Reliance Global Group, Inc. — Q3 2022 Form 10-Q
Business context and period: The company acquires and operates U.S. insurance agencies and develops insurance technology platforms. This unaudited report covers the three and nine months ended September 30, 2022, compared with the same periods in 2021. The company reported ten insurance agency acquisitions as of period-end. In 2022, it acquired Medigap in January and Barra in April.
Key financial results
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2022 | $4.15 million | $12.60 million |
| Revenue, 2021 | $2.58 million | $7.10 million |
| Operating loss, 2022 | $(1.52) million | $(5.86) million |
| Operating loss, 2021 | $(0.48) million | $(2.06) million |
| Net income (loss), 2022 | $6.12 million | $25.96 million |
| Net income (loss), 2021 | $(0.60) million | $(2.49) million |
- Revenue increased 61% in Q3 and 78% for the first nine months, which management attributed to organic growth and the 2022 acquisitions.
- Operating margin, calculated from reported revenue and operating loss, was approximately negative 36.5% in Q3 and negative 46.5% for the nine months. The comparable 2021 margins were approximately negative 18.4% and negative 29.1%.
- Reported net income was substantially driven by noncash gains from changes in warrant fair value: $7.92 million in Q3 and $32.40 million for the nine months. The nine-month gain exceeded operating losses; reported net income should not be read as operating profitability or cash generation.
- Basic EPS was $0.35 for Q3 and $1.10 for the nine months; diluted EPS was a loss of $0.10 and $0.78, respectively. The filing explains that warrant-related adjustments affected diluted EPS.
- No income tax expense was recorded; the company maintained a full valuation allowance against net deferred tax assets.
Financial position, cash flow and debt
- At September 30, 2022, cash was $1.62 million and restricted cash was $1.41 million, totaling $3.02 million. Current assets were $4.49 million and current liabilities were $7.97 million, a working capital deficit of approximately $3.48 million.
- Stockholders’ equity was $28.37 million, compared with a deficit of $26.07 million at December 31, 2021. The filing attributes the working-capital improvement in part to warrant-liability classification changes; it does not represent an equivalent improvement in cash.
- For the first nine months, operating cash flow was negative $2.18 million, investing cash flow was negative $24.98 million, and financing cash flow was positive $25.56 million. Cash and restricted cash declined by $1.60 million.
- Investing cash outflow included $24.14 million for acquisitions. Financing included $17.85 million net proceeds from the January private placement, $6.52 million of acquisition borrowing, and $1.50 million from a related-party loan.
- At period-end, reported debt included $13.67 million of Oak Street long-term debt (including its current portion), $1.68 million of related-party loans, and $0.31 million of short-term premium financing. Lease liabilities and earn-out obligations are additional liabilities.
- Total assets were $55.23 million, including $33.49 million of goodwill and $14.36 million of net intangible assets, which increased primarily with acquisitions.
Changes, outlook and risks
- Operating expenses rose faster than revenue: nine-month salaries and wages increased 98%, general and administrative expense 85%, and marketing and advertising expense 1,243%. Management linked these increases to expanded operations, acquisitions and Medigap’s consumer marketing, among other factors.
- Medigap’s reported standalone results from acquisition through September 30 were $3.87 million of revenue and a $0.69 million loss; Barra’s were $0.66 million of revenue and a $0.18 million loss.
- Management plans to pursue additional insurance acquisitions and organic growth over the next 12 months. It also described expansion of 5MinuteInsure.com and RELI Exchange; the filing provides no numerical financial guidance.
- Management stated that it considers the financial position and ability to raise capital reasonable and sufficient, while reporting negative operating cash flow and a working capital deficit.
- Nasdaq notified the company on September 27, 2022 that its share price had failed the $1.00 minimum bid-price requirement for 30 consecutive business days. The initial compliance period ran through March 27, 2023; the company said it intended to seek compliance but could not assure success.
- Revenue concentration is material: for the nine months, LTC Global represented 27% of revenue, Priority Health 24%, and BlueCross BlueShield 10%. The company warned that losing a significant customer could adversely affect it.
- Other disclosed risks include competition in insurance distribution, inflation-related cost pressure, uncertainty associated with COVID-19, and potential future litigation. Management reported no material legal contingency accrual. The company also disclosed immaterial prior-period adjustments related to historical purchase-price allocations, accrued revenue and equity accounts.
Most important facts for investors to verify
- Whether reported earnings excluding noncash warrant fair-value gains reflect progress toward sustainable operating profitability and positive operating cash flow.
- Current liquidity, financing needs, debt terms and capacity to service debt while funding acquisitions and integration.
- Acquisition performance, including whether Medigap and Barra can improve on their reported post-acquisition losses and support projected synergies.
- Warrant-liability valuation assumptions and the resulting effects on reported earnings and diluted EPS.
- Progress toward Nasdaq’s minimum bid-price requirement and any subsequent listing notices or corrective actions.
- Exposure to major insurance-carrier customers and the durability of commission revenue from concentrated sources.