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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from _____ to _____
Commission
file number of the issuing entity:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
524210
(Primary Standard Industrial Code Classification Number)
(Address, including zip code, and telephone number, including area code of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
| ||||
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.
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).
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 ☐ | |
| Smaller
reporting company | ||
| Emerging
Growth Company |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).
Yes:
☐
At August 15, 2022 the registrant had shares of common stock, par value $0.086 per share, outstanding.
TABLE OF CONTENTS
Reliance Global Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable | ||||||||
| Accounts receivable, related parties | ||||||||
| Prepaid expense and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Investment in NSURE, Inc. | ||||||||
| Intangibles, net | ||||||||
| Goodwill | ||||||||
| Other non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity (deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and other accrued liabilities | $ | $ | ||||||
| Chargeback reserve | ||||||||
| Other payables | ||||||||
| Short term Financing Agreements | ||||||||
| Current portion of long-term debt | ||||||||
| Current portion of leases payable | ||||||||
| Earn-out liability, current portion | ||||||||
| Warrant commitment | ||||||||
| Total current liabilities | ||||||||
| Loans payable, related parties, less current portion | ||||||||
| Long term debt, less current portion | ||||||||
| Leases payable, less current portion | ||||||||
| Earn-out liability, less current portion | ||||||||
| Warrant liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Preferred stock, $ par value; shares authorized and and issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | ||||||||
| Common stock, $ par value; shares authorized and and issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Stock subscription receivable | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 1 |
Reliance Global Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | ||||||||||||||||
| Commission income | $ | $ | $ | $ | ||||||||||||
| Total revenue | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Commission expense | $ | $ | $ | $ | ||||||||||||
| Salaries and wages | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Marketing and advertising | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Recognition and change in fair value of warrant liabilities | ||||||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Basic earnings (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted earnings (loss) per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares outstanding - Basic | ||||||||||||||||
| Weighted average number of shares outstanding - Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 2 |
Reliance Global Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
| 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 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Share based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Shares issued due to private placement | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Shares issued pursuant to acquisition of Medigap | - | - | ||||||||||||||||||||||||||||||||||||||
| Exercise of Series A warrants | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of prefunded Series C Warrants in exchange for common shares | - | ( | ) | ( | ) | - | ||||||||||||||||||||||||||||||||||
| Shares issued for vested stock awards | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Share based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Exercise of Series C warrants into common shares | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 3 |
Reliance Global Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
| 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 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Share based compensation | - | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for services | - | - | |||||||||||||||||||||||||||||||||||
| Shares issued due to public offering, net of offering costs of $ | - | - | |||||||||||||||||||||||||||||||||||
| Over-allotment shares from offering, net of offering costs of $ | - | - | |||||||||||||||||||||||||||||||||||
| Warrants sold during public offering at quoted price | - | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued due to conversion of preferred stock | ( | ) | ( | ) | - | ( |
) | ||||||||||||||||||||||||||||||
| Shares issued due to conversion of debt | - | - | |||||||||||||||||||||||||||||||||||
| Rounding shares related to initial public offering | - | ( | ) | ||||||||||||||||||||||||||||||||||
| Shares issued pursuant to software purchase | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Share based compensation | - | - | - | ||||||||||||||||||||||||||||||||||
| Rounding shares related to initial public offering | - | - | |||||||||||||||||||||||||||||||||||
| Shares issued pursuant to acquisition of Kush | - | - | |||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 4 |
Reliance Global Group, Inc. and Subsidiaries and Predecessor
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustment to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt issuance costs and accretion of debt discount | ||||||||
| Non-cash lease expense | ||||||||
| Stock compensation expense | ||||||||
| Earn-out fair value and write-off adjustments | ||||||||
| Recognition and change in fair value of warrant liabilities | ( | ) | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts payables and other accrued liabilities | ( | ) | ( | ) | ||||
| Accounts receivable | ||||||||
| Accounts receivable, related parties | ( | ) | ( | ) | ||||
| Other payables | ||||||||
| Charge back reserve | ||||||||
| Other non-current assets | ( | ) | ( | ) | ||||
| Prepaid expense and other current assets | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Business acquisitions, net of cash acquired | ( | ) | ( | ) | ||||
| Purchase of intangibles | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Principal repayments of debt | ( | ) | ( | ) | ||||
| Proceeds from loan for business acquisition | ||||||||
| Payment of debt issuance costs | ( | ) | ||||||
| Payments on earn-out liabilities | ( | ) | ||||||
| Proceeds from loans payable, related parties | ||||||||
| Payments of loans payable, related parties | ( | ) | ( | ) | ||||
| Proceeds from exercise of warrants into common stock | ||||||||
| Repayments on short-term financing | ( | ) | ||||||
| Net proceeds from private placement issuance of shares and warrants | ||||||||
| Issuance of common stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase in cash and restricted cash | ( | ) | ||||||
| Cash and restricted cash at beginning of period | ||||||||
| Cash and restricted cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash and non-cash investing and financing transactions: | ||||||||
| Issuance of Series D Warrants | $ | $ | ||||||
| Issuance of placement agent warrants | $ | $ | ||||||
| Prepaid insurance acquired through short-term financing | $ | $ | ||||||
| Conversion of preferred stock into common stock | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Conversion of debt into equity | $ | $ | ||||||
| Common stock issued pursuant to acquisition | $ | $ | ||||||
| Common stock issued in lieu of services | $ | $ | ||||||
| Issuance of common stock pursuant to the purchase of software | $ | $ | ||||||
| Acquisition of business deferred purchase price | $ | $ | ||||||
| Lease assets acquired in exchange for lease liabilities | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 5 |
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”) incorporated in Florida on August 2, 2013.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles 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 accounts of Reliance Global Group, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Liquidity
As
of June 30, 2022, the Company’s reported cash and restricted cash aggregated balance was approximately $
Use of Estimates
The preparation of financial statements in conformity with 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 its estimates on historical experience and on assumptions believed to be reasonable under the circumstances. Actual results could differ materially from those estimates.
