UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021September 30, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number of the issuing entity: 001-40020
RELIANCE GLOBAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida | 46-3390293 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
Florida524210
(State or other jurisdiction of incorporation or organization)
46-3390293
I.R.S. Employer Identification Number
524210
(Primary Standard Industrial Code Classification Number)
300 Blvd. of the Americas, Suite 105 Lakewood, NJ08701
732-380-4600732-380-4600
(Address, including zip code, and telephone number, including area code of registrant’s principal executive offices)
Copies to:
Mr. Ezra Beyman
Chief Executive Officer
300 Blvd.Securities registered pursuant to Section 12(b) of the Americas, Suite 105 Lakewood, NJ 08701Act:
732-380-4600
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | RELI | The Nasdaq Capital Market | ||
Series A Warrants | RELIW | Nasdaq Capital Market |
(Address, including zip code, and telephone number,
including area code, of agent for service)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes: [X]Yes: ☒ No: [ ]☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes: [X]Yes: ☒ No: [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated fi ler,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes: [X] No: [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company, in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer ☒ | Smaller reporting company ☒ | |
Emerging Growth Company ☐ |
Yes: [ ] No: [X]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Yes: [ ] No: [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).
Yes: [ ] ☐ No: [X] ☒
Securities registered pursuant to Section 12(b) of the Act:
At May 11, 2021November 14, 2022 the registrant had 10,929,514 shares of common stock, par value $0.086 per share, outstanding.
TABLE OF CONTENTS
2 |
RELIANCE GLOBAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2021 | December 31, 2020 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 9,432,070 | $ | 45,213 | ||||
Restricted cash | 585,906 | 484,368 | ||||||
Accounts receivable | 27,693 | 236,651 | ||||||
Accounts receivable, related parties | 7,131 | - | ||||||
Note receivables | 3,825 | 3,825 | ||||||
Other receivables | 1,952 | 1,952 | ||||||
Prepaid expense and other current assets | 38,081 | 38,081 | ||||||
Total current assets | 10,096,658 | 810,090 | ||||||
Property and equipment, net | 326,428 | 375,947 | ||||||
Right-of-use asset | 382,299 | 433,529 | ||||||
Investment in NSURE, Inc. | 1,350,000 | 1,350,000 | ||||||
Intangibles, net | 5,402,082 | 5,685,650 | ||||||
Goodwill | 9,265,070 | 9,265,070 | ||||||
Other non-current assets | 1,800 | 1,800 | ||||||
Total assets | $ | 26,824,337 | $ | 17,922,086 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and other accrued liabilities | $ | 250,077 | $ | 1,143,582 | ||||
Loans payable | 14,598 | 14,598 | ||||||
Current portion of loans payables, related parties | 588,369 | 4,523,045 | ||||||
Other payables | 62,500 | 62,500 | ||||||
Current portion of long-term debt | 963,450 | 963,450 | ||||||
Current portion of leases payable | 153,574 | 176,897 | ||||||
Total current liabilities | $ | 2,032,568 | 6,884,072 | |||||
Loan payables, related parties, less current portion | 145,204 | 143,475 | ||||||
Long term debt, less current portion | 7,677,558 | 7,885,830 | ||||||
Leases payable, less current portion | 230,293 | 262,904 | ||||||
Earn-out liability | 2,631,418 | 2,631,418 | ||||||
Total liabilities | 12,717,041 | 17,807,699 | ||||||
Stockholders’ and members’ equity: | ||||||||
Preferred stock, $0.086 par value; 750,000,000 shares authorized and 1,147 and 395,640 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | 100 | 33,912 | ||||||
Common stock, $0.086 par value; 2,000,000,000 shares authorized and 10,929,514 and 4,241,028 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | 938,542 | 363,517 | ||||||
Common stock issuable | 482,116 | 822,116 | ||||||
Additional paid-in capital | 25,810,147 | 11,377,123 | ||||||
Accumulated deficit | (13,123,609 | ) | (12,482,281 | ) | ||||
Total stockholders’ equity (deficit) | 14,107,296 | 114,387 | ||||||
Total liabilities and stockholders’ equity | $ | 26,824,337 | $ | 17,922,086 |
See accompanying notes to Condensed Consolidated Financial Statements.
RELIANCE GLOBAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31, | ||||||||
2021 | 2020 | |||||||
REVENUE | ||||||||
Commission income | $ | 2,296,328 | $ | 2,004,314 | ||||
Total revenue | 2,296,328 | 2,004,314 | ||||||
OPERATING EXPENSES | ||||||||
Commission expense | $ | 529,472 | 425,585 | |||||
Salaries and wages | 918,545 | 868,274 | ||||||
General and administrative expenses | 1,004,401 | 1,121,120 | ||||||
Marketing and advertising | 23,079 | 67,762 | ||||||
Depreciation and amortization | 333,088 | 329,091 | ||||||
Total operating expenses | 2,808,585 | 2,811,832 | ||||||
Loss from operations | (512,257 | ) | (807,518 | ) | ||||
Other expense, net | (129,071 | ) | (172,280 | ) | ||||
(129,071 | ) | (172,280 | ) | |||||
Net loss | $ | (641,328 | ) | $ | (979,798 | ) | ||
Basic and diluted loss per share | $ | (0.09 | ) | $ | (0.34 | ) | ||
Weighted average number of shares outstanding | 7,542,377 | 2,916,041 |
See accompanying notes to Condensed Consolidated Financial Statements.
RELIANCE GLOBAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Reliance Global Group, Inc. | ||||||||||||||||||||||||||||||||||||
Preferred stock | Common stock | Common stock issuable | Additional paid- | Accumulated | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | in capital | Deficit | Total | ||||||||||||||||||||||||||||
Balance, December 31, 2020 | 395,640 | $ | 33,912 | 4,241,028 | $ | 363,517 | 51,042 | $ | 822,116 | $ | 11,377,123 | $ | (12,482,281 | ) | $ | 114,387 | ||||||||||||||||||||
Share based compensation | - | - | - | - | - | - | 246,966 | - | 246,966 | |||||||||||||||||||||||||||
Shares issued for services | - | - | 15,000 | 1,290 | - | - | 89,760 | - | 91,050 | |||||||||||||||||||||||||||
Shares issued due to public offering, net of offering costs of $1,672,852 | - | - | 1,800,000 | 154,800 | - | - | 8,954,348 | - | 9,109,148 | |||||||||||||||||||||||||||
Over-allotment shares from offering, net of offering costs of $250,928 | - | - | 270,000 | 23,220 | - | - | 1,343,153 | - | 1,366,373 | |||||||||||||||||||||||||||
Warrants sold during public offering at quoted price | - | - | - | - | - | 20,700 | - | 20,700 | ||||||||||||||||||||||||||||
Shares issued due to conversion of preferred stock | (394,493 | ) | (33,812 | ) | 3,944,930 | 339,264 | - | - | (305,452 | ) | - | - | ||||||||||||||||||||||||
Shares issued due to conversion of debt | - | - | 633,333 | 54,467 | - | - | 3,745,533 | - | 3,800,000 | |||||||||||||||||||||||||||
Rounding shares related to initial public offering | - | - | 1,885 | (3 | ) | - | - | - | - | |||||||||||||||||||||||||||
Shares issued pursuant to software purchase | - | - | 23,338 | 1,984 | (23,338 | ) | (340,000 | ) | 338,016 | - | 0 | |||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (641,328 | ) | (641,328 | ) | |||||||||||||||||||||||||
Balance, March 31, 2021 | 1,147 | $ | 100 | 10,929,514 | $ | 938,542 | 27,701 | $ | 482,116 | $ | 25,810,147 | $ | (13,123,609 | ) | $ | 14,107,296 |
Reliance Global Group, Inc. | ||||||||||||||||||||||||||||||||||||
Preferred stock | Common stock | Common stock issuable | Additional paid- | Accumulated | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | in capital | Deficit | Total | ||||||||||||||||||||||||||||
Balance, December 31, 2019 | 395,640 | $ | 33,912 | 4,115,330 | $ | 352,743 | 51,042 | $ | 822,116 | $ | 8,216,829 | $ | (8,783,276 | ) | $ | 642,324 | ||||||||||||||||||||
Shares issued pursuant to investment in NSURE, Inc. | - | - | 46,667 | 4,000 | - | - | 996,000 | - | 1,000,000 | |||||||||||||||||||||||||||
Share based compensation | - | - | - | - | - | - | 394,719 | - | 394,719 | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (979,798 | ) | (979,798 | ) | |||||||||||||||||||||||||
Balance, March 31, 2020 | 395,640 | $ | 33,912 | 4,161,997 | $ | 356,743 | 51,042 | $ | 822,116 | $ | 9,607,548 | $ | (9,763,074 | ) | $ | 1,057,245 |
See accompanying notes to Condensed Consolidated Financial Statements.
RELIANCE GLOBAL GROUP, INC. AND SUBSIDIATIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31, | ||||||||
2021 | 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | (641,328 | ) | (979,798 | ) | ||||
Adjustment to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 333,087 | 329,091 | ||||||
Amortization of debt issuance costs and accretion of debt discount | 5,722 | 5,722 | ||||||
Non-cash lease expense | (4,704 | ) | 202 | |||||
Stock compensation expense | 352,299 | 394,719 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts payables and other accrued liabilities | (893,505 | ) | 23,634 | |||||
Accounts payables and other accrued liabilities, related parties | - | 46,210 | ||||||
Accounts receivable | 208,958 | (49,736 | ) | |||||
Accounts receivable, related parties | (7,131 | ) | - | |||||
Other receivables | - | 7,436 | ||||||
Other payables | - | 3,835 | ||||||
Prepaid expense and other current assets | - | (5,011 | ) | |||||
Net cash used in operating activities | (646,602 | ) | (223,696 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Investment in NSURE, Inc. | - | (1,000,000 | ) | |||||
Net cash used in investing activities | - | (1,000,000 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Principal repayments of debt | (213,994 | ) | (54,381 | ) | ||||
Proceeds from loans payable, related parties | 177,824 | 373,210 | ||||||
Payments of loans payable, related parties | (310,771 | ) | (210 | ) | ||||
Issuance of common stock | 10,481,938 | 1,000,000 | ||||||
Net cash provided by financing activities | 10,134,997 | 1,318,409 | ||||||
Net increase in cash and restricted cash | 9,488,395 | 94,713 | ||||||
Cash and restricted cash at beginning of year | 529,581 | 491,585 | ||||||
Cash and restricted cash at end of year | 10,017,976 | 586,298 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH AND NON-CASH TRANSACTIONS: | ||||||||
Cash paid for interest | 116,830 | 48,412 | ||||||
Conversion of preferred stock into common stock | 339,264 | - | ||||||
Conversion of debt into equity | 3,800,000 | - | ||||||
Common stock issued in lieu of services | 91,050 | - | ||||||
Issuance of common stock pursuant to the purchase of software from The Referral Depot, LLC | 340,000 | - |
See accompanying notes to Condensed Consolidated Financial Statements.
NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Reliance Global Group, Inc. (formerlyand Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, 2022 | December 31, 2021 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 1,615,054 | $ | 4,136,180 | ||||
Restricted cash | 1,409,562 | 484,542 | ||||||
Accounts receivable | 1,025,120 | 1,024,831 | ||||||
Accounts receivable, related parties | 1,159 | 7,131 | ||||||
Note receivables | - | - | ||||||
Other receivables | 37,674 | - | ||||||
Prepaid expense and other current assets | 399,506 | 2,328,817 | ||||||
Total current assets | 4,488,075 | 7,981,501 | ||||||
Property and equipment, net | 199,030 | 130,359 | ||||||
Right-of-use assets | 1,327,361 | 1,067,734 | ||||||
Investment in NSURE, Inc. | 1,350,000 | 1,350,000 | ||||||
Intangibles, net | 14,359,973 | 7,078,900 | ||||||
Goodwill | 33,486,107 | 10,050,277 | ||||||
Other non-current assets | 23,284 | 16,792 | ||||||
Total assets | $ | 55,233,830 | $ | 27,675,563 | ||||
Liabilities and stockholders’ equity (deficit) | ||||||||
Current liabilities: | ||||||||
Accounts payable and other accrued liabilities | $ | 1,221,583 | $ | 2,759,160 | ||||
Other payables | 1,241,341 | 81,500 | ||||||
Chargeback reserve | 1,350,533 | - | ||||||
Short term Financing Agreements | 309,993 | - | ||||||
Current portion of long-term debt | 1,026,541 | 913,920 | ||||||
Current portion of leases payable | 538,018 | 276,009 | ||||||
Earn-out liability, current portion | 2,283,380 | 3,297,855 | ||||||
Warrant commitment | - | 37,652,808 | ||||||
Total current liabilities | 7,971,389 | 44,981,252 | ||||||
Loans payable, related parties, less current portion | 1,679,560 | 353,766 | ||||||
Long term debt, less current portion | 12,640,673 | 7,085,325 | ||||||
Leases payable, less current portion | 833,395 | 805,326 | ||||||
Earn-out liability, less current portion | 635,647 | 516,023 | ||||||
Warrant liabilities | 3,107,578 | - | ||||||
Total liabilities | 26,868,242 | 53,741,692 | ||||||
Stockholders’ equity (deficit): | ||||||||
Preferred stock, $ par value; shares authorized and issued and outstanding as of September 30, 2022 and December 31, 2021 | - | - | ||||||
Common stock, $ par value; shares authorized and and issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | 1,551,358 | 940,829 | ||||||
Additional paid-in capital | 34,314,591 | 26,451,187 | ||||||
Stock subscription receivable | - | (20,000,000 | ) | |||||
Accumulated deficit | (7,500,361 | ) | (33,458,145 | ) | ||||
Total stockholders’ equity (deficit) | 28,365,588 | (26,066,129 | ) | |||||
Total liabilities and stockholders’ equity (deficit) | $ | 55,233,830 | $ | 27,675,563 |
The accompanying notes are an integral part of these condensed consolidated financial statements
3 |
Reliance Global Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
2022 | 2021 | 2022 | 2021 | |||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenue | ||||||||||||||||
Commission income | $ | 4,153,361 | $ | 2,581,636 | $ | 12,596,268 | $ | 7,096,213 | ||||||||
Total revenue | 4,153,361 | 2,581,636 | 12,596,268 | 7,096,213 | ||||||||||||
Operating expenses | ||||||||||||||||
Commission expense | 862,857 | 660,708 | 2,617,140 | 1,748,451 | ||||||||||||
Salaries and wages | 2,114,730 | 1,188,267 | 6,373,697 | 3,217,441 | ||||||||||||
General and administrative expenses | 1,253,097 | 755,130 | 5,465,384 | 2,961,881 | ||||||||||||
Marketing and advertising | 726,115 | 65,010 | 1,922,520 | 143,110 | ||||||||||||
Depreciation and amortization | 713,444 | 387,729 | 2,077,372 | 1,090,183 | ||||||||||||
Total operating expenses | 5,670,243 | 3,056,844 | 18,456,113 | 9,161,066 | ||||||||||||
Loss from operations | (1,516,882 | ) | (475,208 | ) | (5,859,845 | ) | (2,064,853 | ) | ||||||||
Other income (expense) | ||||||||||||||||
Other expense, net | (280,340 | ) | (120,025 | ) | (580,900 | ) | (421,192 | ) | ||||||||
Recognition and change in fair value of warrant liabilities | 7,919,315 | - | 32,398,530 | - | ||||||||||||
Total other income (expense) | 7,638,975 | (120,025 | ) | 31,817,630 | (421,192 | ) | ||||||||||
Net income (loss) | $ | 6,122,093 | $ | (595,233 | ) | $ | 25,957,785 | $ | (2,486,045 | ) | ||||||
Basic earnings (loss) per share | $ | 0.35 | $ | (0.05 | ) | $ | 1.10 | $ | (0.25 | ) | ||||||
Diluted earnings (loss) per share | $ | (0.10 | ) | $ | (0.05 | ) | $ | (0.78 | ) | $ | (0.25 | ) | ||||
Weighted average number of shares outstanding - Basic | 17,424,267 | 10,944,439 | 17,320,146 | 9,809,092 | ||||||||||||
Weighted average number of shares outstanding - Diluted | 17,424,267 | 10,944,439 | 17,320,146 | 9,809,092 |
The accompanying notes are an integral part of these condensed consolidated financial statements
4 |
Reliance Global Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
Shares | Amount | Shares | Amount | Shares | Amount | capital | Receivable | Deficit | Total | |||||||||||||||||||||||||||||||
Reliance Global Group, Inc. | ||||||||||||||||||||||||||||||||||||||||
Preferred stock | Common stock | Common stock issuable | Additional paid-in | Subscription | Accumulated | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | capital | Receivable | Deficit | Total | |||||||||||||||||||||||||||||||
Balance, December 31, 2021 | - | $ | - | 10,956,109 | $ | 940,829 | - | $ | - | $ | 26,451,187 | $ | (20,000,000 | ) | $ | (33,458,145 | ) | $ | (26,066,129 | ) | ||||||||||||||||||||
Share based compensation | - | - | - | - | - | - | 739,960 | - | - | 739,960 | ||||||||||||||||||||||||||||||
Shares issued due to private placement | 9,076 | 781 | 2,670,892 | 229,694 | - | - | (230,424 | ) | 20,000,000 | - | 20,000,051 | |||||||||||||||||||||||||||||
Shares issued pursuant to acquisition of Medigap | - | - | 606,037 | 52,119 | - | - | 4,711,332 | - | - | 4,763,451 | ||||||||||||||||||||||||||||||
Exercise of Series A warrants | - | - | 375,000 | 32,250 | - | - | 2,442,750 | - | - | 2,475,000 | ||||||||||||||||||||||||||||||
Issuance of prefunded Series C Warrants in exchange for common shares | - | - | (3,276,929 | ) | (281,815 | ) | - | - | 281,815 | - | - | - | ||||||||||||||||||||||||||||
Shares issued for vested stock awards | - | - | 6,000 | 516 | - | - | (516 | ) | - | - | - | |||||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | 9,340,000 | 9,340,000 | ||||||||||||||||||||||||||||||
Balance, March 31, 2022 | 9,076 | $ | 781 | 11,337,109 | $ | 973,593 | - | $ | - | $ | 34,396,104 | $ | - | $ | (24,118,145 | ) | $ | 11,252,333 | ||||||||||||||||||||||
Share based compensation | - | - | - | - | - | - | 179,083 | - | - | 179,083 | ||||||||||||||||||||||||||||||
Issuance of common stock for conversion of Series C warrants | - | - | 3,276,929 | 281,815 | - | - | (280,479 | ) | - | - | 1,336 | |||||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | 10,495,691 | 10,495,691 | ||||||||||||||||||||||||||||||
Balance, June 30, 2022 | 9,076 | $ | 781 | 14,614,038 | $ | 1,255,408 | - | $ | - | $ | 34,294,708 | $ | - | $ | (13,622,454 | ) | $ | 21,928,443 | ||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||||||||||||||
Share based compensation | - | - | - | - | - | - | 314,257 | - | - | 314,257 | ||||||||||||||||||||||||||||||
Issuance of common stock for conversion of Series D warrants | - | - | 1,221,347 | 105,100 | - | - | (104,305 | ) | - | - | 795 | |||||||||||||||||||||||||||||
Shares issued due to conversion of preferred stock | (9,076 | ) | (781 | ) | 2,219,084 | 190,850 | - | - | (190,069 | ) | - | - | - | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | 6,122,093 | 6,122,093 | ||||||||||||||||||||||||||||||
Balance, September 30, 2022 | - | $ | - | 18,054,469 | $ | 1,551,358 | - | $ | - | $ | 34,314,591 | $ | - | $ | (7,500,361 | ) | $ | 28,365,588 |
The accompanying notes are an integral part of these condensed consolidated financial statements
5 |
Reliance Global Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
Shares | Amount | Shares | Amount | Shares | Amount | capital | Deficit | Total | ||||||||||||||||||||||||||||
Reliance Global Group, Inc. | ||||||||||||||||||||||||||||||||||||
Preferred stock | Common stock | Common stock issuable | Additional paid-in | Accumulated | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | capital | Deficit | Total | ||||||||||||||||||||||||||||
Balance, December 31, 2020 | 395,640 | $ | 33,912 | 4,241,028 | $ | 363,517 | 23,341 | $ | 340,000 | $ | 11,559,239 | - | $ | (12,359,680 | ) | $ | (63,012 | ) | ||||||||||||||||||
Share based compensation | - | - | - | - | - | - | 246,966 | - | 246,966 | |||||||||||||||||||||||||||
Shares issued for services | - | - | 15,000 | 1,290 | - | - | 89,760 | - | 91,050 | |||||||||||||||||||||||||||
Shares issued due to public offering, net of offering costs of $1,672,852 | - | - | 1,800,000 | 154,800 | - | - | 8,954,348 | - | 9,109,148 | |||||||||||||||||||||||||||
Over-allotment shares from offering, net of offering costs of $250,928 | - | - | 270,000 | 23,220 | - | - | 1,343,153 | - | 1,366,373 | |||||||||||||||||||||||||||
Warrants sold during public offering at quoted price | - | - | - | - | - | 20,700 | - | 20,700 | ||||||||||||||||||||||||||||
Shares issued due to conversion of preferred stock | (394,493 | ) | (33,812 | ) | 3,944,930 | 339,264 | - | - | (305,452 | ) | - | - | ||||||||||||||||||||||||
Shares issued due to conversion of debt | - | - | 633,333 | 54,467 | - | - | 3,745,533 | - | 3,800,000 | |||||||||||||||||||||||||||
Rounding shares related to initial public offering | - | - | 1,885 | - | (3 | ) | - | - | - | - | ||||||||||||||||||||||||||
Shares issued pursuant to software purchase | - | - | 23,338 | 1,984 | (23,338 | ) | (340,000 | ) | 338,016 | - | - | |||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | (613,926 | ) | (613,926 | ) | ||||||||||||||||||||||||
Balance, March 31, 2021 | 1,147 | $ | 100 | 10,929,514 | $ | 938,542 | - | $ | - | $ | 25,992,263 | - | $ | (12,973,606 | ) | $ | 13,957,299 | |||||||||||||||||||
Share based compensation | - | - | - | - | - | - | 183,132 | - | 183,132 | |||||||||||||||||||||||||||
Rounding shares related to initial public offering | 20 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Shares issued pursuant to acquisition of Kush | - | - | 14,925 | 1,284 | - | - | 48,716 | - | 50,000 | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | (1,276,886 | ) | (1,276,886 | ) | ||||||||||||||||||||||||
Balance, June 30, 2021 | 1,167 | $ | 100 | 10,944,439 | $ | 939,826 | - | $ | - | $ | 26,224,111 | - | $ | (14,250,492 | ) | $ | 12,913,545 | |||||||||||||||||||
Share based compensation | - | - | - | - | - | - | 146,225 | - | 146,225 | |||||||||||||||||||||||||||
Rounding shares related to initial public offering | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Shares issued pursuant to acquisition of Kush | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | (595,233 | ) | (595,233 | ) | ||||||||||||||||||||||||
Net income (loss) | - | - | - | - | - | - | - | - | (595,233 | ) | (595,233 | ) | ||||||||||||||||||||||||
Balance, September 30, 2021 | 1,167 | $ | 100 | 10,944,439 | $ | 939,826 | - | $ | - | $ | 26,370,336 | - | $ | (14,845,725 | ) | $ | 12,464,537 |
The accompanying notes are an integral p9rt of these condensed consolidated financial statements
6 |
Reliance Global Group, Inc. and Subsidiaries and Predecessor
Condensed Consolidated Statements of Cash Flows
(Unaudited)
2022 | 2021 | |||||||
Nine months ended September 30, | ||||||||
2022 | 2021 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 25,957,785 | $ | (2,486,045 | ) | |||
Adjustment to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Depreciation and amortization | 2,077,372 | 1,090,183 | ||||||
Amortization of debt issuance costs and accretion of debt discount | 28,702 | 37,822 | ||||||
Non-cash lease expense | 30,451 | 2,331 | ||||||
Stock compensation expense | 1,233,300 | 667,373 | ||||||
Earn-out fair value and write-off adjustments | 132,445 | - | ||||||
Recognition and change in fair value of warrant liabilities | (32,398,530 | ) | - | |||||
Change in operating assets and liabilities: | ||||||||
Accounts payables and other accrued liabilities | (1,541,037 | ) | (314,045 | ) | ||||
Accounts receivable | 92,297 | (87,058 | ) | |||||
Accounts receivable, related parties | 5,972 | (7,131 | ) | |||||
Other receivables | (37,674 | ) | 3,825 | |||||
Other payables | 34,841 | (112 | ) | |||||
Charge back reserve | (133,940 | ) | - | |||||
Other non-current assets | (6,492 | ) | (14,992 | ) | ||||
Prepaid expense and other current assets | 2,346,510 | (196,471 | ) | |||||
Net cash used in operating activities | (2,177,998 | ) | (1,304,320 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (67,906 | ) | (24,257 | ) | ||||
Business acquisitions, net of cash acquired | (24,138,750 | ) | (1,608,586 | ) | ||||
Purchase of intangibles | (775,953 | ) | (331,054 | ) | ||||
Net cash used in investing activities | (24,982,609 | ) | (1,963,897 | ) | ||||
Cash flows from financing activities: | ||||||||
Principal repayments of debt | (663,016 | ) | (663,907 | ) | ||||
Proceeds from loan for business acquisition | 6,520,000 | - | ||||||
Payment of debt issuance costs | (214,257 | ) | - | |||||
Payments on earn-out liabilities | (1,627,296 | ) | (452,236 | ) | ||||
Proceeds from loans payable, related parties | 1,500,000 | 2,931 | ||||||
Payments of loans payable, related parties | (174,206 | ) | (504,899 | ) | ||||
Proceeds from exercise of warrants into common stock | 2,477,131 | - | ||||||
Repayments on short-term financing | (107,206 | ) | ||||||
Net proceeds from private placement issuance of shares and warrants | 17,853,351 | - | ||||||
Issuance of common stock | - | 10,496,221 | ||||||
Net cash provided by financing activities | 25,564,501 | 8,878,110 | ||||||
Net (decrease) increase in cash and restricted cash | (1,596,106 | ) | 5,609,893 | |||||
Cash and restricted cash at beginning of period | 4,620,722 | 529,581 | ||||||
Cash and restricted cash at end of period | $ | 3,024,616 | $ | 6,139,474 | ||||
Supplemental disclosure of cash and non-cash investing and financing transactions: | ||||||||
Cash paid for interest | $ | 562,800 | $ | 350,175 | ||||
Issuance of series D warrants | $ | 6,930,335 | $ | - | ||||
Issuance of placement agent warrants | $ | 1,525,923 | $ | - | ||||
Prepaid insurance acquired through short-term financing | $ | 417,199 | $ | - | ||||
Conversion of preferred stock into common stock | $ | 190,069 | $ | 339,264 | ||||
Conversion of debt into equity | $ | - | $ | 3,800,000 | ||||
Cashless conversion of series D warrants into common stock | $ | 36,761 | $ | - | ||||
Common stock issued pursuant to acquisition | $ | 4,763,451 | $ | 50,000 | ||||
Common stock issued in lieu of services | $ | - | $ | 91,050 | ||||
Issuance of common stock pursuant to the purchase of software | $ | - | $ | 340,000 | ||||
Acquisition of business deferred purchase price | $ | 1,125,000 | $ | - | ||||
Lease assets acquired in exchange for lease liabilities | $ | 628,004 | $ | 861,443 |
The accompanying notes are an integral part of these condensed consolidated financial statements
7 |
Reliance Global Group, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
NOTE 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Reliance Global Group, Inc., formerly known as Ethos Media Network, Inc.) (“RELI”, “Reliance”, or the “Company”) was incorporated in Florida on August 2, 2013. In September 2018, Reliance Global Holdings, LLC (“Reliance Holdings”, or “Parent Company”), a related party acquired control of the Company. Ethos Media Network, Inc. was then renamed on October 18, 2018.
