At March 15, 2021 the registrant had 6,351,251
shares of common stock, par value $0.086 per share, outstanding.
The aggregate market value of the common stock,
no par value, held by non-affiliates of the registrant, based on the closing sale price of registrant’s common stock as quoted
on the OTCQB on June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter), was approximately
$67.8million. Accordingly, the registrant qualifies under the SEC’s revised rules as a “smaller reporting company.”
PART
I
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements (within the meaning of the federal securities law) that involve
substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Annual Report
on Form 10-K regarding our strategy, future operations, future financial position, future net sales, gross margin expectations,
projected costs, projected expenses, prospects and plans and objectives of management are forward-looking statements. The words
“anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,”
“plans,” “projects,” “will,” “would,” and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements contain these identifying words. We have based
these forward-looking statements on our current expectations and projections about future events. Although we believe that the
expectations underlying any of our forward-looking statements are reasonable, these expectations may prove to be incorrect, and
all of these statements are subject to risks and uncertainties. Should one or more of these risks and uncertainties materialize,
or should underlying assumptions, projections, or expectations prove incorrect, our actual results, performance, or financial
condition may vary materially and adversely from those anticipated, estimated, or expected. We have included important factors
in the cautionary statements included in this Annual Report on Form 10-K, particularly in the section entitled “Risk Factors,”
that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our
forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures,
investments or terminations of distribution arrangements that we may make. We do not assume any obligation to update any forward-looking
statements, whether as a result of new information, future events, or otherwise, except as required by law.
Unless
the context requires otherwise, references to “Reliance Global Group, Inc.,” “we,” “our,”
and “us” in this Annual Report on Form 10-K refer to Reliance Global Group, Inc.
Item
1. BUSINESS
About
Reliance Global Group, Inc.
Reliance
Global Group, Inc. (formerly known as Ethos Media Network, Inc.) was incorporated in Florida on August 2, 2013. In September 2018,
Reliance Global Holdings, LLC, a related party, purchased a controlling interest in the Company. Ethos Media Network, Inc. was
renamed Reliance Global Group, Inc. on October 18, 2018.
We
operate as a company managing in assets in the insurance markets, as well as other related sectors. Our focus is to grow the Company
by pursuing an aggressive acquisition strategy, initially and primarily focused upon wholesale and retail insurance agencies.
The Company is controlled by the same management team as Reliance Global Holdings, LLC (“Reliance Holdings”), a New
York based firm that is the owner and operator of numerous companies with core interests in real estate and insurance. Our relationship
with Reliance Holdings provides us with significant benefits: (1) experience, knowhow, and industry relations in both sectors;
(2) a source of acquisition targets currently under Reliance Holdings’ control; and (3) financial and logistics assistance.
We are led and advised by a management team that offers over 100 years of combined business expertise in real estate, insurance,
and the financial service industry.
In
the insurance sector, our management has extensive experience acquiring and managing insurance portfolios in several states, as
well as developing specialized programs targeting niche markets. Our primary strategy is to identify specific risk to reward arbitrage
opportunities and develop these on a national platform, thereby increasing revenues and returns, and then identify and acquire
undervalued wholesale and retail insurance agencies with operations in growing or underserved segments, expand and optimize their
operations, and achieve asset value appreciation while generating interim cash flows.
As
part of our growth and acquisition strategy, we are currently in negotiations with several non-affiliated parties and expect to
complete a number of material insurance asset transactions throughout the course of 2021. As of December 31, 2019, we have acquired
six insurance agencies, including both affiliated and unaffiliated companies. In addition to the acquisition of UIS Agency, LLC
in August 2020, an unaffiliated niche transportation insurance agency we are in the process of continuing our investments in NSURE
Inc. As of December 31, 2020, our total investment in NSURE, Inc., a digital insurance agency, amounted to $1.350 million.
Reliance Holdings has committed to fund the Company for at least the next 12 months in the event that the capital raise is not
successful.
Long
term, we seek to conduct all transactions and acquisitions through the direct operations of the Company. However, in some instances,
Reliance Holdings could act as a placeholder to facilitate the acquisition process, whereby Reliance Holdings will acquire the
prospective asset and ultimately transfer it to the Company at a later date. This would be necessary for example in the case of
a material acquisition that would require an audit. Reliance Holdings would acquire the asset and hold it as the audit is in process
and transfer it to the Company upon successful completion of the audit. However, the Reliance Holdings will ultimately, upon successful
completion of the audit, transfer the asset to the Company and the Company will pay for the consideration of the asset.
Over
the next 12 months, we plan to focus on the expansion and growth of our business through two different channels: continued asset
acquisitions in insurance markets; and organic growth of our current insurance operations through geographic expansion and market
share growth.
Insurance
Market Overview
There
are three main insurance sectors: (1) property/casualty (P/C), which consists mainly of auto, home, and commercial insurance;
(2) life/health (L/H), which consists mainly of life insurance and annuity products; and (3) accident and health, which is normally
written by insurers whose main business is health insurance. The $3 trillion global insurance industry plays a huge role in the
U.S. economy, with insurance spending in 2019 making up about 11.5% of the U.S.’s GDP (Source: OECD Insurance Statistics),
as shown in the table below.
The
U.S. remained the world’s largest insurance market, with a 28% market share of global direct premiums written in 2017. There
were approximately 743 L/H insurers, 2,620 P/C insurers, and 1,130 health insurers licensed in the U.S. in 2017, with premiums
of $638 billion, $640 billion, and $189 billion, respectively (Source: Agency Checklist’s U.S. Insurance Market Still
the Largest—Federal Report Covers the State of the Industry, November 2018). Sustained economic growth, rising interest
rates, and higher investment income are among the positive factors that have bolstered insurers’ results in 2018, setting
the stage for enhanced top- and bottom-line growth in the years ahead for us as we benefit from growth in insurers’ business
growth (Source: Deloitte’s 2019 Insurance Industry Outlook).
Insurance
Agency Industry Overview
An
insurance agency or broker, solicits, writes, and binds policies through many different insurance companies, as they are not directly
employed by any insurance carrier. Thus, insurance agencies can decide which insurance carriers they would like to represent and
which products they would like to sell. They are like a retail shop that sells insurance services and products created by the
insurance carrier. The main difference between a broker and an agent has to do with who they represent. An agent represents one
or more insurance companies, acting as an extension of the insurer. A broker represents the insurance buyer.
An
insurance carrier, on the other hand, is a manufacturer of insurance services and products that the insurance agencies sell. They
control the underwriting process, claims process, pricing, and the overall management of the insurance products. Insurance carriers
do not sell their products through direct agents, but only through independent agencies. Insurance policies are created and administered
by the insurance carrier.
A
key operating difference between agencies and carriers is the risk profile. The potential financial risks to the insurance industry
caused by unforeseen event such as natural disasters are the responsibility of the carriers (and their re-insurers). Agencies
and brokers bear no insurance risk. Furthermore, an increase in damage caused by natural disasters generally boosts demand for
insurance and results in possible premium increases. Since insurance brokers and agents are a central part of the distribution
of these products, they normally benefit from this increase in demand and premiums despite damaged profit margins among these
upstream underwriters and carriers. Natural disasters are inherently difficult to forecast but any increase in the frequency of
these events holds the potential to boost insurance policy volumes, particularly for property and casualty products (Source: IBISWorld’s
Insurance Brokers & Agencies Industry in the US, December 2018).
This
risk difference is key, especially considering the changing climate which is contributing to more volatile weather patterns that
is resulting in an increased rate of natural disasters. The economic costs of 2018’s 394 natural disaster events were estimated
at $225 billion, with insurance covering $90 billion of the overall total and creating the fourth costliest year on record for
insured losses, noting that 2017 and 2018 brought the costliest back-to-back years on record for both economic losses ($653 billion)
due to weather-related events and for insured losses ($237 billion) (Source: Aon’s Weather, Climate & Catastrophe
Insight – 2018 Insight Report, January 2019).
Since
insurance brokers and agents are a central part to the distribution of these products, they normally benefit from this increase
in demand and premiums, despite damaged profit margins among these upstream underwriters and carriers (Source: IBISWorld’s
Insurance Brokers & Agencies Industry in the US, December 2018).
The
U.S. insurance broker and agency industry has grown steadily over the five years through 2020 due to macroeconomic growth, beneficial
legislation which has passed, and positive trends within the insurance sector, reaching revenues of $161 billion in 2020. Over
the next few years through to 2025, the industry is expected to grow moderately as the macroeconomic landscape continues to improve
(Source: IBISWorld’s Insurance Brokers & Agencies Industry in the US, November 2020). The solid growth within
the insurance agency market has resulted in strong mergers and acquisition (M&A) activity within this sector. Mergers and
acquisitions from insurance agents and brokers broke records in 2020. The insurance distribution industry continues to prove its
resiliency as Q4 2020 deal activity reached unimaginable highs. This is especially true given that a significant portion of the
year was sluggish due to the pandemic. Total transactions in the Q4 were 290, nearly double that of the same period in 2019, and
total deals for 2020 were 774, nearly 20% higher than what was recorded in 2019. (Source: Optis Partners Agent & Broker 2020
Year-end Merger & Acquisition Report). The confluence of unrelenting market pressure to achieve sustainable growth, a lingering
abundance of capital and capacity, improving global economies, and an upturn in interest rates may indicate that insurers should
be prepared for a continued growth of M&A activity in 2021 and beyond.
Along
with all other industries the insurance sector is increasing its presence in the online market. A J.D. Power study has found that
“insurance customer expectations are being influenced by the user experience of all-digital brands such as Amazon and Netflix,
and many insurers are falling short. Insurers have created attractive user interfaces but these lack functionality.” The
market size of the Online Insurance Brokers industry is expected to increase 3.2% in 2021. The market size of the Online Insurance
Brokers industry in the US has grown 6.7% per year on average between 2016 and 2021. (Source: IBIS World Online Insurance Brokers
in the US - Market Size 2003–2026, April 6, 2020)
The
global insurtech market size was valued at $2.72 billion in 2020. It is expected to expand at a compound annual growth rate (CAGR)
of 48.8% from 2021 to 2028. The increasing need for digitization of insurance services is expected to propel the market growth.
Insurtech is the usage of technology innovations particularly designed to make the existing insurance model more efficient. By
using technologies such as AI and data analytics, insurtech solutions allow products to be priced more competitively. Insurance
companies are widely adopting these solutions to drive cheaper, better, and faster operational results. Hence, the insurance industry
is witnessing increased investment in technology. The outbreak of COVID-19 is anticipated to have a positive impact on the market.
Numerous insurance companies are reconsidering their long-term strategies and short-term needs. The COVID-19 and its impacts are
accelerating the implementation of online platforms and new mobile applications to meet consumer needs. (Grand View Research Insurtech
Market Size, Share & Growth Report, 2021-2028)
The
Company has therefore, strategically invested in NSURE, Inc., “Americas First Digital Insurance Agency”®. As a
result of NSURE, Inc.’s superior proprietary technology and unique approach, we are specifically positioned to take 5% of
offline insurance distribution and bring it online. Nsure.com is completely redesigning the home and auto insurance shopping and
purchasing experience – making it simpler and transparent while providing significant savings of money and time for consumers.
Nsure.com achieves this by simplifying application processes, real time connection via API to over 35 top rated insurance carriers,
instant accurate coverage recommendations and in-house insurance buying/policy binding capabilities amongst other efficiencies.
The
Company has additionally invested in its own platform 5MinuteInsure.com as the next step in expanding its national footprint.
5minuteInsure.com is a new and proprietary tool developed by Reliance Global to be utilized in conjunction with current and planned
agency acquisitions, as well as affiliated agencies. The goal of the new offering is to tap into the growing number of online
shoppers in order to drive traffic to the Company’s insurance agents and affiliates. 5minuteInsure.com utilizes artificial
intelligence and data mining, to provide competitive insurance quotes within 5 minutes, with minimal data input. Live “hot
leads” are then immediately transferred to the geographically closest agent and/or affiliates.
Agencies
and Brokers Outlook
Insurance
brokers and agencies play a critical role within the insurance market by distributing policies and consulting insurance underwriters
and consumers. The industry is a vital component to the larger insurance sector as industry operators act as intermediaries between
insurance providers and downstream consumers. Operators generate income via commissions earned on policies sold. Given the transaction-based
nature of the industry, revenue primarily depends on three factors: (1) policy (premium) pricing; (2) demand for insurance; and
(3) the popularity of using agents and brokers in the distribution process.
The
U.S. insurance broker and agency industry has grown steadily over the five years to 2020 due to macroeconomic growth, beneficial
legislation that has been passed, and positive trends in the insurance sector, achieving $161 billion in revenues in 2019. As
disposable income levels rose during that period, consumers were better suited to pay for more expensive insurance policies. Furthermore,
some legislation, such as the Private Patient Affordable Care Act (PPACA), mandates that consumers have health insurance, which
industry operators help consumers purchase. This helped provide constant demand for insurance products and services provided by
industry operators during the period. For the coming five years, through 2023, the industry is anticipated to grow moderately
as the macroeconomic landscape continues to improve (Source: IBISWorld’s Insurance Brokers & Agencies Industry in
the US, December 2018).
Insurance
carriers should not continue to depend on the positive (though uncertain) fundamental economic strength of years past to maintain
positive balance sheet momentum. In order to succeed, carriers must address foundational challenges, which include remaining relevant
despite systemic economic changes combined with expanding consumer preferences. Some of the issues that insurers must address
will fall within the areas of mergers and acquisitions (M&A), technology, product development, talent, regulation, as well
as tax reform, as described below.
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M&A.
The convergence of market pressures to attain sustainable growth, a persistent wealth of capital and capacity, and a possible
upturn in interest rates may demonstrate that insurers should be prepared for an uptick in M&A activity in 2019. As it
stands now, fairly rich valuations could dampen activity, however, M&A could offer opportunities to scale and obtain new
capabilities, primarily as it relates to technology.
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Technology.
Advancements in mobile and digital technology are forcing insurers to innovate, which is expected to continue and intensify,
where every insurance agency will need to focus on what makes their customer experiences and products unique. They will also
need to integrate with technology enablers to bring to their customers a value proposition via a connected ecosystem. Furthermore,
to better compete within the industry, those within the distribution system would benefit tremendously by improving the ability
to share critical data and analytics between systems. Insurers are seeking to employ the cloud to power advanced analytics,
improve data gathering, and grow cognitive applications. In order to keep pace with the industry and prepare for a cloud-enabled
future, insurance carriers should prioritize migrating their existing systems to the cloud and launch new applications off-site.