Cash and Restricted Cash
Cash and restricted cash reported on our Condensed Consolidated Balance Sheets are reconciled to the total shown on our Condensed Consolidated Statements of Cash Flows as follows:
| June 30, 2022 | June 30, 2021 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
| 6 |
Fair Value of Financial Instruments
Level 1 — Observable inputs reflecting quoted prices (unadjusted) in active markets for identical assets 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 re-measures fair value of its Level 3 warrant liabilities at the balance sheet date, using a binomial option pricing model. The following summarizes the significant unobservable inputs:
| June 30, 2022 | December 31, 2021 | |||||||
| Stock price | $ | $ | ||||||
| Volatility | % | % | ||||||
| Time to expiry | ||||||||
| Dividend yield | % | % | ||||||
| Risk free rate | % | % | ||||||
The following reconciles fair value of the liability classified warrants:
| Three and Six Months ended June 30, 2022 | ||||||||||||||||
| Series B Warrant Commitment | Series B warrant liabilities | Placement agent warrants | Total | |||||||||||||
| Beginning balance | $ | $ | $ | $ | ||||||||||||
| Initial recognition | ||||||||||||||||
| Unrealized (gain) loss | ( | ) | ( | ) | ( | ) | ||||||||||
| Warrants exercised or transferred | ( | ) | ( | ) | ||||||||||||
| Ending balance, March 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Unrealized gain | ( | ) | ( | ) | ( | ) | ||||||||||
| Ending balance, June 30, 2022 | ||||||||||||||||
| December 31, 2021 | ||||||||
| Series B Warrant Commitment | Total | |||||||
| Beginning balance | $ | $ | ||||||
| Initial recognition | ||||||||
| Unrealized gain | ||||||||
| Ending balance | $ | $ | ||||||
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 cash flows, rate of return, and probability assessments. The following table summarizes the significant unobservable inputs used in the fair value measurements:
| June 30, 2022 | December 31, 2021 | |||||||
| Valuation technique | ||||||||
| Significant unobservable input | ||||||||
| 7 |
The Company values its Level 3 earn-out liability related to the Barra Acquisition using a Monte Carlo simulation in a risk-neutral framework (a special case of the Income Approach). The following summarizes the significant unobservable inputs:
| June 30, 2022 | ||||
| WACC Risk Premium: | % | |||
| Volatility | % | |||
| Credit Spread: | % | |||
| Payment Delay (days) | % | |||
| Risk free rate | ||||
| Discounting Convention: | ||||
| Number of Iterations | ||||
Undiscounted
remaining earn out payments are approximately $
| June 30, 2022 | December 31, 2021 | |||||||
| Beginning balance – January 1 | $ | $ | ||||||
| Acquisitions and Settlements | ||||||||
| JP Kush Acquisition | ||||||||
| Barra Acquisition | ||||||||
| CCS Write-off | ( | ) | ||||||
| Altruis partial settlement | ( | ) | ( | ) | ||||
| Montana final settlement | ( | ) | ||||||
| Period adjustments: | ||||||||
| Fair value changes and accretion included in earnings* | ( | ) | ||||||
| Ending balance | $ | $ | ||||||
| Less: Current portion | ( | ) | ( | ) | ||||
| Ending balance, less current portion | ||||||||
| * |
Revenue Recognition
The following table disaggregates the Company’s revenue by line of business, showing commissions earned:
| Three Months ended June 30, 2022 | Medical/Life | Property and Casualty | Total | |||||||||
| Regular | ||||||||||||
| EBS | $ | $ | $ | |||||||||
| USBA | ||||||||||||
| CCS/UIS | ||||||||||||
| Montana | ||||||||||||
| Fortman | ||||||||||||
| Altruis | ||||||||||||
| Kush | ||||||||||||
| Medigap | ||||||||||||
| Barra | ||||||||||||
| $ | $ | $ | ||||||||||
| 8 |
| Six Months ended June 30, 2022 | Medical/Life | Property and Casualty | Total | |||||||||
| Regular | ||||||||||||
| EBS | $ | $ | $ | |||||||||
| USBA | ||||||||||||
| CCS/UIS | ||||||||||||
| Montana | ||||||||||||
| Fortman | ||||||||||||
| Altruis | ||||||||||||
| Kush | ||||||||||||
| Medigap | ||||||||||||
| Barra | ||||||||||||
| $ | $ | $ | ||||||||||