On August 17, 2020, the Company acquired UIS Agency, Inc. (“UIS”). UIS is an insurance agency and employee benefits provider (See Note 3).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated and combined financial statements included hereinunaudited Condensed Consolidated Financial Statements have been prepared by the Company in accordance with generally accepted accounting principles generally accepted in the United States of America (“U.S. GAAP”). for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of recurring accruals) necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto, set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The accompanying unaudited condensed consolidated financial statements include the accountingaccounts of Reliance Global Group, Inc., and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and noted thereto for the year ended December 31, 2020 included in the Company’s annual report on Form 10-K.
Liquidity
As of March 31, 2021,September 30, 2022, the Company’s reported cash and restricted cash aggregated balance was approximately $10,018,000,$3,024,000, current assets were approximately $10,097,000$4,488,000, while current liabilities were approximately $2,033,000 including loan payable to related party$7,971,000. As of approximately $734,000. At March 31, 2021,September 30, 2022, the Company had a working capital deficit of approximately $8,064,000. The Company had$3,483,000 and stockholders’ equity of $14,107,000 forapproximately $28,366,000. For the periodnine months ended March 31, 2021,September 30, 2022, the Company reported a net loss from operations of approximately $641,000$5,860,000, a non-cash, non-operating gain on the recognition and change in fair value of warrant liabilities of approximately $32,399,000, resulting in an overall net income of approximately $25,958,000. For the nine months ended September 30, 2022, the Company reported negative cash flows from operations of $647,000.approximately $2,178,000. The Company also completed ana capital offering in FebruaryJanuary 2022 that raised net proceeds of approximately $10,496,000.$ . Management therefore believes that the Company’s financial position causes no concern about the Company’s liquidity.and its ability to raise capital to be reasonable and sufficient.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures in the financial statements and accompanying notes. Management bases itits estimates on historical experience and on assumptions believed to be reasonable under the circumstances. Actual results could differ materially from those estimates.
Cash
Cash consists of checking accounts. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
and Restricted Cash
Restricted cash includes cash pledged as collateral to secure obligations and/or all cash whose use is otherwise limited by contractual provisions.
The reconciliation of cashCash and restricted cash reported within the applicable balance sheet that sumon our Condensed Consolidated Balance Sheets are reconciled to the total shown on our Condensed Consolidated Statements of the same such amounts shown in the statement of cash flows isCash Flows as follows:
SCHEDULE OF RESTRICTED CASH IN STATEMENT OF CASH FLOW
March 31, 2021 | March 31, 2020 | September 30, 2022 | September 30, 2021 | |||||||||||||
Cash | $ | 9,432,070 | $ | 232,629 | $ | 1,615,054 | $ | 5,655,103 | ||||||||
Restricted cash | 585,906 | 353,879 | 1,409,562 | 484,371 | ||||||||||||
Total cash and restricted cash | $ | 10,017,976 | $ | 586,508 | $ | 3,024,616 | $ | 6,139,474 |
8 |
Property and Equipment
Property and equipment are stated at cost. Depreciation, including assets acquired under capital leases or finance leases, are recorded over the shorter of the estimated useful life or the lease term of the applicable assets using the straight-line method beginning on the date an asset is placed in service. The Company regularly evaluates the estimated remaining useful lives of the Company’s property and equipment to determine whether events or changes in circumstances warrant a revision to the remaining period of depreciation. Maintenance and repairs are charged to expense as incurred. The estimated useful life of the Companies Property and Equipment is as follows:
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:
Level 1 — UnadjustedObservable inputs reflecting quoted prices (unadjusted) in active markets for identical assets or liabilities in active markets;and liabilities;
Level 2 — Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and
Level 3 — Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions market participants would use in pricing the asset or liability, including assumptions about risk.
Warrant Liabilities: The Company’sCompany re-measures fair value of its Level 3 warrant liabilities at the balance sheet includes certain financial instruments, including cash, notes receivables, accounts payable, notes payables and short and long-term debt.date, using a binomial option pricing model. The carrying amounts of current assets and current liabilities approximate their fair value because offollowing summarizes the relatively short period of time between the origination of these instruments and their expected realization. significant unobservable inputs:
SCHEDULE OF EARN OUT LIABILITY
September 30, 2022 | December 31, 2021 | |||||||
Stock price | $ | 0.78 | $ | 6.44 | ||||
Volatility | 105 | % | 90 | % | ||||
Time to expiry | 4.26 | 5 | ||||||
Dividend yield | 0 | % | 0 | % | ||||
Risk free rate | 4.10 | % | 1.10 | % |
The carrying amounts of long-term debt approximate their fair value as the variable interest rates are based on a market index.
Deferred Financing Costs
The Company has recorded deferred financing costs as a result of fees incurred by the Company in conjunction with its debt financing activities. These costs are amortized to interest expense using the straight-line method which approximates the interest rate method over the term of the related debt. As of March 31, 2021 and December 31, 2020, unamortized deferred financing costs were $180,590, and $186,312, respectively and are netted against the related debt.
Business Combinations
The Company accounts for its business combinations using the acquisition method of accounting. Under the acquisition method, the assets acquired, the liabilities assumed, and the consideration transferred are recorded at the date of acquisition at their respective fair values. Definite-lived intangible assets are amortized over the expected life of the asset. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
Goodwill represents the excess purchase price over thefollowing reconciles fair value of the tangible net assetsliability classified warrants:
SCHEDULE OF RECONCILES WARRANT COMMITMENT
1 | 2 | 3 | 4 | |||||||||||||
Three and Nine Months ended September 30, 2022 | ||||||||||||||||
Series B Warrant Commitment | Series B warrant liabilities | Placement agent warrants | Total | |||||||||||||
Beginning balance | $ | 37,652,808 | $ | - | $ | - | $ | 37,652,808 | ||||||||
Initial recognition | - | 55,061,119 | 1,525,923 | 56,587,042 | ||||||||||||
Unrealized (gain) loss | 17,408,311 | (31,980,437 | ) | (946,461 | ) | (15,518,587 | ) | |||||||||
Warrants exercised or transferred | (55,061,119 | ) | (55,061,119 | ) | ||||||||||||
Ending balance, March 31, 2022 | $ | - | $ | 23,080,682 | $ | 579,462 | $ | 23,660,144 | ||||||||
Unrealized (gain) loss | - | (12,322,737 | ) | (310,514 | ) | (12,633,251 | ) | |||||||||
Ending balance, June 30, 2022 | $ | - | $ | 10,757,945 | $ | 268,948 | $ | 11,026,893 | ||||||||
Beginning balance | $ | - | $ | 10,757,945 | $ | 268,948 | $ | 11,026,893 | ||||||||
Unrealized (gain) loss | - | (7,726,161 | ) | (193,154 | ) | (7,919,315 | ) | |||||||||
Ending balance, September 30, 2022 | - | 3,031,784 | 75,794 | 3,107,578 | ||||||||||||
Ending balance | - | 3,031,784 | 75,794 | 3,107,578 |
1 | 2 | |||||||
December 31, 2021 | ||||||||
Series B Warrant Commitment | Total | |||||||
Beginning balance | $ | - | $ | - | ||||
Initial recognition | 20,244,497 | 20,244,497 | ||||||
Unrealized (gain) loss | 17,408,311 | 17,408,311 | ||||||
Ending balance | $ | 37,652,808 | $ | 37,652,808 |
Earn-out liabilities: The Company generally values its Level 3 earn-out liabilities using the income valuation approach. Key valuation inputs include contingent payment arrangement terms, projected revenues and intangible assets acquiredcash flows, rate of return, and probability assessments. The following table summarizes the significant unobservable inputs used in the fair value measurements:
SCHEDULE OF FAIR VALUE MEASUREMENTS
September 30, 2022 | December 31, 2021 | |||
Valuation technique | Discounted cash flow | Discounted cash flow | ||
Significant unobservable input | Projected revenue and probability of achievement | Projected revenue and probability of achievement |
9 |
The Company values its Level 3 earn-out liability related to the Barra Acquisition using a Monte Carlo simulation in a business combination. Acquisition-related expensesrisk-neutral framework (a special case of the Income Approach). The following summarizes the significant unobservable inputs:
SCHEDULE OF EARN OUT LIABILITY
September 30, 2022 | ||||
WACC Risk Premium: | 14.5 | % | ||
Volatility | 50 | % | ||
Credit Spread: | 15.1 | % | ||
Payment Delay (days) | 90 | % | ||
Risk free rate | USD Yield Curve | |||
Discounting Convention: | Mid-period | |||
Number of Iterations | 100,000 |
Undiscounted remaining earn out payments are recognized separately from business combinations and are expensedapproximately $3,291,883 as incurred. If the business combination provides for contingent consideration, the Company records the contingent consideration at fair value at the acquisition date. Changes inof September 30, 2022. The following table reconciles fair value of contingent consideration resulting from eventsearn-out liabilities for the period ending September 30, 2022:
SCHEDULE OF GAIN OR LOSSES RECOGNIZED FAIR VALUE
September 30, 2022 | December 31, 2021 | |||||||
Beginning balance – January 1 | $ | 3,813,878 | $ | 2,931,418 | ||||
Acquisitions and Settlements | (1,027,296 | ) | 1,160,562 | |||||
Period adjustments: | ||||||||
Fair value changes included in earnings* | 132,445 | (278,102 | ) | |||||
Ending balance | $ | 2,919,027 | $ | 3,813,878 | ||||
Less: Current portion | (2,283,380 | ) | (3,297,855 | ) | ||||
Ending balance, less current portion | 635,647 | 516,023 |
* | Recorded as a reduction to general and administrative expenses |
Investment in Nsure
On February 19, 2020, the Company entered into a securities purchase agreement with NSURE, Inc. (“NSURE”), which was further amended on October 8, 2020, and as amended provides that the Company may invest up to an aggregate of $5,700,000 in NSURE to be funded in three tranches. In exchange, the Company will receive a total of shares of NSURE’s Class A Common Stock.
During the course of calendar year 2020 and by October 8, 2020, the Company funded the first tranche, $ in exchange for shares. The second tranche allowed the Company to acquire an additional shares at a price of $ per share by no later than December 30, 2020. The third full tranche allowed the Company to purchase an additional shares at a purchase price of $ after December 20, 2020, but no later than March 31, 2021.
The Company did not fund tranches two and three in the required timeframes, thus, the Company relinquished its rights under the contract to any additional NSURE shares aside for the ones already acquired with tranche one.
10 |
The Company measures the NSURE shares subsequent to acquisition date, such as earn-outs, are recognized as follows: 1) if the contingent consideration is classified as equity, the contingent consideration is not re-measured and its subsequent settlement is accounted for within equity, or 2) if the contingent consideration is classified as a liability, the changes in accordance with ASC 321-10-35-2, at cost less impairment since no readily determinable fair value are recognized in earnings.
Identifiable Intangible Assets, net
Finite-lived intangible assets such as customer relationships assets, trademarks and tradenames are amortized over their estimated useful lives, generally on a straight-line basis for periods ranging from 3is available to 20 years. Finite-lived intangible assets arethe Company. The investment is reviewed for impairment or obsolescence whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of intangible assets is measuredat each reporting period by a comparison of the carrying amount of the asset to the future undiscounted net cash flows expected to be generated by that asset. If the asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the estimated fair value. No impairment was recognized during the periods presented.
Goodwill and other indefinite-lived intangibles
The Company records goodwill when the purchase price of a business acquisition exceeds the estimatedqualitatively assessing any indicators demonstrating fair value of net identified tangiblethe investment is less than carrying value. The Company did not observe any price changes resulting from orderly transactions for identical or similar assets for the periods ended September 30, 2022 or September 30, 2021. ASC 321-10-50-4 further requires an entity to disclose unrealized gains and intangible assets acquired. Goodwill is assignedlosses for periods that relate to equity securities held at a reporting unitdate. To-date, the Company has not recognized any unrealized gains or losses on the acquisition date and tested for impairment at least annually, or more frequently when events or changesNSURE security.
In accordance with ACS 321-10-35-3, the Company performed a qualitative assessment to determine if the investment may be impaired. After considering the indicators contained in circumstances indicateASC 321-10-35-3a –3e, the Company determined that the fair value of a reporting unit has more likely thaninvestment was not declined below its carrying value. Similarly, indefinite-lived intangible assets other than goodwill, such as trade names, are tested annually or more frequently if indicated, for impairment. If impaired, intangible assets are written down to fair value based on the expected discounted cash flows. During the three months ended March 31, 2021 and 2020, the Company recorded no impairment of goodwill.impaired.
Revenue Recognition
The Company’s revenue is primarily comprised of commission paid by health insurance carriers related to insurance plans that have been purchased by a member who used the Company’s service. The Company defines a member as an individual currently covered by an insurance plan, including individual and family, Medicare-related, small business and ancillary plans, for which the Company are entitled to receive compensation from an insurance carrier.
The following table disaggregates the Company’s revenue by line of business, showing commissions earned:
SCHEDULE OF DISAGGREGATION REVENUE
Three Months ended September 30, 2022 | Medical/Life | Property and Casualty | Total | |||||||||
Regular | ||||||||||||
EBS | $ | 212,384 | $ | - | $ | 212,384 | ||||||
USBA | 13,732 | - | 13,732 | |||||||||
CCS/UIS | - | 76,035 | 76,035 | |||||||||
Montana | 426,591 | - | 426,591 | |||||||||
Fortman | 259,255 | 186,860 | 446,115 | |||||||||
Altruis | 896,012 | - | 896,012 | |||||||||
Kush | 366,219 | - | 366,219 | |||||||||
Medigap | 1,331,593 | - | 1,331,593 | |||||||||
Barra | 83,615 | 301,065 | 384,680 | |||||||||
$ | 3,589,401 | $ | 563,960 | $ | 4,153,361 |
Three Months ended March 31, 2020 | Medical/Life | Property and Casualty | Contingent commission | Total | ||||||||||||
Regular | ||||||||||||||||
EBS | 197,306 | 197,306 | ||||||||||||||
USBA | 133,672 | 133,672 | ||||||||||||||
CCS/UIS | 93,518 | 93,518 | ||||||||||||||
Montana | 489,826 | 489,826 | ||||||||||||||
Fortman | 349,226.00 | 188,372 | 537,598 | |||||||||||||
Altruis | 552,394 | 552,394 | ||||||||||||||
1,722,424 | 281,890 | - | 2,004,314 |
Three Months ended March 31, 2021 | Medical/Life | Property and Casualty | Contingent commission | Total | ||||||||||||
Regular | ||||||||||||||||
EBS | 208,994 | - | 208,994 | |||||||||||||
USBA | 12,225 | - | 12,225 | |||||||||||||
CCS/UIS | - | 88,818 | 88,818 | |||||||||||||
Montana | 535,116 | - | 535,116 | |||||||||||||
Fortman | 249,801 | 207,772 | 457,573 | |||||||||||||
Altruis | 993,602 | - | 993,602 | |||||||||||||
1,999,738 | 296,590 | - | 2,296,328 |
11 |
Nine Months ended September 30, 2022 | Medical/Life | Property and Casualty | Total | |||||||||
Regular | ||||||||||||
EBS | $ | 645,217 | $ | - | $ | 645,217 | ||||||
USBA | 39,638 | - | 39,638 | |||||||||
CCS/UIS | - | 177,111 | 177,111 | |||||||||
Montana | 1,385,017 | - | 1,385,017 | |||||||||
Fortman | 949,189 | 589,924 | 1,539,113 | |||||||||
Altruis | 3,056,257 | - | 3,056,257 | |||||||||
Kush | 1,230,259 | - | 1,230,259 | |||||||||
Medigap | 3,868,654 | - | 3,868,654 | |||||||||
Barra | 153,539 | 501,463 | 655,002 | |||||||||
$ | 11,327,770 | $ | 1,268,498 | $ | 12,596,268 |
Three Months ended September 30, 2021 | Medical/Life | Property and Casualty | Total | |||||||||
Regular | ||||||||||||
EBS | 226,233 | - | 226,233 | |||||||||
USBA | 18,241 | - | 18,241 | |||||||||
CCS/UIS | - | 120,762 | 120,762 | |||||||||
Montana | 343,546 | - | 343,546 | |||||||||
Fortman | 357,638 | 194,218 | 551,856 | |||||||||
Altruis | 807,775 | - | 807,775 | |||||||||
Kush | 513,223 | - | 513,223 | |||||||||
$ | 2,266,656 | $ | 314,980 | $ | 2,581,636 |
Nine Months ended September 30, 2021 | Medical/Life | Property and Casualty | Total | |||||||||
Regular | ||||||||||||
EBS | $ | 642,428 | $ | - | $ | 642,428 | ||||||
USBA | 45,861 | - | 45,861 | |||||||||
CCS/UIS | - | 274,928 | 274,928 | |||||||||
Montana | 1,283,402 | - | 1,283,402 | |||||||||
Fortman | 884,073 | 628,327 | 1,512,400 | |||||||||
Altruis | 2,558,653 | - | 2,558,653 | |||||||||
Kush | 778,541 | - | 778,541 | |||||||||
$ | 6,192,958 | $ | 903,255 | $ | 7,096,213 |
The following, are customers representing 10% or more of total revenue:
SCHEDULE OF CONCENTRATIONS OF REVENUES
Insurance Carrier | 2022 | 2021 | ||||||
For the three months ended September 30, | ||||||||
Insurance Carrier | 2022 | 2021 | ||||||
LTC Global | 27 % | -% | ||||||
Priority Health | 21 % | 27% | ||||||
BlueCross BlueShield | 10 % | 24% |
Insurance Carrier | 2022 | 2021 | ||||||
For the Nine months ended September 30, | ||||||||
Insurance Carrier | 2022 | 2021 | ||||||
LTC Global | 27 | % | - | % | ||||
Priority Health | 24 | % | 30 | % | ||||
BlueCross BlueShield | 10 | % | 25 | % |
The core principle of ASC 606 is to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchangeNo other single Customer accounted for those goods or services. Accordingly, we recognize revenue for our services in accordance with the following five steps outlined in ASC 606:
Identificationmore than 10% of the contract, or contracts, with a customer. A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance, and (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.
Identification of the performance obligations in the contract. Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract.
Determination of the transaction price.Company’s commission revenues. The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer.
Allocation of the transaction price to the performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis.
Recognition of revenue when, or as, the Company satisfies a performance obligation. The Company satisfies performance obligations either over time or at a point in time, as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised good or service to the customer.
For individual and family, Medicare supplement, small business and ancillary plans, the Company’s compensation is generally a percentage of the premium amount collected by the carrier during the period that a member maintains coverage under a plan (commissions) and, to a lesser extent, override commissions that health insurance carriers pays the Company for achieving certain objectives. Premium-based commissions are reported to the Company after the premiums are collected by the carrier, generally on a monthly basis. The Company generally continues to receive the commission payment from the relevant insurance carrier until the health insurance plan is cancelled or the Company otherwise does not remain the agent on the policy. The Company recognizes commission revenue for individual and family, Medicare Supplement, small business and ancillary plans when premiums are effective. The Company determines that there is persuasive evidence of an arrangement when the Company has a commission agreement with a health insurance carrier, a carrier reports to the Company that it has approved an application submitted through the Company’s platform, and the applicant starts making payments on the plan. The Company’s services are complete when a carrier has approved an application. The seller’s price is fixed or determinable and collectability is reasonably assured when commission amounts have been reported to the Company by a carrier.