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Product
Development. Economic and technological changes create the need for new types of coverage, revamped policies, and alternative
distribution platforms; adaptation of this, however, has been slow within the insurance industry. Siloed business lines, legacy
processes, and regulatory considerations hinder the rapid and agile product development needed within this highly competitive
landscape. Accordingly, insurers would benefit by focusing on creating hybrid policies that cover both commercial and personal
risks. They could also supply on-demand coverage options, which provide greater control to customers for their policy terms
and time frames. Furthermore, novel and unique micro-experiences could become the foundation for digital expansion as agencies
are distinguished by the niche markets they sell to and can better service versus their peers. Digital content campaigns and
user interfaces targeting specialized prospects and customer segments are expected to continue to expand. These micro-experiences
could allow agencies to have access to a market that can quote, bind, and service insurance online, and where they are focused
on commercial lines and specialty insurance for niche markets. In such a scenario, they may be able to offer new opportunities
for agencies to expand quickly via digital building blocks that can be easily integrated into existing business and/or workflows.
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Talent.
Overlapping with expanding technologies and product development, insurance companies are increasing their staff, specifically
in the areas of analytics and technology (where talent is increasingly scarce). Additionally, the expanded use of robotic
process automation and artificial intelligence (AI), could reinvent or eliminate a broad spectrum of insurance job functions,
giving way to personnel’s need to take on more complicated responsibilities. This is likely to require retraining to
learn the needed skills to function within a digital-first organization. Specifically, insurers may need to modify job descriptions
as well as retrain their current staff to develop a group of professionals whose work is improved by emerging technologies
and where they can focus on higher-value, strategic roles. Simultaneously, insurance carries could transition operations to
accommodate a more flexible and virtual workforce. Insurance carriers should further focus on scaling up efforts to retain
and employ methods that are most productive for its long-term employees as a way to keep institutional knowledge and industry
experience in-house (perhaps beyond anticipated retirement).
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Regulation.
Regulation will continue to play a significant role in the operations and development of the insurance industry, with three
high-priority compliance issues (each with global and domestic implications) facing insurers:
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Market
conduct. “Best interest” standards are being considered at both the federal and state levels to protect consumers
who purchase annuities and life insurance. Due to this, insurers should seek to review and adjust their compliance structures
to accommodate what could turn into a patchwork oversight system. One possibility could be to integrate new technologies that
would allow for continual oversight and management of the sales process.
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Cyber
risk. With New York State’s new cybersecurity regulations, insurers are facing compliance deadlines, which have
formed the basis of a nationwide model law developed by the National Association of Insurance Commissioners. Going forward,
the spotlight is likely to be on how insurers plan to manage third-party risks, given so much importance has been placed on
migrating policyholder data and software systems to external hosts.
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Privacy
oversight. Privacy is both a data-security and reputational risk issue given the European Union’s General Data Protection
Regulation (GDPR) having been implemented along with similar standards set to be imposed in California. Equally as important
is how data can be used moving forward, specifically when it comes to disclosure and consumer signoff. In addition to legal
and IT experts, insurers should include multiple stakeholders in its compliance efforts. Over the longer term, carriers may
reexamine how the vast amounts of alternative data at their disposal may be leveraged for the mutual benefit not only for
the carriers but their policyholders, while simultaneously remaining compliant with domestic and global regulations.
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Taxes.
The global trend has been to lower corporate income tax rates, with a recent report from the Organization for Economic Co-operation
and Development citing significant tax reform packages enacted in Argentina, France, Latvia, and the U.S., with other countries
introducing more disjointed reforms. U.S. insurers continue to focus on adapting to the changes introduced in the Tax Cuts
and Jobs Act of 2017. The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have issued final and proposed
guidance on certain important, newly enacted provisions, such as the application of the base erosion and anti-abuse tax to
reinsurance, as well as the taxation of foreign operations owned by U.S. taxpayers. Additional guidance could be imminent
on many other important provisions, including how the new loss carryover rules will fit with the old rules in the context
of consolidated returns.
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While
the industry may need to address internal and external pressures, the impact from these issues will continue to fall within the
individual insurer. Thus, since insurers control their own destinies, potentially the most significant factor is likely to be
how committed and prepared insurers are to quickly adjust to changes in the economy, society, and technology, and respond accordingly.
Online
Insurance and the NSure Opportunity
In
February 2020, we purchased a minority stake in Nsure.com, which is a licensed online insurance agency that utilizes state of
the art digital technology, and seek to use this platform to develop business in the online insurance business which we believe
represents an underutilized opportunity.
We
estimate that a mere 10% of the multibillion dollar personal home and auto insurance market is now online. Moreover, the current
insurance purchasing processes is time consuming and lacks transparency. Most of the current online sites are simply lead generators,
which result in false insurance quotes, constant spam and aggressive sales pitches. We believe consumers are looking for an online
platform that will replicate the services they could obtain from a traditional brick and mortar insurance agency, thus driving
business toward the online site as we all migrate to online in this post COVID world.
Another
key benefit to online insurance is the ability to combine seamlessly with electronic capabilities in processing, such as Nsure.com’s
proprietary backend processing technology to support our traditional agency business. By implementing artificial intelligence,
robotic process automation and automatic shopping for best rates at renewals, we believe we can dramatically reduce costs, and
allow our agents to focus on selling new policies, creating a digitally empowered and scalable insurance agency model.
Specific
benefits of the Nsure.com platform include:
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First,
a simplified application process
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Second,
Nsure.com has real-time connections with over 30 top-rated insurers, which allows consumers to transparently compare real,
not estimated, quotes from multiple insurers side-by-side.
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Third,
Nsure.com provides instant accurate coverage recommendations for home and auto insurance, providing consumers confidence they
are not under or over-insured.
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Fourth,
Nsure.com provides in-house insurance buying and policy binding capabilities, meaning no redirection to other websites and
the ability to finalize purchases on Nsure.com in as little as five minutes.
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Fifth,
Nsure.com’s free and secure account enables 24/7 access to quotes, policies and other documents.
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And
finally, when it’s time for a policy renewal, Nsure.com automatically informs customers about the best offers in the
market before their policy expires.
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Thus,
we believe in the specific benefits of the online insurance business, and we believe that Nsure.com provides the platform to transform
this segment of the industry.
Insurance
M&A Overview
The
insurance distribution industry continues to prove its resiliency as Q4 2020 deal activity reached unimaginable highs. This is
especially true given that a significant portion of the year was sluggish due to the pandemic. Total transactions in the Q4 were
290, nearly double that of the same period in 2019, and total deals for 2020 were 774, nearly 20% higher than what was recorded
in 2019. M&A activity reached these heights due to a combination of pent-up demand as we learned to live and work in a pandemic
world and to avoid an expected increase in capital gains tax by selling before year end. Activity in 2021 will likely continue
as, once again, the industry is seen to be a safe investment bet, the supply of agencies is still high, and as sellers will continue
to push to close as a hedge against a possible increase in capital gains tax. (Source: Optis Partners Agent & Broker 2020
Year-end Merger & Acquisition Report).
(Source:
Optis Partners 2020 Year End M&A Report)
The
confluence of unrelenting market pressure to achieve sustainable growth, a lingering abundance of capital and capacity, improving
global economies, and an upturn in interest rates may indicate that insurers should be prepared for continued growth of M&A
activity beyond 2020. Specifically, we believe that the following factors are among the expected driving forces of an active insurance
M&A market in the coming years:
Sustained
U.S. economic growth, rising interest rates, and higher investment income are among the positive factors bolstering insurance
companies’ results in 2019 and positioning them for bottom-line growth in the new year, making them attractive takeover
targets.
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Continued
soft debt rates, resulting in an increase in the available capital, which could drive insurance agencies’ acquisitions
to increase market share, diversification, and growth in niche areas.
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The
volatility of the stock market, which causes falling prices and sell-offs, which could present opportunities for companies
with strong balance sheets and private equity groups to acquire distressed assets at favorable valuations.
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Easement
of regulatory barriers to M&A, which is good news for well-capitalized insurance companies and other entities looking
to investments or acquisitions as ways to boost inorganic growth (Source: Deloitte’s 2019 Insurance M&A Outlook).
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These
driving forces have facilitated the acquisition of insurance agencies, especially small- and mid-market companies looking at consolidation
to grow and build out their portfolio capabilities, boost their bottom line, broaden their product portfolio or geographic reach,
and strengthen future competitiveness.
The
COVID-19 crisis may have an impact on the insurance industry for quite some time. Some factors to consider are:
Strain
on investment portfolios – Insurance companies rely on their investment portfolios to generate returns. Markets have
been in turmoil and, as a result, insurers’ investment portfolios may be significantly impacted. Additionally, interest
income revenue streams may quickly dry up as interest rates continue to drop.
Delayed
payments – Regulators are urging insurance companies to accept late premium payments with no penalty, putting a strain
on cash flow. Despite liquidity being impacted, insurance companies are still being expected to pay out claims.
Decreased
premium volume – Full or partial closing of businesses coupled with social distancing has led to decreased demand for
insurance. Lower payroll levels lead to lower payroll-based premiums, such as those in workers’ compensation, and an uptick
in layoffs results in fewer people buying houses, cars, and other insurable purchases. A decrease in premium volume means a decrease
in income for insurers.
Coverage
disputes – Pandemics are generally excluded from insurance policy coverage and therefore policy premium has not included
the necessary charges to provide such coverage. A number of states are attempting to legislate to force insurance companies to
provide insurance coverage for business interruption and other losses for claims resulting from the COVID-19 pandemic. There is
uncertainty regarding which party will ultimately incur the additional cost for these adjustments.
We
cannot presently estimate the full financial impact of the unprecedented COVID-19 pandemic on our business or predict the related
federal, state and local civil authority actions, which are highly dependent on the severity and duration of the pandemic; however,
we see opportunities which may arise as to changes in the markets. Due to the uncertainties associated with the COVID-19 pandemic
and the indeterminate length of time it will affect, we have taken proactive measures to secure our liquidity position to be able
to meet our obligations for the foreseeable future.
Item
1a. RISK FACTORS
The
following important factors, among others, could cause our actual operating results to differ materially from those indicated
or suggested by forward-looking statements made in this Form 10-K or presented elsewhere by management from time to time. Investors
should carefully consider the risks described below before making an investment decision. The risks described below are not the
only ones we face. Additional risks not presently known to us or that we currently believe are not material may also significantly
impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could
decline due to any of these risks, and investors may lose all or part of their investment.
Risks
Related to Our Business
We
may experience significant fluctuations in our quarterly and annual results.
Fluctuations
in our quarterly and annual financial results have resulted and will continue to result from numerous factors, including:
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The
Company having a limited operating history
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The
Company has limited resources and there is significant competition for business combination opportunities. Therefore, the
Company may not be able to acquire other assets or businesses
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The
Company may be unable to obtain additional financing, if required, to complete an acquisition, or to Company the operations
and growth of existing and target business, which could compel the Company to restructure a potential business transaction
or abandon a particular business combination
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Our
inability to retain or hire qualified employees, as well as the loss of any of our executive officers, could negatively impact
our ability to retain existing business and generate new business
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Our
growth strategy depends, in part, on the acquisition of other insurance intermediaries, which may not be available on acceptable
terms in the future or which, if consummated, may not be advantageous to us
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A
cybersecurity attack, or any other interruption in information technology and/or data security and/or outsourcing relationships,
could adversely affect our business, financial condition and reputation
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Rapid
technological change may require additional resources and time to adequately respond to dynamics, which may adversely affect
our business and operating results
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Changes
in data privacy and protection laws and regulations, or any failure to comply with such laws and regulations, could adversely
affect our business and financial results
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Because
our insurance business is highly concentrated in Michigan, New Jersey, Montana and Ohio, adverse economic conditions, natural
disasters, or regulatory changes in these regions could adversely affect our financial condition
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If
we fail to comply with the covenants contained in certain of our agreements, our liquidity, results of operations and financial
condition may be adversely affected
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Certain
of our agreements contain various covenants that limit the discretion of our management in operating our business and could
prevent us from engaging in certain potentially beneficial activities
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There
are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements
in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP). Any changes in estimates, judgments
and assumptions could have a material adverse effect on our financial position and results of operations and therefore our
business
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Improper
disclosure of confidential information could negatively impact our business
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Our
business, results of operations, financial condition and liquidity may be materially adversely affected by certain actual
and potential claims, regulatory actions and proceedings
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These
factors, some of which are not within our control, may cause the price of our common stock to fluctuate substantially. If our
quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could
drop suddenly and significantly. We believe quarterly comparisons of our financial results are not always meaningful and should
not be relied upon as an indication of our future performance.
The
Company has a limited operating history.
Since
the change of control which took place in September of 2018, the Company’s operations have been limited to acquiring the
insurance agencies as described in the “Insurance Operations” and “Overview”. Investors will have little
basis upon which to evaluate the Company’s ability to achieve the Company’s business objectives which are to acquire,
own and operate insurance agencies.
The
Company has limited resources and there is significant competition for business combination opportunities. Therefore, the Company
may not be able to acquire other assets or businesses.
The
Company expects to encounter intense competition from other entities having a business objective similar to the Company’s,
which are also competing for acquisitions. Many of these entities are well established and have extensive experience in identifying
and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human
and other resources than the Company does, and the Company’s financial resources are limited when contrasted with those
of many of these competitors. While the Company believes that there are numerous potential target businesses that it could acquire,
the Company’s ability to compete in acquiring certain sizable target businesses might be limited if the Company’s
limited financial resources are less than that of its competitors. This inherent competitive limitation gives others an advantage
in pursuing the acquisition of certain target businesses.
The
Company may be unable to obtain additional financing, if required, to complete an acquisition, or to Company the operations and
growth of existing and target business, which could compel the Company to restructure a potential business transaction or abandon
a particular business combination.
To
date, much of our capital for acquiring insurance agencies and operating the ones we have acquired has come from funds provided
by Reliance Global Holdings our affiliate, and from loans from unaffiliated lenders. We may be required to seek additional financing.
We cannot assure you that such financing would be available on acceptable terms, if at all. If additional financing proves to
be unavailable, we would be compelled to restructure or existing business, or abandon a proposed acquisition or acquisitions.
In addition, if we consummate additional acquisitions, we may require additional financing to Company the operations or growth
of that business. The failure to secure additional financing could have a material adverse effect on the continued development
or growth of our business.
Our
inability to retain or hire qualified employees, as well as the loss of any of our executive officers, could negatively impact
our ability to retain existing business and generate new business.
Our
success depends on our ability to attract and retain skilled and experienced personnel. There is significant competition from
within the insurance industry and from businesses outside the industries for exceptional employees, especially in key positions.
If we are not able to successfully attract, retain and motivate our employees, our business, financial results and reputation
could be materially and adversely affected.
Losing
employees who manage or support substantial customer relationships or possess substantial experience or expertise could adversely
affect our ability to secure and complete customer engagements, which would adversely affect our results of operations. Also,
if any of our key personnel were to join an existing competitor or form a competing company, some of our customers could choose
to use the services of that competitor instead of our services. While our key personnel are generally prohibited by contract from
soliciting our employees and customers for a two-year period following separation from employment with us, they are not prohibited
from competing with us.