| Three Months ended June 30, 2021 | Medical/Life | Property and Casualty | Total | |||||||||
| Regular | ||||||||||||
| EBS | ||||||||||||
| USBA | ||||||||||||
| CCS/UIS | ||||||||||||
| Montana | ||||||||||||
| Fortman | ||||||||||||
| Altruis | ||||||||||||
| Kush | ||||||||||||
| $ | $ | $ | ||||||||||
| Six Months ended June 30, 2021 | Medical/Life | Property and Casualty | Total | |||||||||
| Regular | ||||||||||||
| EBS | $ | $ | $ | |||||||||
| USBA | ||||||||||||
| CCS/UIS | ||||||||||||
| Montana | ||||||||||||
| Fortman | ||||||||||||
| Altruis | ||||||||||||
| Kush | ||||||||||||
| $ | $ | $ | ||||||||||
The following, are customers representing 10% or more of total revenue:
For the three months ended June 30, | ||||||||
| Insurance Carrier | 2022 | 2021 | ||||||
| LTC Global | % | % | ||||||
| Priority Health | % | % | ||||||
| BlueCross BlueShield | % | % | ||||||
| 9 |
For the six months ended June 30, | ||||||||
| Insurance Carrier | 2022 | 2021 | ||||||
| BlueCross BlueShield | % | % | ||||||
| Priority Health | % | % | ||||||
| LTC Global | % | % | ||||||
No
other single Customer accounted for more than
Income Taxes
The Company recorded no income tax expense for the three and six months ended June 30, 2022 and 2021 because the estimated annual effective tax rate was zero. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated, the 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 of June 30, 2022 and December 31, 2021, the Company provided a full valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized.
Prior Period Adjustments
The 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 comparative 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 condensed consolidated financial statements for the period ended June 30, 2022.
| Account | 12/31/2020 As reported | Adjustment | 12/31/2020 Adjusted | |||||||||
| Earn-out liability | ||||||||||||
| Goodwill | ( | ) | ||||||||||
| Common stock issuable | ( | ) | ||||||||||
| Additional paid-in-capital | ||||||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||||||
| Account | 3/31/2021 As reported | Adjustment | 3/31/2021 Adjusted | |||||||||
| Common stock issuable | ( | ) | ||||||||||
| Additional paid-in-capital | ||||||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||||||
| 10 |
Recently Issued Accounting Pronouncements
We do not expect any recently issued accounting pronouncements to have a material effect on our financial statements.
NOTE 2. STRATEGIC INVESTMENTS AND BUSINESS COMBINATIONS
Medigap Healthcare Insurance Company, LLC Transaction
On
January 10, 2022, pursuant to an asset purchase agreement, dated December 21, 2021, the Company completed the acquisition of all of the
assets of Medigap Healthcare Insurance Company, LLC (“Medigap”) for a purchase price of $
The acquisition of Medigap 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.
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) | ||||||
| Property, plant and equipment | $ | |||||||
| Right-of-use asset | ||||||||
| Trade names | ||||||||
| Customer relationships | ||||||||
| Technology | ||||||||
| Backlog | ||||||||
| Chargeback reserve | ( | ) | ||||||
| Lease liability | ( | ) | ||||||
| Goodwill | ||||||||
| $ | ||||||||
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
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
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
| 11 |
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
Goodwill
of $
The
approximate revenue and net profit or loss for the acquired business as a standalone entity per ASC 805 from January 10, 2022 to June
30, 2022 was $
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 six months ended June 30, 2022 and 2021:
| June 30, | June 30, | |||||||
| 2022 | 2021 | |||||||
| Revenue | $ | $ | ||||||
| Net Income (Loss) | $ | $ | ( | ) | ||||
| Earnings (Loss) per common share, basic | $ | $ | ( | ) | ||||
| Earnings (Loss) per common share, diluted | $ | ( | ) | $ | ( | ) | ||
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 $
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.