Commission revenue from insurance distribution and brokerage operations is recognized when all placement services have been provided, protection is afforded under the insurance policy, and the premium is known or can be reasonably estimated and is billable. In general, two types of billing practices occur as part of our agency contracts, which is direct bill and agency bill. In direct bill scenarios, the insurance carriers that underwrite the insurance policies directly bill and collect the premium for the policy without any involvement from the Company. Upon collection, a commission is then remitted from the insurance carrier to the Company. These commissions have not met the criteria for revenue recognition until the Company receives the commissions, as the Company does not have insight into policy acceptance and premium collections until the commission is received from the insurance carrier, representing that the insurance policy has been bound and therefore commissions have been earned by the Company. The second billing practice where the Company bills the policy holder and collects the premiums (“Agency Bill”) provides greater transparency by the Company into the acceptance of the policy and premium collection. As part of the Agency Bill process, the Company can, at times, net its commissions out of the premiums to be sent to the insurance carriers. For Agency Bill customers, the revenue recognition criteria are considered met when the Agency receives the premiums from the policy holder, with an allowance established against the revenue for policies that may not be bound by the insurance companies.
All commission revenue is recorded netloss of any deductions for estimated commission adjustments due to lapses, policy cancellations,significant customer, including Priority Health, BlueCross BlueShield and revisions in coverage.
Insurance commissions earned from carriers for life insurance products are recorded gross of amounts due to agents, with a corresponding commission expense for downstream agent commissions being recorded as commission expense within the condensed consolidated statements of operations.
The Company earns additional revenue including contingent commissions, profit-sharing, override and bonuses based on meeting certain revenue or profit targets established periodically by the carriers (collectively the Contingent Commissions). The Contingent Commissions are earned when the Company achieves the targets established by the insurance carries. The insurance carriers notify the company when it has achieved the target. The Company recognizes revenue for any additional commissions at the time it is reasonably assured it will receive payment for these commissions, which is generally when the insurance carrier notifies the Company that it has earned the commission typically early in the following fiscal year.
General and Administrative
General and administrative expenses primarily consist of personnel costs for the Company’s administrative functions, professional service fees, office rent, all employee travel expenses, and other general costs.
Marketing and Advertising
The Company’s direct channel expenses primarily consist of costs for e-mail marketing and newspaper advertisements. The Company’s online advertising channel expense primarily consist of social media ads. Advertising costs for both direct and online channels are expensed as incurred.
Stock-Based Compensation
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. This ASU, which the Company adopted as of January 1, 2019, did notLTC Global could have a material adverse effect on the Company’s consolidated financial statements.Company.
Stock-based compensation cost is measured atIncome Taxes
The Company recorded no income tax expense for the grant date based onthree and nine months ended September 30, 2022 and 2021 because the fair valueestimated annual effective tax rate was zero. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the awardCompany’s annual earnings and is recognized as an expense on a straight-line basis over the requisite service period, based on the terms of the awards. The fair value of the stock-based payments to nonemployees that are fully vested and non-forfeitable as at the grant date is measured and recognized at that date, unless there is a contractual term for servicestaxing jurisdictions in which case such compensation wouldthe earnings will be amortized overgenerated, the contractual term. impact of state and local income taxes, the ability to use tax credits and net operating loss carry forwards, and available tax planning alternatives.
As the Reliance Global Group, Inc. Equity Incentive Plan 2019 was adopted in January of 2019,September 30, 2022 and December 31, 2021, the Company lacks the historical basis to estimate forfeitures and will recognize forfeitures as they occur.
Leases
On January 1, 2019, the Company adopted Accounting Standards Codification Topic 842, “Leases” (“ASC 842”) to replace existing lease accounting guidance. This pronouncement is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet for most leases. Expenses associated with leases will continue to be recognized inprovided a manner similar to previous accounting guidance. The Company adopted ASC 842 utilizing the transition practical expedient added by the Financial Accounting Standards Board (“FASB”), which eliminates the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption.
The Company is the lessee in a lease contract when the Company obtains the right to use the asset. Operating leases are included in the line items right-of-use asset, lease obligation, current, and lease obligation, long-term in the consolidated balance sheet. Right-of-use (“ROU”) asset represents the Company’s right to use an underlying asset for the lease term and lease obligations represent the Company’s obligations to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded on the consolidated balance sheet and are expensed on a straight-line basis over the lease term in the condensed consolidated statement of operations. The Company determines the lease term by agreement with lessor.
Income Taxes
The Company recognizesfull valuation allowance against its net deferred tax assets and liabilities using enacted tax rates forsince the effect of temporary differences between the book and tax basis of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance ifCompany believes it is more likely than not that some portion or all of the deferred tax asset will not be realized. In evaluating its ability to recover deferred tax assets within the jurisdiction in which they arise, the Company considers all available positive and negative evidence, including the expected reversals of taxable temporary differences, projected future taxable income, taxable income available via carryback to prior years, tax planning strategies, and results of recent operations. The Company assesses the realizability of its deferred tax assets including scheduling the reversal of its deferred tax assets and liabilities, to determine the amount of valuation allowance needed. Scheduling the reversal of deferred tax asset and liability balances requires judgment and estimation. The Company believes the deferred tax liabilities relied upon as future taxable income in its assessment will reverse in the same period and jurisdiction and are of the same character as the temporary differences giving rise to the deferred tax assets that willnot be realized.
SeasonalityPrior Period Adjustments
A greater numberThe Company identified certain immaterial adjustments impacting prior reporting periods. Specifically, the Company identified adjustments to correct certain asset, liability and equity accounts in relation to historical purchase price allocation accounting, historical accrued revenues and true ups of the common stock issuable account.
The Company assessed the materiality of the adjustments to prior period financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. (SAB) 99, Materiality, and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, and ASC 250, Accounting Changes and Error Corrections.
Accordingly, the Company’s Medicare-related health insurance plans are soldcomparative condensed consolidated financial statements and impacted notes have been revised from amounts previously reported to reflect these adjustments. The following table illustrates the impact on previously reported amounts and adjusted balances presented in the fourth quarter duringcondensed consolidated financial statements for the Medicare annual enrollment period when Medicare-eligible individuals are permitted to change their Medicare Advantage. The majority of the Company’s individual and family health insurance plans are sold in the annual open enrollment period as defined under the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act. Individuals and families generally are not able to purchase individual and family health insurance outside of these open enrollment periods, unless they qualify for a special enrollment period as a result of certain qualifying events, such as losing employer-sponsored health insurance or moving to another state.ended September 30, 2022.
SUMMARIZES THE CHANGES TO THE PREVIOUSLY ISSUED FINANCIAL INFORMATION
Account | 12/31/2020 As reported | Adjustment | 12/31/2020 Adjusted | |||||||||
Earn-out liability | 2,631,418 | 300,000 | 2,931,418 | |||||||||
Goodwill | 9,265,070 | (503,345 | ) | 8,761,725 | ||||||||
Common stock issuable | 822,116 | (482,116 | ) | 340,000 | ||||||||
Additional paid-in-capital | 11,377,123 | 182,116 | 11,559,239 | |||||||||
Accumulated Deficit | (12,482,281 | ) | 122,601 | (12,359,680 | ) |
Account | 3/31/2021 As reported | Adjustment | 3/31/2021 Adjusted | |||||||||
Common stock issuable | 482,116 | (482,116 | ) | 0 | ||||||||
Additional paid-in-capital | 25,810,147 | 182,116 | 25,992,263 | |||||||||
Accumulated Deficit | (13,123,609 | ) | 150,003 | (12,973,606 | ) |
13 |
Recently Issued Accounting Pronouncements
In June 2016, the FASBWe do not expect any recently issued ASU No. 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”), which requires the measurement of expected credit losses for financial instruments carried at amortized cost, such as accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU isaccounting pronouncements to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financing Instruments—Credit Losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. On November 15, 2019, the FASB delayed the effective date of FASB ASC Topic 326 for certain small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition. The Company does not currently believe the adoption of this standard will have a significant impactmaterial effect on itsour financial statements, given its history of minimal bad debt expense relating to trade accounts receivable.statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which eliminates certain exceptions to the general principles in Topic 740 and simplifies other areas of the existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted this pronouncement January 1, 2021.
NOTE 3. 2. STRATEGIC INVESTMENTS AND BUSINESS COMBINATIONCOMBINATIONS
To date, we have acquired seven insurance brokerages (see table below), including both acquisitions of affiliated companies (i.e., owned by Reliance Holdings before the acquisition) and unaffiliated companies. As our acquisition strategy continues, our reach within the insurance arena can provide us with the abilityMedigap Healthcare Insurance Company, LLC Transaction
On January 10, 2022, pursuant to offer lower rates, which could boost our competitive position within the industry.
The following table lists our activity inan asset purchase agreement, dated December 21, 2021, by number of agents, approximate policies issued and revenue written:
Agency Name | Number of Agents | Number of Policies issued | Aggregate Revenue Recognized March 31 2021 | |||||||||
USBA and EBS | 6 | 5,173 | $ | 221,219 | ||||||||
UIS Agency, LLC / Commercial Solutions | 2 | 48 | $ | 88,818 | ||||||||
Southwestern Montana | 13 | 1,212 | $ | 535,116 | ||||||||
Fortman Insurance | 14 | 3,258 | $ | 457,573 | ||||||||
Altruis | 8 | 6,298 | $ | 993,602 |
The following table lists our activity in 2020 by number of agents, approximate policies issued and revenue written:
Agency Name | Number of Agents | Number of Policies issued | Aggregate Revenue Recognized December 31, 2020 | |||||||||
USBA and EBS | 6 | 3,278 | $ | 330,978 | ||||||||
Commercial Solutions | 2 | 32 | $ | 93,518 | ||||||||
Southwestern Montana | 13 | 1,031 | $ | 489,826 | ||||||||
Fortman Insurance | 14 | 3,110 | $ | 537,598 | ||||||||
Altruis | 8 | 5,026 | $ | 552,394 |
UIS Transaction
On August 17, 2020, the Company entered into a Stock Purchase Agreement with UIS Agencycompleted the acquisition of all of the assets of Medigap Healthcare Insurance Company, LLC whereby the Company shall purchase the business and certain assets noted within the Purchase Agreement (the “UIS Acquisition”(“Medigap”) for a total purchase price of $883,334. The purchase price was paid with a$20,096,250, consisting of: (i) payment to Medigap of $18,138,750 in cash paymentand (ii) the issuance to Medigap of $601,696, $200,000 in shares of the Company’s restricted common stock in a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. The purchase price is subject to post-closing adjustment to reconcile certain pre-closing credits and an earn-out payment. Three cash installment payments totaling $500,000 were due on September 30, 2020, October 31, 2020liabilities of the parties. The shares issued to Medigap as part of the purchase price are further subject to lock up arrangements pursuant to which 50% of the shares may be sold after the one-year anniversary of the date of closing of the transaction and December 31, 2020. Earn-out payment is dependent on the Net Product Line Revenues being equal to or greater than $450,000 for the measurement period. The balance of the earn-out liability asshares may be sold after the second-year anniversary of March 31, 2021 and December 31, 2020 was $81,638 and is included in long term debt on the balance sheet.date of closing of the transaction.
The UIS Acquisitionacquisition of Medigap was accounted for as a business combination in accordance with the acquisition method under the guidance in ASC 805-10 and 805-20.pursuant to FASB Topic No. 805, Business Combination (ASC 805). Accordingly, the total purchase consideration was allocated to intangiblethe assets acquired, and liabilities assumed based on their respective estimated fair values. The acquisition method of accounting requires, among other things, that assets acquired, and liabilities assumed, if any, in a business purchase combination be recognized at their fair values as of the acquisition date. The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating the costs, and timing.
The preliminary allocation of the purchase price in connection with the UIS Acquisitionacquisition of Medigap was calculated as follows:
SCHEDULE OF ALLOCATION OF PURCHASE PRICE
Description | Fair Value | Weighted Average Useful Life (Years) | Fair Value | Weighted Average Useful Life (Years) | ||||||||||||
Cash | $ | 5,772 | ||||||||||||||
Trade name and trademarks | 35,600 | 5 | ||||||||||||||
Property, plant and equipment | $ | 20,666 | 5 | |||||||||||||
Right-of-use asset | 317,787 | |||||||||||||||
Trade names | 340,000 | 15 | ||||||||||||||
Customer relationships | 100,000 | 10 | 4,550,000 | 12 | ||||||||||||
Non-competition agreements | 25,500 | 5 | ||||||||||||||
Technology | 67,000 | 3 | ||||||||||||||
Backlog | 210,000 | 1 | ||||||||||||||
Chargeback reserve | (1,484,473 | ) | ||||||||||||||
Lease liability | (317,787 | ) | ||||||||||||||
Goodwill | 716,462 | Indefinite | 19,199,008 | Indefinite | ||||||||||||
$ | 883,334 | $ | 22,902,201 |
Trade name was measured at fair value using the relief-from-royalty method under the income approach. Significant inputs used to measure the fair value include an estimate of projected revenue from the trade name, a pre-tax royalty rate of 0.5% and a discount rate of 11.0%.
Customer relationships were measured at fair value using the multiple-period excess earnings method under the income approach. Significant inputs used to measure the fair value include an estimate of projected revenue and costs associated with existing customers, and a discount rate of 11.0%.
Technology was measured at fair value using the cost replacement method of the cost approach. Significant inputs used to measure the fair value include an estimate of cost to replace, an obsolescence rate of 40.3%.
14 |
The value assigned to backlog acquired was estimated based upon the contractual nature of the backlog as of the acquisition date, using the income approach to discount back to present value the cash flows attributable to the backlog, using a discount rate of 11.0%.
Goodwill of $716,462$19,199,008 arising from the UIS Acquisitionacquisition of Medigap consisted of the value of the employee workforce and the residual value after all identifiable intangible assets were valued. Goodwill recognized pursuant to the UIS Acquisitionacquisition of Medigap is currently expected to be deductible for income tax purposes. Total acquisition costs for the UIS Acquisitionacquisition of Medigap incurred were $33,344$94,065 recorded as a component of General and administrative expenses.
The revenuesapproximate revenue and net profit or loss for the acquired business as a standalone entity per ASC 805 from January 1, 202010, 2022 to March 31, 2020September 30, 2022 was $3,868,654 and a loss of $ , respectively.
Pro Forma Information
The results of operations of Medigap will be included in the Company’s consolidated financial statements as of the date of acquisition through the current period end. The following supplemental pro-forma financial information approximate combined financial information assumes that the acquisition had occurred at the beginning of the nine months ended September 30, 2022 and 2021:
SCHEDULE OF PRO FORMA INFORMATION RELATED TO ACQUISITION
September 30, | September 30, | |||||||
2022 | 2021 | |||||||
Revenue | $ | 12,962,843 | $ | 10,931,340 | ||||
Net Income (Loss) | $ | 25,971,268 | $ | (2,344,977 | ) | |||
Earnings (Loss) per common share, basic | $ | 1.10 | $ | (0.24 | ) | |||
Earnings (Loss) per common share, diluted | $ | (0.78 | ) | $ | (0.24 | ) |
Barra & Associates, LLC Transaction
On April 26, 2022, the Company entered into an asset purchase agreement (the “APA”) with Barra & Associates, LLC (“Barra”) pursuant to which the Company purchased all of the assets of Barra & Associates, LLC on April 26, 2022 for a purchase price in the amount of $7,725,000 in cash, with $6,000,000 paid to Barra at closing, $1,125,000 payable in six months from closing, and a final estimated earnout of $600,000 payable over two years from closing, based upon meeting stated milestones. The source of the cash payment was $6,520,000 in funds borrowed from Oak Street Lending (“Loan”), the Company’s existing lender pursuant to a Fifth Amendment to Credit Agreement and Promissory Note, of even date. The purchase price is subject to post-closing adjustment to reconcile certain pre-closing credits and liabilities of the parties.
The acquisition of Barra was accounted for as a business combination in accordance with the acquisition method pursuant to FASB Topic No. 805, Business Combination (ASC 805). Accordingly, the total purchase consideration was allocated to the assets acquired, and liabilities assumed based on their respective estimated fair values. The acquisition method of accounting requires, among other things, that assets acquired, and liabilities assumed, if any, in a business purchase combination be recognized at their fair values as of the acquisition date. The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating the costs, and timing.
15 |
The preliminary allocation of the purchase price in connection with the acquisition of Barra was calculated as follows:
SCHEDULE OF ALLOCATION OF PURCHASE PRICE
Description | Fair Value | Weighted Average Useful Life (Years) | ||||||
Acquired accounts receivable | $ | 92,585 | ||||||
Property, plant and equipment | 8,593 | 7 | ||||||
Right-of-use asset | 122,984 | |||||||
Trade names | 22,000 | 4 | ||||||
Customer relationships | 550,000 | 10 | ||||||
Agency relationships | 2,585,000 | 10 | ||||||
Developed technology | 230,000 | 5 | ||||||
Lease liability | (122,984 | ) | ||||||
Goodwill | 4,236,822 | Indefinite | ||||||
$ | 7,725,000 |
Trade name was measured at fair value using the relief-from-royalty method under the income approach. Significant inputs used to measure the fair value include an estimate of projected revenue from the trade name, a pre-tax royalty rate of 0.5% and a discount rate of 19.5%.
Customer and Agency relationships were $173,430. measured at fair value using the multiple-period excess earnings method under the income approach. Significant inputs used to measure the fair value include an estimate of projected revenue and costs associated with existing customers, and a discount rate of 19.5%.
Developed technology was measured at fair value using the cost replacement method of the cost approach. Significant inputs used to measure the fair value include an estimate of cost to replace, an obsolescence rate of 28.6%.
Goodwill of $4,236,822 arising from the acquisition of Barra consisted of the value of the employee workforce and the residual value after all identifiable intangible assets were valued. Goodwill recognized pursuant to the acquisition of Barra is currently expected to be deductible for income tax purposes. Total acquisition costs incurred through September 30, 2022 for the acquisition of Barra were $72,793 recorded as a component of General and administrative expenses.
The approximate revenue and net profit or loss for the acquired business as a standalone entity per ASC 805 from April 26, 2022 to September 30, 2022 was not determinable$655,002 and a loss of $ , respectively.
Pro Forma Information
The results of operations of Barra will be included in the Company’s consolidated financial statements as the business was fully integrated with an existing subsidiary of the Company.date of acquisition through the current period end. The following supplemental pro forma financial information approximate combined financial information assumes that the acquisition had occurred at the beginning of the nine months ended September 30, 2022 and 2021:
SCHEDULE OF PRO FORMA INFORMATION RELATED TO ACQUISITION
September 30, | September 30, | |||||||
2022 | 2021 | |||||||
Revenue | $ | 13,143,889 | $ | 8,370,850 | ||||
Net Income (Loss) | $ | 26,192,218 | $ | (1,940,384 | ) | |||
Earnings (Loss) per common share, basic | $ | 1.11 | $ | (0.20 | ) | |||
Earnings (Loss) per common share, diluted | $ | (0.76 | ) | $ | (0.20 | ) |
16 |
NOTE 4. INVESTMENT IN NSURE, INC.
On February 19, 2020, the Company entered into a securities purchase agreement with NSURE, Inc. (“NSURE”) whereas the Company may invest up to an aggregate of $20,000,000 in NSURE which will be funded with three tranches. In exchange, the Company will receive a total of 5,837,462 shares of NSURE’s Class A Common Stock, which represents 35% of the outstanding shares. The first tranche of $1,000,000 was paid immediately upon execution of the agreement. As a result of the first tranche, the Company received 291,873 shares of NSURE’s Class A Common Stock. The second tranche of $3,000,000 and third tranche of $16,000,000 have not occurred as of March 31, 2021. The Company will use the cost method of acquisition for the initial recognition of this investment. Once the Company determines that it can exercise significant influence over NSURE, it will begin to account for its investment under the equity method. On February 10, 2020, the Company issued 46,667 shares of common stock to a third-party individual for the purpose of raising capital to fund the Company’s investment in NSURE, Inc. The Company received proceeds of $1,000,000 for the issuance of these common shares. As of March 31, 2021 and December 31, 2020, the investment balance is $1,350,000.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Estimated Useful Lives (Years) | March 31, 2021 | December 31, 2020 | ||||||||
Computer equipment and software | 5 | $ | 33,774 | $ | 33,774 | |||||
Office equipment and furniture | 7 | 36,573 | 36,573 | |||||||
Leasehold Improvements | Shorter of the useful life or the lease term | 56,631 | 56,631 | |||||||
Software | 3 | 562,327 | 562,327 | |||||||
Property and equipment, gross | 689,305 | 689,305 | ||||||||
Less: Accumulated depreciation and amortization | (362,877 | ) | (313,358 | ) | ||||||
Property and equipment, net | $ | 326,428 | $ | 375,947 |
Depreciation expense associated with property and equipment is included in depreciation within the Company’s Condensed Consolidated Statements of Operations was $49,519 and $51,825 for the three months ended March 31, 2021 and 2020, respectively.
NOTE 6. 3. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2020 the Company reorganized its reporting structure into a single operating unit. All of the acquisitions made by the Company are in one industry insurance agencies. These agencies operate in a very similar economic and regulatory environment. The Company has one executive who is responsible for the operations of the insurance agencies. This executive reports directly to the Chief Financial Officer (“CFO”) on a quarterly basis. Additionally, the CFO who is responsible for the strategic direction of the Company review the operations of the insurance agency business as opposed to an office by office view. In accordance with guidance in ASC 350-20-35-45 all the Company’s goodwill will be reassigned to a single reporting unit.
As of March 31, 2021 and December 31, 2020,following table rolls forward the Company’s goodwill balance for the periods ending September 30, 2022 and December 31, 2021. As discussed in Note 1 - Prior Period Adjustments, a $(503,345) adjustment was $9,265,070.identified for goodwill which impacted the closing December 31, 2020 balance in the same amount. Accordingly, the December 31, 2020 balance is adjusted in the following table from the originally reported balance of $9,265,070 to $8,761,725.
