBY is actively improving liquidity and mitigating cash conversion cycle challenges (average 49 days payroll lag) through factoring and new receivables purchase programs, including a favorable JP Morgan facility expected to reduce cycle time by 90 days for a major client.
• While facing competitive pressures from larger, more diversified players like ManpowerGroup and Adecco, RLBY differentiates through integrated multimedia services and niche expertise, aiming for growth in specialized markets.

A Niche Player Forges Ahead Amidst Legal Headwinds

Reliability Incorporated, operating primarily through its wholly-owned subsidiary, The Maslow Media Group (MMG), occupies a specialized corner of the workforce solutions industry. Its core business revolves around providing skilled talent and related services across four key segments: Employer of Record (EOR), Recruiting and Staffing, Direct Hire, and Video and Multimedia Production. This focus, particularly within the media and IT sectors, positions RLBY as a niche provider, distinct from the broad generalist staffing giants. The company's current structure and strategic direction were fundamentally shaped by the reverse merger with MMG in October 2019, a transaction that, while establishing its operational foundation, also entangled it in a complex legal dispute – the Vivos Matter – that continues to influence its financial and corporate trajectory.

RLBY's strategic response to its market position and historical challenges centers on leveraging its specialized expertise and improving its financial resilience. The company aims to capitalize on its integrated service offerings, such as combining staffing with multimedia production capabilities, which can offer unique value propositions to clients. This integrated approach is a key differentiator against larger competitors who may lack such specialized, in-house creative services.

In the competitive landscape, RLBY faces established global players like ManpowerGroup (MAN), Adecco Group (ADEN), and Randstad N.V. (RAND). These competitors possess significant scale, broader service portfolios, and more robust financial profiles. ManpowerGroup, for instance, reported $22.8 billion in revenue in 2022 with operating margins around 4-5%, while Adecco and Randstad also operate with higher gross margins (20-22% and 18-20% respectively) compared to RLBY's trailing twelve-month gross margin of 13.34%. RLBY's smaller scale inherently leads to higher operating costs per unit (estimated 10-15% higher than larger peers), impacting its net profitability (TTM net margin of -3.38% vs. peers in the low single digits positive).

However, RLBY's competitive edge lies in its specialized focus and integrated services. The Video and Multimedia Production segment, while small, offers script-to-screen services that can be bundled with staffing, potentially enhancing recruitment efficiency and project delivery for clients. While specific quantifiable benefits of this technology are not detailed with metrics like percentage improvements, the strategic intent is clear: to offer a more comprehensive and potentially faster solution than competitors relying solely on staffing or recruitment. This niche technological capability, particularly relevant in media and tech-centric industries, allows RLBY to target specific client needs and potentially command higher value for integrated projects. The company's strategy is to grow within these specialized segments where its unique combination of services provides a competitive advantage, aiming for growth rates that, while volatile, can exceed the industry average in specific niches.

The ongoing Vivos Matter remains a significant factor shaping RLBY's corporate governance and potential for future growth initiatives. The arbitration awards, now court judgments totaling $8.333 million (excluding post-award legal fees and interest), represent a substantial claim against the Vivos Group, which holds approximately 84% of RLBY's shares. The appointment of a receiver to collect these damages, potentially through the transfer of Vivos's RLBY shares back to the company, is a critical step towards resolving this overhang. Until this matter is finalized, the Vivos Group shareholders are restricted from voting, and the Company's ability to access capital markets or use its stock for acquisitions is constrained by the fact that all 300 million authorized shares are currently issued and outstanding. The resolution of this legal dispute is paramount for RLBY to potentially increase authorized shares or execute a reverse stock split, creating the necessary capital structure flexibility for future strategic moves.

Recent Performance and Operational Dynamics

Examining the financial performance for the three months ended March 31, 2025, provides insight into RLBY's current operational state. Total revenue for Q1 2025 was $4.746 million, a decrease of $549,000 or 10.4% compared to $5.295 million in Q1 2024. This decline was primarily attributable to the EOR segment, which saw revenue fall by $817,000 (17.9%) to $3.755 million. A significant portion of this EOR decline ($366,000) stemmed from reduced activity with one major client, largely due to the absence of election-related work present in the prior year. This single client impact accounted for approximately 67% of the total revenue decrease.

Conversely, the Staffing segment demonstrated strong growth, increasing revenue by $265,000 (39.7%) to $932,000. This growth was heavily influenced by a government agency client, contributing $233,000 or about 88% of the segment's increase. Video Production also saw a modest increase in revenue to $49,000 from $32,000. The Direct Hire segment, however, experienced a significant drop from $24,000 to $10,000.

Despite the overall revenue decrease, gross profit margin slightly improved to 13.5% in Q1 2025 from 13.4% in Q1 2024. This margin expansion was driven by a favorable shift in revenue mix, with the higher-margin Staffing segment (17.9% GM in Q1 2025) representing a larger proportion of total revenue (19.6% in Q1 2025 vs. 12.6% in Q1 2024). This offset a slight dip in EOR margin (12.0% vs. 12.2%) and the impact of the Direct Hire revenue decline (90.0% GM in Q1 2025 vs. 95.8% in Q1 2024).

