Reliance Global Group, Inc.: Form 10-Q for the period ended Mar 31, 2024

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 March 31, 2024, 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, and more specifically, on May 14, 2024, the Company announced the signing of a definitive agreement to acquire Spetner Associates (“Spetner”), a well-established benefits enrollment company that, through its BenManage benefits enrollment company, is a leading provider of voluntary benefits to over 75,000 employees throughout the United States. Pursuant to a Stock Exchange Agreement (the “SE Agreement”), dated as of May 14, 2024, by and among the parties thereto, the Company shall: (i) acquire eighty percent (80%) of the issued and outstanding shares of common stock, par value $1.00 per share, of Spetner (the “Spetner Common Stock”) for the amount of $13,714,286 (which shall be paid in $8 million cash, the issuance of certain shares of common stock of the Company, and the issuance a promissory note of the Company); and (ii) have the sole option to acquire the remaining twenty percent (20%) of the Spetner Common Stock for a predetermined amount based on a multiple of EBITDA.

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 130%.

Business Operations

We’ve adopted a ‘One-Firm’ strategy, whereby the Reliance owned and operated agencies come together to operate as one cohesive unit which allows for efficient and effective cross-selling, cross-collaboration, and the effective deployment of the Company’s human capital. This strategy also aims to enhance the Company’s overall market presence across the U.S., with all business lines operating under the RELI Exchange brand. It’s expected to benefit agents and clients by improving relationships with carriers, leading to better commission and bonus contracts due to higher business volumes. The approach also strengthens the capability of RELI Exchange agency partners in securing diverse insurance policies and fosters increased cross-selling opportunities. This unified strategy positions the company for rapid scaling and integration of accretive acquisitions, expanding its industry reach.

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 March 31, 2024, 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). 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. In furtherance of this strategy, on May 14, 2024, the Company entered into a Stock Exchange Agreement to acquire Spetner Associates (“Spetner”) for cash, stock and issuance of a promissory note. Spetner is a well-established benefits enrollment company that, through its BenManage benefits enrollment company, is a leading provider of voluntary benefits to over 75,000 employees throughout the United States. Completion of the transaction is subject to standard and stipulated closing. See “Note 10. Subsequent Events” to the financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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Recent Developments

Non-GAAP Measure

The Company believes certain financial measures which meet the definition of non-GAAP financial measures, as defined in Regulation G of the SEC rules, provide important supplemental information. Namely our key financial performance metric Adjusted EBITDA (“AEBITDA”) is a non-GAAP financial measure that is not in accordance with, or an alternative to, measures prepared in accordance with GAAP. “AEBITDA” is defined as earnings before interest, taxes, depreciation, and amortization (EBITDA) with additional adjustments as further outlined below, to result in Adjusted EBITDA (or “AEBITDA”). The Company considers AEBITDA an important financial metric because it provides a meaningful financial measure of the quality of the Company’s operational, cash impacted and recurring earnings and operating performance across reporting periods. Other companies may calculate Adjusted EBITDA differently than we do, which might limit its usefulness as a comparative measure to other companies in the industry. AEBITDA is used by management in addition to and in conjunction (and not as a substitute) with the results presented in accordance with GAAP. Management uses AEBITDA to evaluate the Company’s operational performance, including earnings across reporting periods and the merits for implementing cost-cutting measures. We have presented AEBITDA solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations and assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Consistent with Regulation G, a description of such information is provided below herein and tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are contained in this Report on Form 10-Q under “Results of Operations”.

We exclude the following items, and the following items define our non-GAAP financial measure AEBITDA:

• Interest and related party interest expense: Unrelated to core Company operations and excluded to provide more meaningful supplemental information regarding the Company’s core operational performance.
• Depreciation and amortization: Non-cash charge, excluded to provide more meaningful supplemental information regarding the Company’s core operational performance.
• Goodwill and/or asset impairments: Non-cash charge, excluded to provide more meaningful supplemental information regarding the Company’s core operational performance.
• Equity-based compensation: Non-cash compensation provided to employees and service providers, excluded to provide more meaningful supplemental information regarding the Company’s core cash impacted operational performance.
• Change in estimated acquisition earn-out payables: An Earn-out liability is a liability to the seller upon an acquisition which is contingent on future earnings. These liabilities are valued at each reporting period and the changes are reported as either a gain or loss in the change in estimated acquisition earn-out payables account in the consolidated statements of operations. The gain or loss is non-cash, can be highly volatile and overall is not deemed relevant to ongoing operations, thus, it’s excluded to provide more meaningful supplemental information regarding the Company’s core operational performance.
• Recognition and change in fair value of warrant liabilities: This account includes changes to derivative warrant liabilities which are valued at each reporting period and could result in either a gain or loss. The period changes do not impact cash, can be highly volatile, and are unrelated to ongoing operations, and thus are excluded to provide more meaningful supplemental information regarding the Company’s core operational performance.
• Other income (expense), net: Includes non-routine income or expenses and other individually de minimis items and is thus excluded as unrelated to core operations of the company.
• Transactional costs: This includes expenses related to mergers, acquisitions, financings and refinancings, and amendments or modification to indebtedness. Thes costs are unrelated to primary Company operations and are excluded to provide more meaningful supplemental information regarding the Company’s core operational performance.
• Non recuring costs: This account includes non-recurring non-operational items, related to costs incurred for a legal suit the Company has filed against one of the third parties involved in the discontinued operations and is excluded to provide more meaningful supplemental information regarding the Company’s core operational performance.
• Loss from discontinued operations before tax: This account includes the net results from discontinued operations, and since discontinued, are unrelated to the Company’s ongoing operations and thus excluded to provide more meaningful supplemental information regarding the Company’s core operational performance.