SCHEDULE OF IMPAIRMENT OF GOODWILL
Goodwill | ||||
December 31, 2019 | $ | 8,548,608 | ||
Goodwill recognized in connection with acquisition on August 17, 2020 | 716,462 | |||
December 31, 2020 | $ | 9,265,070 | ||
March 31, 2021 | $ | 9,265,070 |
Goodwill | ||||
December 31, 2020 | $ | 8,761,725 | ||
Goodwill recognized in connection with Kush acquisition on May 1, 2021 | 1,288,552 | |||
December 31, 2021 | 10,050,277 | |||
Goodwill recognized in connection with Medigap acquisition on January 10, 2022 | 19,199,008 | |||
Goodwill recognized in connection with Barra acquisition on April 26, 2022 | 4,236,822 | |||
September 30, 2022 | $ | 33,486,107 |
The following table sets forth the major categories of the Company’s intangible assets and the weighted-average remaining amortization period as of March 31, 2021:September 30, 2022:
Weighted Average Remaining Amortization period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||
Trade name and trademarks | 3.8 | $ | 1,087,760 | $ | (360,101 | ) | $ | 727,659 | ||||||
Customer relationships | 8.2 | 3,686,290 | (720,424 | ) | 2,965,867 | |||||||||
Non-competition agreements | 3.2 | 2,677,010 | (968,455 | ) | 1,708,556 | |||||||||
$ | 7,451,060 | $ | (2,048,979 | ) | $ | 5,402,082 |
SCHEDULE OF INTANGIBLE ASSETS AND WEIGHTED-AVERAGE REMAINING AMORTIZATION PERIOD
Weighted Average Remaining Amortization period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||
Trade name and trademarks | 4.6 | $ | 2,141,858 | $ | (897,390 | ) | $ | 1,244,468 | ||||||||
Internally developed software | 4.3 | 1,530,537 | (210,443 | ) | 1,320,094 | |||||||||||
Customer relationships | 9.3 | 11,922,290 | (1,793,319 | ) | 10,128,971 | |||||||||||
Purchased software | 0.4 | 665,137 | (568,039 | ) | 97,098 | |||||||||||
Video Production Assets | 0.3 | 50,000 | (36,621 | ) | 13,379 | |||||||||||
Non-competition agreements | 2.1 | 3,504,810 | (2,003,505 | ) | 1,501,305 | |||||||||||
Contracts Backlog | 0.3 | 210,000 | (155,342 | ) | 54,658 | |||||||||||
$ | 20,024,632 | $ | (5,664,659 | ) | $ | 14,359,973 |
The following table sets forth the major categories of the Company’s intangible assets and the weighted-average remaining amortization period as of December 31, 2020:2021:
Weighted Average Remaining Amortization period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Remaining Amortization period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||
Trade name and trademarks | 2.6 | $ | 1,087,760 | $ | (307,163 | ) | $ | 780,597 | 3.5 | $ | 1,777,475 | $ | (609,822 | ) | $ | 1,167,653 | ||||||||||||||
Internally developed software | 4.7 | 595,351 | (28,443 | ) | 566,908 | |||||||||||||||||||||||||
Customer relationships | 7.6 | 3,686,290 | (623,649 | ) | 3,062,641 | 7.7 | 4,237,290 | (1,048,726 | ) | 3,188,564 | ||||||||||||||||||||
Purchased software | 0.6 | 562,327 | (452,985 | ) | 109,342 | |||||||||||||||||||||||||
Video Production Assets | 1.0 | 20,000 | - | 20,000 | ||||||||||||||||||||||||||
Non-competition agreements | 2.6 | 2,677,010 | (834,598 | ) | 1,842,412 | 2.9 | 3,504,809 | (1,478,376 | ) | 2,026,433 | ||||||||||||||||||||
$ | 7,451,060 | $ | (1,765,410 | ) | $ | 5,685,650 | $ | 10,697,252 | $ | (3,618,352 | ) | $ | 7,078,900 |
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Amortization expense was $283,569 and $277,266 for the three months ended March 31, 2021 and 2020, respectively.
The following table reflects the expected amortization expense of acquired intangible assets as of March 31, 2021,September 30, 2022, for each of the following five years and thereafter:
Years ending December 31, | Amortization Expense | |||
2021 | $ | 1,117,013 | ||
2022 | 1,124,024 | |||
2023 | 1,101,669 | |||
2024 | 558,187 | |||
2025 | 371,973 | |||
Thereafter | 1,129,216 | |||
Total | $ | 5,402,082 |
SCHEDULE OF AMORTIZATION EXPENSE OF ACQUIRED INTANGIBLES ASSETS
As of March 31, 2021 and December 31, 2020, the Company was in compliance with the covenants due to start up initiatives that were funded by Reliance Holdings.
1 | ||||
Years ending December 31, | Amortization Expense | |||
2022 (remainder of year) | $ | 707,166 | ||
2023 | 2,536,548 | |||
2024 | 2,158,445 | |||
2025 | 1,764,541 | |||
2026 | 1,504,660 | |||
Thereafter | 5,688,613 | |||
Total | $ | 14,359,973 |
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Significant components of accounts payable and accrued liabilities were as follows:
March 31, 2021 | December 31, 2020 | |||||||
Accounts payable | $ | 186,653 | $ | 980,943 | ||||
Accrued expenses | 19,181 | 35,022 | ||||||
Accrued credit card payables and other liabilities | 44,243 | 127,617 | ||||||
$ | 250,077 | $ | 1,143,582 |
NOTE 8. 4. LONG-TERM DEBT AND SHORT-TERM FINANCINGS
Long-Term Debt
The composition of the long-term debt follows:
SCHEDULE OF LONG TERM DEBT
March 31, 2021 | December 31, 2020 | |||||||
Oak Street Funding LLC Term Loan for the acquisition of EBS and USBA, net of deferred financing costs of $16,270 and $16,825 as of March 31, 2021 and December 31, 2020, respectively | $ | 528,616 | $ | 542,760 | ||||
Oak Street Funding LLC Senior Secured Amortizing Credit Facility for the acquisition of CCS, net of deferred financing costs of $19,542 and $20,181 as of March 31, 2021 and December 31, 2020, respectively | 854,900 | 877,550 | ||||||
Oak Street Funding LLC Term Loan for the acquisition of SWMT, net of deferred financing costs of $12,359 and $13,080 as of March 31, 2021 and December 31, 2020, respectively | 956,671 | 979,966 | ||||||
Oak Street Funding LLC Term Loan for the acquisition of FIS, net of deferred financing costs of $45,569 and $47,023 as of March 31, 2021 and December 31, 2020, respectively | 2,406,843 | 2,465,410 | ||||||
Oak Street Funding LLC Term Loan for the acquisition of ABC, net of deferred financing costs of $51,850 and $54,023 as of March 31, 2021 and December 31, 2020, respectively | 3,893,978 | 3,983,594 | ||||||
8,641,008 | 8,849,280 | |||||||
Less: current portion | (963,450 | ) | (963,450 | ) | ||||
Long-term debt | $ | 7,677,558 | $ | 7,885,830 |
September 30, 2022 | December 31, 2021 | |||||||
Oak Street Funding LLC Term Loan for the acquisition of EBS and USBA, net of deferred financing costs of $12,942 and $14,606 as of September 30, 2022 and December 31, 2021, respectively | $ | 442,368 | $ | 485,317 | ||||
Oak Street Funding LLC Senior Secured Amortizing Credit Facility for the acquisition of CCS, net of deferred financing costs of $15,713 and $17,626 as of September 30, 2022 and December 31, 2021, respectively | 715,816 | 785,826 | ||||||
Oak Street Funding LLC Term Loan for the acquisition of SWMT, net of deferred financing costs of $9,613 and $11,027 as of September 30, 2022 and December 31, 2021, respectively | 811,699 | 884,720 | ||||||
Oak Street Funding LLC Term Loan for the acquisition of FIS, net of deferred financing costs of $38,298 and $42,660 as of September 30, 2022 and December 31, 2021, respectively | 2,045,048 | 2,226,628 | ||||||
Oak Street Funding LLC Term Loan for the acquisition of ABC, net of deferred financing costs of $43,749 and $48,609 as of September 30, 2022 and December 31, 2021, respectively | 3,337,241 | 3,616,754 | ||||||
Oak Street Funding LLC Term Loan for the acquisition of Barra, net of deferred financing costs of $204,958 and $0 as of September 30, 2022 and December 31, 2021, respectively | 6,315,042 | - | ||||||
13,667,214 | 7,999,245 | |||||||
Less: current portion | (1,026,541 | ) | (913,920 | ) | ||||
Long-term debt | $ | 12,640,673 | $ | 7,085,325 |
Oak Street Funding LLC – Term Loans and Credit Facilities
SCHEDULE OF CUMULATIVE MATURITIES OF LONG-TERM LOANS AND CREDIT FACILITIES
Fiscal year ending December 31, | Maturities of Long-Term Debt | |||
2022 (remainder of year) | $ | 211,904 | ||
2023 | 1,168,585 | |||
2024 | 1,482,266 | |||
2025 | 1,616,891 | |||
2026 | 1,760,367 | |||
Thereafter | 7,752,474 | |||
Total | 13,992,487 | |||
Less: debt issuance costs | (325,273 | ) | ||
Total | $ | 13,667,214 |
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DuringShort-Term Financings
The Company financed certain annual insurance premiums through the use of two short-term notes, payable in nine and ten equal monthly installments of $42,894 and $4,456 at interest rates of 7.51% and 7.95%, per annum respectively. Policies financed include directors and officers and errors and omissions insurance coverage with premium financing recognized in 2022 and 2021 of $417,199 and $0, respectively. Outstanding balances as of September 30, 2022 and December 31, 2021, respectively were $309,993 and $0.
NOTE 5. WARRANT LIABILITIES
Series B Warrants
On December 22, 2021, the Company entered into a securities purchase agreement with several institutional buyers for the purchase and sale of (i) warrants to purchase up to an aggregate of 9,779,952 shares of the Company’s common stock, par value $ per share at an exercise price of $4.09 per share, (ii) an aggregate of shares of Common Stock, and (iii) shares of the Company’s newly-designated Series B convertible preferred stock, par value $ per share, with a stated value of $ per share, initially convertible into an aggregate of shares of Common Stock at a conversion price of $4.09 per share, each a freestanding financial instrument, (the “Private Placement”). The aggregate purchase price for the Common Shares, the Preferred Shares and the Warrants was approximately $ .
By entering into the Private Placement on December 22, 2021, the Company entered into a commitment to issue the Common Shares, Preferred Shares and Series B Warrants on the Initial Closing Date for a fixed price and exercise price, as applicable. The commitment to issue Series B Warrants (the “Warrant Commitment”) represents a derivative financial instrument, other than an outstanding share, that, at inception, has both of the following characteristics: (i) embodies a conditional obligation indexed to the Company’s equity. The Company classified the commitment to issue the warrants as a derivative liability because it represents a written option that does not qualify for equity accounting The Company initially measured the derivative liability at its fair value and will subsequently remeasure the derivative liability, at fair value with changes in fair value recognized in earnings. An option pricing model was utilized to calculate the fair value of the Warrant Commitment. The Company initially recorded $17,652,808 of non-operating unrealized losses within the recognition and change in fair value of warrant liabilities account for the year ended December 31, 20182021. The Private Placement closed on January 4, 2022, at which time the Company entered into two debt agreements with Oak Street Funding LLC. On August 1, 2018, EBSremeasured the derivative liability for the warrants issued in the transaction. The Company recognized $7,726,161 and USBA entered into a Credit Agreement with Oak Street Funding LLC (“Oak Street”) whereby EBS$34,621,024 of non-operating unrealized gains within the recognition and USBA borrowed $750,000 from Oak Street under a Term Loan.change in fair value of warrant liabilities account on the condensed consolidated statement of operations for the three and nine months ended September 30, 2022, respectively, related to the subsequent changes in its fair value through September 30, 2022. A corresponding derivative liability of $3,031,784 is included on Company’s condensed consolidated balance sheet as of September 30, 2022. The Term Loan is secured by certain assetsclosing of the Company. Interest accrues at 5.00%Private Placement settled the subscription receivable reported on the basisCompany’s balance sheet as of a 360-day year, maturing 120 months from the Amortization Date (September 25, 2018). The Company incurred debt issuance costs associatedDecember 31, 2021.
Placement Agent Warrants
In connection with the Term LoanPrivate Placement, the Company issued 244,539 warrants to the placement agent for the Private Placement. The warrants were issued as compensation for the Placement Agent’s services. The Placement Agent Warrants are: (i) exercisable on any day after the six (6) month anniversary of the issue date, (ii) expire five years after the closing of the Private Placement, and (iii) exercisable at $4.09 per share. The Placement Agent Warrants contain terms that may require the Company to transfer assets to settle the warrants. Therefore, the Placement Agent Warrants are classified as a derivative liability measured at fair value of $1,525,923 on the date of issuance and will be remeasured each accounting period with the changes in fair value reported in earnings. The Placement Agent Warrants are considered financing expense fees paid to the Placement Agent. Since the financing expenses relate to a derivative liability measured at fair value, this financing expense of $1,525,923, along with non-operating unrealized gains of $193,154 and $1,450,129, were included in the amountrecognition and change in fair value of $22,188. On December 7, 2018, CCS entered into a Facility with Oak Street whereby CCS borrowed $1,025,000 from Oak Street under a senior secured amortizing credit facility. The borrowing rate underwarrant liabilities account on the Facilitycondensed consolidated statement of operations for the three and nine months ended September 30, 2022, respectively, A corresponding derivative liability of $75,794 is a variable rate equal to Prime +1.50% and matures 10 years from the closing date. The Company incurred debt issuance costs associated with the Facility in the amountincluded on Company’s condensed consolidated balance sheet as of $25,506, which were deferred and are amortized over the length of the Facility.September 30, 2022.
During the year ended December 31, 2019 the Company entered in Credit Agreements with Oak Street on April 1, 2019, May 1, 2019 and September 5, 2019 whereby the Company borrowed a total amount of $7,912,000 from Oak Street under the Term Loans. The Term Loans are secured by certain assets of the Company. The borrowing rates under the Facility is a variable rate equal to Prime + 2.00% and matures 10 years from the closing date. The Company recorded debt issuance costs associated with the aforementioned loans in total of $181,125.
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Oak Street Funding LLC – Senior Secured Amortizing Credit Facility (“Facility”)
NOTE 6. EQUITY
Aggregated cumulative maturities of long-term obligations (including the Term Loan and the Facility), excluding deferred financing costs, as of March 31, 2021 are:
Period ending December 31, | Maturities of Long-Term Debt | |||
2021 | $ | 963,450 | ||
2022 | 963,450 | |||
2023 | 963,450 | |||
2024 | 963,450 | |||
2025 | 963,450 | |||
Thereafter | 4,032,031 | |||
Total | $ | 8,849,281 |
Loans Payable
Paycheck Protection Program
On April 4, 2020, the Company entered into a loan agreement with First Financial Bank for a loan of $673,700 pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 (the “CARES Act”). Under the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent loan proceeds are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP. The Company intends to use the entire loan amount for designated qualifying expenses and to apply for forgiveness in accordance with the terms of the PPP. This loan is evidenced by a promissory note dated April 4, 2020 and matures two years from the disbursement date. This loan bears interest at a rate of 1.00% per annum, with the first six months of interest deferred. Principal and interest are payable monthly commencing one year after the disbursement date and may be prepaid by the Company at any time prior to maturity with no prepayment penalties. This loan contains customary events of default relating to, among other things, payment defaults or breaches of the terms of the loan. Upon the occurrence of an event of default, the lender may require immediate repayment of all amounts outstanding under the note. The principal and interest of the loan are repayable in 18 monthly equal installments of $37,913 each. Interest accrued in the first six months is included in the monthly installments. Installments must be paid on the 24th day of each month. On November 17, 2020 the Company received notification from the SBA that the PPP loan has been forgiven in its entirety. As of March 31, 2021 the Company has repaid a total of $165,000 on this loan.
NOTE 9. SIGNIFICANT CUSTOMERS
Carriers representing 10% or more of total revenue are presented in the table below:
For the three months ended March 31, | For the period ended December 31, | |||||||||||||||
2021 | 2020 | 2020 | 2019 | |||||||||||||
BlueCross BlueShield | 22 | % | 25 | % | 25 | % | 26 | % | ||||||||
Priority Health | 35 | % | 24 | % | 26 | % | 20 | % |
No other single insurance carrier accounted for more than 10% of the Company’s commission revenues. The loss of any significant customer, including Priority Health and BlueCross BlueShield, could have a material adverse effect on the Company.
NOTE 10. EQUITY
Preferred Stock
The Company has been authorized to issue $0.086$ par value Preferred Stock. The Board of Directors is expressly vested with the authority to divide any or all of the Preferred Stock into series and to fix and determine the relative rights and preferences of the shares of each series so established, within certain guidelines established in the Articles of Incorporation. Each shares of
In January 2022, the Company issued shares of its newly designated Series B convertible preferred stock through the Private Placement for the purpose of raising capital. The Series B convertible preferred stock have no voting rights and initially each share of Series A Convertible Preferred Stock shall have ten (10) votes per share and may be converted into ten (10) shares of $0.086 par valuethe Company’s common stock. The holders of the Series A Convertible Preferred Stock shall beB convertible preferred stock are not entitled to receive when, if and as declared byany dividends other than any dividends paid on account of the Board, out of funds legally available therefore, cumulative dividends payable in cash. The annual interest rate at which cumulative preferred dividends will accrue on each share of Series A Convertible Preferred Stock is 0%.common stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, before any distribution of assetsthe holders shall be entitled to receive out of the Corporation shall be made toassets, whether capital or set apart for the holders of the Common Stock and subject and subordinate to the rights of secured creditorssurplus, of the Company the holderssame amount that a holder of Series Acommon stock would receive if the Preferred Stock shall receive an amount per share equal to the greater of (i) one dollar ($1.00), adjustedwere fully converted (disregarding for such purposes any recapitalization, stock combinations, stock dividends (whether paid or unpaid), stock options and the like with respect to such shares, plus any accumulated but unpaid dividends (whether or not earned or declared) on the Series A Convertible Preferred Stock, and (ii) the amount such holder would have received if such holder has converted its shares of Series A Convertible Preferred Stockconversion limitations hereunder) to common stock subject to but immediately prior to such liquidation.
On February 11, 2021, Reliance Global Holdings, LLC, a related party, converted 394,493 shares of Series A Convertible Preferred Stock into 339,264 shareswhich amounts shall be paid pari-passu with all holders of common stock.
As of March 31, 2021 and December 31, 2020, there were 1,147 and 395,640 shares ofDuring August 2022, all AB Convertible Preferred Stock outstanding, respectively.were converted by third parties into shares of common stock. Series
Common Stock
The Company has been authorized to issue $0.086$ par value. Each share of issued and outstanding common stock shall entitleentitles the holder thereof to fully participate in all shareholder meetings, to cast one vote on each matter with respect to which shareholders have the right to vote, and to share ratably in all dividends and other distributions declared and paid with respect to common stock, as well as in the net assets of the corporation upon liquidation or dissolution. shares of common stock,
In February 2021,January 2022, the Company issued 2,070,000 shares of common stock through a stock offeringthe Private Placement for the purpose of raising capital. The CompanySee Note 5 - Warrant Liabilities for proceeds received gross proceeds of $12,420,000 forby the issuance of these common shares.Company.
In February 2021, Reliance Global Holdings, LLC, a related party, converted $3,800,000 of outstanding debt into 633,333 shares of common stock. The conversion considered the fair market value of the stock on the day of conversion of $6.00 for total shares issued as a result of 633,333.
Stock Options
During the year ended December 31, 2019,January 2022, the Company adopted the Reliance Global Group, Inc. 2019 Equity Incentive Plan (the “Plan”) under which options exercisable forissued shares of common stock have been or may be grantedpursuant to employees, directors, consultants, and service providers.the Medigap Acquisition.
In January 2022, upon agreement with Series A totalwarrant holders, warrants were exercised at a price of 700,000$6.60 into of the Company’s common stock.
In March 2022, the Company issued are reserveddue to the vesting of stock awards pursuant to an employee agreement. shares of the Company’s common stock
In May and June 2022, 3,276,929 Series C prepaid warrants were exchanged for issuance under3,276,929 shares of the Plan. At March 31, 2020Company’s common stock.
In July 2022, 1,221,347 Series D prepaid warrants were exchanged for 1,221,347 shares of the Company’s common stock.
As of September 30, 2022 and December 31, 2020,2021, there were 466,083 and shares of common stock reserved for future awards under the Plan. The Company issues new shares of common stock from the shares reserved under the Plan upon exercise of options.Common Stock outstanding, respectively.
The Plan is administered by the Board of Directors (the “Board”). The Board is authorized to select from among eligible employees, directors, and service providers, those individuals to whom options are to be granted and to determine the number of shares to be subject to, and the terms and conditions of the options. The Board is also authorized to prescribe, amend, and rescind terms relating to options granted under the Plan. Generally, the interpretation and construction of any provision of the Plan or any options granted hereunder is within the discretion of the Board.
The Plan provides that options may or may not be Incentive Stock Options (ISOs) within the meaning of Section 422 of the Internal Revenue Code. Only employees of the Company are eligible to receive ISOs, while employees, non-employee directors, consultants, and service providers are eligible to receive options which are not ISOs, i.e. “Non-Statutory Stock Options.” The options granted by the Board in connection with its adoption of the Plan were Non-Statutory Stock Options.
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The fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model or the value of the services provided, whichever is more readily determinable. The Black-Scholes option pricing model takes into account, as of the grant date, the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the option.Warrants
The following is a summary of the stock options granted, forfeited or expired, and exercised under the Plan for the three months ended March 31, 2021:Series A Warrants
Options | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2020 | 233,917 | $ | 15.43 | 3.63 | $ | - | ||||||||||
Granted | - | - | - | - | ||||||||||||
Forfeited or expired | - | - | - | - | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Outstanding at March 31, 2021 | 233,917 | $ | 15.22 | 3.38 | $ | - |
The following is a summary of the stock options granted, forfeited or expired, and exercised under the Plan for the three months ended March 31, 2020:
Options | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2019 | 229,833 | $ | 15.43 | 4.62 | $ | 2,995,640 | ||||||||||
Granted | 23,333 | 33.43 | 4.28 | - | ||||||||||||
Forfeited or expired | - | - | - | - | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Outstanding at March 31, 2020 | 253,166 | $ | 17.14 | 4.42 | $ | 2,558,300 |
The following is a summary ofIn conjunction with the Company’s non-vested stock options as of March 31, 2021, and changes during the three months ended March 31, 2021:
Options | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life (Years) | ||||||||||
Non-vested at December 31, 2020 | 159,542 | $ | 13.39 | 2.53 | ||||||||
Granted | - | - | - | |||||||||
Vested | - | - | - | |||||||||
Forfeited or expired | - | - | - | |||||||||
Non-vested at March 31, 2021 | 159,542 | $ | 14.87 | 2.34 |
The following is a summary of the Company’s non-vested stock options as of March 31, 2020, and changes during the three months ended March 31, 2020:
Options | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life (Years) | ||||||||||
Non-vested at December 31, 2019 | 212,333 | $ | 15.43 | 4.30 | ||||||||
Granted | 23,333 | 33.43 | 4.98 | |||||||||
Vested | (17,500 | ) | 17.14 | 3.96 | ||||||||
Forfeited or expired | - | - | - | |||||||||
Non-vested at March 31, 2020 | 218,166 | $ | 17.14 | 3.88 |
During the three months ended March 31, 2021, the Board did not approved any options to be issued pursuant to the Plan.
During the three months ended March 31, 2020, the Board approved options to be issued pursuant to the Plan to a certain current employee, during the period, totaling 23,333 shares. These options have been granted with an exercise price greater than the market value of the common stock on the date of grant and have a contractual term of 5 years. The options vest ratably over a 4-year period through February 2024 and remain subject to forfeiture if vesting conditions are not met. Compensation cost is recognized on a straight-line basis over the vesting period or requisite service period. Subsequent to March 31, 2020 the employee was terminated and the options were forfeited.
The Company determined that the options granted had a total fair value for the period ending on March 31, 2020 of $3,967,480 which will be amortized in future periods through November 2023. During the three months ending March 31, 2020, the Company recognized $394,719 of compensation expense relating to the stock options granted to employees, directors, and consultants. As of March 31, 2020, unrecognized compensation expense totaled $2,525,385 which will be recognized on a straight-line basis over the vesting period or requisite service period through November 2023.
The intrinsic value is calculated as the difference between the market value and the exercise price of the shares on March 31, 2020. The market values as of March 31, 2020 was $17.14 based on the closing bid price for March 31, 2020.
As of March 31, 2021 the Company determined that the options granted had a total fair value of $3,386,156. During the three months ended March 31, 2021, the Company recognized $232,684 of compensation expense relating to the stock options granted to employees, directors, and consultants. As of March 31, 2021, unrecognized compensation expense totaled $801,698.
The intrinsic value is calculated as the difference between the market value and the exercise price of the shares on March 31, 2021. The market values as of March 31, 2021 was $4.36 based on the closing bid price for March 31, 2021.
