Reliance Global Group, Inc.: Form 10-Q for the period ended Sep 30, 2023

Overview

Reliance Global Group, Inc. (the “Company”) operates 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.

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 September 30, 2023, we have acquired nine insurance agencies.

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”) Insurtech platform during 2021 which expanded our national footprint. 5MI is a high-tech proprietary tool developed by us as a business to consumer portal which enables consumers to instantly compare quotes from multiple carriers and purchase their 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 with an InsurTech platform white 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 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. Several insurance companies are engaged in the direct sale of insurance, primarily to individuals, and do not pay commissions to agents and brokers.

Financial Instruments

The Company’s financial instruments as of September 30, 2023, 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 to achieve asset value appreciation while generating interim cash flows. In the insurance sector, our management team has over 100 years of experience 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 multiple 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.

Recent Developments

Reverse Stock Split

On February 23, 2023, pursuant to authority granted by the Board of Directors of the Company, the Company implemented a 1-for-15 reverse split of the Company’s authorized and issued and outstanding common stock (the “Reverse Split-2023”). The par value remains unchanged. All share and per share information as well as common stock and additional paid-in capital have been retroactively adjusted to reflect the Reverse Split-2023 for all periods presented, unless otherwise indicated. The split resulted in a rounding addition of approximately 15,300 shares valued at par, totaling $1,300.

Second Amendment to Fortman Purchase Agreement

As previously disclosed, the Company, Fortman Insurance Services, LLC, Fortman Insurance Agency, LLC, Jonathan Fortman, and Zachary Fortman (collectively, the “Parties”) entered into a purchase agreement on or around May 1, 2019 (the “Purchase Agreement”), whereby the Company purchased the business and certain assets noted within the Purchase Agreement. On May 18, 2023, the Parties entered into that certain second amendment to the Purchase Agreement (the “Second Amendment”). Pursuant to the Second Amendment, the Parties agreed to a total remaining balance of $716,850 owed to both Jonathan Fortman and Zachary Fortman under the Purchase Agreement for a combined total amount owed of $1,433,700. In satisfaction of such remaining balances, the Company agreed to issue 176,130 shares of the Company’s restricted common stock, par value $0.086 per share (the “Common Stock”), to both Jonathan Fortman and Zachary Fortman (collectively, the “Shares”), for a total issuance of 352,260 shares of Common Stock. Following the issuance of the Shares, the Company’s issued and outstanding Common Stock count will be 1,983,308. If the Nasdaq official closing price of the Common Stock is less than $4.07 on November 18, 2023, then the Company shall pay both Jonathan Fortman and Zachary Fortman an amount equal to the Make-Up Payment (as defined herein) within 15 business days thereafter. Pursuant to the Second Amendment, the “Make-Up Payment” means an amount in cash equal to $616,850 minus First Holder Shares Value (as defined herein) to Jonathan Fortman, and $616,850 minus Second Holder Shares Value (as defined herein) to Zachary Fortman. Further, under the Second Amendment, the “First Holder Shares Value” and “Second Holder Shares Value” means 176,130 and 176,130 respectively (subject to appropriate adjustments for any stock dividend, stock split, stock combination, rights offerings, reclassification or similar transaction that proportionately decreases or increases the Common Stock) multiplied by the Nasdaq official closing price of the Common Stock on November 18, 2023.

Settlement Agreement

On June 30, 2023, the Company entered into a Confidential Settlement Agreement and Mutual Release (the “Settlement Agreement”) by and between the Company, Medigap Healthcare Insurance Agency, LLC, a wholly owned subsidiary of the Company (the “Agency” and together with the Company, the “Reliance Parties”), Pagidem, LLC f/k/a Medigap Healthcare Insurance Company, LLC (“Pagidem”), Joseph J. Bilotti, III (together with Pagidem, the “Bilotti Parties”), Kyle Perrin, Zachary Lewis, T65 Health Insurance Solutions, Inc. f/k/a T65 Health Solutions, Inc. (“T65”), and Seniors First Life, LLC (collectively with Mr. Lewis and T65, the “Lewis Parties”).