| 12 |
The preliminary allocation of the purchase price in connection with the acquisition of Barra was calculated as follows:
| Description | Fair Value | Weighted Average Useful Life (Years) | ||||||
| Acquired accounts receivable | $ | |||||||
| Property, plant and equipment | ||||||||
| Right-of-use asset | ||||||||
| Trade names | ||||||||
| Customer relationships | ||||||||
| Agency relationships | ||||||||
| Developed technology | ||||||||
| Lease liability | ( | ) | ||||||
| Goodwill | ||||||||
| $ | ||||||||
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
Customer
and Agency 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
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
Goodwill
of $
The
approximate revenue and net profit or loss for the acquired business as a standalone entity per ASC 805 from April 26, 2022 to June 30,
2022 was $
Pro Forma Information
The results of operations of Barra 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 six months ended June 30, 2022 and 2021:
| June 30, | June 30, | |||||||
| 2022 | 2021 | |||||||
| Revenue | $ | $ | ||||||
| Net Income (Loss) | $ | $ | ( | ) | ||||
| Earnings (Loss) per common share, basic | $ | $ | ( | ) | ||||
| Earnings (Loss) per common share, diluted | $ | ( | ) | $ | ( | ) | ||
| 13 |
NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS
The
following table rolls forward the Company’s goodwill balance for the periods ending June 30, 2022 and December 31, 2021. As
discussed in Note 1 - Prior Period Adjustments, a $(
| Goodwill | ||||
| December 31, 2020 | $ | |||
| Goodwill recognized in connection with Kush acquisition on May 1, 2021 | $ | |||
| December 31, 2021 | $ | |||
| Goodwill recognized in connection with Medigap acquisition on January 10, 2022 | $ | |||
| Goodwill recognized in connection with Barra acquisition on April 26, 2022 | ||||
| June 30, 2022 | $ | |||
The following table sets forth the major categories of the Company’s intangible assets and the weighted-average remaining amortization period as of June 30, 2022:
| Weighted Average Remaining Amortization period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||
| Trade name and trademarks | $ | $ | ( | ) | $ | |||||||||||
| Internally developed software | ( | ) | ||||||||||||||
| Customer relationships | ( | ) | ||||||||||||||
| Purchased software | ( | ) | ||||||||||||||
| Video Production Assets | ( | ) | ||||||||||||||
| Non-competition agreements | ( | ) | ||||||||||||||
| Contracts Backlog | ( | ) | ||||||||||||||
| $ | $ | ( | ) | $ | ||||||||||||
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, 2021:
| Weighted Average Remaining Amortization period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||
| Trade name and trademarks | $ | $ | ( | ) | $ | |||||||||||
| Internally developed software | ( | ) | ||||||||||||||
| Customer relationships | ( | ) | ||||||||||||||
| Purchased software | ( | ) | ||||||||||||||
| Video Production Assets | ||||||||||||||||
| Non-competition agreements | ( | ) | ||||||||||||||
| $ | $ | ( | ) | $ | ||||||||||||
| 14 |
The following table reflects expected amortization expense as of June 30, 2022, for each of the following five years and thereafter:
| Years ending December 31, | Amortization Expense | |||
| 2022 (remainder of year) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
NOTE 4. LONG-TERM DEBT AND SHORT-TERM FINANCINGS
Long-Term Debt
The composition of the long-term debt follows:
June 30, 2022 | December 31, 2021 | |||||||
| Oak Street Funding LLC Term Loan for the acquisition of EBS and USBA, net of deferred financing costs of $ | $ | $ | ||||||
| Oak Street Funding LLC Senior Secured Amortizing Credit Facility for the acquisition of CCS, net of deferred financing costs of $ | ||||||||
| Oak Street Funding LLC Term Loan for the acquisition of SWMT, net of deferred financing costs of $ | ||||||||
| Oak Street Funding LLC Term Loan for the acquisition of FIS, net of deferred financing costs of $ | ||||||||
| Oak Street Funding LLC Term Loan for the acquisition of ABC, net of deferred financing costs of $ | ||||||||
| Oak Street Funding LLC Term Loan for the acquisition of Barra, net of deferred financing costs of $ | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Long-term debt | $ | $ | ||||||
Oak Street Funding LLC – Term Loans and Credit Facilities
| Fiscal year ending December 31, | Maturities of Long-Term Debt | |||
| 2022 (remainder of year) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | ||||
| Less: debt issuance costs | ( | ) | ||
| Total | $ | |||
| 15 |
Short-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 $
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 an aggregate of up to
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 $
Placement Agent Warrants
In
connection with the Private Placement, the Company issued
| 16 |
NOTE 6. EQUITY
Preferred Stock
The Company has been authorized to issue shares of $ 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.