The Company estimated the fair value of each stock option on the grant date using a Black-Scholes option-pricing model. Black-Scholes option-pricing models requires the Company to make predictive assumptions regarding future stock price volatility, recipient exercise behavior, and dividend yield. The Company estimated the future stock price volatility using the historical volatility over the expected term of the option. The expected term of the options was computed by taking the mid-point between the vesting date and expiration date. The following assumptions were used in the Black-Scholes option-pricing model:
Three Months Ended | Three Months Ended | |||||||
March 31, 2021 | March 31, 2020 | |||||||
Exercise price | $0.16 - $0.26 | $ | 0.39 | |||||
Expected term | 3.25 to 3.75 years | 3.75 years | ||||||
Risk-free interest rate | 0.38% - 2.43 | % | 0.38 | % | ||||
Estimated volatility | 293.07% - 517.13 | % | 318.00 | % | ||||
Expected dividend | - | - | ||||||
Option price at valuation date | $0.12 - $0.31 | $ | 0.31 |
Warrants
As a part of the Company’sinitial public offering, the Company issued 2,070,000 Series A Warrants. These warrants areWarrants which were classified as equity warrants because of provisions, pursuant to the warrant agreement, that permit the holder obtain a fixed number of shares for a fixed monetary amount. The warrants are standalone equity securities that are transferable without the Company’s consent or knowledge. The warrants were recorded at a value per the offering of $0.01.$0.01. The warrants may be exercised at any point from the effective date until the 5 year5-year anniversary of issuance and are not subject to standard anti-dilutionantidilution provisions. The Series A Warrants are exercisable at a per share exercise price equal to 110% of the public offering price of one share of common stock and accompanying Series A Warrant, $6.00.$6.00. Series A warrant holders exercised Series A warrants in January 2022, resulting in of Series A warrants remaining issued and outstanding as of September 30, 2022.
Series C and D Warrants
In January 2022, as a result of the Private Placement and the Medigap Acquisition, the Company received a deficiency notification from Nasdaq indicating violation of Listing Rule 5365(a). As part of its remediation plan, in March 2022, the Company entered into Exchange Agreements with the holders of common stock issued in January 2022. Pursuant to the Exchange Agreements, the Company issued 3,276,929 Series C prepaid warrants in exchange for 3,276,929 shares of the Company’s common stock. Additionally, as compensation for entering into the Exchange Agreements, the Company issued 1,222,498 Series D prepaid warrants to the Private Placement investors for no additional consideration. The fair value of the Series D prepaid warrants was treated as a deemed dividend and accordingly treated as a reduction from income available to common stockholders in the calculation of earnings per share. Refer to Note 7, Earnings (Loss) Per Share for additional information.
The Series C and D Warrants are equity classified pursuant to the warrant agreement provisions that permit holders to obtain a fixed number of shares for a fixed monetary amount. The warrants are standalone equity securities that are transferable without the Company’s consent or knowledge. The warrants expire on the fifth anniversary of the respective issuance dates and are exercisable at a per share exercise price equal to $0.001.
In May and June 2022, the 0.001. Through September 30, 2022, the Company has received payments of $1,336 for these issuances. Series C prepaid warrants were converted for shares of the Company’s common stock for a conversion price of $
In July 2022, the 0.001 through both cash and cashless exercises. Proceeds of $795 were received in conjunction with the cash exercise. Series D prepaid warrants were converted into shares of the Company’s common stock for a conversion price of $
Equity-based Compensation
Between February and May 2022, three existing employees were awarded bonuses consisting of shares of the Company’s common stock to be vested immediately. The shares granted in 2022 were valued at $
In April 2022 , pursuant to an agreement between the Company and an executive, the executive will be compensated with 60,000 shares of the Company’s common stock. These shares vest quarterly over a three-year period. The shares granted were valued at $178,200 at the date of the grant. For the three and nine months ended September 30, 2022, compensation expense on this grant was $ and $ , respectively. As of September 30, 2022, no shares were issued under this contract.
Pursuant to an equity-based compensation program at one of the Company’s subsidiaries which provides agents the ability to earn and receive restricted stock awards upon completion of agreed upon service requirements, the Company granted 303,143 restricted stock awards which were immediately vested. Stocks earned are restricted for twelve months. The stocks were valued at $and recognized as stock-based compensation for the three and nine months ended September 30, 2022.
Basic earnings per common share (“EPS”) applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding.
If there is a loss from operations, diluted EPS is computed in the same manner as basic EPS is computed. Similarly, if the Company has net income but its preferred dividend adjustment made in computing income available to common stockholders results in a net loss available to common stockholders, diluted EPS would be computed in the same manner as basic EPS. Accordingly,
21 |
SCHEDULE OF CALCULATIONS OF BASIC AND DILUTED EPS
Three Months | Three Months | |||||||
ended | ended | |||||||
September 30, 2022 | September 30, 2021 | |||||||
Net income (loss) | $ | 6,122,093 | $ | (595,233 | ) | |||
Deemed dividend | - | - | ||||||
Net income (loss), numerator, basic computation | 6,122,093 | (595,233 | ) | |||||
Recognition and change in fair value of Series B warrant liability | (7,726,161 | ) | - | |||||
Recognition and change in fair value of Placement Agent warrant liability | (193,154 | ) | ||||||
Net income (loss), numerator, diluted computation | $ | (1,797,222 | ) | $ | (595,233 | ) | ||
Weighted average common shares | 16,491,942 | 10,944,439 | ||||||
Effect of series C warrants | - | - | ||||||
Effect of Series D warrants | 623,285 | - | ||||||
Effect of weighted average vested stock awards | 309,040 | |||||||
Weighted average shares - denominator basic computation | 17,424,267 | 10,944,439 | ||||||
Effect of dilutive securities | - | - | ||||||
Weighted average shares, as adjusted - denominator diluted computation | 17,424,267 | 10,944,439 | ||||||
Earnings (loss) per common share – basic | $ | 0.35 | $ | (0.05 | ) | |||
Earnings (loss) per common share – diluted | (0.10 | ) | (0.05 | ) |
Nine Months | Nine Months | |||||||
ended | ended | |||||||
September 30, 2022 | September 30, 2021 | |||||||
Net income (loss) | $ | 25,957,785 | $ | (2,486,045 | ) | |||
Deemed dividend | (6,930,335 | ) | - | |||||
Net income (loss), numerator, basic computation | 19,027,450 | (2,486,045 | ) | |||||
Recognition and change in fair value of Series B warrant liability | (32,474,324 | ) | ||||||
Net income (loss), numerator, diluted computation | $ | (13,446,874 | ) | $ | (2,486,045 | ) | ||
Weighted average shares | 14,308,069 | 9,809,092 | ||||||
Effect of series C warrants | 1,819,213 | |||||||
Effect of Series D warrants | 1,019,803 | - | ||||||
Effect of weighted average vested stock awards | 173,061 | - | ||||||
Weighted average shares - denominator basic computation | 17,320,146 | 9,809,092 | ||||||
Effect of dilutive securities | - | - | ||||||
Weighted average shares, as adjusted - denominator diluted computation | 17,320,146 | 9,809,092 | ||||||
Earnings (loss) per common share - basic | $ | 1.10 | $ | (0.25 | ) | |||
Earnings (loss) per common share - diluted | $ | (0.78 | ) | $ | (0.25 | ) |
The gain in fair value of the outstanding Series A Convertible Preferred StockB warrants for the three and nine months September 30, 2022 is consideredincluded in the numerator of the dilutive EPS calculation to eliminate the effects of the warrants that have been recorded in net income as the impact is dilutive. The gain in fair value of the Placement Agent warrants for the three months September 30, 2022 is included in the numerator of the dilutive EPS calculation to eliminate the effects of the warrants that have been recorded in net income as the impact is dilutive. For the nine months ended September 30, 2022, as the fair value change in the Placement Agent warrants is a loss, the addback of the loss would result in anti-dilution and therefore is not included in the numerator of dilutive EPS.
The potential impact of the in which 100,000 and 395,640 were issued and outstanding at March 31, 2021 and 2020, respectively. Series A Convertible Preferred Stock is convertible into common stock on a 10 for 1 basis. The outstanding stock optionssecurities.
SCHEDULE OF DILUTIVE NET LOSS PER COMMON SHARES
1 | 2 | |||||||
For the three months ended | ||||||||
September 30, 2022 | September 30, 2021 | |||||||
Shares subject to outstanding common stock options | 163,925 | 163,925 | ||||||
Shares subject to outstanding Series A warrants | 1,695,000 | 2,070,000 | ||||||
Shares subject to preferred stock | 2,219,084 | 11,670 | ||||||
Shares subject to unvested stock awards | 61,280 | 15,655 |
The calculations of basic and diluted EPS, are as follows:
1 | 2 | |||||||
For the nine months ended | ||||||||
September 30, 2022 | September 30, 2021 | |||||||
Shares subject to outstanding common stock options | 163,925 | 163,925 | ||||||
Shares subject to outstanding Series A warrants | 1,695,000 | 2,070,000 | ||||||
Shares subject to outstanding Placement Agent warrants | 244,539 | - | ||||||
Shares subject to preferred stock | 2,219,084 | 11,670 | ||||||
Shares subject to unvested stock awards | 61,280 | 15,655 | ||||||
Diluted net loss per common share | 61,280 | 15,655 |
March 31, 2021 | March 31, 2020 | |||||||
Basic and diluted loss per common share: | ||||||||
Net loss | $ | (641,328 | ) | $ | (979,798 | ) | ||
Basic weighted average shares outstanding | 7,542,377 | 2,916,041 | ||||||
Basic and diluted loss per common share: | $ | (0.09 | ) | $ | (0.34 | ) |
NOTE 12. LEASES
Operating Leases
The Company adopted ASU 2016-02, Leases, effective January 1, 2019. The standard requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease, initially measured at the present value of the lease payments. As a result, we recorded right-of-use assets aggregating $684,083 as of January 1, 2019, utilizing a discount rate of 7.45%. That amount consists of operating leases on buildings and office space.
ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. As of March 31, 2021 the Company reflected accumulated amortization of right of use assets of $382,299 related to these leases, resulting in a net asset balance of $383,867.
22 |
In accordance with ASU 2016-02,
NOTE 8. LEASES
Operating lease expense for the right-of-use assets are being amortized overthree months ended September 30, 2022 and 2021 was $159,624 and $97,265 respectively. Operating lease expense for the life of the underlying leases.
nine months ended September 30, 2022 and 2021 was $434,798 and $220,798 respectively. As of March 31, 2021September 30, 2022, the weighted average remaining lease term for the operating leases is 2.51 years. Theand weighted average discount rate for the operating leases is 7.45%.were 3.86 years and 5.72% respectively.
Future minimum lease payment under these operating leases consisted of the following:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENT
Year ending December 31, | Operating Lease Obligations | Operating Lease Obligations | ||||||
2021 | $ | 139,244 | ||||||
2022 | 164,660 | $ | 157,633 | |||||
2023 | 85,440 | 570,275 | ||||||
2024 | 32,999 | 269,908 | ||||||
2025 | 144,124 | |||||||
2026 | 113,738 | |||||||
Thereafter | - | 268,202 | ||||||
Total undiscounted operating lease payments | 422,343 | 1,523,880 | ||||||
Less: Imputed interest | (38,476 | ) | 152,467 | |||||
Present value of operating lease liabilities | $ | 383,867 | $ | 1,371,413 |
NOTE 13. 9. COMMITMENTS AND CONTINGENCIES
Legal Contingencies
The Company is subject to various legal proceedings and claims, either asserted or unasserted, arising in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe the outcome of any of these matters will have a material adverse effect on our business, financial position, results of operations, or cash flows, and accordingly, no legal contingencies are accrued as of March 31, 2021September 30, 2022 and December 31, 2020.2021. Litigation relating to the insurance brokerage industry is not uncommon. As such the Company, from time to time have been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future.
We may have unforeseen risks as a result of the COVID-19 pandemicEarn-out liabilities
The spread of the coronavirus (COVID-19) outbreak in the United States has resulted in economic uncertainties which may negatively impactfollowing outlines changes to the Company’s business operations. Whileearn-out liability balances for the disruption is expected to be temporary, there is uncertainty surrounding the duration and extent of the impact. The impact of the coronavirus outbreak on the financial statements cannot be reasonably estimated at this time.
Adverse events such as health-related concerns about working in our offices, the inability to travel and other matters affecting the general work environment could harm our business and our business strategy. While we do not anticipate any material impact to our business operations as a result of the coronavirus, in the event of a major disruption caused by the outbreak of pandemic diseases such as coronavirus, we may lose the services of our employees or experience system interruptions, which could lead to diminishment of our business operations. Any of the foregoing could harm our business and delay the implementation of our business strategy and we cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business.
Management is actively monitoring the global situation on its financial condition, liquidity, operations, industry and workforce.
NOTE 14. INCOME TAXES
The Company did not have any material uncertain tax positions. The Company’s policy is to recognize interest and penalties accrued related to unrecognized benefits as a component income tax expense (benefit). The Company did not recognize any interest or penalties, nor did it have any interest or penalties accrued as of March 31, 2021respective periods ended September 30, 2022 and December 31, 2020.2021:
SCHEDULE OF EARN-OUT LIABILITY
Fortman | Montana | Altruis | Kush | Barra | Total | |||||||||||||||||||
Ending balance December 31, 2021 | $ | 515,308 | $ | 615,969 | $ | 992,868 | $ | 1,689,733 | $ | - | $ | 3,813,878 | ||||||||||||
Changes due to acquisitions | - | - | - | - | 600,000 | 600,000 | ||||||||||||||||||
Changes due to payments | (34,430 | ) | (326,935 | ) | (84,473 | ) | (1,181,458 | ) | - | (1,627,296 | ) | |||||||||||||
Changes due to fair value adjustments | 186,122 | 37,741 | (212,609 | ) | 201,191 | (80,000 | ) | 132,445 | ||||||||||||||||
Ending balance September 30, 2022 | $ | 667,000 | $ | 326,775 | $ | 695,786 | $ | 709,466 | $ | 520,000 | $ | 2,919,027 |
CCS | Fortman | Montana | Altruis | Kush | Total | |||||||||||||||||||
Ending balance December 31, 2020 | $ | 81,368 | $ | 432,655 | $ | 522,553 | $ | 1,894,842 | $ | - | $ | 2,931,418 | ||||||||||||
Changes due to business combinations | - | - | - | - | 1,694,166 | 1,694,166 | ||||||||||||||||||
Changes due to payments | - | - | - | (452,236 | ) | - | (452,236 | ) | ||||||||||||||||
Changes due to fair value adjustments | - | 82,653 | 93,416 | (449,738 | ) | (4,433 | ) | (278,102 | ) | |||||||||||||||
Changes due to write-offs | (81,368 | ) | - | - | - | - | (81,368 | ) | ||||||||||||||||
Ending balance December 31, 2021 | $ | - | $ | 515,308 | $ | 615,969 | $ | 992,868 | $ | 1,689,733 | $ | 3,813,878 |
The Company’s income tax provision for interim periods is generally determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items arising in the quarter. For the three months ended March 31, 2021, however, the Company calculates its income tax expense by applying to any pre-tax loss/income an effective tax rate determined as if the year to date period is the annual period. Using this method, for the three months ended March 31, 2021, its estimated annual effective tax rate from continuing operation was 0% and the resulting income tax expense was $0. We believe that, at this time, this method for determining the effective tax rate is more reliable than projecting an annual effective tax rate due to the uncertainty of estimating annual pre-tax loss/income under the impact of the COVID-19 pandemic. The Company’s estimated annual effective tax rate differs from the U.S. statutory tax rate primarily due to a valuation allowance recorded against the deferred tax assets. Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using applicable tax rates. A valuation allowance is recorded against deferred tax assets if it is not more likely than not that some or all of the deferred tax assets will not be realized. Due to the uncertainty surrounding the realization of the deferred tax assets in future, the Company has recorded a full valuation allowance against its net deferred tax assets.
The calculation of the Company’s tax liabilities also involves assessment of uncertainties in the application of complex tax laws and regulations in the applicable jurisdictions, and a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of technical merits. The Company’s policy is to record interest and penalties accrued related to unrecognized benefits as a component of income tax expense (benefit). The Company did not have any material uncertain tax positions, and there were no amounts for penalties or interest recorded as of March 31, 2021. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its positions.
On March 11, 2021, The American Rescue Plan Act of 2021 (“ARPA Act”) was signed into law. We evaluated the applicable provisions of the ARPA Act and determined that there is no material impact expected to our financial results. We will continue to monitor future guidance issued regarding the ARPA Act to determine any future impacts to our financial results.
NOTE 15. 10. RELATED PARTY TRANSACTIONS
TheOn September 13, 2022, the Company has entered into issued a Loan Agreement with Reliance Global Holdings,promissory note to YES Americana Group, LLC, a related party under common control. Thereentity for the principal sum of $1,500,000 (the “Note”). The Note matures on January 15, 2024, bearing interest of 0% per annum for the first six months, and 5% per annum thereafter, payable monthly. In the event the Note is no term tonot paid by the maturity date, the loan will automatically be extended for an additional year until January 15, 2025, and it bears no interest. Repayment will be made as the Company has business cash flows. The proceeds from the various loans were utilized to fund the USBA Acquisition, the EBS Acquisition, CCS Acquisition, SWMT Acquisition, FIS Acquisition, ABC Acquisition, and UIS Agency LLC.if necessary, extended again for one additional year through January 15, 2026.
As of March 31, 2021 and December 31, 2020 the related party loan payable was $733,573 and $4,666,520 respectively.
At March 31, 2021 and December 31, 2020, Reliance Holdings owned approximately 50.32% and 25.58%, respectively, of the common stock of the Company.
NOTE 16. SUBSEQUENT EVENTS
On May 12, 2021, the Company acquired J.P. Kush and Associates, Inc., a premier healthcare insurance agency with operations in 10 states, headquartered in Troy, Michigan. The acquisition price was $1,950,000 which includes upfront cash provided by the Company in the amount of $1,900,000 and RELI stock of $50,000.
23 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Reliance Global Group, Inc. (formerly known as Ethos Media Network, Inc.) was incorporated in Florida on August 2, 2013. In September 2018, Reliance Global Holdings, LLC, a related party, purchased a controlling interest in the Company. Ethos Media Network, Inc. was renamed Reliance Global Group, Inc. on October 18, 2018.
We operate as a diversified company engaging in business in the insurance market, as well as other related sectors. Our focus is to grow the Company by pursuing an aggressive acquisition strategy, initially and primarily focused upon wholesale and retail insurance agencies. The Company is controlled by the same management team as Reliance Global Holdings, LLC (“Reliance Holdings”), a New York based firm that is the owner and operator of numerous companies with core interests in real estate and insurance. Our relationship with Reliance Holdings provides us with significant benefits: (1) experience, knowhow,knowledge, and industry relations; (2) a source of acquisition targets currently under Reliance Holdings’ control; and (3) financial and logistics assistance. We are led and advised by a management team that offers over 100 years of combined business expertise in real estate, insurance, and the financial service industry.
In the insurance sector, our management has extensive experience acquiring and managing insurance portfolios in several states, as well as developing specialized programs targeting niche markets. Our primary strategy is to identify specific risk to reward arbitrage opportunities and develop these on a national platform, thereby increasing revenues and returns, and then identify and acquire undervalued wholesale and retail insurance agencies with operations in growing or underserved segments, expand and optimize their operations, and achieve asset value appreciation while generating interim cash flows.
Consistent with our disciplined approach, we decided not to proceed with the LOI announced on September 9, 2020 following extensive due diligence, including further evaluation of the growth prospects, earnings potential and proposed purchase price. We have also accomplished organically manyAs part of our original goalsgrowth and acquisition strategy, we continue to survey the current insurance market for value-add acquisition opportunities. As of this acquisition,September 30, 2022, we have acquired ten insurance agencies, including the addition of new carriersboth affiliated and licensing of 5minuteinsure.com in numerous states across the U.S. through Reliance Insurtech, LLCunaffiliated companies and our Fortman Insurance Agency subsidiary.
Longlong term, we seek to conduct all transactions and acquisitions through our direct operations.
Over the next 12 months, we plan to focus on the expansion and growth of our business through continued asset acquisitions in insurance markets and organic growth of our current insurance operations through geographic expansion and market share growth.
Further, the Company recently announced the beta launch of itswe launched our 5MinuteInsure.com (“5MI”) Insurtech platform as the next step in expandingduring 2021 which expanded our national footprint. 5minuteInsure.com5MI is a new andhigh-tech proprietary tool developed by Reliance Globalus as a business to be utilizedconsumer portal which enables consumers to instantly compare quotes from multiple carriers and purchase their car and home insurance in conjunction with currenta time efficient and planned agency acquisitions, as well as affiliated agencies. The goal of the new offering is to tapeffective manner. 5MI taps into the growing number of online shoppers in order to drive traffic to the Company’s insurance agents and affiliates. 5MinuteInsure.com utilizes advanced artificial intelligence and data mining techniques, to provide competitive insurance quotes withinin around 5 minutes with minimal data input. Live “hot leads” are then immediately transferred toinput needed from the geographically closest agent and/or affiliates.
After a successful closed Beta program, 5MinuteInsure.com gathered valuable information onconsumer. The platform launched during the online insurance consumer’s ideal experience. Through extensive research, we have determined the key factors required to most efficiently convert a prospect into a client, using the online interactive platform. Consumers are demanding an online independent agent that, compares real quotes for Homesummer of 2021 and Auto insurance between multiple carriers, and at the same time enables clients to instantly purchase the coverage they desire, on a single platform. This is a major differentiating factor from lead generator comparison sites that compare quotes and sell your information as a lead. Reliance is in a strong position to fill the personal insurance needs of the online consumer through 5MnuteInsure.com. Our R&D team has been working closely with software development company fine tuning a user experience that is in high demand of consumers.
5MinuteInsure.com platform is currently licensed to sell Home and Auto insuranceoperates in 46 states offering coverage with up to 30 highly rated insurance carriers.
With the acquisition of Barra, we launched RELI Exchange, our business-to-business (B2B) InsurTech platform and District of Columbia under the name Reliance InsurTech LLC. The list of carriers offeredagency partner network that builds on the artificial intelligence and data mining backbone of 5MinuteInsure.com. Through RELI Exchange we on-board agency partners and provide them an InsurTech platform continueswhite labeled, designed and branded specifically for their business. This combines the best of digital and human capabilities by providing our agency partners and their customers quotes from multiple carriers within minutes. Since its inception, RELI Exchange, has increased its agent roster by more than 30%.
Business Trends and Uncertainties
The insurance intermediary business is highly competitive, and we actively compete with numerous firms for customers, properties and insurance companies, many of which have relationships with insurance companies, or have a significant presence in niche insurance markets that may give them an advantage over us. Other competitive concerns may include the quality of our products and services, our pricing and the ability of some of our customers to grow rapidly. Thereself-insure and the entrance of technology companies into the insurance intermediary business. A number of insurance companies are currently 11 carriers being offered through 5MinuteInsure.com which is earning Reliance well deserved national exposure as becoming a major player is the industry. Insurance carriers are consistently initiating the conversation of joining the 5MinuteInsure.com platform as they are very impressed by Reliance Global Group Inc.’s investmentengaged in the user experience using Artificial Intelligence (AI)direct sale of insurance, primarily to bring accurateindividuals, and adequately underwritten quotesdo not pay commissions to clients faster.agents and brokers.
Financial Instruments
The Company’s financial instruments as of September 30, 2022, consist of derivative warrants. These are accounted at fair value as of inception/issuance date, and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, (non-cash) gain or loss.
Insurance Operations
Our insurance operations focus on the acquisition and management of insurance agencies throughout the U.S. Our primary focus is to pinpoint undervalued wholesale and retail insurance agencies with operations in growing or underserved segments (including healthcare and Medicare, as well as personal and commercial insurance lines). We then focus on expanding their operations on a national platform and improving operational efficiencies in order to achieve asset value appreciation while generating interim cash flows. In the insurance sector, our management team has over 100 years of experiences acquiring and managing insurance portfolios in several states, as well as developing specialized programs targeting niche markets. We plan to accomplish these objectives by acquiring wholesale and retail insurance agencies it deems to represent a good buying opportunity (as opposed to insurance carriers) as insurance agencies bear no insurance risk. Once acquired, we willplan to develop them on a national platform to increase revenues and profits through a synergetic structure. The Company is initially focused on segments that are underserved or growing, including healthcare and Medicare, as well as personal and commercial insurance lines.