In
addition, we could be adversely affected if we fail to adequately plan for the succession of our senior leaders and key executives.
We cannot guarantee that the services of these executives will continue to be available to us. The loss of our senior leaders
or other key personnel, or our inability to continue to identify, recruit and retain such personnel, or to do so at reasonable
compensation levels, could materially and adversely affect our business, results of operations, cash flows and financial condition.
Our
growth strategy depends, in part, on the acquisition of other insurance intermediaries, which may not be available on acceptable
terms in the future or which, if consummated, may not be advantageous to us.
Our
growth strategy partially includes the acquisition of other insurance intermediaries. Our ability to successfully identify suitable
acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, and expand into new markets
requires us to implement and continuously improve our operations and our financial and management information systems. Integrated,
acquired businesses may not achieve levels of revenues or profitability comparable to our existing operations, or otherwise perform
as expected. In addition, we compete for acquisition and expansion opportunities with firms and banks that may have substantially
greater resources than we do. Acquisitions also involve a number of special risks, such as diversion of management’s attention;
difficulties in the integration of acquired operations and retention of personnel; increase in expenses and working capital requirements,
which could reduce our return on invested capital; entry into unfamiliar markets or lines of business; unanticipated problems
or legal liabilities; estimation of the acquisition earn-out payables; and tax and accounting issues, some or all of which could
have a material adverse effect on our results of operations, financial condition and cash flows. Post-acquisition deterioration
of operating performance could also result in lower or negative earnings contribution and/or goodwill impairment charges.
A
cybersecurity attack, or any other interruption in information technology and/or data security and/or outsourcing relationships,
could adversely affect our business, financial condition and reputation.
We
rely on information technology and third party vendors to provide effective and efficient service to our customers, process claims,
and timely and accurately report information to carriers and which often involves secure processing of confidential sensitive,
proprietary and other types of information. Cybersecurity breaches of any of the systems we rely on may result from circumvention
of security systems, denial-of-service attacks or other cyber-attacks, hacking, “phishing” attacks, computer viruses,
ransomware, malware, employee or insider error, malfeasance, social engineering, physical breaches or other actions, any of which
could expose us to data loss, monetary and reputational damages and significant increases in compliance costs. An interruption
of our access to, or an inability to access, our information technology, telecommunications or other systems could significantly
impair our ability to perform such functions on a timely basis. If sustained or repeated, such a business interruption, system
failure or service denial could result in a deterioration of our ability to write and process new and renewal business, provide
customer service, pay claims in a timely manner or perform other necessary business functions. We have from time to time experienced
cybersecurity breaches, such as computer viruses, unauthorized parties gaining access to our information technology systems and
similar incidents, which to date have not had a material impact on our business.
Additionally,
we are an acquisitive organization and the process of integrating the information systems of the businesses we acquire is complex
and exposes us to additional risk as we might not adequately identify weaknesses in the targets’ information systems, which
could expose us to unexpected liabilities or make our own systems more vulnerable to attack. In the future, any material breaches
of cybersecurity, or media reports of the same, even if untrue, could cause us to experience reputational harm, loss of clients
and revenue, loss of proprietary data, regulatory actions and scrutiny, sanctions or other statutory penalties, litigation, liability
for failure to safeguard clients’ information or financial losses. Such losses may not be insured against or not fully covered
through insurance we maintain.
Rapid
technological change may require additional resources and time to adequately respond to dynamics, which may adversely affect our
business and operating results.
Frequent
technological changes, new products and services and evolving industry standards are influencing the insurance businesses. The
Internet, for example, is increasingly used to securely transmit benefits, property and personal information, and related information
to customers and to facilitate business-to-business information exchange and transactions.
We
are continuously taking steps to upgrade and expand our information systems capabilities. Maintaining, protecting and enhancing
these capabilities to keep pace with evolving industry and regulatory standards, and changing customer preferences, requires an
ongoing commitment of significant resources. If the information we rely upon to run our businesses was found to be inaccurate
or unreliable or if we fail to effectively maintain our information systems and data integrity, we could experience operational
disruptions, regulatory or other legal problems, increases in operating expenses, loss of existing customers, difficulty in attracting
new customers, or suffer other adverse consequences.
Changes
in data privacy and protection laws and regulations, or any failure to comply with such laws and regulations, could adversely
affect our business and financial results.
We
are subject to a variety of continuously evolving and developing laws and regulations globally regarding privacy, data protection,
and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal
data. Significant uncertainty exists as privacy and data protection laws may be interpreted and applied differently from country
to country and may create inconsistent or conflicting requirements. These laws apply to transfers of information among our affiliates,
as well as to transactions we enter into with third party vendors. These and similar initiatives around the world could increase
the cost of developing, implementing or securing our servers and require us to allocate more resources to improved technologies,
adding to our information technology and compliance costs. In addition, enforcement actions and investigations by regulatory authorities
related to data security incidents and privacy violations continue to increase. The enactment of more restrictive laws, rules,
regulations or future enforcement actions or investigations could impact us through increased costs or restrictions on our business,
and noncompliance could result in regulatory penalties and significant legal liability.
Because
our insurance business is highly concentrated in Michigan, New Jersey, Montana and Ohio, adverse economic conditions, natural
disasters, or regulatory changes in these regions could adversely affect our financial condition.
A
significant portion of our insurance business is concentrated in Michigan, New Jersey, Montana and Ohio. For the year ended December
31, 2020, and 2019 we derived $7,279,530 and $4,450,785 respectively or 100%, of our annual revenue, respectively, from our operations
located in these regions (FYE 2020 - Michigan – 45.11%, New Jersey – 3.81%, Montana – 21.48% and Ohio –
28% and FYE 2019 - Michigan – 42.14%, New Jersey – 8.36%, Montana – 23.29% and Ohio – 26.22%). The insurance
business is primarily a state-regulated industry, and therefore, state legislatures may enact laws that adversely affect the insurance
industry. Because our business is concentrated in these four states, we face greater exposure to unfavorable changes in regulatory
conditions in those states than insurance intermediaries whose operations are more diversified through a greater number of states.
In addition, the occurrence of adverse economic conditions, natural or other disasters, or other circumstances specific to or
otherwise significantly impacting these states could adversely affect our financial condition, results of operations and cash
flows. We are susceptible to losses and interruptions caused by hurricanes or other weather conditions, and other possible events
such as terrorist acts and other natural or man-made disasters. Our insurance coverage with respect to natural disasters is limited
and is subject to deductibles and coverage limits. Such coverage may not be adequate or may not continue to be available at commercially
reasonable rates and terms.
If
we fail to comply with the covenants contained in certain of our agreements, our liquidity, results of operations and financial
condition may be adversely affected.
The
Oak Street credit agreements, in the aggregate principal amount of $9,000,746 and $9,328,151, as of December 31, 2020 and 2019,
that govern our debt contain various covenants and other limitations with which we must comply including a debt to EBITDA ratio
covenant and a covenant that at all times that the loans are outstanding: (i) Ezra Beyman, our chief executive officer, Debra
Beyman, Mr. Beyman’s wife, or Yaakov Beyman, son of Mr. and Ms. Beyman, or someone else approved by Oak Street, as applicable,
will be the manager of the current subsidiaries of the Company, (ii) Mr. Ezra Beyman will be President and Chairperson of the
Board of the Company, and (iii) Reliance Holdings will continue to hold at least 51% of the Company’s equity. The credit
agreements also contain provisions which cause a “cross default” if we default our obligations under other material
contracts to which we are parties. The credit agreements contains customary and usual events of default, including, subject to
certain specified cure periods and notice requirements, the Company’s or one of its subsidiaries’ failure to comply
with the covenants therein. Upon an event of default, the lender has customary and usual remedies to cure these defaults including,
but not limited to, the ability to accelerate the indebtedness.
The
Senior Funded Debt to EBIDTA ratio stated in the covenant “shall be no greater than 4.0 to 1.0”. As of June 30, 2020,
the ratio was 4.97 with the Company thereby, defaulting on the covenant. As of June 30, 2020, the Company obtained a covenant
waiver in order to continue to be in compliance with the financial covenants and other limitations contained in each of these
agreements. However, failure to comply with material provisions of our covenants in these agreements or other credit or similar
agreements to which we may become a party could result in a default, rendering them unavailable to us and causing a material adverse
effect on our liquidity, results of operations and financial condition. In the event of certain defaults, the lenders thereunder
would not be required to lend any additional amounts to us and could elect to declare all borrowings outstanding, together with
accrued and unpaid interest and fees, to be due and payable. If the indebtedness under these agreements or our other indebtedness,
were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.
Due
to the covenant waiver on June 30, 2020, Oak Street and the Company signed an amended agreement on August 11, 2020, to update
its covenant so that, the Company should remain in compliance. The amendment states that for the September 30, 2020 and December
31, 2020 covenant test, the ratio of Senior Funded Debt to EBIDTA shall be no greater than 5.0 to 1.0. As of December 31, 2020
the Company reported a ratio of 4.2 for Senior Funded Debt to EBIDTA, and remain in compliance. Beginning at March 31, 2021 and
thereafter the Senior Funded Debt to EBIDTA ratio shall be reduced to no greater than 4.0 to 1.0.
As
of the date of this filing, we are in compliance and do not believe we are at further risk of noncompliance.
Certain
of our agreements contain various covenants that limit the discretion of our management in operating our business and could prevent
us from engaging in certain potentially beneficial activities.
The
restrictive covenants in our debt agreements may impact how we operate our business and prevent us from engaging in certain potentially
beneficial activities. In particular, among other covenants, our debt agreements require us to maintain a minimum ratio of Consolidated
EBITDA (earnings before interest, taxes, depreciation and amortization), adjusted for certain transaction-related items (“Consolidated
EBITDA”), to consolidated interest expense and a maximum ratio of consolidated net indebtedness to Consolidated EBITDA.
Our compliance with these covenants could limit management’s discretion in operating our business and could prevent us from
engaging in certain potentially beneficial activities.
There
are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in
accordance with U.S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our financial
position and results of operations and therefore our business.
The
preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect
reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses, and income. Estimates,
judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes
to the amounts of assets, liabilities, revenues, expenses and income, and could have a material adverse effect on our financial
position, results of operations and cash flows.
Improper
disclosure of confidential information could negatively impact our business.
We
are responsible for maintaining the security and privacy of our customers’ confidential and proprietary information and
the personal data of their employees. We have put in place policies, procedures and technological safeguards designed to protect
the security and privacy of this information; however, we cannot guarantee that this information will not be improperly disclosed
or accessed. Disclosure of this information could harm our reputation and subject us to liability under our contracts and laws
that protect personal data, resulting in increased costs or loss of revenues.
Our
business, results of operations, financial condition and liquidity may be materially adversely affected by certain actual and
potential claims, regulatory actions and proceedings.
We
are subject to various actual and potential claims, regulatory actions and other proceedings including those relating to alleged
errors and omissions in connection with the placement or servicing of insurance and/or the provision of services in the ordinary
course of business, of which we cannot, and likely will not be able to, predict the outcome with certainty. Because we often assist
customers with matters involving substantial amounts of money, including the placement of insurance and the handling of related
claims that customers may assert, errors and omissions claims against us may arise alleging potential liability for all or part
of the amounts in question. Also, the failure of an insurer with whom we place business could result in errors and omissions claims
against us by our customers, which could adversely affect our results of operations and financial condition. Claimants may seek
large damage awards, and these claims may involve potentially significant legal costs, including punitive damages. Such claims,
lawsuits and other proceedings could, for example, include claims for damages based upon allegations that our employees or sub-agents
failed to procure coverage, report claims on behalf of customers, provide insurance companies with complete and accurate information
relating to the risks being insured or appropriately apply funds that we hold for our customers on a fiduciary basis. In addition,
given the long-tail nature of professional liability claims, errors and omissions matters can relate to matters dating back many
years. Where appropriate, we have established provisions against these potential matters that we believe to be adequate in the
light of current information and legal advice, and we adjust such provisions from time to time according to developments.
While
most of the errors and omissions claims made against us (subject to our self-insured deductibles) have been covered by our professional
indemnity insurance, our business, results of operations, financial condition and liquidity may be adversely affected if, in the
future, our insurance coverage proves to be inadequate or unavailable, or if there is an increase in liabilities for which we
self-insure. Our ability to obtain professional indemnity insurance in the amounts and with the deductibles we desire in the future
may be adversely impacted by general developments in the market for such insurance or our own claims experience. In addition,
regardless of monetary costs, these matters could have a material adverse effect on our reputation and cause harm to our carrier,
customer or employee relationships, or divert personnel and management resources.
Risks
Related to the Insurance Industry
We
may experience increased competition from insurance companies, technology companies and the financial services industry, as well
as the shift away from traditional insurance markets.
The
insurance intermediary business is highly competitive and we actively compete with numerous firms for customers, properties and
insurance companies, many of which have relationships with insurance companies, or have a significant presence in niche insurance
markets that may give them an advantage over us. Other competitive concerns may include the quality of our products and services,
our pricing and the ability of some of our customers to self-insure and the entrance of technology companies into the insurance
intermediary business. A number of insurance companies are engaged in the direct sale of insurance, primarily to individuals,
and do not pay commissions to agents and brokers. In addition, and to the extent that banks, securities firms, private equity
companies, and insurance companies affiliate, the financial services industry may experience further consolidation, and we therefore
may experience increased competition from insurance companies and the financial services industry, as a growing number of larger
financial institutions increasingly, and aggressively, offer a wider variety of financial services, including insurance intermediary
services.
Worsening
of Current U.S. economic conditions as a result of the COVID-19 pandemic may adversely affect our business.
If
economic conditions were to worsen, a number of negative effects on our business could result, including declines in values of
insurable exposure units, declines in insurance premium rates, the financial insolvency of insurance companies, the reduced ability
of customers to pay, declines in the stock of residential housing or declines in property values. Also, if general economic conditions
are poor, some of our customers may cease operations completely or be acquired by other companies, which could have an adverse
effect on our results of operations and financial condition. If these customers are affected by poor economic conditions, but
yet remain in existence, they may face liquidity problems or other financial difficulties that could result in delays or defaults
in payments owed to us, which could have a significant adverse impact on our consolidated financial condition and results of operations.
Any of these effects could decrease our net revenues and profitability.
Our
business, and therefore our results of operations and financial condition, may be adversely affected by conditions that result
in reduced insurer capacity.