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. These shares remain issued and outstanding as of June 30, 2022.
The Series B convertible preferred stock has no voting rights and initially each share of Series B convertible preferred stock may be converted into shares of the Company’s common stock. The holders of the Series B convertible preferred stock are not entitled to receive any dividends other than any dividends paid on account of the common stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders shall be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of common stock would receive if the Preferred Stock were fully converted (disregarding for such purposes any conversion limitations hereunder) to common stock which amounts shall be paid pari passu with all holders of common stock.
Common Stock
The Company has been authorized to issue shares of common stock, $ par value. Each share of issued and outstanding common stock shall entitle 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.
In January 2022, the Company issued shares of common stock through the Private Placement for the purpose of raising capital. See Note 5 - Warrant Liabilities for proceeds received by the Company.
In January 2022, the Company issued shares of common stock pursuant to the Medigap Acquisition.
In
January 2022, upon agreement with Series A warrant holders, warrants were exercised at a price of $
In March 2022, the Company issued shares of the Company’s common stock due to the vesting of stock awards pursuant to an employee agreement.
In
May and June 2022,
As of June 30, 2022 and December 31, 2021, there were and shares of Common Stock outstanding, respectively.
Warrants
Series A warrant holders exercised Series A warrants in January 2022, resulting in of Series A warrants remaining issued and outstanding as of June 30, 2022.
| 17 |
In
January 2022, as a result of the issuance of common stock in the January 2022 stock offering 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
In
May and June 2022, the
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 $. For the three and six months ended June 30, 2022, compensation expense on these grants totaled $ and $, respectively. As of June 30, 2022, these shares have not been issued.
In
April 2022 , pursuant to an agreement between the Company and an Executive, the Executive will be compensated with
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, for the three and six months ended
June 30, 2021, due to a net loss, the outstanding Series A Convertible Preferred Stock is considered anti-dilutive in which and
were issued and outstanding at June 30, 2022 and 2021, respectively. Series A Convertible Preferred Stock is convertible into common
stock on a
The following represents the impact of options, stock awards, preferred stock and warrants on basic and diluted EPS for the three and six months ended June 30, 2022:
| ● | Outstanding stock options are considered anti-dilutive, due to the exercise price being greater than the average market price, in which , were issued and outstanding at June 30, 2022. | |
| ● | Vested Stock awards in the amount of have been included in the basic and diluted EPS calculation for the three and six months ended June 30, 2022, and nonvested stock awards in the amount of and have been included in the diluted EPS calculation for the three and six months ended June 30, 2022, respectively. | |
| ● | Outstanding Series A warrants are considered anti-dilutive, due to the exercise price being greater than the average market price, in which , were issued and outstanding at June 30, 2022. | |
| ● | Series B Convertible Preferred stock are considered dilutive and included in the calculation of diluted EPS. | |
| ● | The potential settlement shares of the warrant liability associated with Series B Warrants are considered dilutive and included in the calculation of diluted EPS for the six months ended June 30, 2022. The effects of the warrants that have been recorded in net income on the condensed consolidated statement of operations have been eliminated in the calculation of diluted EPS for the three and six months ended June 30, 2022. |
| 18 |
| ● | The potential settlement shares of the warrant liability associated with the Placement Agent Warrants are considered dilutive and anti-dilutive for the three and six months ended June 30, 2022, respectively, and is included in Diluted EPS calculation for the three months ended June 30, 2022. | |
| ● | The Series C prepaid warrants have been exercised in 2022. and weighted shares were included as outstanding shares in the calculation of basic and diluted EPS for the period prior to exercise for the three and six months ended June 30, 2022, respectively, because they represent shares issuable for only nominal consideration. | |
| ● | The
Series D prepaid warrants have been included as outstanding shares in the calculation of basic and diluted EPS, as they
represent shares issuable for only nominal consideration. The Company reduced income available to common stockholders by $ |
| Three Months | Three Months | |||||||
| ended | ended | |||||||
| June 30, 2022 | June 30, 2021 | |||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Deemed dividend | ||||||||
| Net income (loss), numerator, basic computation | ( | ) | ||||||
| Recognition and change in fair value of warrant liability | ( | ) | ||||||
| Net income (loss), numerator, diluted computation | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares - denominator basic computation | ||||||||
| Effect of stock awards | ||||||||
| Effect of preferred stock | ||||||||
| Weighted average shares, as adjusted - denominator diluted computation | ||||||||
| Earnings (loss) per common share – basic | $ | $ | ( | ) | ||||
| Earnings (loss) per common share – diluted | ( | ) | ( | ) | ||||
| Six Months | Six Months | |||||||
| ended | ended | |||||||
| June 30, 2022 | June 30, 2021 | |||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Deemed dividend | ( | ) | ||||||
| Net income (loss), numerator, basic computation | ( | ) | ||||||
| Recognition and change in fair value of warrant liability | ( | ) | ||||||
| Net income (loss), numerator, diluted computation | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares - denominator basic computation | ||||||||
| Effect of stock awards | ||||||||
| Effect of Series B warrant liability | ||||||||
| Effect of preferred stock | ||||||||
| Weighted average shares, as adjusted - denominator diluted computation | ||||||||
| Earnings (loss) per common share - basic | $ | $ | ( | ) | ||||
| Earnings (loss) per common share - diluted | $ | ( | ) | $ | ( | ) | ||
| 19 |
NOTE 8. LEASES
Operating
lease expense for the three months ended June 30, 2022 and 2021 was $
Future minimum lease payment under these operating leases consisted of the following:
| Year ending December 31, | Operating Lease Obligations | |||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total undiscounted operating lease payments | ||||
| Less: Imputed interest | ( | ) | ||
| Present value of operating lease liabilities | $ | |||
NOTE 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 June 30, 2022 and December 31, 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.