The Company, Pagidem, and Mr. Bilotti previously entered into that certain Asset Purchase Agreement dated December 21, 2021 (the “APA”), pursuant to which the Company acquired, and the Bilotti Parties sold, certain assets and liabilities of Pagidem to the Company. As part of the transactions contemplated by the APA, the Company entered into that certain Employment Agreement, dated as of January 10, 2022, by and between the Company and Mr. Perrin (the “Employment Agreement”). The Company later assigned the assets and liabilities it acquired pursuant to the APA, and the Employment Agreement, to Agency. Mr. Perrin previously served as the Chief Operating Officer and Chief Executive Officer of Agency pursuant to the Employment Agreement. The Company and Mr. Lewis entered into that certain Non-Disclosure Agreement, effective as of January 24, 2022 (the “NDA”).

The Company, pursuant to the APA, previously filed a claim with the American Arbitration Association (“AAA”), Case No. 01-23-0002-3404 (the “Bilotti Arbitration”), wherein the Company purports to assert claims against the Bilotti Parties for fraudulent inducement, intentional and negligent misrepresentation, breach of contract, breach of restrictive covenants, conversion, civil theft, tortious interference, and conspiracy (the “Bilotti Claim”). The Company also filed, pursuant to the Employment Agreement, a claim with the AAA, Case No. 01-23-0002-2048(the “Perrin Arbitration”), wherein the Company purports to assert claims against Mr. Perrin for conversion, civil conspiracy, fraud, breach of fiduciary duty, and breach of duty of loyalty and good faith. (the “Perrin Claim”). In the Perrin Arbitration, Mr. Perrin filed counterclaims against the Company for breaches of employment agreement, unjust enrichment, and breach of the covenant of good faith and fair dealing (the “Perrin Counterclaim”).

The Reliance Parties have filed a complaint in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida, Case No. 50-2023-CA-010777-XXXXMB, Div. AA (the “Lewis Litigation,” and collectively with the Bilotti Arbitration and the Perrin Arbitration, the “Medigap Disputes”), wherein the Reliance Parties purport to assert claims against the Lewis Parties for tortious interference with business relationship, civil conspiracy, breach of contract, conversion, and unjust enrichment (the “Lewis Claim”).

The parties to the Settlement Agreement have each disputed and continue to dispute the claims asserted and allegations made against them.

United Insurance Group Agency, Inc. and/or LTC Global, Inc. or those entities’ assignees, affiliates, subsidiaries, partners or parent companies (collectively, the “Factor”), allege the Reliance Parties owe the Factor a debt, which the Reliance Parties dispute.

Pursuant to the terms of the Settlement Agreement, the Medigap Parties agreed to pay to the Company an amount equal to $2,900,000 (the “Settlement Payment”) within five business days of the effective date of the Settlement Agreement. The Company received the Settlement Payment on July 6, 2023.

Upon receipt of the Settlement Payment, the Reliance Parties agreed to release and discharge each and all of the Bilotti Parties, Mr. Perrin, and the Lewis Parties, and each of their present and former agents, servants, or employees, members, owners, shareholders, officers, managers, partners, directors, trustees, representatives, attorneys, contractors, predecessor and successor entities and assigns, parents, subsidiaries and affiliates (collectively, the “Medigap Released Parties”) of and from any and all past, existing, and/or future suits, liabilities, claims, demands, fees, costs, expenses, payments, judgments, damages, actions and rights or causes of action of any kind or nature, from the beginning of the world to the effective date of the Settlement Agreement, including but not limited to (A) any matters that were or could have been alleged in the: (i) the Bilotti Arbitration; (ii) the Perrin Arbitration; (iii) the Lewis Litigation; and (B) (i) any and all claims to additional money, distributions, or compensation of any kind from the Medigap Released Parties; provided, however, that nothing in the Settlement Agreement will serve to release any claims the Reliance Parties may have against the Factor.

In addition, upon receipt of the Settlement Payment, the Medigap Parties agreed to release and discharge each and all of the Reliance Parties, and each of their present and former agents, servants, or employees, members, owners, shareholders, officers, managers, partners, directors, trustees, representatives, attorneys, contractors, predecessor and successor entities and assigns, parents, subsidiaries and affiliates (collectively, the “Reliance Released Parties”) of and from any and all past, existing, and/or future suits, liabilities, claims, demands, fees, costs, expenses, payments, judgments, damages, actions and rights or causes of action of any kind or nature, from the beginning of the world to the effective date of the Settlement Agreement, including but not limited to (A) any matters that were or could have been alleged in the: (i) the Bilotti Arbitration; (ii) the Perrin Arbitration; (iii) the Lewis Litigation; and (B) (i) any and all claims to additional money, distributions, or compensation of any kind from the Medigap Released Parties.