Operating expenses saw an increase, with selling, general, and administrative (SG&A) expenses rising by $76,000 (8.0%) to $1.023 million. This was primarily due to higher loaded salaries and increased ADP payroll processing fees. The operating loss for the quarter widened to $382,000 from $238,000 in the prior year. Interest expense also increased significantly to $52,000 from $16,000, reflecting higher utilization of financing and factoring facilities. The consolidated net loss for Q1 2025 was $333,000, compared to a net loss of $132,000 in Q1 2024.

A critical operational challenge for RLBY is managing its working capital cycle, particularly the lag between client payments and required payroll disbursements for its EOR field talent. Client payments average approximately 49 days behind payroll. To address this, the company relies on a factoring facility and has increasingly utilized Buyer-Initiated Payment (BIP) and Receivable Purchase Programs with financial institutions like American Express (AXP), MUFG (MUFG), and, most recently, JP Morgan (JPM). These programs allow RLBY to receive faster payment on approved invoices, significantly improving its cash conversion cycle. The new JP Morgan facility, effective April 23, 2025, is particularly impactful, expected to reduce the cash conversion cycle by approximately 90 days for one of its largest clients. This facility offers a more favorable interest rate (SOFR + 80 basis points, approximately 5.15% APR as of May 3, 2025) compared to the average factoring APR (10.60%). These initiatives have helped stabilize Days Sales Outstanding (DSO) around 50 days.

As of March 31, 2025, cash and cash equivalents stood at $264,000, down from $522,000 at December 31, 2024. Total current assets were $9.861 million, including $3.264 million in trade receivables and $5.973 million in notes receivable from related parties (Vivos Debtors). Total current liabilities were $2.895 million, including a factoring liability of $1.163 million. Working capital was $6.966 million, but excluding the Vivos related party notes, adjusted working capital was $993,000. While the company generated positive net cash from operating activities in Q1 2025 ($959,000), compared to a use of $312,000 in Q1 2024, its overall cash position decreased due to financing activities (repayments exceeding proceeds). Management believes it has sufficient liquidity for the next 12 months, citing the cash flow forecast, expected decline in legal fees, anticipated Vivos collection, the JP Morgan facility, factoring availability ($1.5 million available as of May 3, 2025), and cost flexibility.

Outlook and Risks

Management's outlook is cautiously optimistic, grounded in the expectation that ongoing initiatives will improve financial stability. A key assumption is the successful collection of the Vivos arbitration award, which is anticipated to be settled through a combination of cash and stock. The expected decline in legal fees associated with this matter in 2025 is also a positive factor for profitability. The implementation of the JP Morgan financing arrangement is a concrete step expected to significantly improve liquidity management by accelerating cash collection from a major client.

The company intends to hold a shareholder meeting once the Vivos matter is resolved and the uncertainty surrounding share ownership and voting rights is cleared. A potential increase in authorized shares or a reverse stock split is being considered post-resolution to create capacity for future capital raises or strategic acquisitions, though the timing remains uncertain.

Despite these positive steps, significant risks persist. The ultimate collection of the Vivos judgment, particularly the proportion received in cash versus stock, remains uncertain and could negatively impact liquidity. The collection process itself is complex, costly, and a potential distraction for management. Furthermore, the company faces risks related to its client base. High customer concentration is evident, with two clients accounting for 56.9% of revenue in Q1 2025 and three clients representing 79.7% of accounts receivable as of March 31, 2025. The loss of a major client or further extension of payment terms could severely impact revenue and liquidity.

External factors also pose risks. Federal agency budget reviews and directives, such as those from the Department of Government Efficiency (DOGE), could reduce demand for services from government clients, a key source of recent Staffing growth. The lack of transparency in these decisions makes forecasting difficult. Additionally, indirect impacts from tariffs or trade restrictions affecting clients' profitability could lead to reduced discretionary spending on services like media production.

Conclusion

Reliability Incorporated presents a complex investment case, characterized by a specialized business model, ongoing legal resolution, and strategic efforts to enhance financial stability. The company's core strength lies in its niche expertise in workforce solutions for media and IT, complemented by integrated multimedia production capabilities that differentiate it from larger competitors. While recent financial performance reflects challenges, particularly the impact of reduced election-year activity on the EOR segment, growth in Staffing and improved gross margins signal operational resilience and the potential benefits of its strategic focus.

The resolution of the Vivos Matter is a critical catalyst for unlocking shareholder value and providing the necessary capital structure flexibility for future growth initiatives. Simultaneously, the company's proactive measures to improve liquidity through factoring and receivables purchase programs are essential steps in mitigating working capital pressures and strengthening its financial foundation. Investors should monitor the progress of the Vivos collection, the impact of the new financing arrangements on liquidity, and the company's ability to maintain growth in its Staffing and Video Production segments while managing risks associated with client concentration and external economic factors. RLBY's story is one of a niche player working to overcome historical baggage and operational challenges, aiming to leverage its specialized capabilities for future growth in a competitive market.