Earn-out liabilities
The following outlines changes to the Company’s earn-out liability balances inclusive of accumulated accretion for the respective period ended June 30, 2022 and December 31, 2021:
| CCS | Fortman | Montana | Altruis | Kush | Barra | Total | ||||||||||||||||||||||
| Ending balance December 31, 2021 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Changes due to acquisitions | ||||||||||||||||||||||||||||
| Changes due to payments | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Changes due to fair value adjustments | ( | ) | ||||||||||||||||||||||||||
| Ending balance June 30, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| CCS | Fortman | Montana | Altruis | Kush | Total | |||||||||||||||||||
| Ending balance December 31, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Changes due to business combinations | ||||||||||||||||||||||||
| Changes due to payments | ( | ) | ( | ) | ||||||||||||||||||||
| Changes due to fair value adjustments | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Changes due to write-offs | ( | ) | ( | ) | ||||||||||||||||||||
| Ending balance December 31, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 20 |
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, 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.
As part of our growth and acquisition strategy, we continue to survey the current insurance market for value-add acquisition opportunities. As of June 30, 2022, we have acquired ten insurance agencies, including both affiliated and unaffiliated companies and long 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, we launched our 5MinuteInsure.com (“5MI”) platform during 2021 which expanded our national footprint. 5MI is an all new and high-tech proprietary tool developed by us as a business to consumer portal which enables consumers to compare and purchase car and home insurance in a time efficient and effective manner. 5MI taps into the growing number of online shoppers and utilizes advanced artificial intelligence and data mining techniques, to provide competitive insurance quotes in around 5 minutes with minimal data input needed from the consumer. The platform launched during the summer of 2021 and currently operates 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 agency 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 which combines the best of digital and human capabilities by providing agents and customers quotes from multiple carriers within minutes. Since inception, RELI Exchange, has increased it’s agent roster by more than 30% in just three months.
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 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.
| 21 |
Financial Instruments
The Company’s financial instruments as of June 30, 2022, consist of derivative warrants. Accounting treatment is to record the derivative financial instruments at their fair values as of the inception/issuance date of 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 at each balance sheet date.
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 plan 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
As of the balance sheet date, we have acquired ten 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 |
| 22 |
J.P. Kush and Associates, Inc. Transaction
On May 1, 2021, we entered into a Purchase Agreement with J.P. Kush and Associates, Inc. whereby we purchased the business and certain assets noted within the Purchase Agreement (the “Kush Acquisition”) for a total purchase price of $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, in 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 valued. Goodwill recognized pursuant to the Kush 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.
| 23 |
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 loss for the acquired business as a standalone entity per ASC 805 from January 10, 2022 to June 30, 2022 was $2,537,061 and a loss of $412,943, 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 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 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 June 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 June 30, 2022 was $270,321 and a loss of $38,698, 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 an aggregate of up to 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 $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 other offering expenses payable by us. The Warrants are exercisable upon issuance and will expire five years from the 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.
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 acquisition. The Company submitted 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.
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 uplisting 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 three months ended June 30, 2022 to the three months ended June 30, 2021
The following table sets forth our revenue and operating expenses for each of the years presented.
| June 30, 2022 | June 30, 2021 | |||||||
| Revenue | ||||||||
| Commission income | $ | 4,207,126 | $ | 2,190,847 | ||||
| Total revenue | 4,207,126 | 2,190,847 | ||||||
| Operating expenses | ||||||||
| Commission expense | 850,128 | 558,271 | ||||||
| Salaries and wages | 2,176,792 | 1,110,629 | ||||||
| General and administrative expenses | 1,759,217 | 1,202,350 | ||||||
| Marketing and advertising | 609,383 | 55,021 | ||||||
| Depreciation and amortization | 756,403 | 369,366 | ||||||
| Total operating expenses | 6,151,923 | 3,295,637 | ||||||
| Loss from operations | (1,944,797 | ) | (1,104,790 | ) | ||||
| Total Other income (expense) | 12,440,488 | (172,096 | ) | |||||
| Net income (loss) | $ | 10,495,691 | $ | (1,276,886 | ) | |||
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 our 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 is entitled to receive compensation from an insurance carrier.