Our
results of operations depend on the continued capacity of insurance carriers to underwrite risk and provide coverage, which depends
in turn on those insurance companies’ ability to procure reinsurance. Capacity could also be reduced by insurance companies
failing or withdrawing from writing certain coverages that we offer to our customers. We have no control over these matters. To
the extent that reinsurance becomes less widely available or significantly more expensive, we may not be able to procure the amount
or types of coverage that our customers desire and the coverage we are able to procure for our customers may be more expensive
or limited.
Quarterly
and annual variations in our commissions that result from the timing of policy renewals and the net effect of new and lost business
production may have unexpected effects on our results of operations.
Our
commission income (including profit-sharing contingent commissions and override commissions) can vary quarterly or annually due
to the timing of policy renewals and the net effect of new and lost business production. We do not control the factors that cause
these variations. Specifically, customers’ demand for insurance products can influence the timing of renewals, new business
and lost business (which includes policies that are not renewed), and cancellations. In addition, we rely on insurance companies
for the payment of certain commissions. Because these payments are processed internally by these insurance companies, we may not
receive a payment that is otherwise expected from a particular insurance company in a particular quarter or year until after the
end of that period, which can adversely affect our ability to forecast these revenues and therefore budget for significant future
expenditures. Quarterly and annual fluctuations in revenues based upon increases and decreases associated with the timing of new
business, policy renewals and payments from insurance companies may adversely affect our financial condition, results of operations
and cash flows.
Profit-sharing
contingent commissions are special revenue-sharing commissions paid by insurance companies based upon the profitability, volume
and/or growth of the business placed with such companies generally during the prior year. Over the last three years these commissions
generally have been in the range of 3.0% to 3.5% of our previous year’s total core commissions and fees. Due to, among other
things, potentially poor macroeconomic conditions, the inherent uncertainty of loss in our industry and changes in underwriting
criteria due in part to the high loss ratios experienced by insurance companies, we cannot predict the payment of these profit-sharing
contingent commissions. Further, we have no control over the ability of insurance companies to estimate loss reserves, which affects
our ability to make profit-sharing calculations. Override commissions are paid by insurance companies based upon the volume of
business that we place with them and are generally paid over the course of the year. Because profit-sharing contingent commissions
and override commissions materially affect our revenues, any decrease in their payment to us could adversely affect our results
of operations, profitability, and our financial condition.
Our
business practices and compensation arrangements are subject to uncertainty due to potential changes in regulations.
The
business practices and compensation arrangements of the insurance intermediary industry, including our practices and arrangements,
are subject to uncertainty due to investigations by various governmental authorities. Certain of our offices are parties to profit-sharing
contingent commission agreements with certain insurance companies, including agreements providing for potential payment of revenue-sharing
commissions by insurance companies based primarily on the overall profitability of the aggregate business written with those insurance
companies and/or additional factors such as retention ratios and the overall volume of business that an office or offices place
with those insurance companies. Additionally, to a lesser extent, some of our offices are parties to override commission agreements
with certain insurance companies, which provide for commission rates in excess of standard commission rates to be applied to specific
lines of business, such as group health business, and which are based primarily on the overall volume of business that such office
or offices placed with those insurance companies. The legislatures of various states may adopt new laws addressing contingent
commission arrangements, including laws prohibiting such arrangements, and addressing disclosure of such arrangements to insureds.
Various state departments of insurance may also adopt new regulations addressing these matters which could adversely affect our
results of operations.
We
may have unforeseen risks as a result of the COVID-19 pandemic
The
spread of the coronavirus (COVID-19) outbreak in the United States has resulted in economic uncertainties which may negatively
impact the Company’s business operations. While the disruption is expected to be temporary, there is uncertainty surrounding
the duration and extent of the impact. The impact of the coronavirus outbreak on the financial statements cannot be reasonably
estimated at this time.
Adverse
events such as health-related concerns about working in our offices, the inability to travel and other matters affecting the general
work environment could harm our business and our business strategy. While we do not anticipate any material impact to our business
operations as a result of the coronavirus, in the event of a major disruption caused by the outbreak of pandemic diseases such
as coronavirus, we may lose the services of our employees or experience system interruptions, which could lead to diminishment
of our business operations. Any of the foregoing could harm our business and delay the implementation of our business strategy
and we cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely
impact our business.
Management
is actively monitoring the global situation on its financial condition, liquidity, operations, industry and workforce.
Risk
of lack of knowledge in distant geographic markets
Although
the Company intends to focus its investments in locations with which we are generally familiar, the Company runs a risk of experiencing
underwriting challenges or issues associated with a lack of familiarity in some markets. Each market has nuances and idiosyncrasies
that affect values, marketability, desirability, and demand for individual assets that may not be easily understood from afar.
While we believe we can effectively mitigate these risks in a myriad of ways, there is no guarantee that investments in any geographic
market will perform as expected.
Potential
liability or other expenditures associated with potential environmental contamination may be costly.
Various
federal, state and local laws subject multifamily residential community owners or operators to liability for management, and the
costs of removal or remediation, of certain potentially hazardous materials that may be present in the land or buildings of a
multifamily residential community. Potentially hazardous materials may include polychlorinated biphenyls, petroleum-based fuels,
lead-based paint or asbestos, among other materials. Such laws often impose liability without regard to fault or whether the owner
or operator knew of, or was responsible for, the presence of such materials. The presence of, or the failure to manage or remediate
properly, these materials may adversely affect occupancy at such apartment communities as well as the ability to sell or finance
such apartment communities. In addition, governmental agencies may bring claims for costs associated with investigation and remediation
actions, damages to natural resources and for potential fines or penalties in connection with such damage or with respect to the
improper management of hazardous materials. Moreover, private plaintiffs may potentially make claims for investigation and remediation
costs they incur or personal injury, disease, disability or other infirmities related to the alleged presence of hazardous materials
at a multifamily residential community. In addition to potential environmental liabilities or costs associated with our current
multifamily residential communities, we may also be responsible for such liabilities or costs associated with communities we acquire
or manage in the future, or multifamily residential communities we no longer own or operate.
Laws
benefiting disabled persons may result in our incurrence of unanticipated expenses.
Under
the Americans with Disabilities Act of 1990 (the “ADA”), all places intended to be used by the public are required
to meet certain federal requirements related to access and use by disabled persons. The Fair Housing Amendments Act of 1988 (the
“FHAA”) requires multifamily residential communities first occupied after March 13, 1991, to comply with design and
construction requirements for disabled access. For those multifamily residential communities receiving federal funds, the Rehabilitation
Act of 1973 also has requirements regarding disabled access. These and other federal, state and local laws may require structural
modifications to our apartment communities or changes in policy practice or affect renovations of the communities. Noncompliance
with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an
order to correct any non-complying feature, which could result in substantial capital expenditures. Although we believe that our
multifamily residential communities are substantially in compliance with present requirements, we may incur unanticipated expenses
to comply with the ADA, the FHAA and the Rehabilitation Act of 1973 in connection with the ongoing operation or redevelopment
of our multifamily residential communities.
We
compete in a highly regulated industry, which may result in increased expenses or restrictions on our operations.
We
conduct business in several states of the United States of America and are subject to comprehensive regulation and supervision
by government agencies in each of those states. The primary purpose of such regulation and supervision is to provide safeguards
for policyholders rather than to protect the interests of our shareholders, and it is difficult to anticipate how changes in such
regulation would be implemented and enforced. As a result, such regulation and supervision could reduce our profitability or growth
by increasing compliance costs, technology compliance, restricting the products or services we may sell, the markets we may enter,
the methods by which we may sell our products and services, or the prices we may charge for our services and the form of compensation
we may accept from our customers, carriers and third parties. The laws of the various state jurisdictions establish supervisory
agencies with broad administrative powers with respect to, among other things, licensing of entities to transact business, licensing
of agents, admittance of assets, regulating premium rates, approving policy forms, regulating unfair trade and claims practices,
determining technology and data protection requirements, establishing reserve requirements and solvency standards, requiring participation
in guarantee funds and shared market mechanisms, and restricting payment of dividends. Also, in response to perceived excessive
cost or inadequacy of available insurance, states have from time to time created state insurance funds and assigned risk pools,
which compete directly, on a subsidized basis, with private insurance providers. We act as agents and brokers for such state insurance
funds and assigned risk pools in Michigan as well as certain other states. These state funds and pools could choose to reduce
the sales or brokerage commissions we receive. Any such reductions, in a state in which we have substantial operations could affect
the profitability of our operations in such state or cause us to change our marketing focus. Further, state insurance regulators
and the National Association of Insurance Commissioners continually re-examine existing laws and regulations, and such re-examination
may result in the enactment of insurance-related laws and regulations, or the issuance of interpretations thereof, that adversely
affect our business. Certain federal financial services modernization legislation could lead to additional federal regulation
of the insurance industry in the coming years, which could result in increased expenses or restrictions on our operations. Other
legislative developments that could adversely affect us include: changes in our business compensation model as a result of regulatory
developments (for example, the Affordable Care Act); and federal and state governments establishing programs to provide health
insurance or, in certain cases, property insurance in catastrophe-prone areas or other alternative market types of coverage, that
compete with, or completely replace, insurance products offered by insurance carriers. Also, as climate change issues become more
prevalent, the U.S. and foreign governments are beginning to respond to these issues. This increasing governmental focus on climate
change may result in new environmental regulations that may negatively affect us and our customers. This could cause us to incur
additional direct costs in complying with any new environmental regulations, as well as increased indirect costs resulting from
our customers incurring additional compliance costs that get passed on to us. These costs may adversely impact our results of
operations and financial condition.
Although
we believe that we are in compliance in all material respects with applicable local, state and federal laws, rules and regulations,
there can be no assurance that more restrictive laws, rules, regulations or interpretations thereof, will not be adopted in the
future that could make compliance more difficult or expensive.
Risks
Related to Investing in our Securities
We
may experience volatility in our stock price that could affect your investment.
The
market price of our common stock may be subject to significant fluctuations in response to various factors, including: quarterly
fluctuations in our operating results; changes in securities analysts’ estimates of our future earnings; changes in securities
analysts’ predictions regarding the short-term and long-term future of our industry; changes to the tax code; and our loss
of significant customers or significant business developments relating to us or our competitors. Our common stock’s market
price also may be affected by our inability to meet stock analysts’ earnings and other expectations. Any failure to meet
such expectations, even if minor, could cause the market price of our common stock to decline. In addition, stock markets have
generally experienced a high level of price and volume volatility, and the market prices of equity securities of many listed companies
have experienced wide price fluctuations not necessarily related to the operating performance of such companies. These broad market
fluctuations may adversely affect our common stock’s market price. In the past, securities class action lawsuits frequently
have been instituted against companies following periods of volatility in the market price of such companies’ securities.
If any such litigation is initiated against us, it could result in substantial costs and a diversion of management’s attention
and resources, which could have a material adverse effect on our business, results of operations, financial condition and cash
flows.
The
Company’s CEO has a controlling common stock equity interest.
At
March 23rd, 2021, our CEO, Ezra Beyman, is the beneficial owner of approximately 51% of the common stock, consisting of 5,500,165
common shares. As of December 31, 2020, the outstanding amount of the loan from Reliance Holdings to us, is in the amount
of approximately $4,666,520. As such he has the ability to control any actions which require shareholder approval. If there is
an annual or special meeting of stockholders for any reason, our CEO has total discretion regarding proposals submitted to a vote
by shareholders as a consequence of his significant equity interest. Accordingly, the Company’s CEO will continue to exert
substantial control until such time, if ever, that he no longer has majority voting control.
Under
our credit agreements with Oak Street, the Company has agreed that at all times that the loans are outstanding: (i) Ezra Beyman,
our chief executive officer, Debra Beyman, Mr. Beyman’s wife, or Yaakov Beyman, son of Mr. and Ms. Beyman, or someone else
approved by Oak Street, as applicable, will be the manager of the current subsidiaries of the Company, (ii) Mr. Ezra Beyman will
be President and Chairperson of the Board of the Company, and (iii) Reliance Holdings, of which Mr. and Ms. Beyman are the sole
owners, will continue to hold at least 51% of the Company’s equity. The loans by Oak Street, immediately mature and become
due and payable if the Company fails to comply with these provisions, subject to certain notice and/or cure periods.
The
operating agreements of Commercial Coverage Solutions, LLC and Fortman Insurance Services, LLC, appoint Ms. Beyman as manager
and provide her with broad powers to bind the applicable subsidiary without further authorization, including, among other things,
to (1) effect an encumbrance or sale of property, (2) make investments, (3) determine amount and timing of distributions under
the operating agreement, (4) settle, defend and prosecute legal actions or law suits, (5) sell, exchange or otherwise dispose
of any or all of the relevant subsidiary’s assets, including the properties in the ordinary course or not in the ordinary
course, (6) borrow funds, (7) enter into any contracts, leases and agreements with third parties or affiliates and (8) appoint
officers. These operating agreements also provide indemnification protection to Ms. Beyman and Ms. Beyman is not prohibited from
using corporate opportunities, whether unrelated to, or directly in competition with, the business of the Company or its subsidiaries.
The
Company intends to negotiate with Oak Street to revise or remove these provisions. However, there can be no assurance that we
will successfully negotiate such revisions or removal on terms beneficial to the Company and its stockholders. These provisions
may make changing management of the Company and its subsidiaries more difficult or costly. Until the governing documents of the
subsidiaries are revised, the Company may experience loss of opportunities and/or be unable to recoup losses due to management
decisions.
Broad
discretion of management
Any
person who invests in the Company’s common stock will do so without an opportunity to evaluate the specific merits or risks
of any prospective acquisition. As a result, investors will be entirely dependent on the broad discretion and judgment of management
in connection with the selection of acquisitions. There can be no assurance that determinations made by the Company’s management
will permit us to achieve the Company’s business objectives.
Future
sales or other dilution of our equity could adversely affect the market price of our common stock.
We
grow our business organically as well as through acquisitions. One method of acquiring companies or otherwise Companying our corporate
activities is through the issuance of additional equity securities. The issuance of any additional shares of common or of preferred
stock or convertible securities could be substantially dilutive to holders of our common stock. Moreover, to the extent that we
issue restricted stock units, performance stock units, options or warrants to purchase shares of our common stock in the future
and those options or warrants are exercised or as the restricted stock units or performance stock units vest, our stockholders
may experience further dilution. Holders of our common stock have no preemptive rights that entitle holders to purchase their
pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased
dilution to our stockholders. The market price of our common stock could decline as a result of sales of shares of our common
stock or the perception that such sales could occur.
The
price of our common stock may fluctuate significantly, and this may make it difficult for you to resell shares of common stock
owned by you at times or at prices you find attractive.
