Reliance (RELI) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The company's unaudited statements show a shift to net income due to a non-cash gain on warrant liabilities Condensed Consolidated Balance Sheets Total assets doubled and equity turned positive, driven by acquisitions and warrant re-measurement Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $55,233,830 | $27,675,563 | | Goodwill | $33,486,107 | $10,050,277 | | Intangibles, net | $14,359,973 | $7,078,900 | | Total Liabilities | $26,868,242 | $53,741,692 | | Warrant liabilities / commitment | $3,107,578 | $37,652,808 | | Total Stockholders' Equity (Deficit) | $28,365,588 | $(26,066,129) | Condensed Consolidated Statements of Operations Revenue grew 78% from acquisitions, but a large non-cash gain drove a significant net income result Statement of Operations Summary (Nine Months Ended Sep 30) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total Revenue | $12,596,268 | $7,096,213 | | Total Operating Expenses | $18,456,113 | $9,161,066 | | Loss from Operations | $(5,859,845) | $(2,064,853) | | Recognition and change in fair value of warrant liabilities | $32,398,530 | - | | Net Income (Loss) | $25,957,785 | $(2,486,045) | | Basic Earnings (Loss) Per Share | $1.10 | $(0.25) | Condensed Consolidated Statements of Cash Flows Cash decreased by $1.6 million as financing inflows were offset by acquisition and operating outflows Cash Flow Summary (Nine Months Ended Sep 30) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,177,998) | $(1,304,320) | | Net cash used in investing activities | $(24,982,609) | $(1,963,897) | | Net cash provided by financing activities | $25,564,501 | $8,878,110 | | Net (decrease) increase in cash | $(1,596,106) | $5,609,893 | Notes to the Condensed Consolidated Financial Statements Notes detail a working capital deficit, acquisition accounting, and the significant impact of warrant liabilities - As of September 30, 2022, the company had a working capital deficit of approximately $3.5 million[26] - The company completed the acquisition of Medigap for $20.1 million and Barra & Associates for $7.7 million, adding a combined $23.4 million to goodwill[48][57] - The company recognized a non-operating gain of $32.4 million for the nine months ended Sep 30, 2022, from the change in fair value of its warrant liabilities[73][74] - In September 2022, the company issued a $1.5 million promissory note to YES Americana Group, LLC, a related party entity[101] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue growth is driven by an aggressive acquisition strategy, while net income is boosted by non-cash gains Overview and Strategy The company's strategy combines acquiring insurance agencies with developing proprietary Insurtech platforms - The company's primary strategy is to acquire undervalued wholesale and retail insurance agencies, with a focus on growing or underserved segments[104] - Launched 5MinuteInsure.com, a B2C Insurtech platform using AI and data mining to provide instant insurance quotes in 46 states[107] - Launched RELI Exchange, a B2B InsurTech platform for agency partners, building on technology from the Barra acquisition[108] Results of Operations Revenue rose 78% while operating loss widened, but a non-cash gain led to $26.0 million in net income Comparison of Nine Months Ended September 30, 2022 and 2021 | Item | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Commission Income | $12,596,268 | $7,096,213 | +78% | | Commission Expense | $2,617,140 | $1,748,451 | +50% | | Salaries and Wages | $6,373,697 | $3,217,441 | +98% | | Marketing and Advertising | $1,922,520 | $143,110 | +1,243% | | Loss from Operations | $(5,859,845) | $(2,064,853) | +184% | | Net Income (Loss) | $25,957,785 | $(2,486,045) | N/A | - The increase in marketing and advertising expense by 1,243% is primarily due to Medigap's direct-to-consumer marketing model[151] - The significant shift from a net loss to net income is primarily attributable to a $32.4 million non-cash gain from the change in fair value of warrant liabilities[153] Liquidity and Capital Resources The company has a $3.5 million working capital deficit, with liquidity supported by a recent private placement Liquidity Position | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash Balance | $3.0 million | $4.6 million | | Working Capital Deficit | $3.5 million | $37.0 million | Cash Flow Summary (Nine Months Ended Sep 30, 2022) | Activity | Amount | | :--- | :--- | | Net cash used in operating activities | $(2,177,998) | | Net cash used in investing activities | $(24,982,609) | | Net cash provided by financing activities | $25,564,501 | Quantitative and Qualitative Disclosures About Market Risk The company indicates that this section is not applicable - Not applicable[164] Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in the quarter - Based on an evaluation by the CEO and CFO, the company's disclosure controls and procedures were deemed effective as of September 30, 2022[166] - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[167] PART II - OTHER INFORMATION Legal Proceedings The company faces no legal proceedings expected to have a material adverse effect on its financial condition - The company is subject to ordinary course legal proceedings but does not expect them to have a material adverse effect on its business or financial condition[169] Risk Factors The company risks delisting from Nasdaq due to its failure to meet the minimum bid price requirement - The company received a notice from Nasdaq on September 27, 2022, for failing to maintain the minimum bid price of $1.00 per share[172] - The company has a 180-day compliance period, until March 27, 2023, to regain compliance[172] - Failure to regain compliance could lead to delisting, which would negatively impact the stock's price and liquidity[171][172] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no new unregistered sales of equity securities during the period - None that have not been previously disclosed in our filings with the SEC[173] Defaults Upon Senior Securities The company indicates that this section is not applicable - Not applicable[174] Mine Safety Disclosures The company indicates that this section is not applicable - Not applicable[175] Other Information The company indicates that this section is not applicable - Not applicable[176] Exhibits This section lists all exhibits filed with the report, including certifications and corporate documents - Lists various exhibits filed with the report, including bylaws, a promissory note, and CEO/CFO certifications[178][179][180]