We had revenues of $4.2 million for the three months ended June 30, 2022, as compared to $2.2 million for the three months ended June 30, 2021. The increase of $2.0 million or 92% is primarily driven by expanded operations, both organic and due to the additional insurance agencies acquired throughout 2021 and 2022.
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Commission expense
We had total commission expense of $850,000 for the three months ended June 30, 2022 compared to $558,000 for the three months ended June 30, 2021. The increase of $292,000 or 52% is primarily driven by expanded operations, both organic and due to the additional insurance agencies acquired throughout 2021 and 2022.
Salaries and wages
We reported $2.2 million of salaries and wages expense for the three months ended June 30, 2022 compared to $1.1 million for the three months ended June 30, 2021. The increase of $1.1 million or 96% is a result of the Company’s growth driven by expanded operations, both organic and due to the additional insurance agencies acquired throughout 2021 and 2022.
General and administrative expenses
We had total general and administrative expenses of $1.8 million for the three months ended June 30, 2022, as compared to $1.2 million for the three months ended June 30, 2021. The increase in expense of $600,000 or 46% is a result of the Company’s growth driven by expanded operations, both organic and due to the additional insurance agencies acquired throughout 2021 and 2022.
Marketing and advertising
We reported $609,000 of marketing and advertising expense for the three months ended June 30, 2022 compared to $55,000 for the three months ended June 30, 2021. The increase of $554,000 or 1008% 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 $756,000 of depreciation and amortization expense for the three months ended June 30, 2022 compared to $369,000 for the three months ended June 30, 2021. The increase of $387,000 or 105% is a result of our acquired assets through business combinations.
Other income and expense
We reported $12.4 million of other income for the three months ended June 30, 2022 compared to $172,000 of other expense for the three months ended June 30, 2021. The increase of $12.6 million or 7329% is attributable primarily to the change in fair value of warrant liabilities of $12.6 million.
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Comparison of the six months ended June 30, 2022 to the six months ended June 30, 2021
The following table sets forth our revenue and operating expenses for each of the periods presented.
| June 30, 2022 | June 30, 2021 | |||||||
| Revenue | ||||||||
| Commission income | $ | 8,442,907 | $ | 4,514,577 | ||||
| Total revenue | 8,442,907 | 4,514,577 | ||||||
| Operating expenses | ||||||||
| Commission expense | 1,754,283 | 1,087,743 | ||||||
| Salaries and wages | 4,258,967 | 2,029,174 | ||||||
| General and administrative expenses | 4,212,287 | 2,206,751 | ||||||
| Marketing and advertising | 1,196,405 | 78,100 | ||||||
| Depreciation and amortization | 1,363,928 | 702,454 | ||||||
| Total operating expenses | 12,785,870 | 6,104,222 | ||||||
| Loss from operations | (4,342,963 | ) | (1,589,645 | ) | ||||
| Total Other income (expense) | 24,178,655 | (301,167 | ) | |||||
| Net income (loss) | $ | 19,835,692 | $ | (1,890,812 | ) | |||
Revenues
We had revenues of $8.4 million for the six months ended June 30, 2022, as compared to $4.5 million for the six months ended June 30, 2021. The increase of $3.9 million or 87% is primarily driven by expanded operations, both organic and due to the additional insurance agencies acquired throughout 2021 and 2022.
Commission expense
We had total commission expense of $1.8 million for the six months ended June 30, 2022 compared to $1.1 million for the six months ended June 30, 2021. The increase of $700,000 or 61% is primarily driven by expanded operations, both organic and due to the additional insurance agencies acquired throughout 2021 and 2022.
Salaries and wages
We reported $4.3 million of salaries and wages expense for the six months ended June 30, 2022 compared to $2.0 million for the six months ended June 30, 2021. The increase of $2.3 million or 110% is primarily driven by expanded operations, both organic and due to the additional insurance agencies acquired throughout 2021 and 2022.
General and administrative expenses
We had total general and administrative expenses of $4.2 million for the six months ended June 30, 2022, as compared to $2.2 million for the six months ended June 30, 2021. The increase in expense of $2.0 million or 91% is primarily driven by expanded operations, both organic and due to the additional insurance agencies acquired throughout 2021 and 2022.