The
trading price of our common stock may fluctuate widely as a result of a number of factors, including the risk factors described
above many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and
trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations have adversely
affected and may continue to adversely affect the market price of our common stock. Among the factors that could affect our stock
price are:
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General
economic and political conditions such as recessions, economic downturns and acts of war or terrorism;
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Quarterly
variations in our operating results;
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Seasonality
of our business cycle;
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Changes
in the market’s expectations about our operating results;
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Our
operating results failing to meet the expectation of securities analysts or investors in a particular period;
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Changes
in financial estimates and recommendations by securities analysts concerning us or the insurance brokerage or financial services
industries in general;
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Operating
and stock price performance of other companies that investors deem comparable to us;
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News
reports relating to trends in our markets, including any expectations regarding an upcoming “hard” or “soft”
market;
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Cyberattacks
and other cybersecurity incidents;
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Changes
in laws and regulations affecting our business;
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Material
announcements by us or our competitors;
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The
impact or perceived impact of developments relating to our investments, including the possible perception by securities analysts
or investors that such investments divert management attention from our core operations;
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Market
volatility;
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A
negative market reaction to announced acquisitions;
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Competitive
pressures in each of our divisions;
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General
conditions in the insurance brokerage and insurance industries;
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Legal
proceedings or regulatory investigations;
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Regulatory
requirements, including international sanctions and the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act 2010 or other
anti-corruption laws; or
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Sales
of substantial amounts of common shares by our directors, executive officers or significant stockholders or the perception that
such sales could occur.
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Stockholder
class action lawsuits may be instituted against us following a period of volatility in our stock price. Any such litigation could
result in substantial cost and a diversion of management’s attention and resources.
We
can provide no assurance that our common stock or the warrants will always meet the Nasdaq Capital Market continued listing standards.
Our
common stock is currently quoted on the Nasdaq. We can provide no assurance that that an active trading market on the Nasdaq Capital
Market for our common stock and the warrants will develop and continue. If our common stock remains quoted on or reverts to an
over-the-counter system rather than being listed on a national securities exchange, you may find it more difficult to dispose
of shares of our common stock or obtain accurate quotations as to the market value of our common stock.
Possible
issuance of additional securities.
Our
Articles of Incorporation authorize the issuance of 2,000,000,000 shares of common stock, par value $0.086 per share. As of December
31, 2020, we had 4,241,028 shares issued and outstanding. We may be expected to issue additional shares in connection with our
pursuit of new business opportunities and new business operations. To the extent that additional shares of common stock are issued,
our shareholders would experience dilution of their respective ownership interests. If we issue shares of common stock in connection
with our intent to pursue new business opportunities, a change in control of the Company may be expected to occur. The issuance
of additional shares of common stock may adversely affect the market price of our common stock, in the event that an active trading
market commences.
Dividends
unlikely.
The
Company does not expect to pay dividends for the foreseeable future. The payment of dividends will be contingent upon the Company’s
future revenues and earnings, if any, capital requirements and overall financial conditions. The payment of any future dividends
will be within the discretion of the Company’s board of directors as then constituted. It is the Company’s expectation
that future Management following a business combination will determine to retain any earnings for use in its business operations
and accordingly, the Company does not anticipate declaring any dividends in the foreseeable future.
Speculative
Nature of Warrants.
The
warrants offered in our February 2021 offering do not confer any rights of common stock ownership on their holders, such as voting
rights or the right to receive dividends, but rather merely represent the right to acquire shares of our common stock at a fixed
price for a limited period of time. Specifically, commencing on the date of issuance, holders of the Series A Warrants may exercise
their right to acquire the common stock and pay an exercise price of $6.60 per share (110% of the public offering price of our
common stock and warrants in this offering), prior to five years from the date of issuance, after which date any unexercised warrants
will expire and have no further value. Moreover, following this offering, the market value of the warrants is uncertain and there
can be no assurance that the market value of the warrants will equal or exceed their public offering price. There can be no assurance
that the market price of the common stock will ever equal or exceed the exercise price of the warrants, and consequently, whether
it will ever be profitable for holders of the warrants to exercise the warrants.
Our
common stock may be subject to the Penny Stock Rules of the SEC and the trading market in our common stock is limited, which makes
transactions in our stock cumbersome and may reduce the value of an investment in our common stock.
The
Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for
the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price
of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule
15g-9 require:
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that
a broker or dealer approve a person’s account for transactions in penny stocks; and
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the
broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity
of the penny stock to be purchased.
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In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
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obtain
financial information and investment experience objectives of the person; and
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make
a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form:
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sets
forth the basis on which the broker or dealer made the suitability determination; and
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that
the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make
it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to
be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny
stocks.
State
blue sky registration; potential limitations on resale of the Company’s common stock
The
holders of the Company’s shares of common stock registered under the Exchange Act and those persons who desire to purchase
them in any trading market that may develop in the future, should be aware that there may be state blue-sky law restrictions upon
the ability of investors to resell the Company’s securities. Accordingly, investors should consider the secondary market
for the Company’s securities to be a limited one.
Industry
and Market Data
Unless
otherwise indicated, information contained in this Form 10-K concerning our industry and the markets in which we operate, including
our general expectations and market opportunity and market size, is based on information from various sources, including independent
industry publications. In presenting this information, we have also made assumptions based on such data and other similar sources,
and on our knowledge of, and our experience to date in the relevant industries and markets. This information involves a number
of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We believe that the information
from these industry publications that is included in this Form 10-K is reliable. The industry in which we operate is subject to
a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.”
These and other factors could cause results to differ materially from those expressed in the estimates made by the independent
parties and by us.
Item
1B. Unresolved Staff Comments
Not
applicable.
Item
2. Properties
Below
is a schedule of the properties we are currently occupy:
Entity Name
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Location
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Own/Lease
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Description
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Approx. Sq. Footage
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Lease Term
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Monthly
Rent in USD
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Employee Benefits Solutions
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Cadillac, Michigan
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Lease
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Office Building
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3,024
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10/2019– 9/2024
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2,400
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Southwestern Montana Insurance Center
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Helena, Montana
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Lease
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Office Building
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1,500
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Monthly
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1,500
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Southwestern Montana Insurance Center
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Belgrade, Montana
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Lease
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Office Building
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6,000
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4/2019– 3/2023
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7,000
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Fortman Insurance Center
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Bluffton, Ohio
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Lease
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Office Building
|
|
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990
|
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9/2020 – 8/2023
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555
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Fortman Insurance Center
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Ottawa, Ohio
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Lease
|
|
Office Building
|
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2,386
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5/2019– 4/2024
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2,400
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Commercial Coverage Solutions/UIS
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Pomona, New York
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Lease
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Office Building
|
|
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1,000
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8/2020– 8/2022
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2,000
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Altruis Benefits Consultants
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Bingham Farms, MI
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Lease
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Office Building
|
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1,767
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5/2018– 5/2021
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4,725
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Item
3. Legal Proceedings
None.
Item
4. Mine Safety Disclosures
Not
applicable.
Notes
to the Consolidated Financial Statements
NOTE
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Reliance
Global Group, Inc. (formerly known as Ethos Media Network, Inc.) (“RELI”, “Reliance”, or the “Company”)
was incorporated in Florida on August 2, 2013. In September 2018, Reliance Global Holdings, LLC (“Reliance Holdings”,
or “Parent Company”), a related party acquired control of the Company (see Note 4). Ethos Media Network, Inc. was
then renamed on October 18, 2018.
On
August 1, 2018, a related party to Reliance Holdings, US Benefits Alliance, LLC (“USBA”) acquired certain properties
and assets of the insurance businesses of Family Health Advisors, Inc. and Tri Star Benefits, LLC (see Note 3) (the “USBA
Transaction”). Also, on August 1, 2018, Employee Benefits, Solutions, LLC, (“EBS”), related party, acquired
certain properties and assets of the insurance business of Employee Benefit Solutions, Inc. (the “EBS Transaction”,
and, together with USBA Transaction, the “Common Control Transactions”).
On
October 24, 2018, a related party of the Company, entered into a purchase agreement to sell assign, and convey membership interest
and all other property rights in EBS and USBA to Reliance.
USBA
is a general agent for various insurance companies and earns override commissions on business placed by other “downstream”
agencies. EBS is a retail broker with its revenues mainly sourced from independent contractor brokers.
On
December 1, 2018, Commercial Coverage Solutions, LLC (“CCS”), a wholly owned subsidiary of Reliance, acquired Commercial
Solutions of Insurance Agency, LLC (see Note 3). CCS is a property and casualty insurance agency that specializes in commercial
trucking and transportation insurance.
On
April 1, 2019, Southwestern Montana Insurance Center, LLC (“SWMT”), a wholly owned subsidiary of Reliance, acquired
Southwestern Montana Financial Center, Inc. (See Note 3). SWMT is an insurance services firm which specializes in providing personal
and commercial lines of insurance.
On
May 1, 2019, Fortman Insurance Services, LLC (“FIS”), a wholly owned subsidiary of Reliance, acquired Fortman Insurance
Agency, LLC (See Note 3). FIS is an insurance services firm which specializes in providing personal and commercial lines of insurance.
On
September 1, 2019, the Company acquired Altruis Benefits Consulting, Inc. (“ABC”). ABC is an insurance agency and
employee benefits provider.
On
August 17, 2020, the Company acquired UIS Agency, Inc. (“UIS”). UIS is an insurance agency and employee benefits provider.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated and combined financial statements included herein have been prepared by the Company in accordance with
accounting principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial
statements include the accounting of Reliance Global Group, Inc., and its wholly owned subsidiaries. All intercompany transactions
and balances have been eliminated in consolidation and combination.
Liquidity
As
of December 31, 2020, the Company’s reported cash balance was approximately $530,000, current assets were approximately
$810,000 while current liabilities were approximately $6,884,000 including loan payable to related party of approximately $4,523,000.
At December 31, 2020, the Company had a working capital deficiency of approximately $6,074,000. The Company had stockholders’
equity of $114,387 for the year ended December 31, 2020, the Company reported a net loss of approximately $3,699,000 and
negative cash flow from operations of $468,465. Management believes that the company’s financial position may cause concern
about the Company’s liquidity. Therefore, management has developed plans that should alleviate any liquidity issues.
Management
believes it has plans that will alleviate any liquidity issues over next twelve months. Management’s cash flow forecast
for 2021 and beyond indicate that its business should generate positive cash flows from their operations. During 2020,
the Company acquired one new entity. As the acquisition took place in August of 2020 the Company did not receive the benefit of
revenue from this entity for a substantial portion of the year. Going forward the Company will recognize revenue from this entity
for the full year which will increase cash flows. In addition, the Company incurred several one-time expenses, related to professional
and legal fees for the acquisition that closed in 2020, which contributed to the Company’s net loss. Reliance Holdings has
also agreed to support the Company if required and management believes that the related party holding the loan to related party
discussed above will forebear on any amounts due should the company be unable to fulfill its payment obligations under the loan
agreement.
Management has raised capital through
offerings of the Company’s equity securities on the NASDAQ listing, see Note 17 – Subsequent events
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosures in the financial statements and accompanying
notes. Management bases it estimates on historical experience and on assumptions believed to be reasonable under the circumstances.
Actual results could differ materially from those estimates.
Cash
Cash
consists of checking accounts. The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents.
Restricted
Cash
Restricted
cash includes cash pledged as collateral to secure obligations and/or all cash whose use is otherwise limited by contractual provisions.
The
reconciliation of cash and restricted cash reported within the applicable balance sheet that sum to the total of the same such
amounts shown in the statement of cash flows is as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Cash
|
|
$
|
45,213
|
|
|
$
|
6,703
|
|
Restricted cash
|
|
|
484,368
|
|
|
|
484,882
|
|
Total cash and restricted cash
|
|
$
|
529,581
|
|
|
$
|
491,585
|
|
Property
and Equipment
Property
and equipment are stated at cost. Depreciation, including for assets acquired under capital leases or finance leases, are recorded
over the shorter of the estimated useful life or the lease term of the applicable assets using the straight-line method beginning
on the date an asset is placed in service. The Company regularly evaluates the estimated remaining useful lives of the Company’s
property and equipment to determine whether events or changes in circumstances warrant a revision to the remaining period of depreciation.
Maintenance and repairs are charged to expense as incurred.
The
estimated useful life of the Companies Property and Equipment is as follows:
|
Useful
Life (in years)
|
Computer
equipment and software
|
|
5
|
Office
equipment and furniture
|
|
7
|
Leasehold
improvements
|
|
Shorter
of the useful life or the lease term
|
Software
|
|
3
|
Fair
Value of Financial Instruments
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The accounting guidance includes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:
Level
1 — Unadjusted quoted prices for identical assets or liabilities in active markets;
Level
2 — Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly
or indirectly for substantially the full term of the asset or liability; and
Level
3 — Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions
market participants would use in pricing the asset or liability, including assumptions about risk.
The
Company’s balance sheet includes certain financial instruments, including cash, notes receivables, accounts payable, notes
payables and short and long-term debt. The carrying amounts of current assets and current liabilities approximate their fair value
because of the relatively short period of time between the origination of these instruments and their expected realization. The
carrying amounts of long-term debt approximate their fair value as the variable interest rates are based on the market index.
Deferred
Financing Costs
The
Company has recorded deferred financing costs as a result of fees incurred by the Company in conjunction with its debt financing
activities. These costs are amortized to interest expense using the straight-line method which approximates the interest rate
method over the term of the related debt. As of December 31, 2020, and 2019, unamortized deferred financing costs were $186,312,
and $213,733, respectively and are netted against the related debt.
Business
Combinations
The
Company accounts for its business combinations using the acquisition method of accounting. Under the acquisition method, the assets
acquired, and the liabilities assumed, and the consideration transferred are recorded at the date of acquisition at their respective
fair values. Definite-lived intangible assets are amortized over the expected life of the asset. Any excess of the purchase price
over the estimated fair values of the net assets acquired is recorded as goodwill.
Goodwill
represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business
combination. Acquisition-related expenses are recognized separately from business combinations and are expensed as incurred. If
the business combination provides for contingent consideration, the Company records the contingent consideration at fair value
at the acquisition date. Changes in fair value of contingent consideration resulting from events after the acquisition date, such
as earn-outs, are recognized as follows: 1) if the contingent consideration is classified as equity, the contingent consideration
is not re-measured and its subsequent settlement is accounted for within equity, or 2) if the contingent consideration is classified
as a liability, the changes in fair value are recognized in earnings.
Identifiable
Intangible Assets, net
Finite-lived
intangible assets such as customer relationships assets, trademarks and tradenames are amortized over their estimated useful lives,
generally on a straight-line basis for periods ranging from 3 to 20 years. Finite-lived intangible assets are reviewed for impairment
or obsolescence whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability
of intangible assets is measured by a comparison of the carrying amount of the asset to the future undiscounted net cash flows
expected to be generated by that asset. If the asset is considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the asset exceeds the estimated fair value. Impairment was recognized in the year
ending December 31, 2019 for the amount of $593,790 See Note 7 in the notes to the financial statements for further details.