Insurance Acquisitions and Strategic Activities
ToAs of the balance sheet date, we have acquired seventen insurance brokerages (see table below), including both acquisitions of affiliated companies (i.e., owned by Reliance Holdings before the acquisition) and unaffiliated companies. As our acquisition strategy continues, our reach within the insurance arena can provide us with the ability to offer lower rates, which could boost our competitive position within the industry.
Acquired | Date | Location | Line of Business | Status | ||||
U.S. Benefits Alliance, LLC (USBA) | October 24, 2018 | Michigan | Health Insurance | Affiliated | ||||
Employee Benefit Solutions, LLC (EBS) | October 24, 2018 | Michigan | Health Insurance | Affiliated | ||||
Commercial Solutions of Insurance Agency, LLC (CCS or Commercial Solutions) | December 1, 2018 | New Jersey | P&C – Trucking Industry | Unaffiliated | ||||
Southwestern Montana Insurance Center, Inc. (Southwestern Montana or Montana) | April 1, 2019 | Montana | Group Health Insurance | Unaffiliated | ||||
Fortman Insurance Agency, LLC (Fortman or Fortman Insurance) | May 1, 2019 | Ohio | P&C and Health Insurance | Unaffiliated | ||||
Altruis Benefits Consultants, Inc. (Altruis) | September 1, 2019 | Michigan | Health Insurance | Unaffiliated | ||||
UIS Agency, LLC (UIS) | August 17, 2020 | New York | Health Insurance | Unaffiliated | ||||
J.P. Kush and Associates, Inc. (Kush) | May 1, 2021 | Michigan | Health Insurance | Unaffiliated | ||||
Medigap Healthcare Insurance Agency, LLC (Medigap) | January 10, 2022 | Florida | Health Insurance | Unaffiliated | ||||
Barra & Associates, LLC | April 26, 2022 | Illinois | Health Insurance | Unaffiliated |
The following table lists our activity in 2021 by number of agents, approximate policies issued and revenue written:
Agency Name | Number of Agents | Number of Policies issued | Aggregate Revenue Recognized March 31 2021 | |||||||||
USBA and EBS | 6 | 5,173 | $ | 221,219 | ||||||||
UIS Agency, LLC / Commercial Solutions | 2 | 48 | $ | 88,818 | ||||||||
Southwestern Montana | 13 | 1,212 | $ | 535,116 | ||||||||
Fortman Insurance | 14 | 3,258 | $ | 457,573 | ||||||||
Altruis | 8 | 6,298 | $ | 993,602 |
The following table lists our activity in 2020 by number of agents, approximate policies issued and revenue written:
Agency Name | Number of Agents | Number of Policies issued | Aggregate Revenue Recognized December 31, 2020 | |||||||||
USBA and EBS | 6 | 3,278 | $ | 330,978 | ||||||||
Commercial Solutions | 2 | 32 | $ | 93,518 | ||||||||
Southwestern Montana | 13 | 1,031 | $ | 489,826 | ||||||||
Fortman Insurance | 14 | 3,110 | $ | 537,598 | ||||||||
Altruis | 8 | 5,026 | $ | 552,394 |
25 |
J.P. Kush and Associates, Inc. Transaction
Recent Developments
Underwritten Public Offerings
The Company filed a Form 424(b)(4) on February 11, 2021 to offer 1,800,000 shares of common stock and accompanying Series A warrants at a public offering price of $6.00 per share and accompanying Series A warrant for aggregate gross proceeds of $10,800,000 prior to deducting underwriting discounts, commissions, and other offering expenses.
On February 11,May 1, 2021, we completed an underwritten public offering in whichentered into a Purchase Agreement with J.P. Kush and Associates, Inc. whereby we sold 1,800,000 shares of our common stock at a price topurchased the public of $5.99. All sales ofbusiness and certain assets noted within the Company’s common stock had a warrant attached, which was valued at $0.01,Purchase Agreement (the “Kush Acquisition”) for a total purchase price of $6.00. All$3,644,166. The purchase price was paid with a cash payment of $1,900,000, $50,000 in restricted shares of our common stock, soldin a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and an earn-out payment.
The Kush Acquisition was accounted for as a business combination in accordance with the acquisition method under the guidance in ASC 805-10 and 805-20. Accordingly, the total purchase consideration was allocated to intangible assets acquired based on their respective estimated fair values. The acquisition method of accounting requires, among other things, that assets acquired, and liabilities assumed, if any, in a business purchase combination be recognized at their fair values as of the acquisition date. The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating the costs, and timing.
The allocation of the purchase price in connection with the Kush Acquisition was calculated as follows:
Description | Fair Value | Weighted Average Useful Life (Years) | ||||||
Accounts receivable | $ | 291,414 | ||||||
Trade name and trademarks | 685,400 | 5 | ||||||
Customer relationships | 551,000 | 10 | ||||||
Non-competition agreements | 827,800 | 5 | ||||||
Goodwill | 1,288,552 | Indefinite | ||||||
$ | 3,644,166 |
Goodwill of $1,288,552 arising from the Kush Acquisition consisted of the value of the employee workforce and the residual value after all identifiable intangible assets were offered by the Company.
The Company granted a 45-day optionvalued. Goodwill recognized pursuant to the underwriters, exercisable oneKush Acquisition is currently expected to be deductible for income tax purposes. Total acquisition costs for the Kush Acquisition incurred were $58,092 recorded as a component of General and administrative expenses. The approximate revenue and net profit for the acquired business as a standalone entity per ASC 805 from January 1, 2021 to April 30, 2021 was $380,349 and $166,667, respectively, and from January 1, 2020 to December 31, 2020, $1,141,047 and $500,000, respectively.
Medigap Healthcare Insurance Agency, LLC Transaction
On January 10, 2022, pursuant to an asset purchase agreement, dated December 21, 2021, we completed the acquisition of all of the assets of Medigap Healthcare Insurance Company, LLC (“Medigap”) for a purchase price of $20,096,250 consisting of: (i) payment to Medigap of $18,138,750 in cash and (ii) the issuance to Medigap of 606,037 shares of the Company’s restricted common stock in a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. The purchase price is subject to post-closing adjustment to reconcile certain pre-closing credits and liabilities of the parties. The shares issued to Medigap as part of the purchase price are subject to lock up arrangements pursuant to which 50% of the shares may be sold after the one-year anniversary of the date of closing of the transaction and the balance of the shares may be sold after the second-year anniversary of the date of closing of the transaction.
The acquisition of Medigap was accounted for as a business combination in accordance with the acquisition method under the guidance in ASC 805-10 and 805-20. Accordingly, the total purchase consideration was allocated to intangible assets acquired based on their respective estimated fair values. The acquisition method of accounting requires, among other things, that assets acquired, and liabilities assumed, if any, in a business purchase combination be recognized at their fair values as of the acquisition date. The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating the costs, and timing.
The allocation of the purchase price in connection with the acquisition of Medigap was calculated as follows:
Description | Fair Value | Weighted Average Useful Life (Years) | ||||||
Property, plant and equipment | $ | 20,666 | 6 | |||||
Right-of-use asset | 317,787 | |||||||
Trade name and trademarks | 340,000 | 15 | ||||||
Customer relationships | 4,550,000 | 12 | ||||||
Technology | 67,000 | 3 | ||||||
Backlog | 210,000 | 1 | ||||||
Chargeback reserve | (1,484,473 | ) | ||||||
Lease liability | (317,787 | ) | ||||||
Goodwill | 19,199,008 | Indefinite | ||||||
$ | 22,902,201 |
Goodwill of $19,199,008 arising from the acquisition of Medigap consisted of the value of the employee workforce and the residual value after all identifiable intangible assets were valued. Goodwill recognized pursuant to the acquisition of Medigap is currently expected to be deductible for income tax purposes. Total acquisition costs for the acquisition of Medigap incurred were $94,065 recorded as a component of General and administrative expenses. The approximate revenue and net profit or more timesloss for the acquired business as a standalone entity per ASC 805 from January 10, 2022 to September 30, 2022 was $3,868,654 and a loss of $693,861, respectively.
Barra & Associates, LLC Transaction
On April 26, 2022, we entered into an asset purchase agreement (the “APA”) with Barra & Associates, LLC (“Barra”) pursuant to which the Company purchased all of the assets of Barra & Associates, LLC on April 26, 2022 for a purchase price in wholethe amount of $7,725,000 in cash, with $6,000,000 paid to Barra at closing, $1,125,000 payable in nine months from closing, and a final earnout of $600,000 payable over two years from closing based upon meeting stated milestones. The APA contains standard, commercial representations and warranties and covenants. The source of the cash payment was $6,520,000 in funds borrowed from Oak Street Lending (“Loan”), our existing lender pursuant to a Fifth Amendment to Credit Agreement and Promissory Note, of even date. The purchase price is subject to post-closing adjustment to reconcile certain pre-closing credits and liabilities of the parties.
The acquisition of Barra was accounted for as a business combination in accordance with the acquisition method pursuant to FASB Topic No. 805, Business Combination (ASC 805). Accordingly, the total purchase consideration was allocated to the assets acquired, and liabilities assumed based on their respective estimated fair values. The acquisition method of accounting requires, among other things, that assets acquired, and liabilities assumed, if any, in a business purchase combination be recognized at their fair values as of the acquisition date. The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating the costs, and timing.
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The preliminary allocation of the purchase price in connection with the acquisition of Medigap was calculated as follows:
Description | Fair Value | Weighted Average Useful Life (Years) | ||||||
Acquired accounts receivable | $ | 92,585 | ||||||
Property, plant and equipment | 8,593 | 7 | ||||||
Right-of-use asset | 122,984 | |||||||
Trade names | 22,000 | 4 | ||||||
Customer relationships | 550,000 | 10 | ||||||
Developed technology | 230,000 | 5 | ||||||
Agency relationships | 2,585,000 | 10 | ||||||
Lease liability | (122,984 | ) | ||||||
Goodwill | 4,236,822 | Indefinite | ||||||
$ | 7,725,000 |
Goodwill of $4,236,822 arising from the acquisition of Barra consisted of the value of the employee workforce and the residual value after all identifiable intangible assets were valued. Goodwill recognized pursuant to the acquisition of Barra is currently expected to be deductible for income tax purposes. Total acquisition costs incurred through September 30, 2022 for the acquisition of Barra were 72,793 recorded as a component of General and administrative expenses.
The approximate revenue and net profit or in part,loss for the acquired business as a standalone entity per ASC 805 from April 26, 2022 to September 30, 2022 was $655,002 and a loss of $182,603, respectively.
Recent Developments
Private Placement
On December 22, 2021, we entered into a securities purchase agreement with several institutional buyers for the purchase and sale of (i) warrants to purchase up to an additional 270,000aggregate of 9,779,952 shares of the Company’s common stock, par value $0.086 per share at an exercise price of $4.09 per share, (ii) an aggregate of 2,670,892 shares of Common Stock, and (iii) 9,076 shares of the Company’s newly-designated Series B convertible preferred stock, par value $0.086 per share, with a stated value of $1,000 per share, initially convertible into an aggregate of 2,219,084 shares of Common Stock at a conversion price of $5.99$4.09 per share in a private placement (the “Private Placement”).
On January 5, 2022, pursuant to the securities purchase agreement dated December 22, 2021, the Private Placement was closed. The Private Placement resulted in aggregate gross proceeds to us of approximately $20,000,000, before deducting placement agent fees and up to an additional 270,000 Series Aother offering expenses payable by us. The Warrants at a price of $0.01 per Series A Warrant less, in each case the underwriting discountsare exercisable upon issuance and commissions, to cover over-allotments, if any. The total number of common stock shares and warrants issued as a result was 270,000 for both common stock and warrants. The warrants will be exercisable immediately and forexpire five years from the effective date.date of issuance. In connection with the Private Placement, we issued to the placement agent warrants to purchase 244,539 shares of the Company’s Common Stock at an exercise price of $4.09 per share (the “Placement Agent Warrants”). The Placement Agent Warrants have substantially the same terms as the Warrants issued in the Private Placement.
The grossDuring August 2022, all 9,076 Series B Convertible Preferred Stock were converted by third parties into 2,219,084 shares of common stock.
Nasdaq Notification and Warrant Exchange
On January 31, 2022, we received a deficiency notification from Nasdaq regarding the issuance of shares in the Medigap Acquisition and Private Placement in violation of Listing Rule 5635(a). This rule requires an issuer to obtain shareholder approval with respect to an acquisition paid for from the proceeds of a sale of common stock of the issuer which equals or exceeds 20% of the shares of the issuer, issued and outstanding prior to the Company were approximately $12.4 million. After deducting the underwriting discount and other offering expenses, net proceeds were approximately $10.5 million.
Stock Split
acquisition. The Company has hadsubmitted a remediation plan under which the Nasdaq granted us an extension to implement the required changes until May 10, 2022.
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As part of its remediation plan, on March 22, 2022 we entered into Exchange Agreements with the holders of common stock issued in January 2022 resulting from the Medigap Acquisition and Private Placement. Pursuant to the Exchange Agreements, we issued 3,276,929 Series C prepaid warrants in exchange for 3,276,929 shares of our common stock that were previously issued. Additionally, to compensate the Private Placement investors for entering into the Exchange Agreements, we issued 1,222,498 Series D prepaid warrants to such investors for no additional consideration on the same date. The fair value of the Series D prepaid warrants upon issuance was $6,930,335; such amount was treated as a deemed dividend and accordingly reduced income available to common stockholders for the period. Shares of common stock underlying the Series C and D prepaid warrants are treated as outstanding for purposes of calculating basic and diluted earnings per share. The Series C warrants were exercised during the quarter ended June 30, 2022. The Series D warrants were exercised during the quarter ended September 30, 2022.
Stock Split
On January 21, 2021 we effected a reverse split of the issued and outstanding shares of common stock in a ratio of 1:85.71 which is simultaneously occurred with the Company’s up listinguplisting to the Nasdaq Capital Market. The Company has adjusted all of share and per share numbers to take into account this reverse stock split.
Results of Operations
Comparison of the yearthree months ended March 31, 2021September 30, 2022 to the yearthree months ended March 31, 2020September 30, 2021
The following table sets forth our revenue and operating expenses for each of the years presented.
March 31, 2021 | March 31, 2020 | September 30, 2022 | September 30, 2021 | |||||||||||||
Revenue | ||||||||||||||||
Commission income | $ | 2,296,328 | $ | 2,004,314 | $ | 4,153,361 | $ | 2,581,636 | ||||||||
Total revenue | 2,296,328 | 2,004,314 | 4,153,361 | 2,581,636 | ||||||||||||
Operating expenses | ||||||||||||||||
Commission expense | 529,472 | 425,585 | 862,857 | 660,708 | ||||||||||||
Salaries and wages | 918,545 | 868,274 | 2,114,730 | 1,188,267 | ||||||||||||
General and administrative expenses | 1,004,401 | 1,121,120 | 1,253,097 | 755,130 | ||||||||||||
Marketing and advertising | 23,079 | 67,762 | 726,115 | 65,010 | ||||||||||||
Depreciation and amortization | 333,088 | 329,091 | 713,444 | 387,729 | ||||||||||||
Total operating expenses | 2,808,585 | 2,811,832 | 5,670,243 | 3,056,844 | ||||||||||||
(Loss) income from operations | (512,257 | ) | (807,518 | ) | ||||||||||||
Loss from operations | (1,516,882 | ) | (475,208 | ) | ||||||||||||
Other expense, net | (129,071 | ) | (172,280 | ) | 7,638,975 | (120,025 | ) | |||||||||
Total Other expense, net | (129,071 | ) | (172,280 | ) | ||||||||||||
Total Other income (expense) | 7,638,975 | (120,025 | ) | |||||||||||||
Net (loss) income | $ | (641,328 | ) | $ | (979,798 | ) | ||||||||||
Net income (loss) | 6,122,093 | (595,233 | ) |
Revenues
Revenues
The Company’s revenue is primarily comprised of commission paid by health insurance carriers or their representatives related to insurance plans that have been purchased by a member who used the Company’s service. The Company definesour services. We define a member as an individual currently covered by an insurance plan, including individual and family, Medicare-related, small business, and ancillary plans, for which the Company areis entitled to receive compensation from an insurance carrier.
The Company
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We had revenues of $2,296,328$4.2 million for the three months ended March 31, 2021,September 30, 2022, as compared to $2,004,314$2.6 million for the three months ended March 31, 2020.September 30, 2021. The increase of $292,014 was$1.6 million or 61% is primarily due an increase in operations, includingdriven by organic growth and the additional insurance agencies acquired during 2019 and 2020 reporting a full three months of revenue.in 2022.
Commission expense
The CompanyWe had total commission expense of $529,472$863,000 for the three months ended March 31, 2021September 30, 2022 compared to $425,585$661,000 for the three months ended March 31, 2020.September 30, 2021. The increase of $103,887$202,000 or 24%31% is attributable to an increase in operations, includingprimarily driven by organic growth and the additional insurance agencies acquired during 2019 and 2020 reporting a full three months of commission expense.in 2022.
Salaries and wages
The CompanyWe reported $918,545$2.1 million of salaries and wages expense for the three months ended March 31, 2021September 30, 2022 compared to $868,274$1.2 million for the three months ended March 31, 2020.September 30, 2021. The increase of $50,271$926,000 or 6%78% is consistent witha result of the prior year.Company’s growth driven by expanded operations, both organic and due to the additional insurance agencies acquired in 2022.
General and administrative expenses
The CompanyWe had total general and administrative expenses of $1,004,401$1.3 million for the three months ended March 31, 2021,September 30, 2022, as compared to $1,121,120$755,000 for the three months ended March 31, 2020.September 30, 2021. The decreaseincrease in expense was primarilyof $498,000 or 66% is a result of the Company’s growth driven by expanded operations, both organic and due to less professional fees upon the Company up listing to NASDAQadditional insurance agencies acquired in February of 2021.2022.
Marketing and advertising
The CompanyWe reported $23,079$726,000 of marketing and advertising expense for the three months ended March 31, 2021September 30, 2022 compared to $67,762$65,000 for the three months ended March 31, 2020.September 30, 2021. The decreaseincrease of $44,683$661,000 or 65%1,017% is dueprimarily a result of Medigap’s direct business to the Company focusing on up listing the Company from OTCconsumer marketing model deployed through social media platforms, in addition to NASDAQoverall increased branding and raising funds for operations.outreach efforts to achieve greater industry presence.
Depreciation and amortization
The CompanyWe reported $333,088$713,000 of depreciation and amortization expense for the three months ended March 31, 2021September 30, 2022 compared to $329,091$388,000 for the three months ended March 31, 2020.September 30, 2021. The increase of $3,997$326,000 or 1%84% is consistent with prior years.primarily a result of our acquired tangible and intangible assets through business combinations.
Other income and expense
The CompanyWe reported $129,071$7.6 million of other income for the three months ended September 30, 2022 compared to $120,000 of other expense for the three months ended March 31,September 30, 2021. The increase of $7.8 million or 6,464% is attributable primarily to the change in fair value of warrant liabilities of $7.9 million driven by various factors including the Company’s stock price as of the period close, offset by interest expense.
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Comparison of the Nine months ended September 30, 2022 to the Nine months ended September 30, 2021
The following table sets forth our revenue and operating expenses for each of the periods presented.
September 30, 2022 | September 30, 2021 | |||||||
Revenue | ||||||||
Commission income | $ | 12,596,268 | $ | 7,096,213 | ||||
Total revenue | 12,596,268 | 7,096,213 | ||||||
Operating expenses | ||||||||
Commission expense | 2,617,140 | 1,748,451 | ||||||
Salaries and wages | 6,373,697 | 3,217,441 | ||||||
General and administrative expenses | 5,465,384 | 2,961,881 | ||||||
Marketing and advertising | 1,922,520 | 143,110 | ||||||
Depreciation and amortization | 2,077,372 | 1,090,183 | ||||||
Total operating expenses | 18,456,113 | 9,161,066 | ||||||
Loss from operations | (5,859,845 | ) | (2,064,853 | ) | ||||
Total Other income (expense) | 31,817,630 | (421,192 | ) | |||||
Net income (loss) | $ | 25,957,785 | $ | (2,486,045 | ) |
Revenues
We had revenues of $12.6 million for the nine months ended September 30, 2022, as compared to $172,280$7.1 for the threenine months ended March 31, 2020.September 30, 2021. The decreaseincrease of $43,209$5.5 million or 25%78% is primarily driven by organic growth and the additional insurance agencies acquired in 2022.
Commission expense
We had total commission expense of $2.6 million for the nine months ended September 30, 2022 compared to $1.7 million for the nine months ended September 30, 2021. The increase of $0.9 million or 50% is primarily driven by organic growth and the additional insurance agencies acquired in 2022.
Salaries and wages
We reported $6.4 million of salaries and wages expense for the nine months ended September 30, 2022 compared to $3.2 million for the nine months ended September 30, 2021. The increase of $3.2 million or 98% is primarily driven by expanded operations, both organic and due to the additional insurance agencies acquired in 2022.
General and administrative expenses
We had total general and administrative expenses of $5.5 million for the nine months ended September 30, 2022, as compared to $3.0 million for the nine months ended September 30, 2021. The increase in expense of $2.5 million or 85% is primarily driven by expanded operations, both organic and due to the additional insurance agencies acquired in 2022.
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Marketing and advertising
We reported $1.9 million of marketing and advertising expense for the nine months ended September 30, 2022 compared to $143,000 for the nine months ended September 30, 2021. The increase of $1.8 million or 1,243% is primarily a result of Medigap’s direct business to consumer marketing model deployed through social media platforms, in addition to overall increased branding and outreach efforts to achieve greater industry presence.
Depreciation and amortization
We reported $2.1 million of depreciation and amortization expense for the nine months ended September 30, 2022 compared to $1.1 million for the nine months ended September 30, 2021. The increase of $1.0 million or 91% is a result of the assets we acquired through business combinations.
Other income and expense
We reported $31.8 million of other income for the nine months ended September 30, 2022 compared to a loss of $421,000 for the nine months ended September 30, 2021. The increase of $32.2 million or 7,654% is attributable primarily to the repaymentrecognition and change in fair value of debt and decreasewarrant liabilities of $32.4 million driven by various factors including the Company’s stock price as of the period close, offset by interest expense, loan fees and debt issuance cost amortization.expense.
Liquidity and capital resources
As of March 31, 2021, the CompanySeptember 30, 2022, we had a cash balance of $10,017,976 and working capital of $8,064,090 compared to March 31, 2020 with a cash balance of $529,581$3.0 million and a working capital deficit of $6,073,982$3.5 million compared with a cash balance of $4.6 million and working capital deficit of $37 million at MarchDecember 31, 2020.2021. The increase in working capital is primarily attributable to net proceeds raised of $10,496,220 from the issuance of common stock and Series A warrants in February 2021.the derivative warrant liability commitments, effectively reclassifying them from current to non-current liabilities.
The spread of the coronavirus (COVID-19) outbreak in the United States has resulted in economic uncertainties which may negatively impact the Company’sour business operations. While the disruption is expected to be temporary, there is uncertainty surrounding the duration and extent of the impact. Currently the Company haswe have not seen any material financial impact as a result of the coronavirus outbreak. However, management is actively monitoring the global situation on its financial condition, liquidity, operations, industry and workforce.