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Marketing and advertising
We reported $1.2 million of marketing and advertising expense for the six months ended June 30, 2022 compared to $78,000 for the six months ended June 30, 2021. The increase of $1.1 million or 1432% 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 $1.4 million of depreciation and amortization expense for the six months ended June 30, 2022 compared to $702,000 for the six months ended June 30, 2021. The increase of $698,000 or 84% is a result of the assets we acquired through business combinations.
Other income and expense
We reported $24.2 million of other income for the six months ended June 30, 2022 compared to a loss of $301,000 for the six months ended June 30, 2021. The increase of $24.5 million or 8128% is attributable primarily to the recognition and change in fair value of warrant liabilities of $24.5 million.
Liquidity and capital resources
As of June 30, 2022, we had a cash balance of $4.4 million and a working capital deficit of $3.4 million compared with a cash balance of $4.6 million and working capital deficit of $37 million at December 31, 2021. The increase in working capital is primarily attributable to the issuance of 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 our business operations. While the disruption is expected to be temporary, there is uncertainty surrounding the duration and extent of the impact. Currently we 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.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements as such term is defined in Regulation S-K.
Cash Flows
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (1,311,411 | ) | $ | (1,493,252 | ) | ||
| Net cash used in investing activities | (24,625,929 | ) | (1,761,576 | ) | ||||
| Net cash provided by financing activities | 25,714,021 | 9,558,012 | ||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | $ | (223,319 | ) | $ | 6,303,184 | |||
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Operating Activities
Net cash used in operating activities for the six months ended June 30, 2022 was $1.3 million, which includes net income of $19.8 million offset by non-cash expenses of $21.8 million principally related to recognition and change in fair value of warrant liabilities of $24.5 million, offset by share based compensation expense of $919,000, depreciation and amortization of $1.4 million, and an earn-out fair value adjustment of $355,000, as well as changes of net working capital items in the amount of $651,000 principally due to a decreases in accounts payable and accrued expenses of $1.7 million, offset by a decrease in accounts receivable of $41,000, a decrease prepaid expense and other current assets of $2.2 million, an increase in other payables of $127 million and increase of the chargeback reserve of $,000.
Investing Activities.
During the six months ended June 30, 2022, cash flows used in investing activities were $24.6 million compared to cash flow used in investing activities of $1.8 for the six months ended June 30, 2021. The 2021 cash used relates to cash paid for the acquisition of Medigap and Barra of $24.1 million, the purchase of property and equipment of $21,000 and cash paid of $466,000 for intangible assets .
Financing Activities.
During the six months ended June 30, 2022, cash provided by financing activities was $25.7 million as compared to $9.6 million for the six months ended June 30, 2021. The net cash provided by financing activities is primarily related to proceeds from Private Placement offering of shares of common stock and preferred stock in January 2022. The net proceeds from the issuance of these shares was $17.9 million. Additionally, we received proceeds of $2.5 million from the exercise of Series A warrants and $6.5 million through loan proceeds received for a business acquisition. These were offset by debt principal repayments of $448,000, payment of debt issuance costs of $214,000 and the repayments of loans payable to related parties of $22,000 and short term financing of $41,000.
Critical Accounting 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 evaluate our estimates and judgments on an ongoing basis. Our management believes the accounting policies below are critical in the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, or complex judgments.
Business acquisitions: 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 control of the acquired entity is transferred. We typically obtain independent third-party valuation studies to assist in determining fair values, including assistance 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 accounting for the resolution of contingencies, 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.
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Goodwill and intangible assets: We test goodwill for impairment in our fourth quarter each 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.
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. 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:
We recognize revenue in accordance with Accounting Standards Codification (ASC) 606 Revenue from Contracts with Customers which at its core, recognizes 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 exchange for those goods or services.
We earn 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 we achieve the targets established by the insurance carries. The insurance carriers notify the company when it has achieved the target. We only recognize revenue to the extent that it is probable that a significant reversal of the revenue will not occur.
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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
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.
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022. Based on the evaluation, management has concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting, as such 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.
PART II
Item 1. Legal Proceedings.
We are 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 June 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.
Investing in our common stock 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. 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits
The following exhibits are filed with this Form 10-K.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this Form 10-Q statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lakewood, State of New Jersey on August 15, 2022.
| Reliance Global Group, Inc. | ||
| By: | /s/ Ezra Beyman | |
| Ezra Beyman | ||
| Chief Executive Officer and Chairman of the Board | ||
| (Principal Executive Officer) | ||
Date: August 15, 2022
| Reliance Global Group, Inc. | ||
| By: | /s/ Willian Lebovics | |
| William Lebovics | ||
| Chief Financial Officer | ||
(Principal Financial Officer) |
||
Date: August 15, 2022
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