Also, pursuant to the terms of the Settlement Agreement, Mr. Perrin agreed to release the Reliance Parties from all claims arising under any federal, state or local law or statute, including without limitation, the Fair Labor Standards Act, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Family Medical Leave Act, Title VII of the Civil Rights Act of 1964, Employee Retirement Income Security Act, the Equal Pay Act, the Worker Adjustment and Retraining Notification Act, the law of contract and tort, any claim for attorneys’ fees, claims for unpaid wages or other employment compensation, and claims of personal injury, including mental and physical pain and suffering or intentional infliction of emotional distress. Additionally, Mr. Perrin expressly waived any right to recover any type of personal relief from the Reliance Parties, including monetary damages or reinstatement, in any administrative action or proceeding, whether state or federal, and whether brought by Mr. Perrin or on his behalf by an administrative agency, related in any way to the matters herein.

Pursuant to the terms of the Settlement Agreement, all of the parties thereto agreed that, upon receipt of the Settlement Payment by the Reliance Parties, they would discharge any obligations under the APA, the Employment Agreement, the NDA and all ancillary documents and agreements referenced or contemplated therein. In addition, within five business days of receipt of the Settlement Payment: (i) the Company will cause the Bilotti Arbitration to be dismissed, with prejudice; (ii) the Reliance Parties and Mr. Perrin will cause the Perrin Arbitration to be dismissed, with prejudice; and (iii) the Reliance Parties will cause the Lewis Litigation to be dismissed, with prejudice.

Results of Operations

Comparison of the three months ended September 30, 2023 to the three months ended September 30, 2022

The following table sets forth our revenue and operating expenses for each of the years presented.

Revenues

The Company’s revenue is primarily comprised of commissions paid by 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 or entity currently covered by an insurance plan, including individual and family, Medicare-related, small business, and ancillary plans, as well as property and casualty coverage, including auto, home and life, for which the Company is entitled to receive compensation from an insurance carrier.

The Company had revenues of approximately $3.3 million for the three months ended September 30, 2023, as compared to approximately $2.8 million for the three months ended September 30, 2022. The increase of approximately $454,000 or 16% is primarily driven by organic growth.

Commission expense

The Company had total commission expense of approximately $796,000 for the three months ended September 30, 2023, compared to approximately $695,000 for the three months ended September 30, 2022. The increase of approximately $101,000 or 15% is primarily driven by organic growth and in-line with the revenue increase.

Salaries and wages

The Company reported approximately $1.8 million of salaries and wages expense for the three months ended September 30, 2023, compared to approximately $1.6 million for the three months ended September 30, 2022. The increase of approximately $146,000 or 9% is a result of the Company’s growth driven by expanded operations.

General and administrative expenses

The Company had total general and administrative expenses of approximately $1.4 million for the three months ended September 30, 2023, as compared to approximately $1.1 million for the three months ended September 30, 2022. The increase of approximately $251,000, or 22% is primarily driven by the approximate $270,000 loss in fair value change of the estimated earn-out liability compared to the same period in the prior year which had an approximate gain of $223,000.

Marketing and advertising

The Company reported approximately $118,000 of marketing and advertising expense for the three months ended September 30, 2023 compared to approximately $63,000 for the three months ended September 30, 2022. The increase of approximately $54,000, or 86% is a result of increased branding and outreach efforts to drive the higher organic revenue growth.

Depreciation and amortization

The Company reported approximately $653,000 of depreciation and amortization expense for the three months ended September 30, 2023 compared to approximately $651,000 for the three months ended September 30, 2022. The increase of approximately $1,000 or 0.2% is primarily a result of additional assets placed in service.

Other income and expense

The Company reported approximately $1.3 million of other income for the three months ended September 30, 2023 compared to approximately $7.9 million of other income for the three months ended September 30, 2022. The decrease of approximately $6.2 million, or 78%, is attributable primarily to the change in fair value of warrant liabilities, offset by interest expense.

Comparison of the nine months ended September 30, 2023 to the nine months ended September 30, 2022

The following table sets forth our revenue and operating expenses for each of the periods presented.

29

Revenues

The Company had revenues of approximately $10.4 million for the nine months ended September 30, 2023, as compared to approximately $8.7 million for the nine months ended September 30, 2022. The increase of approximately $1.7 million or 19% is primarily driven by organic growth and the addition of RELI Exchange during the second quarter of 2022.

Commission expense

The Company had total commission expense of approximately $2.7 million for the nine months ended September 30, 2023, compared to approximately $2.1 million for the nine months ended September 30, 2022. The increase of approximately $558,000 or 26% is primarily driven by organic growth and the addition of RELI Exchange during the second quarter of 2022.