Adverse events such as health-related concerns about working in our offices, the inability to travel and other matters affecting the general work environment could harm our business and our business strategy. While we do not anticipate any material impact to our business operations as a result of the coronavirus, in the event of a major disruption caused by the outbreak of pandemic diseases such as coronavirus, we may lose the services of our employees or experience system interruptions, which could lead to diminishment of our business operations. Any of the foregoing could harm our business and delay the implementation of our business strategy and we cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business.
Inflation
The Company generally may be impacted by rising costs for certain inflation-sensitive operating expenses such as labor, employee benefits, and facility leases. The Company believes inflation could have a material impact to pricing and operating expenses in future periods due to the state of the economy and current inflation rates.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements as such term is defined in Regulation S-K.
Cash Flows
Three Months Ended March 31, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||
Net cash used in operating activities | $ | (646,602 | ) | $ | (223,696 | ) | $ | (2,177,998 | ) | $ | (1,304,320 | ) | ||||
Net cash used in investing activities | - | (1,000,000 | ) | (24,982,609 | ) | (1,963,897 | ) | |||||||||
Net cash provided by financing activities | 10,134,997 | 1,318,619 | 25,564,501 | 8,878,110 | ||||||||||||
Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 9,488,395 | $ | 94,923 | ||||||||||||
Net (decrease) increase in cash, cash equivalents, and restricted cash | $ | (1,596,106 | ) | $ | 5,609,893 |
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Operating Activities
Net cash used in operating activities for the threenine months ended March 31, 2021September 30, 2022 was $2,570,382,$2.2 million, which includes a net lossincome of $641,328$26.0 million offset by non-cash expensesincome of $686,404$28.9 million principally related to recognition and change in fair value of warrant liabilities of $32.4 million, offset by an earn-out fair value adjustment of $132,445, share based compensation expense of $352,299,$1.2 million, and depreciation and amortization of $333,087, and amortization of debt issuance costs of $5,722,$2.1 million, as well as changes of net working capital items in the amount of $691,678$760,000 principally relateddue to thea decrease in accounts receivable of $92,000, a decrease in prepaid expense and other current assets of $2.3 million, an increase in other payables of $35,000, offset by decreases in accounts payable and accrued expenses of $893,505$1.5 million and a decrease accounts receivable of $7,131. The increase in cash flow used in operating activities additionally was due to the decrease in accounts payable of $893,505. The Company paid down due balances upon the completion of the Company’s offering.chargeback reserve of $134,000.
Investing Activities.
During the threenine months ended March 31, 2021,September 30, 2022, cash flows used in investing activities were $0$25.0 million compared to cash flow used in investing activities of $1,000,000$2.0 million for the threenine months ended March 31, 2020.September 30, 2021. The decrease in cash used in investing activities was duerelates to no agencies being acquired in duringcash paid for the period ended March 31, 2021 compared to multiple agencies being acquired duringacquisition of Medigap and Barra of $24.1 million, the period ended March 31, 2020.purchase of property and equipment of $68,000 and cash paid of $776,000 for intangible assets.
Financing Activities.
During the threenine months ended March 31, 2021,September 30, 2022, cash provided by financing activities was $10,134,997$25.6 million as compared to $1,318,619$8.9 million for the threenine months ended March 31, 2020.September 30, 2021. The net cash provided by financing activities is primarily related to proceeds from the Private Placement offering of 2,070,000 shares of common stock and accompanying warrants in February 2021.January 2022. The net proceeds from the issuance of common stock provided $10,496,221 is partiallythese shares was $17.9 million. Additionally, we received proceeds of $2.5 million from the exercise of Series A warrants, $6.5 million through loan proceeds received for a business acquisition and $1.5 million through a related party loan. These were offset by thedebt principal repayments of debt of $213,994 and the repayments of loans payable to related parties of $310,771. The increase was primarily related to common stock issued, principal repayments$663,000, payment of debt issuance costs of $214,000, payment of a related party loan of $174,000, payments on the earn out liability of $1.6 million and less debt issued, debt issued to related parties, and proceeds from related parties’ loans for the three months ended March 31, 2021.short term financing of $107,000.
CriticalSignificant Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments may vary under different assumptions or conditions. We evaluatedescribe our estimates and judgments on an ongoing basis. Our management believes thesignificant accounting policies below are critical in the portrayalNote 2, Summary of our financial condition and results of operations and require management’s most difficult, subjective, or complex judgments.
Business acquisitions:Significant Accounting for acquisitions requires us to estimate the fair value of consideration paid and the individual assets and liabilities acquired, which involves a number of judgments, assumptions, and estimates that could materially affect the amount and timing of costs recognized in subsequent periods. Accounting for acquisitions can also involve significant judgment to determine when controlPolicies, of the acquired entity is transferred. We typically obtain independent third-party valuation studiesNotes to assistConsolidated Financial Statements, and our critical accounting estimates in determining fair values, including assistanceItem 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in determining future cash flows, discount rates, and comparable market values. Items involving significant assumptions, estimates, and judgments include the following:
● Debt, including discount rate and timing of payments;
● Deferred tax assets, including projections of future taxable income and tax rates;
● Fair value of consideration paid or transferred;
● Intangible assets, including valuation methodology, estimations of future revenue and costs, and discount rates;
Contingencies: We are subject to the possibility of losses from various contingencies. Significant judgment is necessary to estimate the probability and amount of a loss, if any, from such contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired, and the amount of loss can be reasonably estimated. In accountingour Annual Report on Form 10-K for the resolution of contingencies,fiscal year ended December 31, 2021. There have been no significant judgment may be necessary to estimate amounts pertaining to periods prior to the resolution that are charged to operations in the period of resolution and amounts related to future periods.
Goodwill and intangible assets: We test goodwill for impairmentchanges in our fourth quarter eachsignificant accounting policies or critical accounting estimates since the end of fiscal year or more frequently if indicators of an impairment exist, to determine whether it is more likely than not that the fair value of the reporting unit with goodwill is less than its carrying value. For reporting units for which this assessment concludes that it is more likely than not that the fair value is more than its carrying value, goodwill is considered not impaired and we are not required to perform the goodwill impairment test. Qualitative factors considered in this assessment include industry and market considerations, overall financial performance, and other relevant events and factors affecting the fair value of the reporting unit. For reporting units for which this assessment concludes that it is more likely than not that the fair value is below the carrying value, goodwill is tested for impairment by determining the fair value of each reporting unit and comparing it to the carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired. If the carrying value of the reporting unit exceeds its fair value, we would record an impairment loss up to the difference between the carrying value and implied fair value.2021.
Determining when to test for impairment, the reporting units, the assets and liabilities of the reporting unit, and the fair value of the reporting unit requires significant judgment and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates, and expenses and are developed as part of our long-range planning process. The same estimates are used in business planning, forecasting, and capital budgeting. We test the reasonableness of the output of our long-range planning process by calculating an implied value per share and comparing that to current stock prices, analysts’ consensus pricing, and management’s expectations. These estimates and assumptions are used to calculate projected future cash flows for the reporting unit, which are discounted using a risk-adjusted rate to estimate a fair value. The discount rate requires determination of appropriate market comparables. We base fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
We test other identified intangible assets with definite useful lives when events and circumstances indicate the carrying value may not be recoverable by comparing the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset. We test intangible assets with indefinite lives annually for impairment using a fair value method such as discounted cash flows. Estimating fair values involves significant assumptions, including future sales prices, sales volumes, costs, and discount rates.
Income taxes: We are required to estimate our provision for income taxes and amounts ultimately payable or recoverable in numerous tax jurisdictions around the world. These estimates involve significant judgment and interpretations of regulations and are inherently complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of the applicable year. We are also required to evaluate the realizability of our deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of our performance and other relevant factors. Realization of deferred tax assets is dependent on our ability to generate future taxable income. In recent periods, our results of operations have benefited from increases in the amount of deferred taxes we expect to realize, primarily from the levels of capital spending and increases in the amount of taxable income we expect to realize in Japan and the United States. Our income tax provision or benefit is dependent, in part, on our ability to forecast future taxable income in these and other jurisdictions. Such forecasts are inherently difficult and involve significant judgments including, among others, projecting future average selling prices and sales volumes, manufacturing and overhead costs, levels of capital spending, and other factors that significantly impact our analyses of the amount of net deferred tax assets that are more likely than not to be realized.
Revenue recognition:
All commission revenue is recorded net of any deductions for estimated commission adjustments due to lapses, policy cancellations, and revisions in coverage.
The Company earns additional revenue including contingent commissions, profit-sharing, override and bonuses based on meeting certain revenue or profit targets established periodically by the carriers (collectively the Contingent Commissions). The Contingent Commissions are earned when the Company achieves the targets established by the insurance carries. The insurance carriers notify the company when it has achieved the target. The Company only recognizes revenue to the extent that it is probable that a significant reversal of the revenue will not occur.
Stock-based compensation: Stock-based compensation is estimated at the grant date based on the fair value of the award and is recognized as expense using the straight-line amortization method over the requisite service period. For performance-based stock awards, the expense recognized is dependent on our assessment of the likelihood of the performance measure being achieved. We utilize forecasts of future performance to assess these probabilities and this assessment requires significant judgment.
Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires significant judgment, including estimating stock price volatility and expected option life. We develop these estimates based on historical data and market information which can change significantly over time. A small change in the estimates used can result in a relatively large change in the estimated valuation. We use the Black-Scholes option valuation model to value employee stock options and awards granted under our employee stock purchase plan. We estimate stock price volatility based on our historical volatility implied volatility derived from traded options on our stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.Procedures
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
During fiscal year 2020, the management determined it had a material weakness in its financial reporting and closing process. The Company plans to mitigate this material weakness by hiring an SEC reporting manager in fiscal 2021.
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2021.September 30, 2022. Based on thisthe evaluation, our management has concluded that ourthe Company’s disclosure controls and procedures were effective as of September 30, 2022.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting, as such date.term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter which is the subject of this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Not applicable.
The following important factors, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-Q or presented elsewhere by management from time to time. Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are not material may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment.
Risks Related to Our Business
We may experience significant fluctuations in our quarterly and annual results.
Fluctuations in our quarterly and annual financial results have resulted and will continue to result from numerous factors, including:
These factors, some of which are not within our control, may cause the price of our common stock to fluctuate substantially. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. We believe quarterly comparisons of our financial results are not always meaningful and should not be relied upon as an indication of our future performance.
The Company has a limited operating history.
Since the change of control which took place in September of 2018, the Company’s operations have been limited to acquiring the insurance agencies as described in the “Insurance Operations” and “Overview”. Investors will have little basis upon which to evaluate the Company’s ability to achieve the Company’s business objectives which are to acquire, own and operate insurance agencies.
The Company has limited resources and there is significant competition for business combination opportunities. Therefore, the Company may not be able to acquire other assets or businesses.
The Company expects to encounter intense competition from other entities having a business objective similar to the Company’s, which are also competing for acquisitions. Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than the Company does, and the Company’s financial resources are limited when contrasted with those of many of these competitors. While the Company believes that there are numerous potential target businesses that it could acquire, the Company’s ability to compete in acquiring certain sizable target businesses might be limited if the Company’s limited financial resources are less than that of its competitors. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses.
The Company may be unable to obtain additional financing, if required, to complete an acquisition, or to Company the operations and growth of existing and target business, which could compel the Company to restructure a potential business transaction or abandon a particular business combination.
To date, much of our capital for acquiring insurance agencies and operating the ones we have acquired has come from funds provided by Reliance Global Holdings our affiliate, and from loans from unaffiliated lenders. We may be required to seek additional financing. We cannot assure you that such financing would be available on acceptable terms, if at all. If additional financing proves to be unavailable, we would be compelled to restructure or existing business, or abandon a proposed acquisition or acquisitions. In addition, if we consummate additional acquisitions, we may require additional financing to Company the operations or growth of that business. The failure to secure additional financing could have a material adverse effect on the continued development or growth of our business.
Our inability to retain or hire qualified employees, as well as the loss of any of our executive officers, could negatively impact our ability to retain existing business and generate new business.
Our success depends on our ability to attract and retain skilled and experienced personnel. There is significant competition from within the insurance industry and from businesses outside the industries for exceptional employees, especially in key positions. If we are not able to successfully attract, retain and motivate our employees, our business, financial results and reputation could be materially and adversely affected.
Losing employees who manage or support substantial customer relationships or possess substantial experience or expertise could adversely affect our ability to secure and complete customer engagements, which would adversely affect our results of operations. Also, if any of our key personnel were to join an existing competitor or form a competing company, some of our customers could choose to use the services of that competitor instead of our services. While our key personnel are generally prohibited by contract from soliciting our employees and customers for a two-year period following separation from employment with us, they are not prohibited from competing with us.
In addition, we could be adversely affected if we fail to adequately plan for the succession of our senior leaders and key executives. We cannot guarantee that the services of these executives will continue to be available to us. The loss of our senior leaders or other key personnel, or our inability to continue to identify, recruit and retain such personnel, or to do so at reasonable compensation levels, could materially and adversely affect our business, results of operations, cash flows and financial condition.
Our growth strategy depends, in part, on the acquisition of other insurance intermediaries, which may not be available on acceptable terms in the future or which, if consummated, may not be advantageous to us.
Our growth strategy partially includes the acquisition of other insurance intermediaries. Our ability to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, and expand into new markets requires us to implement and continuously improve our operations and our financial and management information systems. Integrated, acquired businesses may not achieve levels of revenues or profitability comparable to our existing operations, or otherwise perform as expected. In addition, we compete for acquisition and expansion opportunities with firms and banks that may have substantially greater resources than we do. Acquisitions also involve a number of special risks, such as diversion of management’s attention; difficulties in the integration of acquired operations and retention of personnel; increase in expenses and working capital requirements, which could reduce our return on invested capital; entry into unfamiliar markets or lines of business; unanticipated problems or legal liabilities; estimation of the acquisition earn-out payables; and tax and accounting issues, some or all of which could have a material adverse effect on our results of operations, financial condition and cash flows. Post-acquisition deterioration of operating performance could also result in lower or negative earnings contribution and/or goodwill impairment charges.
A cybersecurity attack, or any other interruption in information technology and/or data security and/or outsourcing relationships, could adversely affect our business, financial condition and reputation.
We rely on information technology and third-party vendors to provide effective and efficient service to our customers, process claims, and timely and accurately report information to carriers and which often involves secure processing of confidential sensitive, proprietary and other types of information. Cybersecurity breaches of any of the systems we rely on may result from circumvention of security systems, denial-of-service attacks or other cyber-attacks, hacking, “phishing” attacks, computer viruses, ransomware, malware, employee or insider error, malfeasance, social engineering, physical breaches or other actions, any of which could expose us to data loss, monetary and reputational damages and significant increases in compliance costs. An interruption of our access to, or an inability to access, our information technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis. If sustained or repeated, such a business interruption, system failure or service denial could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary business functions. We have from time-to-time experienced cybersecurity breaches, such as computer viruses, unauthorized parties gaining access to our information technology systems and similar incidents, which to date have not had a material impact on our business.
Additionally, we are an acquisitive organization and the process of integrating the information systems of the businesses we acquire is complex and exposes us to additional risk as we might not adequately identify weaknesses in the targets’ information systems, which could expose us to unexpected liabilities or make our own systems more vulnerable to attack. In the future, any material breaches of cybersecurity, or media reports of the same, even if untrue, could cause us to experience reputational harm, loss of clients and revenue, loss of proprietary data, regulatory actions and scrutiny, sanctions or other statutory penalties, litigation, liability for failure to safeguard clients’ information or financial losses. Such losses may not be insured against or not fully covered through insurance we maintain.
Rapid technological change may require additional resources and time to adequately respond to dynamics, which may adversely affect our business and operating results.
Frequent technological changes, new products and services and evolving industry standards are influencing the insurance businesses. The Internet, for example, is increasingly used to securely transmit benefits, property and personal information, and related information to customers and to facilitate business-to-business information exchange and transactions.
We are continuously taking steps to upgrade and expand our information systems capabilities. Maintaining, protecting and enhancing these capabilities to keep pace with evolving industry and regulatory standards, and changing customer preferences, requires an ongoing commitment of significant resources. If the information we rely upon to run our businesses was found to be inaccurate or unreliable or if we fail to effectively maintain our information systems and data integrity, we could experience operational disruptions, regulatory or other legal problems, increases in operating expenses, loss of existing customers, difficulty in attracting new customers, or suffer other adverse consequences.
Changes in data privacy and protection laws and regulations, or any failure to comply with such laws and regulations, could adversely affect our business and financial results.
We are subject to a variety of continuously evolving and developing laws and regulations globally regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. Significant uncertainty exists as privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. These laws apply to transfers of information among our affiliates, as well as to transactions we enter into with third party vendors. These and similar initiatives around the world could increase the cost of developing, implementing or securing our servers and require us to allocate more resources to improved technologies, adding to our information technology and compliance costs. In addition, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase. The enactment of more restrictive laws, rules, regulations or future enforcement actions or investigations could impact us through increased costs or restrictions on our business, and noncompliance could result in regulatory penalties and significant legal liability.
Because our insurance business is highly concentrated in Michigan, New Jersey, Montana and Ohio, adverse economic conditions, natural disasters, or regulatory changes in these regions could adversely affect our financial condition.
A significant portion of our insurance business is concentrated in Michigan, New Jersey, Montana and Ohio. For the three months ended March 31, 2021, and 2020 we derived $2,296,328 and $2,004,314 respectively or 100%, of our quarterly revenue, respectively, from our operations located in these regions (Q1 2021 - Michigan – 50%, New Jersey – 4%, Montana – 21% and Ohio – 26% and Q1 2020 - Michigan – 44%, New Jersey – 5%, Montana – 24% and Ohio – 27%). The insurance business is primarily a state-regulated industry, and therefore, state legislatures may enact laws that adversely affect the insurance industry. Because our business is concentrated in these four states, we face greater exposure to unfavorable changes in regulatory conditions in those states than insurance intermediaries whose operations are more diversified through a greater number of states. In addition, the occurrence of adverse economic conditions, natural or other disasters, or other circumstances specific to or otherwise significantly impacting these states could adversely affect our financial condition, results of operations and cash flows. We are susceptible to losses and interruptions caused by hurricanes or other weather conditions, and other possible events such as terrorist acts and other natural or man-made disasters. Our insurance coverage with respect to natural disasters is limited and is subject to deductibles and coverage limits. Such coverage may not be adequate or may not continue to be available at commercially reasonable rates and terms.
If we fail to comply with the covenants contained in certain of our agreements, our liquidity, results of operations and financial condition may be adversely affected.
The Oak Street credit agreements, in the aggregate principal amount of $8,641,008 and $9,000,746, as of March 31, 2021 and December 31, 2020 that govern our debt contain various covenants and other limitations with which we must comply including a debt to EBITDA ratio covenant and a covenant that at all times that the loans are outstanding: (i) Ezra Beyman, our chief executive officer, Debra Beyman, Mr. Beyman’s wife, or Yaakov Beyman, son of Mr. and Ms. Beyman, or someone else approved by Oak Street, as applicable, will be the manager of the current subsidiaries of the Company, (ii) Mr. Ezra Beyman will be President and Chairperson of the Board of the Company, and (iii) Reliance Holdings will continue to hold at least 51% of the Company’s equity. The credit agreements also contain provisions which cause a “cross default” if we default our obligations under other material contracts to which we are parties. The credit agreements contains customary and usual events of default, including, subject to certain specified cure periods and notice requirements, the Company’s or one of its subsidiaries’ failure to comply with the covenants therein. Upon an event of default, the lender has customary and usual remedies to cure these defaults including, but not limited to, the ability to accelerate the indebtedness.
The Company entered into an amended Master Credit Agreement on March 26, 2021 that removed the provisions for which Debra and Ezra Beyman were required to be the majority owners of the Company.
The Senior Funded Debt to EBIDTA ratio stated in the covenant “shall be no greater than 4.0 to 1.0”. As of June 30, 2020, the ratio was 4.97 with the Company thereby, defaulting on the covenant. As of June 30, 2020, the Company obtained a covenant waiver in order to continue to be in compliance with the financial covenants and other limitations contained in each of these agreements. However, failure to comply with material provisions of our covenants in these agreements or other credit or similar agreements to which we may become a party could result in a default, rendering them unavailable to us and causing a material adverse effect on our liquidity, results of operations and financial condition. In the event of certain defaults, the lenders thereunder would not be required to lend any additional amounts to us and could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable. If the indebtedness under these agreements or our other indebtedness, were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.
Due to the covenant waiver on June 30, 2020, Oak Street and the Company signed an amended agreement on August 11, 2020, to update its covenant so that, the Company should remain in compliance. The amendment states that for the September 30, 2020 and December 31, 2020 covenant test, the ratio of Senior Funded Debt to EBIDTA shall be no greater than 5.0 to 1.0. As of March 31, 2021 and December 31, 2020 the Company reported a ratio of 3.9 and 4.2, respectively, for Senior Funded Debt to EBIDTA, and remain in compliance. Beginning at March 31, 2021 and thereafter the Senior Funded Debt to EBIDTA ratio shall be reduced to no greater than 4.0 to 1.0.
As of the date of this filing, we are in compliance and do not believe we are at further risk of noncompliance.
Certain of our agreements contain various covenants that limit the discretion of our management in operating our business and could prevent us from engaging in certain potentially beneficial activities.
The restrictive covenants in our debt agreements may impact how we operate our business and prevent us from engaging in certain potentially beneficial activities. In particular, among other covenants, our debt agreements require us to maintain a minimum ratio of Consolidated EBITDA (earnings before interest, taxes, depreciation and amortization), adjusted for certain transaction-related items (“Consolidated EBITDA”), to consolidated interest expense and a maximum ratio of consolidated net indebtedness to Consolidated EBITDA. Our compliance with these covenants could limit management’s discretion in operating our business and could prevent us from engaging in certain potentially beneficial activities.
There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with U.S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our financial position and results of operations and therefore our business.
The preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses, and income. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income, and could have a material adverse effect on our financial position, results of operations and cash flows.
Improper disclosure of confidential information could negatively impact our business.
We are responsible for maintaining the security and privacy of our customers’ confidential and proprietary information and the personal data of their employees. We have put in place policies, procedures and technological safeguards designed to protect the security and privacy of this information; however, we cannot guarantee that this information will not be improperly disclosed or accessed. Disclosure of this information could harm our reputation and subject us to liability under our contracts and laws that protect personal data, resulting in increased costs or loss of revenues.
Our business, results of operations, financial condition and liquidity may be materially adversely affected by certain actual and potential claims, regulatory actions and proceedings.
We are subject to various actuallegal proceedings and potential claims, regulatory actions and other proceedings including those relating to alleged errors and omissions in connection with the placementeither asserted or servicing of insurance and/or the provision of servicesunasserted, arising in the ordinary course of business, of which we cannot, and likely will not be able to, predictbusiness. While the outcome with certainty. Because we often assist customers with matters involving substantial amounts of money, including the placement of insurance and the handling of related claims that customers may assert, errors and omissions claims against us may arise alleging potential liability for all or part of the amounts in question. Also, the failure of an insurer with whom we place business could result in errors and omissions claims against us by our customers, which could adversely affect our results of operations and financial condition. Claimants may seek large damage awards, and these claims may involve potentially significant legal costs, including punitive damages. Such claims, lawsuits and other proceedings could, for example, include claims for damages based upon allegations that our employees or sub-agents failed to procure coverage, report claims on behalfcannot be predicted with certainty, management does not believe the outcome of customers, provide insurance companies with complete and accurate information relating to the risks being insured or appropriately apply funds that we hold for our customers on a fiduciary basis. In addition, given the long-tail natureany of professional liability claims, errors and omissions matters can relate to matters dating back many years. Where appropriate, we have established provisions against these potential matters that we believe to be adequate in the light of current information and legal advice, and we adjust such provisions from time to time according to developments.
