Reliance Global Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Reliance Global operates insurance agencies and related platforms, pursuing agency acquisitions and organic growth. The company reported results from continuing operations separately from discontinued Medigap operations.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $3.196m | $2.847m | $7.135m | $5.906m |
| Operating loss | $(1.838)m | $(1.773)m | $(2.843)m | $(4.124)m |
| Operating margin | -57.5% | -62.3% | -39.8% | -69.8% |
| Continuing-operations income (loss) | $(3.870)m | $10.660m | $(0.998)m | $20.047m |
| Net income (loss), including discontinued operations | $(1.055)m | $10.496m | $(2.844)m | $19.836m |
| Basic earnings (loss) per share | $(0.39) | $9.82 | $(1.33) | $12.59 |
Revenue grew 12% in Q2 and 21% year to date, which management attributed primarily to organic growth and RELI Exchange. Commission expense rose faster than revenue—24% in Q2 and 32% for six months—while salaries and wages increased 6% in both periods. General and administrative expense fell 23% year to date, which management linked to cost controls. Marketing expense increased. Commission income less commission expense was approximately $2.374m in Q2 and $5.229m for six months.
Results were significantly affected by noncash warrant-liability remeasurement. Q2 included a $1.593m fair-value loss, versus a $12.633m gain in Q2 2022; the six-month periods included gains of $2.674m and $24.479m, respectively. Q2 discontinued operations recorded $2.814m of income, including a $2.9m Medigap settlement recovery. The six-month discontinued-operations loss was $1.846m, reflecting Medigap impairments and write-offs, including a $4.826m goodwill impairment.
Cash flow, liquidity and obligations
- Six-month operating cash flow was a use of $2.007m, compared with a $1.311m use in 2022. Investing activities provided $0.735m, mainly from the $0.9m sale of NSURE shares. Financing activities provided $2.042m, including about $3.446m net proceeds from a March private placement. Cash and restricted cash increased $0.770m to $2.680m.
- At June 30, cash was $1.275m and restricted cash was $1.406m. Current assets were $7.132m and current liabilities $4.865m, for working capital of approximately $2.268m. Stockholders’ equity was $13.027m.
- Long-term debt, including its current portion, was $13.041m; the company also reported related-party loans and convertible debt, lease liabilities, and $3.759m of warrant liabilities. Much of the long-term debt bears variable interest at a stated spread over prime.
- Management said it believed its financial position and ability to raise capital were reasonable and sufficient, and that it did not believe substantial doubt existed about the company’s ability to continue as a going concern within one year. It also cautioned that financing may not be available on acceptable terms.
Material developments, outlook and risks
- The company abandoned Medigap effective April 17, 2023, after recurring losses, including greater-than-expected revenue chargebacks. It wrote off most Medigap assets, retained certain software and customer relationship assets, and reported no expected continuing involvement. A June 30 settlement provided for $2.9m, received July 6, and released the parties from specified Medigap-related claims and obligations. The settlement did not release claims involving a third party that alleges a debt owed by Reliance; the company disputes that alleged debt.
- In March, a private placement generated approximately $4.0m gross and $3.446m net proceeds. The transaction included common shares and warrants, with potential future dilution. The company also implemented a 1-for-15 reverse stock split in February. Common shares outstanding increased from 1.220m at year-end to 2.053m at June 30.
- Management’s stated priorities are insurance-agency acquisitions, geographic and market-share growth, and expansion of its digital platforms. No quantified financial guidance was provided. The company cited competition, possible direct sales by insurers and technology entrants, inflation-sensitive costs, and significant customer concentration. Priority Health represented 28% of Q2 revenue and 37% of six-month revenue.
- Disclosure controls were assessed as ineffective at June 30 due to a material weakness in earnings-per-share controls. The company used outside advisers to assist with EPS calculations and disclosures. Management reported no material changes to other internal controls during the quarter.
- The company reported no accrued legal contingencies and said ordinary-course claims were not expected to have a material adverse effect, while noting outcomes cannot be assured. A separate Fortman purchase-agreement amendment settled $1.434m of balances with shares and provides for a possible cash make-up payment if the stock price is below $4.07 on November 18, 2023.
Important facts for investors to verify
- Confirm the July receipt and accounting treatment of the $2.9m Medigap settlement, and the status of any remaining disputed third-party debt claim.
- Track operating cash burn, liquidity needs, debt service and access to additional financing; distinguish unrestricted cash from restricted cash.
- Assess potential dilution from outstanding warrants, including Series B warrant resets and the March 2023 placement warrants.
- Monitor customer concentration, especially Priority Health, and whether revenue growth translates into improving operating results.
- Review remediation of the EPS-related material weakness and the conditional Fortman make-up payment.