Refer to the reconciliation of net (loss) income to AEBITDA, illustrated below in tabular format.

Results of Operations

CONSOLIDATED STATEMENTS OF OPERATIONS ANALYTICS

Comparison of the three months ended March 31, 2024 to the three months ended March 31, 2023

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Non-GAAP Reconciliation from Net (Loss) Income to AEBITDA

The following table provides a reconciliation from net (loss) income to AEBITDA (adjusted EBITDA) for the years ended December 31, 2023 and December 31, 2022.

Liquidity and capital resources

As of March 31, 2024, we had a cash balance of approximately $2,113,000 and working capital deficiency of approximately $120,000, compared with a cash balance of approximately $2,739,000 and working capital of approximately $1,189,000 at December 31, 2023. During the first quarter of 2024 the Company entered into an At Market Issuance Sales Agreement with EF Hutton as sales agent (the “ATM Agreement”) under which the Company may offer and sell, from time to time through the sales agent, shares of its Common Stock (the “Shares”), having an aggregate offering price of up to $858,637. Under the ATM Agreement, the Company pays the sales agent a commission equal to 3.5% of the aggregate gross proceeds of any sales of common stock under the ATM Agreement.

During the quarter ended March 31, 2024, the Company sold 187,614 shares of Common Stock under the ATM Agreement, at a price of $0.6891, receiving proceeds, net of $4,636 in sales agent commissions and fees, of $124,649. As of March 31, 2024, the net remaining amount we are permitted to sell under the ATM Agreement was $729,352.

During the period from April 1, 2024 through May 20, 2024, the Company sold 1,320,829 shares of Common Stock under the ATM Agreement, receiving proceeds, net of $15,905 agent commissions and fees of $385,052. As of May 20, the net remaining amount we are permitted to sell under the ATM Agreement was $328,395.

Pursuant to the terms of the Series B Warrants and Series G Warrants, during the second quarter of 2024, the Series B Warrants and Series G Warrants respective exercise prices reduced from $0.63 and $0.6562 per share to $0.26 and $0.26 per share as a result of dilutive issuances of our Common Stock.

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

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Operating Activities

Net cash used in operating activities for the three months ended March 31, 2024 was approximately $204,000, compared to net cash flows used in operating activities of approximately $1.1 million for the three months ended March 31, 2023. The cash used includes net loss of approximately $5,347,000, decreased by approximate non-cash adjustments of $5,142,000 related to asset impairments of approximately $3,922,000, income of recognition and change in fair value of warrant liabilities of approximately $95,000, depreciation and amortization of approximately $534,000, other small adjustments totaling approximately $79,000, as well as a net increase in cash due to changes of net working capital items of approximately $702,000.

Investing Activities

During the three months ended March 31, 2024, cash flows used in investing activities approximated $29,000 compared to cash flows used in investing activities of approximately $96,000 for the three months ended March 31, 2023. The cash used is primarily related to the purchase of property and equipment.

Financing Activities

During the three months ended March 31, 2024, approximate cash used in financing activities was $392,000 as compared to approximately $2.8 million provided for the three months ended March 31, 2023. Net cash used in financing activities relates to proceeds from common shares issued pursuant to the ATM Agreement totaling approximately $125,000, offset by net debt principal, short term financings, and related party payables repayments of approximately $517,000.

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, 2023. There have been no significant changes in our significant accounting policies or critical accounting estimates since the end of fiscal year 2023.

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 March 31, 2024, and determined them to be effective.

Changes in Internal Control over Financial Reporting

During fiscal year 2024, the Company revised its internal controls over its goodwill evaluation process to ensure that any testing performed at interim dates, are rolled forward to the financial statements reporting date. 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, 2023. Except as disclosed below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, as amended from time to time.

The exercise of all or any number of outstanding Series G Warrants may dilute a shareholders holding of shares of our common stock.

We have issued 4,210,528 Series G Warrants providing for the right to purchase 4,4210,528 shares of our common stock at an initial exercise price of $0.6562 per share which price was reduced to $0.26 per share effective as of May 10, 2024 pursuant to a price reset provision pursuant to the terms of the Series G Warrants and the Company’s issuance of shares of its Common Stock pursuant to the ATM. Our shareholders could be subject to increased dilution upon the exercise of the Series G Warrants. In addition, the exercise of the Series G Warrants and the subsequent sale of shares of common stock issued thereby, could have an adverse effect on the market for our common stock, including the price that a shareholder could obtain for their shares. Further, our shareholders may experience dilution in the value of their investment in our common stock upon the exercise of the Series G Warrants.

The number of shares of common stock which may be issued upon exercise of our Series G Warrants is significant in relation to our currently outstanding common stock and could cause downward pressure on the market price for our common stock.

The number of shares of common stock issuable upon exercise of our outstanding Series G Warrants is significant in relation to the number of shares of common stock currently outstanding. If the holder of the Series G Warrants determines to sell a substantial number of shares into the market at any given time, there may not be sufficient demand in the market to purchase the shares without a decline in the market price for our common stock. Moreover, continuous sales into the market of a number of shares in excess of the typical trading volume for our common stock, or even the availability of such a large number of shares, could depress the trading market for our common stock over an extended period of time.