While most of the errors and omissions claims made against us (subject to our self-insured deductibles) have been covered by our professional indemnity insurance, our business, results of operations, financial condition and liquidity may be adversely affected if, in the future, our insurance coverage proves to be inadequate or unavailable, or if there is an increase in liabilities for which we self-insure. Our ability to obtain professional indemnity insurance in the amounts and with the deductibles we desire in the future may be adversely impacted by general developments in the market for such insurance or our own claims experience. In addition, regardless of monetary costs, these matters could have a material adverse effect on our reputation and cause harm to our carrier, customer or employee relationships, or divert personnel and management resources.
Risks Related to the Insurance Industry
We may experience increased competition from insurance companies, technology companies and the financial services industry, as well as the shift away from traditional insurance markets.
The insurance intermediary business is highly competitive and we actively compete with numerous firms for customers, properties and insurance companies, many of which have relationships with insurance companies, or have a significant presence in niche insurance markets that may give them an advantage over us. Other competitive concerns may include the quality of our products and services, our pricing and the ability of some of our customers to self-insure and the entrance of technology companies into the insurance intermediary business. A number of insurance companies are engaged in the direct sale of insurance, primarily to individuals, and do not pay commissions to agents and brokers. In addition, and to the extent that banks, securities firms, private equity companies, and insurance companies affiliate, the financial services industry may experience further consolidation, and we therefore may experience increased competition from insurance companies and the financial services industry, as a growing number of larger financial institutions increasingly, and aggressively, offer a wider variety of financial services, including insurance intermediary services.
Worsening of Current U.S. economic conditions as a result of the COVID-19 pandemic may adversely affect our business.
If economic conditions were to worsen, a number of negative effects on our business could result, including declines in values of insurable exposure units, declines in insurance premium rates, the financial insolvency of insurance companies, the reduced ability of customers to pay, declines in the stock of residential housing or declines in property values. Also, if general economic conditions are poor, some of our customers may cease operations completely or be acquired by other companies, which could have an adverse effect on our results of operations and financial condition. If these customers are affected by poor economic conditions, but yet remain in existence, they may face liquidity problems or other financial difficulties that could result in delays or defaults in payments owed to us, which could have a significant adverse impact on our consolidated financial condition and results of operations. Any of these effects could decrease our net revenues and profitability.
Our business, and therefore our results of operations and financial condition, may be adversely affected by conditions that result in reduced insurer capacity.
Our results of operations depend on the continued capacity of insurance carriers to underwrite risk and provide coverage, which depends in turn on those insurance companies’ ability to procure reinsurance. Capacity could also be reduced by insurance companies failing or withdrawing from writing certain coverages that we offer to our customers. We have no control over these matters. To the extent that reinsurance becomes less widely available or significantly more expensive, we may not be able to procure the amount or types of coverage that our customers desire and the coverage we are able to procure for our customers may be more expensive or limited.
Quarterly and annual variations in our commissions that result from the timing of policy renewals and the net effect of new and lost business production may have unexpected effects on our results of operations.
Our commission income (including profit-sharing contingent commissions and override commissions) can vary quarterly or annually due to the timing of policy renewals and the net effect of new and lost business production. We do not control the factors that cause these variations. Specifically, customers’ demand for insurance products can influence the timing of renewals, new business and lost business (which includes policies that are not renewed), and cancellations. In addition, we rely on insurance companies for the payment of certain commissions. Because these payments are processed internally by these insurance companies, we may not receive a payment that is otherwise expected from a particular insurance company in a particular quarter or year until after the end of that period, which can adversely affect our ability to forecast these revenues and therefore budget for significant future expenditures. Quarterly and annual fluctuations in revenues based upon increases and decreases associated with the timing of new business, policy renewals and payments from insurance companies may adversely affect our financial condition, results of operations and cash flows.
Profit-sharing contingent commissions are special revenue-sharing commissions paid by insurance companies based upon the profitability, volume and/or growth of the business placed with such companies generally during the prior year. Over the last three years these commissions generally have been in the range of 3.0% to 3.5% of our previous year’s total core commissions and fees. Due to, among other things, potentially poor macroeconomic conditions, the inherent uncertainty of loss in our industry and changes in underwriting criteria due in part to the high loss ratios experienced by insurance companies, we cannot predict the payment of these profit-sharing contingent commissions. Further, we have no control over the ability of insurance companies to estimate loss reserves, which affects our ability to make profit-sharing calculations. Override commissions are paid by insurance companies based upon the volume of business that we place with them and are generally paid over the course of the year. Because profit-sharing contingent commissions and override commissions materially affect our revenues, any decrease in their payment to us could adversely affect our results of operations, profitability, and our financial condition.
Our business practices and compensation arrangements are subject to uncertainty due to potential changes in regulations.
The business practices and compensation arrangements of the insurance intermediary industry, including our practices and arrangements, are subject to uncertainty due to investigations by various governmental authorities. Certain of our offices are parties to profit-sharing contingent commission agreements with certain insurance companies, including agreements providing for potential payment of revenue-sharing commissions by insurance companies based primarily on the overall profitability of the aggregate business written with those insurance companies and/or additional factors such as retention ratios and the overall volume of business that an office or offices place with those insurance companies. Additionally, to a lesser extent, some of our offices are parties to override commission agreements with certain insurance companies, which provide for commission rates in excess of standard commission rates to be applied to specific lines of business, such as group health business, and which are based primarily on the overall volume of business that such office or offices placed with those insurance companies. The legislatures of various states may adopt new laws addressing contingent commission arrangements, including laws prohibiting such arrangements, and addressing disclosure of such arrangements to insureds. Various state departments of insurance may also adopt new regulations addressing these matters which could adversely affect our results of operations.
We may have unforeseen risks as a result of the COVID-19 pandemic
The spread of the coronavirus (COVID-19) outbreak in the United States has resulted in economic uncertainties which may negatively impact the Company’s business operations. While the disruption is expected to be temporary, there is uncertainty surrounding the duration and extent of the impact. The impact of the coronavirus outbreak on the financial statements cannot be reasonably estimated at this time.
Adverse events such as health-related concerns about working in our offices, the inability to travel and other matters affecting the general work environment could harm our business and our business strategy. While we do not anticipate any material impact to our business operations as a result of the coronavirus, in the event of a major disruption caused by the outbreak of pandemic diseases such as coronavirus, we may lose the services of our employees or experience system interruptions, which could lead to diminishment of our business operations. Any of the foregoing could harm our business and delay the implementation of our business strategy and we cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business.
Management is actively monitoring the global situation on its financial condition, liquidity, operations, industry and workforce.
Risk of lack of knowledge in distant geographic markets
Although the Company intends to focus its investments in locations with which we are generally familiar, the Company runs a risk of experiencing underwriting challenges or issues associated with a lack of familiarity in some markets. Each market has nuances and idiosyncrasies that affect values, marketability, desirability, and demand for individual assets that may not be easily understood from afar. While we believe we can effectively mitigate these risks in a myriad of ways, there is no guarantee that investments in any geographic market will perform as expected.
Potential liability or other expenditures associated with potential environmental contamination may be costly.
Various federal, state and local laws subject multifamily residential community owners or operators to liability for management, and the costs of removal or remediation, of certain potentially hazardous materials that may be present in the land or buildings of a multifamily residential community. Potentially hazardous materials may include polychlorinated biphenyls, petroleum-based fuels, lead-based paint or asbestos, among other materials. Such laws often impose liability without regard to fault or whether the owner or operator knew of, or was responsible for, the presence of such materials. The presence of, or the failure to manage or remediate properly, these materials may adversely affect occupancy at such apartment communities as well as the ability to sell or finance such apartment communities. In addition, governmental agencies may bring claims for costs associated with investigation and remediation actions, damages to natural resources and for potential fines or penalties in connection with such damage or with respect to the improper management of hazardous materials. Moreover, private plaintiffs may potentially make claims for investigation and remediation costs they incur or personal injury, disease, disability or other infirmities related to the alleged presence of hazardous materials at a multifamily residential community. In addition to potential environmental liabilities or costs associated with our current multifamily residential communities, we may also be responsible for such liabilities or costs associated with communities we acquire or manage in the future, or multifamily residential communities we no longer own or operate.
Laws benefiting disabled persons may result in our incurrence of unanticipated expenses.
Under the Americans with Disabilities Act of 1990 (the “ADA”), all places intended to be used by the public are required to meet certain federal requirements related to access and use by disabled persons. The Fair Housing Amendments Act of 1988 (the “FHAA”) requires multifamily residential communities first occupied after March 13, 1991, to comply with design and construction requirements for disabled access. For those multifamily residential communities receiving federal funds, the Rehabilitation Act of 1973 also has requirements regarding disabled access. These and other federal, state and local laws may require structural modifications to our apartment communities or changes in policy practice or affect renovations of the communities. Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. Although we believe that our multifamily residential communities are substantially in compliance with present requirements, we may incur unanticipated expenses to comply with the ADA, the FHAA and the Rehabilitation Act of 1973 in connection with the ongoing operation or redevelopment of our multifamily residential communities.
We compete in a highly regulated industry, which may result in increased expenses or restrictions on our operations.
We conduct business in several states of the United States of America and are subject to comprehensive regulation and supervision by government agencies in each of those states. The primary purpose of such regulation and supervision is to provide safeguards for policyholders rather than to protect the interests of our shareholders, and it is difficult to anticipate how changes in such regulation would be implemented and enforced. As a result, such regulation and supervision could reduce our profitability or growth by increasing compliance costs, technology compliance, restricting the products or services we may sell, the markets we may enter, the methods by which we may sell our products and services, or the prices we may charge for our services and the form of compensation we may accept from our customers, carriers and third parties. The laws of the various state jurisdictions establish supervisory agencies with broad administrative powers with respect to, among other things, licensing of entities to transact business, licensing of agents, admittance of assets, regulating premium rates, approving policy forms, regulating unfair trade and claims practices, determining technology and data protection requirements, establishing reserve requirements and solvency standards, requiring participation in guarantee funds and shared market mechanisms, and restricting payment of dividends. Also, in response to perceived excessive cost or inadequacy of available insurance, states have from time to time created state insurance funds and assigned risk pools, which compete directly, on a subsidized basis, with private insurance providers. We act as agents and brokers for such state insurance funds and assigned risk pools in Michigan as well as certain other states. These state funds and pools could choose to reduce the sales or brokerage commissions we receive. Any such reductions, in a state in which we have substantial operations could affect the profitability of our operations in such state or cause us to change our marketing focus. Further, state insurance regulators and the National Association of Insurance Commissioners continually re-examine existing laws and regulations, and such re-examination may result in the enactment of insurance-related laws and regulations, or the issuance of interpretations thereof, that adversely affect our business. Certain federal financial services modernization legislation could lead to additional federal regulation of the insurance industry in the coming years, which could result in increased expenses or restrictions on our operations. Other legislative developments that could adversely affect us include: changes in our business compensation model as a result of regulatory developments (for example, the Affordable Care Act); and federal and state governments establishing programs to provide health insurance or, in certain cases, property insurance in catastrophe-prone areas or other alternative market types of coverage, that compete with, or completely replace, insurance products offered by insurance carriers. Also, as climate change issues become more prevalent, the U.S. and foreign governments are beginning to respond to these issues. This increasing governmental focus on climate change may result in new environmental regulations that may negatively affect us and our customers. This could cause us to incur additional direct costs in complying with any new environmental regulations, as well as increased indirect costs resulting from our customers incurring additional compliance costs that get passed on to us. These costs may adversely impact our results of operations and financial condition.
Although we believe that we are in compliance in all material respects with applicable local, state and federal laws, rules and regulations, there can be no assurance that more restrictive laws, rules, regulations or interpretations thereof, will not be adopted in the future that could make compliance more difficult or expensive.
Risks Related to Investing in our Securities
We may experience volatility in our stock price that could affect your investment.
The market price of our common stock may be subject to significant fluctuations in response to various factors, including: quarterly fluctuations in our operating results; changes in securities analysts’ estimates of our future earnings; changes in securities analysts’ predictions regarding the short-term and long-term future of our industry; changes to the tax code; and our loss of significant customers or significant business developments relating to us or our competitors. Our common stock’s market price also may be affected by our inability to meet stock analysts’ earnings and other expectations. Any failure to meet such expectations, even if minor, could cause the market price of our common stock to decline. In addition, stock markets have generally experienced a high level of price and volume volatility, and the market prices of equity securities of many listed companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies. These broad market fluctuations may adversely affect our common stock’s market price. In the past, securities class action lawsuits frequently have been instituted against companies following periods of volatility in the market price of such companies’ securities. If any such litigation is initiated against us, it could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, financial position, results of operations, financial conditionor cash flows, and cash flows.accordingly, no legal contingencies are accrued as of September 30, 2022. Litigation relating to the insurance brokerage industry is not uncommon. As such we, from time to time have been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future.
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Item 1A. Risk Factors.
The Company’s CEO has a controlling
Investing in our common stock equity interest.involves a high degree of risk. You should consider carefully the information disclosed in Part I, Item1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2021. Except as set forth below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
At May 13, 2021, our CEO, Ezra Beyman, isOur failure to meet the beneficial ownercontinued listing requirements of approximately 50.324% of the common stock, consisting of 5,500,165 common shares. As of March 31, 2021, the outstanding amount of the loan from Reliance Holdings to us, isThe Nasdaq Capital Market could result in the amount of approximately $733,573. As such he has the ability to control any actions which require shareholder approval. If there is an annual or special meeting of stockholders for any reason, our CEO has total discretion regarding proposals submitted to a vote by shareholders as a consequence of his significant equity interest. Accordingly, the Company’s CEO will continue to exert substantial control until such time, if ever, that he no longer has majority voting control.
Under our credit agreements with Oak Street, the Company has agreed that at all times that the loans are outstanding: (i) Ezra Beyman, our chief executive officer, Debra Beyman, Mr. Beyman’s wife, or Yaakov Beyman, son of Mr. and Ms. Beyman, or someone else approved by Oak Street, as applicable, will be the manager of the current subsidiaries of the Company, (ii) Mr. Ezra Beyman will be President and Chairperson of the Board of the Company, and (iii) Reliance Holdings, of which Mr. and Ms. Beyman are the sole owners, will continue to hold at least 51% of the Company’s equity. The loans by Oak Street, immediately mature and become due and payable if the Company fails to comply with these provisions, subject to certain notice and/or cure periods.
The operating agreements of Commercial Coverage Solutions, LLC and Fortman Insurance Services, LLC, appoint Ms. Beyman as manager and provide her with broad powers to bind the applicable subsidiary without further authorization, including, among other things, to (1) effect an encumbrance or sale of property, (2) make investments, (3) determine amount and timing of distributions under the operating agreement, (4) settle, defend and prosecute legal actions or law suits, (5) sell, exchange or otherwise dispose of any or all of the relevant subsidiary’s assets, including the properties in the ordinary course or not in the ordinary course, (6) borrow funds, (7) enter into any contracts, leases and agreements with third parties or affiliates and (8) appoint officers. These operating agreements also provide indemnification protection to Ms. Beyman and Ms. Beyman is not prohibited from using corporate opportunities, whether unrelated to, or directly in competition with, the business of the Company or its subsidiaries.
The Company intends to negotiate with Oak Street to revise or remove these provisions. However, there can be no assurance that we will successfully negotiate such revisions or removal on terms beneficial to the Company and its stockholders. These provisions may make changing management of the Company and its subsidiaries more difficult or costly. Until the governing documents of the subsidiaries are revised, the Company may experience loss of opportunities and/or be unable to recoup losses due to management decisions.
Broad discretion of management
Any person who invests in the Company’s common stock will do so without an opportunity to evaluate the specific merits or risks of any prospective acquisition. As a result, investors will be entirely dependent on the broad discretion and judgment of management in connection with the selection of acquisitions. There can be no assurance that determinations made by the Company’s management will permit us to achieve the Company’s business objectives.
Future sales or other dilution of our equity could adversely affect the market pricedelisting of our common stock.
We grow our business organically as well as through acquisitions. One method of acquiring companies or otherwise Companying our corporate activities is through the issuance of additional equity securities. The issuance of any additional shares of common or of preferred stock or convertible securities could be substantially dilutive to holders of our common stock. Moreover, to the extent that we issue restricted stock units, performance stock units, options or warrants to purchase shares of our common stock in the future and those options or warrants are exercised or as the restricted stock units or performance stock units vest, our stockholders may experience further dilution. Holders of our common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our stockholders.
The market price of our common stock could decline as a result of sales of shares of our common stock or the perception that such sales could occur.
The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive.
The trading price of our common stock may fluctuate widely as a result of a number of factors, including the risk factors described above many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations have adversely affected and may continue to adversely affect the market price of our common stock. Among the factors that could affect our stock price are:
Our | ||
Stockholder class action lawsuits may be instituted against us following a period of volatility in our stock price. Any such litigation could result in substantial cost and a diversion of management’s attention and resources.
We can provide no assurance that our common stock or the warrants will always meet the Nasdaq Capital Market continued listing standards.
Our common stock is currently quoted on the Nasdaq. We can provide no assurance that that an active trading market on the Nasdaq Capital Market for our common stock and the warrants will develop and continue. If our common stock remains quoted on or reverts to an over-the-counter system rather than being listed on a national securities exchange, you may find it more difficult to dispose of shares of our common stock or obtain accurate quotations as to the market value of our common stock.
Possible issuance of additional securities.
Our Articles of Incorporation authorize the issuance of 2,000,000,000 shares of common stock, par value $0.086 per share. As of March 31, 2021 we had 10,929,514 shares issued and outstanding. We may be expected to issue additional shares in connection with our pursuit of new business opportunities and new business operations. To the extent that additional shares of common stock are issued, our shareholders would experience dilution of their respective ownership interests.currently listed on The Nasdaq Capital Market. If we issue sharesfail to satisfy the continued listing requirements of common stock in connection with our intentThe Nasdaq Capital Market, such as the corporate governance requirements, minimum bid price requirement or the minimum stockholder’s equity requirement, The Nasdaq Stock Market LLC may take steps to pursue new business opportunities, a change in control of the Company may be expected to occur. The issuance of additional shares of common stock may adversely affect the market price ofdelist our common stock, in the event that an active trading market commences.
Dividends unlikely.
The Company does not expect to pay dividends for the foreseeable future. The payment of dividends will be contingent upon the Company’s future revenues and earnings, if any, capital requirements and overall financial conditions. The payment of any future dividends will be within the discretion of the Company’s board of directors as then constituted. It is the Company’s expectation that future Management followingstock. Any delisting would likely have a business combination will determine to retain any earnings for use in its business operations and accordingly, the Company does not anticipate declaring any dividends in the foreseeable future.
Speculative Nature of Warrants.
The warrants offered in our February 2021 offering do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of our common stock at a fixed price for a limited period of time. Specifically, commencingnegative effect on the date of issuance, holders of the Series A Warrants may exercise their right to acquire the common stock and pay an exercise price of $6.60 per share (110% of the public offering price of our common stock and warrants in this offering), priorwould impair stockholders’ ability to five yearssell or purchase their common stock when they wish to do so.
On September 27, 2022, we received written notice from the dateListing Qualifications Department of issuance, afterThe Nasdaq Stock Market LLC notifying us that for the preceding 30 consecutive business days (August 15, 2022 through September 26, 2022), our common stock did not maintain a minimum closing bid price of $1.00 per share (“Minimum Bid Price Requirement”) as required by Nasdaq Listing Rule 5550(a)(2). The notice has no immediate effect on the listing or trading of our common stock which datewill continue to trade on The Nasdaq Capital Market under the symbol “RELI”. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we initially have a compliance period of 180 calendar days, or until March 27, 2023, to regain compliance with Nasdaq Listing Rules. Compliance can be achieved automatically and without further action if the closing bid price of our common stock is at or above $1.00 for a minimum of ten consecutive business days at any unexercised warrantstime during the compliance period, in which case Nasdaq will expirenotify us of our compliance and have no further value. Moreover, following this offering, the matter will be closed. If, however, we do not achieve compliance with the Minimum Bid Price Requirement by March 27, 2023, we may be eligible for additional time to comply; however, such additional time is not guaranteed and is subject to the discretion of Nasdaq. In order to be eligible for such additional time, we will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the warrants is uncertainexception of the Minimum Bid Price Requirement, and theremust notify Nasdaq in writing of our intention to cure the deficiency during the second compliance period
We intend to attempt to take actions to restore our compliance with Nasdaq’s listing requirements, but we can beprovide no assurance that the market value of the warrants will equalany action taken by us would result in our common stock meeting The Nasdaq listing requirements, or exceed their public offering price. There can be no assurance that any such action would stabilize the market price or improve the liquidity of our common stock. Any perception that we may not regain compliance or a delisting of our common stock by Nasdaq could adversely affect our ability to attract new investors, decrease the liquidity of the outstanding shares of our common stock, will ever equal or exceedreduce the exercise price at which such shares trade and increase the transaction costs inherent in trading such shares with overall negative effects for our stockholder. In addition, delisting of the warrants, and consequently, whether it will ever be profitable for holders of the warrants to exercise the warrants.
State blue sky registration; potential limitations on resale of the Company’s common stock
The holders of the Company’s shares ofour common stock registered under the Exchange Actfrom Nasdaq could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock, and thosemight deter certain institutions and persons who desire to purchase themfrom investing in any trading market that may develop in the future, should be aware that there may be state blue-sky law restrictions upon the ability of investors to resell the Company’s securities. Accordingly, investors should consider the secondary market for the Company’s securities to be a limited one.our common stock.
Industry and Market Data
Unless otherwise indicated, information contained in this Form 10-Q concerning our industry and the markets in which we operate, including our general expectations and market opportunity and market size, is based on information from various sources, including independent industry publications. In presenting this information, we have also made assumptions based on such data and other similar sources, and on our knowledge of, and our experience to date in the relevant industries and markets. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We believe that the information from these industry publications that is included in this Form 10-Q is reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Date of Transaction | Transaction type (e.g. new issuance, cancellation, shares returned to treasury) and all under Section 4(a)(2) of the Securities Act of 1933 | Number of Shares Issued (or cancelled) | Class of Securities | Value of shares issued ($/per share) at Issuance | Were the shares issued at a discount to market price at the time of issuance? (Yes/No) | Individual/ Entity Shares were issued to (entities must have individual with voting / investment control disclosed). | Reason for share issuance (e.g. for cash or debt conversion) OR Nature of Services Provided (if applicable) | Restricted or Unrestricted as of this filing? | Exemption or Registration Type? | ||||||||||||||||
3/5/2021 | New | 15,000 | Common | $ | 6.07 | No | Tradigital Marketing | Cash | restricted | Rule 144 |
None that have not been previously disclosed in our filings with the SEC.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Not applicable.
The following exhibits are filed with this Form 10-K.
Inline XBRL Instance | ||
Inline XBRL Taxonomy | ||
Inline XBRL Taxonomy | ||
Inline XBRL Taxonomy Extension Definition Linkbase | ||
Inline XBRL Taxonomy | ||
Inline XBRL Taxonomy Extension Presentation Linkbase | ||
104 | Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101). |
* FurnishedFiled herewith
** Filed herein
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SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, of 1934, as amended, the registrant has duly caused this reportForm 10-Q statement to be signed on its behalf by the undersigned, thereunto duly authorized.authorized, in the City of Lakewood, State of New Jersey on November 14, 2022.
Reliance Global | ||||
/s/ Ezra Beyman | ||||
Ezra Beyman | ||||
Chief Executive Officer and Chairman of the Board | ||||
(Principal Executive |
Date: November 14, 2022
Reliance Global | ||||
/s/ | ||||
William Lebovics | ||||
Chief Financial Officer | ||||
(Principal Financial | ||||
Officer) |
Date: November 14, 2022
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