Goodwill
and other indefinite-lived intangibles
The
Company records goodwill when the purchase price of a business acquisition exceeds the estimated fair value of net identified
tangible and intangible assets acquired. Goodwill is assigned to a reporting unit on the acquisition date and tested for impairment
at least annually, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit
has more likely than not declined below its carrying value. Similarly, indefinite-lived intangible assets other than goodwill,
such as trade names, are tested annually or more frequently if indicated, for impairment. If impaired, intangible assets are written
down to fair value based on the expected discounted cash flows.
Revenue
Recognition
In
May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange
for those goods or services. In April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing.
ASU 2016-10 provides guidance in identifying performance obligations and determining the appropriate accounting for licensing
arrangements. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements
in Topic 606 (and any other Topic amended by ASU 2014-09). This ASU, which the Company adopted using the prospective method effective
January 1, 2019. The adoption did not have a material effect on the Company’s consolidated financial statements.
The
Company’s revenue is primarily comprised of commission paid by health insurance carriers related to insurance plans that
have been purchased by a member who used the Company’s service. The Company defines a member as an individual currently
covered by an insurance plan, including individual and family, Medicare-related, small business and ancillary plans, for which
the Company are entitled to receive compensation from an insurance carrier.
The
core principle of ASC 606 is to recognize revenue upon the transfer of promised goods or services to customers in an amount that
reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Accordingly, we recognize
revenue for our services in accordance with the following five steps outlined in ASC 606:
Identification
of the contract, or contracts, with a customer. A contract with a customer exists when (i) we enter into an enforceable contract
with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment
terms related to these goods or services, (ii) the contract has commercial substance, and (iii) we determine that collection of
substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and
ability to pay the promised consideration.
Identification
of the performance obligations in the contract. Performance obligations promised in a contract are identified based on the
goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit
from the goods or service either on its own or together with other resources that are readily available from third parties or
from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable
from other promises in the contract.
Determination
of the transaction price. The transaction price is determined based on the consideration to which we will be entitled in exchange
for transferring goods or services to the customer.
Allocation
of the transaction price to the performance obligations in the contract. If the contract contains a single performance obligation,
the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations
require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis.
Recognition
of revenue when, or as, the Company satisfies a performance obligation. The Company satisfies performance obligations either
over time or at a point in time, as discussed in further detail below. Revenue is recognized at the time the related performance
obligation is satisfied by transferring the promised good or service to the customer.
For
individual and family, Medicare supplement, small business and ancillary plans, the Company’s compensation is generally
a percentage of the premium amount collected by the carrier during the period that a member maintains coverage under a plan (commissions)
and, to a lesser extent, override commissions that health insurance carriers pays the Company for achieving certain objectives.
Premium-based commissions are reported to the Company after the premiums are collected by the carrier, generally monthly. The
Company generally continues to receive the commission payment from the relevant insurance carrier until the health insurance plan
is cancelled or the Company otherwise does not remain the agent on the policy. The Company recognizes commission revenue for individual
and family, Medicare Supplement, small business and ancillary plans when premiums are effective. The Company determines that there
is persuasive evidence of an arrangement when the Company has a commission agreement with a health insurance carrier, a carrier
reports to the Company that it has approved an application submitted through the Company’s platform, and the applicant starts
making payments on the plan. The Company’s services are complete when a carrier has approved an application. The seller’s
price is fixed or determinable and collectability is reasonably assured when commission amounts have been reported to the Company
by a carrier.
Commission
revenue from insurance distribution and brokerage operations is recognized when all placement services have been provided, protection
is afforded under the insurance policy, and the premium is known or can be reasonably estimated and is billable. In general, two
types of billing practices occur as part of our agency contracts, which is direct bill and agency bill. In direct bill scenarios,
the insurance carriers that underwrite the insurance policies directly bill and collect the premium for the policy without any
involvement from the Company. Upon collection, a commission is then remitted from the insurance carrier to the Company. These
commissions have not met the criteria for revenue recognition until the Company receives the commissions, as the Company does
not have insight into policy acceptance and premium collections until the commission is received from the insurance carrier, representing
that the insurance policy has been bound and therefore commissions have been earned by the Company. The second billing practice
where the Company bills the policy holder and collects the premiums (“Agency Bill”) provides greater transparency
by the Company into the acceptance of the policy and premium collection. As part of the Agency Bill process, the Company can,
at times, net its commissions out of the premiums to be sent to the insurance carriers. For Agency Bill customers, the revenue
recognition criteria are considered met when the Agency receives the premiums from the policy holder, with an allowance established
against the revenue for policies that may not be bound by the insurance companies.
All
commission revenue is recorded net of any deductions for estimated commission adjustments due to lapses, policy cancellations,
and revisions in coverage.
Insurance
commissions earned from carriers for life insurance products are recorded gross of amounts due to agents, with a corresponding
commission expense for downstream agent commissions being recorded as commission expense within the statements of operations.
The
Company earns additional revenue including contingent commissions, profit-sharing, override and bonuses based on meeting certain
revenue or profit targets established periodically by the carriers (collectively the Contingent Commissions). The Contingent Commissions
are earned when the Company achieves the targets established by the insurance carries. The insurance carriers notify the company
when it has achieved the target. The Company recognizes revenue for any additional commissions at the time it is reasonably assured
it will receive payment for these commissions, which is generally when the insurance carrier notifies the Company that it has
earned the commission typically early in the following fiscal year.
The
following table disaggregates the Company’s revenue by line of business, showing regular commissions earned contingent commissions
bonus, profit sharing
Year ended December 31, 2020
|
|
Medical/Life
|
|
|
Property and Casualty
|
|
|
Total
|
|
Regular
|
|
$
|
6,009,558
|
|
|
$
|
1,064804
|
|
|
$
|
7,074,362
|
|
Contingent commission
|
|
|
|
|
|
|
205,168
|
|
|
$
|
205,168
|
|
Total year ended December 31, 2020
|
|
$
|
6,009,558
|
|
|
$
|
1,064,804
|
|
|
$
|
7,279,530
|
|
Year ended December 31, 2019
|
|
Medical/Life
|
|
|
Property and Casualty
|
|
|
Total
|
|
Regular
|
|
$
|
3,583,992
|
|
|
$
|
866,793
|
|
|
$
|
4,450,785
|
|
Contingent commission
|
|
|
|
|
|
|
|
|
|
|
|
|
Total year ended December 31, 2019
|
|
$
|
3,582,182
|
|
|
$
|
866,793
|
|
|
$
|
4,450,785
|
|
General
and Administrative
General
and administrative expenses primarily consist of personnel costs for the Company’s administrative functions, professional
service fees, office rent, all employee travel expenses, and other general costs.
Marketing
and Advertising
The
Company’s direct channel expenses primarily consist of costs for e-mail marketing and newspaper advertisements. The Company’s
online advertising channel expense primarily consist of social media ads. Advertising costs for both direct and online channels
are expensed as incurred.
Stock-Based
Compensation
In
June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting
for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments
to nonemployees would be aligned with the requirements for share-based payments granted to employees. The amendments are effective
for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. This ASU, which the Company adopted
as of January 1, 2019, did not have a material effect on the Company’s consolidated financial statements.
Stock-based
compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line
basis over the requisite service period, based on the terms of the awards. The fair value of the stock-based payments to nonemployees
that are fully vested and non-forfeitable as at the grant date is measured and recognized at that date, unless there is a contractual
term for services in which case such compensation would be amortized over the contractual term. As the Reliance Global Group,
Inc. Equity Incentive Plan 2019 was adopted in January of 2019, the Company lacks the historical basis to estimate forfeitures
and will recognize forfeitures as they occur.
Leases
On
January 1, 2019, the Company adopted Accounting Standards Codification Topic 842, “Leases” (“ASC 842”)
to replace existing lease accounting guidance. This pronouncement is intended to provide enhanced transparency and comparability
by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet for most leases. Expenses
associated with leases will continue to be recognized in a manner similar to previous accounting guidance. The Company adopted
ASC 842 utilizing the transition practical expedient added by the Financial Accounting Standards Board (“FASB”), which
eliminates the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption.
The
Company is the lessee in a lease contract when the Company obtains the right to use the asset. Operating leases are included in
the line items right-of-use asset, lease obligation, current, and lease obligation, long-term in the consolidated balance sheet.
Right-of-use (“ROU”) asset represents the Company’s right to use an underlying asset for the lease term and
lease obligations represent the Company’s obligations to make lease payments arising from the lease, both of which are recognized
based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease
term of 12 months or less at inception are not recorded on the consolidated balance sheet and are expensed on a straight-line
basis over the lease term in our consolidated statement of income. The Company determines the lease term by agreement with lessor.
Income
Taxes
The
Company recognizes deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between
the book and tax basis of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax asset will not be realized. In evaluating its ability to recover
deferred tax assets within the jurisdiction in which they arise, the Company considers all available positive and negative evidence,
including the expected reversals of taxable temporary differences, projected future taxable income, taxable income available via
carryback to prior years, tax planning strategies, and results of recent operations. The Company assesses the realizability of
its deferred tax assets, including scheduling the reversal of its deferred tax assets and liabilities, to determine the amount
of valuation allowance needed. Scheduling the reversal of deferred tax asset and liability balances requires judgment and estimation.
The Company believes the deferred tax liabilities relied upon as future taxable income in its assessment will reverse in the same
period and jurisdiction and are of the same character as the temporary differences giving rise to the deferred tax assets that
will be realized.
Seasonality
A
greater number of the Company’s Medicare-related health insurance plans are sold in the fourth quarter during the Medicare
annual enrollment period when Medicare-eligible individuals are permitted to change their Medicare Advantage. The majority of
the Company’s individual and family health insurance plans are sold in the annual open enrollment period as defined under
the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation
Act. Individuals and families generally are not able to purchase individual and family health insurance outside of these open
enrollment periods, unless they qualify for a special enrollment period as a result of certain qualifying events, such as losing
employer-sponsored health insurance or moving to another state.
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”), which requires
the measurement of expected credit losses for financial instruments carried at amortized cost, such as accounts receivable, held
at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this
ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial
instruments and other commitments to extend credit held by a reporting entity at each reporting date. In November 2018, the FASB
issued ASU No. 2018-19, Codification Improvements to Topic 326, Financing Instruments—Credit Losses. ASU 2016-13 is effective
for fiscal years beginning after December 15, 2019. On November 15, 2019, the FASB delayed the effective date of FASB ASC Topic
326 for certain small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed
until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under
the SEC’s definition. The Company does not currently believe the adoption of this standard will have a significant impact
on its financial statements, given its history of minimal bad debt expense relating to trade accounts receivable.
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12”), which eliminates certain exceptions to the general principles in Topic 740 and simplifies other areas of the
existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those
fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2019-12 on its financial statements.
NOTE
3. STRATEGIC INVESTMENTS AND BUSINESS COMBINATIONS
The
company has six insurance agencies directly or through intermediaries. The majority of the business acquired are agencies that
specialize in health insurance. The following table summarizes for 2020 the number of agents, the number of policies issued and
aggregate commission revenue for all the agencies we acquired.
Agency Name
|
|
Number of Agents
|
|
Number of Policies issued
|
|
|
Aggregate Revenue Recognized
December 31, 2020
|
|
USBA and EBS
|
|
5
|
|
|
4,930
|
|
|
$
|
1,001,067
|
|
UIS Agency, LLC / Commercial Solutions
|
|
3
|
|
|
217
|
|
|
$
|
270,804
|
|
Southwestern Montana
|
|
14
|
|
|
2,000
|
|
|
$
|
1,493,431
|
|
Fortman Insurance
|
|
15
|
|
|
8,000
|
|
|
$
|
2,134,177
|
|
Altruis
|
|
15
|
|
|
7,809
|
|
|
$
|
2,380,051
|
|
Agency Name
|
|
Number of Agents
|
|
Number of Policies issued
|
|
|
Aggregate Revenue Recognized
December 31, 2019
|
|
USBA and EBS
|
|
15
|
|
|
9,767
|
|
|
$
|
1,161,036
|
|
Commercial Solutions
|
|
2
|
|
|
322
|
|
|
$
|
378,956
|
|
Southwestern Montana
|
|
13
|
|
|
370
|
|
|
$
|
1,106,432
|
|
Fortman Insurance
|
|
15
|
|
|
7,826
|
|
|
$
|
1,186,950
|
|
Altruis
|
|
16
|
|
|
8,500
|
|
|
$
|
617,411
|
|
EBS
LLC / US Benefits Alliance, LLC:
On
August 1, 2018, a related party to Reliance Holdings, US Benefits Alliance, LLC (“USBA”) acquired certain properties
and assets of the insurance businesses of Family Health Advisors, Inc. and Tri Star Benefits, LLC (the “USBA Acquisition”).
Also, on August 1, 2018, Employee Benefits, Solutions, LLC, (“EBS”), related party, acquired certain properties and
assets of the insurance business of Employee Benefit Solutions, Inc. (the “EBS Transaction”, and, together with USBA
Transaction, the “Common Control Transactions”).
On
October 24, 2018, Reliance Holdings and the Company entered into a Bill of Sale agreement to transfer all of the outstanding membership
interest in EBS LLC and USBA LLC. In exchange for the membership interest, the Board of Directors of the Company authorized and
issued 191,333 shares of restricted common stock of the Company for all the membership interest of USBA LLC and EBS LLC.
The
USBA Acquisition was accounted for as a business combination by Reliance Holdings. It was accounted for as a business combination
in accordance with the acquisition method whereby the total purchase consideration was allocated to intangible assets acquired
based on their respective estimated fair values. The acquisition method of accounting uses the fair value concept defined in ASC
820. ASC 805 requires, among other things, that assets acquired, and liabilities assumed, if any, in a business purchase combination
be recognized at their fair values as of the acquisition date. The process for estimating the fair values of identifiable intangible
assets requires the use of significant estimates and assumptions, including estimating future cash flows, developing appropriate
discount rates, estimating the costs, and timing. The allocation of the purchase price in connection with the USBA Acquisition
was calculated as follows:
Description
|
|
Fair Value
|
|
|
Weighted Average Useful Life (Years)
|
Trade name and trademarks
|
|
$
|
6,520
|
|
|
3
|
Customer relationships
|
|
|
116,100
|
|
|
9
|
Non-competition agreements
|
|
|
48,540
|
|
|
5
|
Goodwill
|
|
|
578,840
|
|
|
Indefinite
|
|
|
$
|
750,000
|
|
|
|
Goodwill
of $578,840 arising from the USBA Acquisition consisted of the value of the employee workforce and the residual value after all
identifiable intangible assets were valued. Goodwill recognized pursuant to the USBA Acquisition is currently expected to be deductible
for income tax purposes.