Salaries and wages

The Company reported approximately $5.2 million of salaries and wages expense for the nine months ended September 30, 2023, compared to approximately $4.9 million for the nine months ended September 30, 2022. The increase of approximately $331,000 or 7% is a result of the Company’s growth driven by expanded operations and the addition of RELI Exchange during the second quarter of 2022.

General and administrative expenses

The Company had total general and administrative expenses of approximately $4.4 million for the nine months ended September 30, 2023, as compared to approximately $5.1 million for the nine months ended September 30, 2022. The decrease in expense of approximately $651,000, or 13%, is a result of the Company’s focus on leaner operations and the implementation of cost-cutting measures.

Marketing and advertising

The Company reported approximately $364,000 of marketing and advertising expense for the nine months ended September 30, 2023, compared to approximately $148 million for the nine months ended September 30, 2022. The increase of approximately $216,000 or 146% is a result of the Company increasing its branding and outreach efforts to drive the higher organic revenue growth.

Depreciation and amortization

The Company reported approximately $2.0 million of depreciation and amortization expense for the nine months ended September 30, 2023, compared to approximately $1.9 million for the nine months ended September 30, 2022. The increase of approximately $60,000, or 3%, is primarily a result of our acquired tangible and intangible assets through business combinations.

Other income and expense

The Company reported approximately $3.1 million of other income for the nine months ended September 30, 2023, compared to approximately $32.4 million of other income for the nine months ended September 30, 2022. The decrease of approximately $28 million, or 86%, is attributable primarily to the change in the fair value of warrant liabilities, offset by interest expense.

Liquidity and capital resources

As of September 30, 2023, we had a cash balance of approximately $3.2 million and working capital of approximately $795,000, compared with a cash balance of approximately $1.9 million and working capital deficit of approximately $4.6 million at December 31, 2022. The improved working capital is primarily attributable to cash proceeds from the issuance of stock with a private placement, other receivables related to discontinued operations recoveries/settlements, and the repayment of liabilities.

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

Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2023 was approximately $17,000, compared to net cash flows used in operating activities of approximately $2.2 million for the nine months ended September 30, 2022. The cash used includes net loss of approximately $2.98 million, decreased by approximate non-cash adjustments of $855,000 principally related to income of recognition and change in fair value of warrant liabilities of $4.4 million, offset by earn-out fair value adjustments and depreciation and amortization of $1.3 million and $1.96 million, respectively, as well as a net increase in cash due to changes of net working capital items in the amount of $285,000 and offset by net cash adjustments for discontinued operating activities of $3.8 million.

Investing Activities

During the nine months ended September 30, 2023, cash flows provided in investing activities approximated $719,000 compared to cash flows used in investing activities of approximately $25 million for the nine months ended September 30, 2022. The cash provided is primarily related to the sale of the Company’s shares in NSURE stock. Total proceeds received in 2023 were $900,000.

Financing Activities

During the nine months ended September 30, 2023, approximate cash provided by financing activities was $576,000 as compared to approximately $25.6 million for the nine months ended September 30, 2022. Net cash provided by financing activities primarily relates to proceeds from private placement offerings of approximately $3.4 million, offset by net debt principal repayments of $786,000, related party loan and related party convertible debt repayments of $1.6 million, and earn out payments of $419,000.

Significant Accounting Policies and Estimates

We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, and our critical accounting estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. There have been no significant changes in our significant accounting policies or critical accounting estimates since the end of fiscal year 2022.

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 2022, the Company determined it had a material weakness in its disclosure controls and procedures relating to earnings per share (“EPS”). During the quarters ended March 31, June 30 and September 30, 2023, the Company mitigated the deficiency by consulting with qualified advisors that have in-depth EPS expertise. These advisors assisted the Company in the calculations and disclosures of EPS for the three and nine months ended September 30, 2023.

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023, and concluded that they were not effective as of September 30, 2023 due to the material weakness discussed above.

Changes in Internal Control over Financial Reporting

During fiscal year 2022, the Company retained subject matter expert advisors to prepare the accounting and disclosures over Earnings per Share. These advisors assisted the Company in the calculations and disclosures of EPS for the three and nine months ended September 30, 2023. Aside for the foregoing, there have been no other 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.

Investing in our common stock involves a high degree of risk. You should consider carefully the information disclosed in Part I, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2022. 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, 2022, as amended from time to time.