Reliance (RELI) - 2021 Q2 - Quarterly Report

PART I Financial Information This section presents the company's financial statements, management's discussion and analysis, and controls and procedures for the reporting period Financial Statements The company's financial statements for the period ended June 30, 2021, reflect significant growth in assets and revenue, primarily driven by acquisitions and a public stock offering Condensed Consolidated Balance Sheets The balance sheet shows a substantial increase in total assets and stockholders' equity, primarily due to a public offering and debt conversion Balance Sheet Highlights (Unaudited) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash | $6,348,415 | $45,213 | | Total current assets | $7,763,875 | $1,436,036 | | Goodwill | $9,750,492 | $8,761,725 | | Total assets | $26,890,287 | $18,044,687 | | Liabilities & Equity | | | | Total current liabilities | $1,559,218 | $6,884,072 | | Total liabilities | $13,676,742 | $17,807,699 | | Total stockholders' equity | $13,213,545 | $236,988 | | Total liabilities and stockholders' equity | $26,890,287 | $18,044,687 | - Total assets grew by 49% from December 31, 2020, primarily due to a significant increase in cash from $45,213 to $6.35 million[14] - This was driven by proceeds from a public offering[18] - Total liabilities decreased, while stockholders' equity increased substantially from $237k to $13.2 million, reflecting the capital raise and conversion of debt and preferred stock[26] Condensed Consolidated Statements of Operations The statements of operations indicate revenue growth for both three and six-month periods, though operating expenses also increased, impacting net loss Three Months Ended June 30 (Unaudited) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenue | $2,190,847 | $1,642,018 | | Total Operating Expenses | $3,295,637 | $2,667,461 | | Loss from Operations | ($1,104,790) | ($1,025,443) | | Net Loss | ($1,276,886) | ($1,138,413) | | Basic and Diluted Loss Per Share | ($0.12) | ($0.27) | Six Months Ended June 30 (Unaudited) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenue | $4,514,577 | $3,646,332 | | Total Operating Expenses | $6,104,222 | $5,479,293 | | Loss from Operations | ($1,589,645) | ($1,832,961) | | Net Loss | ($1,890,812) | ($2,118,211) | | Basic and Diluted Loss Per Share | ($0.20) | ($0.51) | - Revenue increased by 33% for the three-month period and 24% for the six-month period year-over-year, driven by acquisitions[16] - However, operating expenses also increased, leading to a higher net loss in Q2 2021 compared to Q2 2020, but a reduced net loss for the six-month period[16] Condensed Consolidated Statements of Cash Flows The cash flow statement highlights a significant net increase in cash, primarily from financing activities, offsetting operational and investing outflows Cash Flow Summary for Six Months Ended June 30 (Unaudited) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | ($1,493,252) | ($246,812) | | Net cash used in investing activities | ($1,761,576) | ($1,200,000) | | Net cash provided by financing activities | $9,558,012 | $1,717,286 | | Net increase in cash and restricted cash | $6,303,184 | $270,474 | - The company experienced a significant net increase in cash, primarily due to $9.56 million in net cash from financing activities[22] - This included approximately $10.5 million from the issuance of common stock, which offset cash used for operations and investing activities, such as the acquisition of businesses for $1.6 million[22] Selected Notes to Financial Statements Key notes detail the company's acquisition strategy, liquidity, goodwill, debt, equity transactions, and significant customer concentration - The company's business strategy focuses on acquiring insurance agencies[24] - On May 1, 2021, it acquired J.P. Kush and Associates, Inc. for a total purchase price of $2.59 million, which included cash, stock, and an earn-out liability[82] - Following a public offering in February 2021 that raised net proceeds of approximately $10.5 million, management believes the company has sufficient liquidity for the foreseeable future, with a working capital of approximately $6.2 million as of June 30, 2021[26] - Goodwill increased from $8.76 million at year-end 2020 to $9.75 million as of June 30, 2021, with the $988,767 increase resulting from the Kush acquisition[91][92] - As of June 30, 2021, the company had $8.43 million in long-term debt, net of deferred financing costs, primarily consisting of term loans from Oak Street Funding LLC used to finance acquisitions[97] - In February 2021, the company issued 2,070,000 shares of common stock in a public offering, raising gross proceeds of $12.42 million[107] - In the same month, a related party, Reliance Global Holdings, LLC, converted $3.8 million of debt into 633,333 shares of common stock[107] - Two customers, BlueCross BlueShield and Priority Health, accounted for 25% and 33% of total revenue, respectively, for the six months ended June 30, 2021, indicating significant customer concentration[103] Management's Discussion and Analysis (MD&A) Management discusses the company's growth strategy, centered on acquiring insurance agencies and developing its proprietary 5MinuteInsure.com platform, highlighting revenue growth, increased expenses, and improved liquidity from a public offering Business Overview and Strategy The company's core strategy involves aggressive acquisition of insurance agencies and the development of its AI-powered 5MinuteInsure.com platform, supported by a recent public offering - The company's primary strategy is to grow through an aggressive acquisition of wholesale and retail insurance agencies, leveraging the experience and relationships of its management and parent company, Reliance Global Holdings, LLC[144][145] - A key strategic initiative is the development of the 5MinuteInsure.com platform, a proprietary tool using artificial intelligence and data mining to provide competitive home and auto insurance quotes in under five minutes[147] - The platform is licensed in 46 states and D.C. and offers policies from 16 carriers[150] - In February 2021, the company completed an underwritten public offering, selling 2,070,000 shares of common stock and accompanying warrants, raising gross proceeds of approximately $12.4 million[156][159] Results of Operations Revenue growth in both periods was driven by acquisitions, which also contributed to increased operating expenses and a continued net loss Comparison of Three Months Ended June 30, 2021 vs 2020 | Metric | 2021 | 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $2,190,847 | $1,642,018 | +$548,829 | +33% | | Commission Expense | $558,271 | $353,899 | +$204,372 | +58% | | Salaries and Wages | $1,110,629 | $868,222 | +$242,407 | +28% | | Net Loss | ($1,276,886) | ($1,138,413) | -$138,473 | +12% | Comparison of Six Months Ended June 30, 2021 vs 2020 | Metric | 2021 | 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $4,514,577 | $3,646,332 | +$868,245 | +24% | | Commission Expense | $1,087,743 | $779,484 | +$308,259 | +40% | | Salaries and Wages | $2,029,174 | $1,736,496 | +$292,688 | +17% | | Net Loss | ($1,890,812) | ($2,118,211) | +$227,399 | -11% | - Revenue growth in both the three and six-month periods was primarily due to the inclusion of revenue from insurance agencies acquired in 2020 and 2021[167][176] - The increase in commission, salaries, and G&A expenses is also attributed to this operational growth and costs associated with the NASDAQ uplisting[170] Liquidity and Capital Resources The company's liquidity significantly improved, driven by a $10.5 million public offering, which covered cash used in operating and investing activities - As of June 30, 2021, the company had a cash balance of $6.8 million and working capital of $6.2 million, a significant improvement from a working capital deficit of $4.6 million a year prior[183] - The increase in working capital is primarily attributed to net proceeds of approximately $10.5 million from the issuance of common stock and warrants in February 2021[183] - For the six months ended June 30, 2021, net cash used in operating activities was $1.5 million, and net cash used in investing activities was $1.8 million (mainly for the Kush acquisition)[188][189][190] - These outflows were more than covered by $9.6 million in net cash from financing activities[192] Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant judgment, including business acquisitions, goodwill impairment, income taxes, revenue recognition, and stock-based compensation - Management identifies several critical accounting policies that require significant judgment and estimates, including: - Business Acquisitions: Estimating the fair value of assets acquired and liabilities assumed - Goodwill and Intangible Assets: Annual impairment testing, which involves significant estimates of future cash flows and discount rates - Income Taxes: Estimating provisions and the realizability of deferred tax assets - Revenue Recognition: Recognizing commission revenue, including contingent commissions, which requires estimating potential adjustments and reversals - Stock-Based Compensation: Determining the fair value of awards using models like Black-Scholes, which requires assumptions about volatility and option life[193][194][195][199] Controls and Procedures Management concluded that disclosure controls were effective as of June 30, 2021, with plans to mitigate a previously identified material weakness in financial reporting - Management concluded that disclosure controls and procedures were effective as of June 30, 2021[207] - A material weakness in financial reporting and closing was identified in fiscal year 2020, which the company plans to mitigate by hiring an SEC reporting manager in fiscal 2021[207] PART II Other Information This section covers risk factors, legal proceedings, defaults, and unregistered sales of equity securities Risk Factors The company identifies numerous risks, categorized into business, industry, and investment-related factors, including limited operating history, competition, regulatory changes, and stock price volatility Business and Operational Risks Key business risks include a limited operating history, intense competition for acquisitions, integration difficulties, cybersecurity threats, and restrictive debt covenants - The company has a limited operating history since its change of control in 2018 and faces intense competition for acquiring other insurance agencies[212][213] - Growth depends on acquiring other insurance intermediaries, which involves risks such as integration difficulties, diversion of management attention, and unanticipated liabilities[219] - Cybersecurity attacks or other IT interruptions could adversely affect business, financial condition, and reputation[221] - Debt agreements with Oak Street Funding contain restrictive covenants, including a Senior Funded Debt to EBITDA ratio[228] - Failure to comply could lead to default and acceleration of debt; the company was in default as of June 30, 2020, but obtained a waiver and amended the covenant[230][231] Insurance Industry Risks Industry risks include intense competition, economic downturns, comprehensive state-level regulation, and unpredictable contingent commission revenue - The insurance intermediary business is highly competitive, with pressure from insurance companies, technology firms, and other financial services institutions[239] - Economic downturns, such as those resulting from the COVID-19 pandemic, could negatively impact clients' ability to pay premiums, affecting the company's revenue and profitability[240][246] - The business is subject to comprehensive state-level regulation, and changes in laws or regulations could increase compliance costs or restrict operations[253] - Revenue from profit-sharing contingent commissions is unpredictable and depends on factors outside the company's control, such as the profitability and loss reserves of insurance carriers[244] Investment and Securities Risks Investment risks highlight stock price volatility, the CEO's controlling equity interest, potential for future share dilution, and the speculative nature of warrants - The company's CEO, Ezra Beyman, beneficially owned approximately 46.4% of the common stock as of April 26, 2021, giving him the ability to control actions requiring shareholder approval[256] - Future sales of equity to fund acquisitions or other corporate activities could be substantially dilutive to existing shareholders[262] - The company does not expect to pay dividends in the foreseeable future, as earnings are expected to be retained for business operations[268] - The warrants issued in the February 2021 offering are speculative, and there is no assurance that the market price of the common stock will ever exceed the warrant exercise price of $6.60[269] Other Items The report indicates no material legal proceedings, defaults, or mine safety disclosures, and details two unregistered sales of common stock - Legal Proceedings, Defaults Upon Senior Securities, and Mine Safety Disclosures are all reported as "Not applicable"[208][274][276] Unregistered Sales of Equity Securities | Date | Shares Issued | Class | Reason | Exemption | | :--- | :--- | :--- | :--- | :--- | | 3/5/2021 | 15,000 | Common | Marketing Services | Rule 144 | | 5/1/2021 | 14,925 | Common | Business Combination | Rule 144 |