The
EBS Acquisition was accounted for as a business combination by Reliance Holdings. It was accounted for as a business combination
in accordance using the acquisition method whereby the total purchase consideration was allocated to intangible assets acquired
based on their respective estimated fair values. The acquisition method of accounting requires, among other things, that assets
acquired, and liabilities assumed, if any, in a business purchase combination be recognized at their fair values as of the acquisition
date. The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use
of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating
the costs, and timing.
The
allocation of the purchase price in connection with the EBS Acquisition was calculated as follows:
Description
|
|
Fair Value
|
|
|
Weighted Average Useful Life (Years)
|
Trade name and trademarks
|
|
$
|
33,140
|
|
|
20
|
Customer relationships
|
|
|
47,630
|
|
|
9
|
Non-competition agreements
|
|
|
42,320
|
|
|
5
|
Goodwill
|
|
|
274,956
|
|
|
Indefinite
|
Fixed assets
|
|
|
1,954
|
|
|
5-7
|
|
|
$
|
400,000
|
|
|
|
Goodwill
of $274,956 arising from the EBS Acquisition consisted of the value of the employee workforce and the residual value after all
identifiable intangible assets were valued. Goodwill recognized pursuant to the EBS Acquisition is currently expected to be deductible
for income tax purposes. Total acquisition costs for the EBS Acquisition incurred were $44,353.
Commercial
Solutions of Insurance Agency, LLC:
On
December 1, 2018, Commercial Coverage Solutions LLC, a wholly-owned subsidiary of the Company (“CCS”) entered into
a Purchase Agreement with Commercial Solutions of Insurance Agency, LLC (“CSIA”) whereby CCS purchased the business
and certain assets of CSIA noted within the Purchase Agreement (the “CSIA Acquisition”) for a total purchase price
of $1,200,000. The total purchase price was made up of (1) a cash payment of $1,080,000 (the “Cash Payment”) on the
“Closing Date” or the first bank business day thereafter (i.e. December 1, 2018); (2) the balance of the purchase
price, having a value of $120,000, paid in the form of 8,889 shares of common stock in the Company, issued at a per-share price
equal to Fifteen and 75/100 Cents ($13.50) (the “Closing Shares”); and (3) the amount of any cash necessary to satisfy
the required closing date working capital set off against the Cash Payment by CCS. “Required closing date working capital”
consisted only of cash and pre-paid rent and/or security deposits or pre-payments or deposits for any assumed liabilities. The
Closing Shares were transferred from the shares owned by Reliance Holdings and were transferred subsequent to December 31, 2018;
and as a result, is a component of Loans payables, related parties on the accompanying Consolidated Balance Sheets.
The
CSIA Acquisition is being accounted for as a business combination under the acquisition method whereby the total purchase consideration
was allocated to tangible and intangible assets acquired based on their respective estimated fair values. The acquisition method
requires, among other things, that assets acquired, and liabilities assumed in a business purchase combination be recognized at
their fair values as of the acquisition. The process for estimating the fair values of identifiable intangible assets and certain
tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows, developing
appropriate discount rates, estimating the costs, and timing.
The
allocation of the purchase price in connection with the CCS Acquisition was calculated as follows:
Description
|
|
Fair Value
|
|
|
Weighted Average Useful Life (Years)
|
Cash
|
|
$
|
13,500
|
|
|
N/A
|
Fixed Assets
|
|
|
1,638
|
|
|
5-7
|
Customer relationships
|
|
|
284,560
|
|
|
11
|
Non-competition agreements
|
|
|
40,050
|
|
|
5
|
Trade name and trademarks
|
|
|
8,500
|
|
|
2
|
Goodwill
|
|
|
851,752
|
|
|
Indefinite
|
|
|
$
|
1,200,000
|
|
|
|
Goodwill
of $851,752 arising from the CSIA Acquisition consisted of the value of the employee workforce and the residual value after all
identifiable intangible assets were valued. Goodwill recognized pursuant to the CSIA Acquisition is currently expected to be deductible
for income tax purposes. Total acquisition costs for the CSIA Acquisition incurred were $113,247.
Southwestern
Montana Insurance Center, LLC:
On
April 1, 2019, Southwestern Montana Insurance Center, LLC (“SWMT”), a wholly owned subsidiary of Reliance Holdings,
acquired Southwestern Montana Financial Center, Inc. SWMT is an insurance services firm which specializes in providing group and
individual health lines of insurance. On September 17, 2019, Reliance Holdings, transferred all of the outstanding membership
interest in SWMT to the Company.
On
April 1, 2019, SWMT entered into a Purchase Agreement with Southwestern Montana Financial Center, Inc. whereby the SWMT shall
purchase the business and certain assets noted within the Purchase Agreement (the “SWMT Acquisition”) for a total
purchase price of $2,394,509. The purchase price was paid with a cash payment of $1,389,840, 5,833 in shares of the Company’s
restricted common stock transferred from the shares owned by Reliance Holdings, and an earn-out payment equal to 32% of the final
earn-out EBITDA multiplied by 5.00, which is payable in $300,000 in shares of the Company’s common stock with any amount
in excess of $300,000 to be paid in cash. The balance of the earn-out liability as of December 31, 2019 was $522,553 and is included
in long term debt on the balance sheet. SWMT was transferred to the Company from Reliance Holdings. The SWMT Acquisition was accounted
for as a business combination, by Reliance Holdings, in accordance under the acquisition method whereby the total purchase consideration
was allocated to assets acquired and liabilities assumed based on their respective estimated fair values. The acquisition method
of accounting requires, among other things, that assets acquired, and liabilities assumed, if any, in a business purchase combination
be recognized at their fair values as of the acquisition date. The process for estimating the fair values of identifiable intangible
assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash
flows, developing appropriate discount rates, estimating the costs, and timing.
The
allocation of the purchase price in connection with the SWMT Acquisition was calculated as follows:
Description
|
|
Fair Value
|
|
|
Weighted Average Useful Life (Years)
|
Customer relationships
|
|
$
|
561,000
|
|
|
10
|
Non-competition agreements
|
|
|
599,200
|
|
|
5
|
Goodwill
|
|
|
1,217,790
|
|
|
Indefinite
|
Fixed assets
|
|
|
41,098
|
|
|
5-7
|
Loan Payable
|
|
|
(24,579
|
)
|
|
|
|
|
$
|
2,394,509
|
|
|
|
Goodwill
of $1,217,790 arising from the SWMT Acquisition consisted of the value of the employee workforce and the residual value after
all identifiable intangible assets were valued. Goodwill recognized pursuant to the SWMT Acquisition is currently expected to
be deductible for income tax purposes. Total acquisition costs for the SWMT Acquisition were $122,660, which were paid in full
by Reliance Global Holdings, LLC, a related party.
The
operating results of the acquired business has been included in the Company’s Consolidated Statement of Operations from
the date of acquisition through December 31, 2019. The revenues of the acquired business for the period from April 1, 2019 to
December 31, 2019 was $1,036,154 and the net loss was $23,104. The revenues and net income for the acquired business as a standalone
entity per ASC 805 from January 1, 2019 to December 31, 2019 were $1,381,991 and $30,805.
Fortman
Insurance Services, LLC:
On
May 1, 2019, Fortman Insurance Services, LLC (“FIS”), a wholly owned subsidiary of Reliance Global Holdings, LLC,
acquired Fortman Insurance Agency, LLC. FIS is an insurance services firm which specializes in providing personal and commercial
lines of insurance.
On
May 1, 2019, FIS entered into a Purchase Agreement with Fortman Insurance Agency, LLC whereby the FIS shall purchase the business
and certain assets noted within the Purchase Agreement (the “FIS Acquisition”) for a total purchase price of $4,156,405.
The purchase price was paid with a cash payment of $3,223,750, $500,000 in shares of the Company’s restricted common stock
transferred from the shares owned by Reliance Holdings, and an earn-out payment equal to 10% of the final earn-out EBITDA multiplied
by 6.25. The earn-out measurement period is 12 months commencing May 1, 2021 and ending April 30, 2022. The earn-out shall not
accrue and shall be paid without interest within 60 days after the measurement period. The balance of the earn-out liability as
of December 31, 2019 was $432,655 and is included in long term debt on the balance sheet. On September 17, 2019, FIS was transferred
to the Company from Reliance Holdings. The FIS Acquisition was accounted for as a business combination, by Reliance Holdings,
in accordance with the Acquisition method whereby the total purchase consideration was allocated to intangible assets acquired
based on their respective estimated fair values. The acquisition method of accounting requires, among other things, that assets
acquired, and liabilities assumed, if any, in a business purchase combination be recognized at their fair values as of the acquisition
date. The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use
of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating
the costs, and timing.
The
allocation of the purchase price in connection with the FIS Acquisition was calculated as follows:
Description
|
|
Fair Value
|
|
|
Weighted Average Useful Life (Years)
|
Trade name and trademarks
|
|
$
|
289,400
|
|
|
5
|
Customer relationships
|
|
|
1,824,000
|
|
|
10
|
Non-competition agreements
|
|
|
752,800
|
|
|
5
|
Goodwill
|
|
|
1,269,731
|
|
|
Indefinite
|
Fixed assets
|
|
|
19,924
|
|
|
5-7
|
Prepaid rent
|
|
|
550
|
|
|
|
|
|
$
|
4,156,405
|
|
|
|
Goodwill
of $1,269,731 arising from the FIS Acquisition consisted of the value of the employee workforce and the residual value after all
identifiable intangible assets were valued. Goodwill recognized pursuant to the FIS Acquisition is currently expected to be deductible
for income tax purposes. Total acquisition costs for the FIS Acquisition were $63,663, which were paid in full by Reliance Global
Holdings, LLC, a related party.
During
September 2019, Reliance Global Holdings, LLC transferred all of the outstanding membership interest in SWMT and FIS to the Company.
In exchange for the membership interest, the Board of Directors of Reliance Inc. issued 173,122 shares of restricted common stock
of Reliance Inc. for all the membership interest of SWMT and FIS.
The
operating results of the acquired business has been included in the Company’s Consolidated Statement of Operations for the
year ended December 31, 2019. The revenues of the acquired business for the period from May 1, 2019 to December 31, 2019 was $1,166,778
and the net income was $9,773. The revenues and net income for the acquired business as a standalone entity per ASC 805 from January
1, 2019 to December 31, 2019 were $1,780,427 and $176,154. The revenues of the acquired business for the year ending December
31, 2020 was $2,134,177 and the net income was $246,681.
Altruis
Benefits Consulting, Inc.:
On
September 1, 2019, the Company entered into a Stock Purchase Agreement with Altruis Benefits Consulting, Inc. whereby the Company
purchased the business and certain assets noted within the Purchase Agreement (the “ABC Acquisition”) for a total
purchase price of $7,688,168. The purchase price was paid with a cash payment of $5,202,364, $578,040 in shares of the Company’s
common stock, and an earn-out payment made annually for 3 years. Each year one-third of the earn-out shares held in escrow shall
be released to the seller. The yearly earn-out payments are equal to 6.66% of the final earn-out EBITDA multiplied by 7.00. The
earn-out measurement periods are the 12 months commencing September 1, 2019 and ending August 31, 2022. The balance of the earn-out
liability as of December 31, 2019 was $1,894,842 and is included in long term debt on the balance sheet. The ABC Acquisition is
being accounted for as a business combination in accordance with the acquisition method whereby the total purchase consideration
was allocated to intangible assets acquired based on their respective estimated fair values. The acquisition method of accounting
requires, among other things, that assets acquired, and liabilities assumed, if any, in a business purchase combination be recognized
at their fair values as of the acquisition date. The process for estimating the fair values of identifiable intangible assets
and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows,
developing appropriate discount rates, estimating the costs, and timing.
The
allocation of the purchase price in connection with the ABC Acquisition was calculated as follows:
Description
|
|
Fair Value
|
|
|
Weighted Average Useful Life (Years)
|
Cash
|
|
$
|
1,850,037
|
|
|
|
Trade name and trademarks
|
|
|
714,600
|
|
|
5
|
Customer relationships
|
|
|
753,000
|
|
|
10
|
Non-competition agreements
|
|
|
1,168,600
|
|
|
5
|
Goodwill
|
|
|
4,949,329
|
|
|
Indefinite
|
Fixed assets
|
|
|
85
|
|
|
5
|
Payable to seller
|
|
|
(1,747,483
|
)
|
|
|
|
|
$
|
7,688,168
|
|
|
|
Goodwill
of $4,949,329 arising from the ABC Acquisition consisted of the value of the employee workforce and the residual value after all
identifiable intangible assets were valued. Goodwill recognized pursuant to the ABC Acquisition is currently expected to be deductible
for income tax purposes. Total acquisition costs for the ABC Acquisition incurred were $92,172 recorded as a component of General
and administrative expenses on the accompanying Consolidated Statement of Operations for the year ended December 31, 2019.
The
operating results of the acquired business has been included in the Company’s Consolidated Statement of Operations for the
year ended December 31, 2019. The revenues of the acquired business for the period from September 1, 2019 to December 31, 2019
was $625,036 and the net loss was $67,682. The revenues and net income for the acquired business as a standalone entity per ASC
805 from January 1, 2019 to December 31, 2019 were $2,469,636 and $150,705. The revenues of the acquired business for the year
ending December 31, 2020 was $2,380,051 and the net loss was $88,185.
UIS
Transaction
On
August 17, 2020, the Company entered into a Stock Purchase Agreement with UIS Agency LLC whereby the Company shall purchase the
business and certain assets noted within the Purchase Agreement (the “UIS Acquisition”) for a total purchase price
of $883,334. The purchase price was paid with a cash payment of $601,696, $200,000 in shares of the Company’s common stock
and an earn-out payment. Three cash installment payments totaling $500,000 were due on September 30, 2020, October 31, 2020 and
December 31, 2020. Earn-out payment is dependent on the Net Product Line Revenues being equal to or greater than $450,000 for
the measurement period. The balance of the earn-out liability as of December 31, 2020 was $81,638 and is included in long term
debt on the balance sheet.
The
UIS Acquisition was accounted for as a business combination in accordance with the acquisition method under the guidance in ASC
805-10 and 805-20. Accordingly, the total purchase consideration was allocated to intangible assets acquired based on their respective
estimated fair values. The acquisition method of accounting requires, among other things, that assets acquired, and liabilities
assumed, if any, in a business purchase combination be recognized at their fair values as of the acquisition date. The process
for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates
and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating the costs, and timing.
