Reliance Global Group, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 24, 2021. The company acquires and operates insurance agencies, with growth focused on acquisitions and organic expansion. It acquired UIS Agency in August 2020 and held a $1.35 million investment in digital agency NSURE, Inc. Financial statements received an unqualified audit opinion; the auditor did not audit internal control effectiveness.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $7.280 million | $4.451 million |
| Operating loss | $(3.644) million | $(3.104) million |
| Net loss | $(3.699) million | $(3.495) million |
| Basic and diluted loss per share | $(0.88) | $(1.21) |
| Cash used in operating activities | $(468,465) | $(373,934) |
| Cash used in investing activities | $(1.946) million | $(11.880) million |
- Revenue increased 63.6%, mainly because agencies acquired in 2019 contributed a full year of revenue in 2020. Management attributed much of the increase to Altruis, SWMT, and Fortman.
- Operating expenses rose to $10.924 million from $7.555 million, reflecting fuller-year acquisition costs, higher compensation, amortization, stock-based compensation, and professional fees. Operating margin was approximately negative 50.1% versus negative 69.7% in 2019; net margin was approximately negative 50.8% versus negative 78.5%.
- Year-end assets were $17.922 million, liabilities $17.808 million, and stockholders’ equity $114,387. Working capital was negative $6.074 million.
- Balance-sheet cash was $45,213 plus $484,368 of restricted cash, or $529,581 combined. The company also reported a $1.350 million NSURE investment, $9.265 million of goodwill, and $5.686 million of net intangible assets. No impairment was recorded in 2020; a $593,790 goodwill impairment was recorded in 2019.
- Debt included $8.849 million of Oak Street term loans and facility borrowings, net of financing costs, plus $4.667 million owed to related parties. Current liabilities included $4.523 million of related-party loans and $963,450 of current long-term debt. Total liabilities were $17.808 million.
Material changes and unusual items
- The company acquired UIS Agency for stated consideration of $883,334, including cash, shares, and contingent consideration. The acquisition added $716,462 of goodwill. NSURE investment totaled $1.350 million; the company said it would not make the remaining purchases contemplated under its original investment agreement.
- A $673,700 Paycheck Protection Program loan was forgiven in November 2020, producing a $508,700 gain on extinguishment of debt as reported in the income statement. The filing also reports $165,000 of repayments before forgiveness.
- Net loss increased by $203,524 despite higher revenue. The filing cites increased expenses, including acquisition-related and professional costs, and a full year of costs from businesses acquired in 2019.
- At June 30, 2020, the company reported a 4.97 senior funded debt-to-EBITDA ratio against a 4.0 covenant limit and obtained a waiver. An amendment raised the permitted ratio to 5.0 for the September and December 2020 tests; year-end ratio was 4.2, which management said was compliant. The limit returns to 4.0 beginning March 31, 2021.
- After year-end, the company completed a 1-for-85.71 reverse stock split and announced a February 2021 offering of 1.8 million shares with warrants at $6 per share, for $10.8 million gross proceeds before expenses. The CEO also converted preferred shares and approximately $3.8 million of company debt into equity at $6 per share.
Outlook, risks, and contingencies
- Management planned continued agency acquisitions, geographic expansion, and organic growth, including development of its 5MinuteInsure.com digital lead platform. The company also described plans to expand insurance offerings to small-business groups. No quantified operating guidance was provided.
- Management forecast positive operating cash flows and said Reliance Global Holdings had committed to fund the company for at least 12 months if a capital raise was unsuccessful. Management also said the related-party lender was expected to forbear if the company could not meet payments. The filing nevertheless identifies substantial liquidity concerns, a working-capital deficit, and recurring losses.
- Key risks include acquisition execution and integration, financing availability, debt covenant compliance, reliance on related-party funding, regional concentration, carrier concentration, technology and cybersecurity exposure, insurance regulation, and possible dilution. BlueCross BlueShield and Priority Health represented 25.1% and 25.5% of 2020 revenue, respectively. The company reported all revenue from Michigan, New Jersey, Montana, and Ohio.
- Management reported no material COVID-19 financial impact to date, but said the pandemic’s duration and effects remained uncertain. The company reported no pending legal proceedings under Item 3; its notes describe ordinary-course claims and proceedings, with no legal contingency accrued at year-end.
- Management disclosed a material weakness in the financial reporting and closing process and planned to address it by hiring an SEC reporting manager in 2021. The filing contains inconsistent cash-flow financing figures: MD&A reports $2.453 million of cash provided by financing, while the cash-flow statement reports $3.119 million.
Important facts for investors to verify
- Reconcile the financing cash-flow discrepancy and confirm unrestricted cash available for operations; most reported cash and cash equivalents were restricted.
- Review debt maturities, related-party loan repayment terms and support commitments, and compliance with the tighter 4.0 debt-to-EBITDA covenant beginning March 2021.
- Assess whether acquisitions and digital initiatives can improve operating performance and cash generation; the company recorded a $3.699 million net loss and negative operating cash flow in 2020.
- Verify the effects of the 2021 share offering, reverse split, preferred-stock conversion, and CEO debt conversion on dilution, voting control, and liquidity.
- Monitor remediation of the disclosed financial-reporting material weakness and the assumptions supporting goodwill and intangible-asset valuations.