The
allocation of the purchase price in connection with the UIS Acquisition was calculated as follows:
Description
|
|
Fair Value
|
|
|
Weighted Average Useful Life (Years)
|
Cash
|
|
$
|
5,772
|
|
|
|
Trade name and trademarks
|
|
|
35,600
|
|
|
5
|
Customer relationships
|
|
|
100,000
|
|
|
10
|
Non-competition agreements
|
|
|
25,500
|
|
|
5
|
Goodwill
|
|
|
716,462
|
|
|
Indefinite
|
|
|
$
|
883,334
|
|
|
|
Goodwill
of $716,462 arising from the UIS Acquisition consisted of the value of the employee workforce and the residual value after all
identifiable intangible assets were valued. Goodwill recognized pursuant to the UIS Acquisition is currently expected to be deductible
for income tax purposes. Total acquisition costs for the UIS Acquisition incurred were $33,344 recorded as a component of General
and administrative expenses. The revenues of the acquired business for the period from August 17, 2020 to December 31, 2020 was
$65,018. The revenues for the acquired business as a standalone entity per ASC 805 from January 1, 2020 to December 31, 2020 were
$377,921. The net loss for the acquired business was not determinable as the business was fully integrated with an existing subsidiary
of the Company.
NOTE
4. RECAPITALIZATION AND COMMON CONTROL TRANSACTIONS
The
purchase of Ethos, as described in Note 1, is being accounted for as a reverse recapitalization. As such, Reliance and its wholly
owned subsidiaries are treated as the continuing company and Ethos is treated as the “acquired” company
for financial reporting purposes. This determination was primarily based on the operations of Reliance’s subsidiaries comprising
of substantially all the ongoing operations of the post-combination company, the parent company of Reliance owning 84.5% of the
voting control of Reliance and Reliance’s parent senior management comprising substantially all of the senior management
of the post-combination Company. Accordingly, for accounting purposes, the purchase of Ethos is treated as the equivalent of Reliance
and its wholly owned subsidiaries are issuing stock for the net assets of Ethos, accompanied by a recapitalization. The net assets
of Reliance are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the purchase
of Ethos are the historical operations of Reliance and its wholly owned subsidiaries are the combined financial statements include
Family Health Advisors, Inc., Employee Benefits Solutions, LLC, and Tri Star Benefits, LLC as discussed in Note 3.
The
amount of consideration paid on September 21, 2018 to the controlling seller of Ethos was $287,500. Immediately following, the
parent of Reliance owned approximately 583,333 preferred shares and 542,372 common shares of Ethos. Ethos was then renamed on
October 18, 2018.
On
October 24, 2018, Reliance Holdings and the Company entered into a Bill of Sale agreement to transfer all of the outstanding membership
interest in EBS LLC and USB LLC. In exchange for the membership interest, the Board of Directors of the Company authorized and
issued 191,333 shares of restricted common stock of the Company for all the membership interest of USB LLC and EBS LLC.
During
September 2019, Reliance Holdings transferred all of the outstanding membership interest in SWMT and FIS to the Company. In exchange
for the membership interest, the Board of Directors of Reliance Inc. issued 173,122 shares of restricted common stock of Reliance
Inc. for all the membership interest of SWMT and FIS.
NOTE
5. INVESTMENT IN NSURE, INC.
On February 19, 2020, the Company entered
into a securities purchase agreement with NSURE, Inc. (“NSURE”) whereas the Company may invest up to an aggregate
of $20,000,000 in NSURE which will be funded with three tranches. In exchange, the Company will receive a total of 5,837,462 shares
of NSURE’s Class A Common Stock, which represents 35% of the outstanding shares. The first tranche of $1,000,000 was paid
immediately upon execution of the agreement. As a result of the first tranche, the Company received 291,873 shares of NSURE’s
Class A Common Stock. The second tranche of $3,000,000 and third tranche of $16,000,000 have not occurred as of December 31,
2020. The Company will use the cost method of acquisition for the initial recognition of this investment. Once the Company
determines that it can exercise significant influence over NSURE, it will begin to account for its investment under the equity
method. On June 1, 2020, the Company invested an additional $200,000 and received 58,375 shares of NSURE Class A Common Stock.
On August 5, 2020 and August 20, 2020, the Company invested an additional $100,000 and $50,000, respectively, for which the Company
received 43,781 shares of NSURE Class A common stock. As of December 31, 2020, the investment balance is $1,350,000.
On
February 10, 2020, the Company issued 46,667 shares of common
stock to a third-party individual for the purpose of raising capital to fund the Company’s investment in NSURE, Inc. The
Company received proceeds of $1,000,000 for the issuance of these common shares.
NOTE
6. PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
Estimated
Useful Lives
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Computer equipment and software
|
|
|
5
|
|
|
$
|
33,774
|
|
|
$
|
33,774
|
|
Office equipment and furniture
|
|
|
7
|
|
|
|
36,573
|
|
|
|
36,573
|
|
Leasehold Improvements
|
|
|
Shorter of the useful life or the lease term
|
|
|
|
56,631
|
|
|
|
56,631
|
|
Software
|
|
|
3
|
|
|
|
562,327
|
|
|
|
562,327
|
|
Property and equipment, gross
|
|
|
|
|
|
|
689,305
|
|
|
|
689,305
|
|
Less: Accumulated depreciation and amortization
|
|
|
|
|
|
|
(313,358
|
)
|
|
|
(97,054
|
)
|
Property and equipment, net
|
|
|
|
|
|
$
|
375,947
|
|
|
$
|
592,251
|
|
Depreciation
expense associated with property and equipment is included in depreciation within the Company’s Consolidated Statement of
Operations was $216,304 and $94,474 for the year ended December 31, 2020 and the December 31, 2019, respectively.
Software
On
July 22, 2019, the Company entered into a purchase agreement with The Referral Depot, LLC (TRD), a related party, to purchase
a client referral software created exclusively for the insurance industry. The Company purchased this software to be utilized
internally and does not plan to license, sell, or otherwise market the software, as such the total cost of the software has been
capitalized and will be amortized on a straight-line basis over the useful life. The total purchase price of the software is $250,000
cash and 2,000,000 restricted common shares (at $0.17 per share which amounted to $340,000) of the Company. Per the agreement,
the Company paid an initial payment of $50,000 at closing and the remaining $200,000 will be paid with forty-eight equal monthly
payments commencing on the first anniversary of the effective date, or July 22, 2020. As of December 31, 2019, the Company recorded
a loan payable to a related party of $172,327, net of discount on the loan of $27,673. The loan payable outstanding as of December
31, 2020 was $154,953. As of December 31, 2020, no shares related to this acquisition have been issued. The Company has recorded
the 2,000,000 shares as common stock issuable as of December 31, 2020 and 2019. The total carrying cost of the software as of
December 31, 2020 is $296,783. Depreciation Expense related to the software for the year ending December 31, 2020 and 2019 was
$187,442 and $78,101.
NOTE
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective
January 1, 2020 the Company reorganized its reporting structure into a single operating unit. All of the acquisitions made by
the Company are in one industry insurance agencies. These agencies operate in a very similar economic and regulatory environment.
The Company has one executive who is responsible for the operations of the insurance agencies. This executive reports directly
to the Chief Financial Officer (“CFO”) on a quarterly basis. Additionally, the CFO who is responsible for the strategic
direction of the Company review the operations of the insurance agency business as opposed to an office by office view. In accordance
with guidance in ASC 350-20-35-45 all the Company’s goodwill will be reassigned to a single reporting unit.
For the year ending December 31, 2019 and
2020 the Company tested goodwill using discounted cash flow analysis and probability weighted market multiples valuations to determine
the fair value of EBS, USBA, and CCS. The Company determined that CCS was overvalued by $593,790 and recorded goodwill impairment
expense for the full amount. During the year ended December 31, 2019, the Company recorded impairment of goodwill of $593,790.
For the year ending December 31, 2020 the impairment test was performed for EBS, USBA and CCS; SWMT; FIS; Altruis; and UIS
reporting units. The valuation concluded that there was no goodwill impairment.
After
accounting for the goodwill impairment, the excess fair value over carrying value of the EBS & USBA reporting unit and
the CCS reporting unit was $677,772 and $0, respectively.
|
|
Goodwill
|
|
December 31, 2018
|
|
$
|
1,705,548
|
|
Goodwill recognized in connection with acquisition on April 1, 2019
|
|
|
1,217,790
|
|
Goodwill recognized in connection with acquisition on May 1, 2019
|
|
|
1,269,731
|
|
Goodwill recognized in connection with acquisition on September 1, 2019
|
|
|
4,949,329
|
|
Impairment of goodwill
|
|
|
(593,790
|
)
|
December 31, 2019
|
|
$
|
8,548,608
|
|
Goodwill recognized in connection with acquisition on August 17, 2020
|
|
$
|
716,462
|
|
December 31, 2020
|
|
$
|
9,265,070
|
|
The
following table sets forth the major categories of the Company’s intangible assets and the weighted-average remaining amortization
period as of December 31, 2020:
|
|
Weighted Average Remaining Amortization period (Years)
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net
Carrying Amount
|
|
Trade name and trademarks
|
|
|
2.6
|
|
|
$
|
1,087,760
|
|
|
$
|
(307,163
|
)
|
|
$
|
780,597
|
|
Customer relationships
|
|
|
7.6
|
|
|
|
3,686,290
|
|
|
|
(623,649
|
)
|
|
|
3,062,641
|
|
Non-competition agreements
|
|
|
2.6
|
|
|
|
2,677,010
|
|
|
|
(834,598
|
)
|
|
|
1,842,412
|
|
|
|
|
|
|
|
$
|
7,451,060
|
|
|
$
|
(1,765,410
|
)
|
|
$
|
5,685,650
|
|
The
following table sets forth the major categories of the Company’s intangible assets and the weighted-average remaining amortization
period as of December 31, 2019:
|
|
Weighted Average Remaining Amortization period (Years)
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net
Carrying Amount
|
|
Trade name and trademarks
|
|
|
4.3
|
|
|
$
|
1,052,160
|
|
|
$
|
(96,258
|
)
|
|
$
|
955,902
|
|
Customer relationships
|
|
|
9.4
|
|
|
|
3,586,290
|
|
|
|
(257,529
|
)
|
|
|
3,328,761
|
|
Non-competition agreements
|
|
|
4.4
|
|
|
|
2,651,510
|
|
|
|
(302,589
|
)
|
|
|
2,348,921
|
|
|
|
|
|
|
|
$
|
7,289,960
|
|
|
$
|
(656,376
|
)
|
|
$
|
6,633,584
|
|
The
Company tests goodwill and indefinite-lived intangible assets for impairment annually on October 1st, or more frequently whenever
events or changes in circumstances indicate that the asset might be impaired. The Company tested goodwill using discounted cash
flow analysis and probability weighted market multiples valuations to determine the fair value of EBS, USBA, UIS, and CCS. In
the year ending December 31, 2019, the Company determined that CCS was overvalued by $593,790 and recorded goodwill impairment
expense for the full amount. During the year ended December 31, 2020 and 2019, the Company recorded impairment of goodwill of
$0 and $593,790, respectively.
Amortization
expense was $1,109,033 and $633,505 for the year ended December 31, 2020 and 2019, respectively.
The
amortization expense of acquired intangible assets for each of the following five years are expected to be as follows:
Years ending December 31,
|
|
Amortization Expense
|
|
2021
|
|
$
|
1,127,374
|
|
2022
|
|
|
1,124,024
|
|
2023
|
|
|
1,108,221
|
|
2024
|
|
|
735,672
|
|
2025
|
|
|
371,973
|
|
Thereafter
|
|
|
1,218,366
|
|
Total
|
|
$
|
5,685,650
|
|
NOTE
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Significant
components of accounts payable and accrued liabilities were as follows:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
980,943
|
|
|
$
|
102,112
|
|
Accrued expenses
|
|
|
35,022
|
|
|
|
5,797
|
|
Accrued credit card payables
|
|
|
119,896
|
|
|
|
32,395
|
|
Other accrued liabilities
|
|
|
7,721
|
|
|
|
12,922
|
|
|
|
$
|
1,143,582
|
|
|
$
|
153,226
|
|
NOTE
9. LONG-TERM DEBT
The
composition of the long-term debt follows:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Oak Street Funding LLC Term Loan for the acquisition of EBS and USBA, net of deferred financing costs of $19,044 and $21,263 as of December 31, 2020 and 2019, respectively
|
|
$
|
542,760
|
|
|
$
|
595,797
|
|
Oak Street Funding LLC Senior Secured Amortizing Credit Facility for the acquisition of CCS, net of deferred financing costs of $22,737 and $25,293 as of December 31, 2020 and 2019, respectively
|
|
|
877,550
|
|
|
|
963,174
|
|
Oak Street Funding LLC Term Loan for the acquisition of SWMT, net of deferred financing costs of $16,685 as of December 31, 2020 and 2019
|
|
|
979,966
|
|
|
|
1,066,815
|
|
Oak Street Funding LLC Term Loan for the acquisition of FIS, net of deferred financing costs of $54,293 as of December 31, 2020 and 2019
|
|
|
2,465,410
|
|
|
|
2,593,707
|
|
Oak Street Funding LLC Term Loan for the acquisition of ABC, net of deferred financing costs of $65,968 as of December 31, 2020 and 2019
|
|
|
3,983,594
|
|
|
|
4,062,032
|
|
|
|
|
8,849,280
|
|
|
|
9,281,525
|
|
Less: current portion
|
|
|
(963,450
|
)
|
|
|
(1,010,570
|
)
|
Long-term debt
|
|
$
|
7,885,830
|
|
|
$
|
8,270,955
|
|
Oak
Street Funding LLC – Term Loans
On
August 1, 2018, EBS and USBA entered into a Credit Agreement with Oak Street Funding LLC (“Oak Street”) whereby EBS
and USBA borrowed $750,000 from Oak Street under a Term Loan. The Term Loan is secured by certain assets of the Company. Interest
will accrue at 5.00% on the basis of a 360-day year, maturing 120 months from the Amortization Date (September 25, 2018). For
the year ended December 31, 2018, the Company incurred debt issuance costs associated with the Term Loan in the amount of $22,188,
which were deferred and are amortized to interest expense over the length of the Term Loan. The proceeds of the Term Loan were
to be used for the purpose of acquiring entities through the respective USBA and EBS acquisitions.
On
April 1, 2019, SWMT entered into a Credit Agreement with Oak Street Funding LLC (“Oak Street”) whereby SWMT borrowed
$1,136,000 from Oak Street under a Term Loan. The Term Loan is secured by certain assets of the Company. The borrowing rate under
the Facility is a variable rate equal to Prime + 2.00% and matures 10 years from the closing date. For the year ended December
31, 2019, the Company incurred debt issuance costs associated with the Term Loan in the amount of $28,849, which were deferred
and are amortized to interest expense over the length of the Term Loan. The proceeds of the Term Loan were to be used for the
purpose of acquiring an entity through SWMT.
On
May 1, 2019, FIS entered into a Credit Agreement with Oak Street Funding LLC (“Oak Street”) whereby FIS borrowed $2,648,000
from Oak Street under a Term Loan. The Term Loan is secured by certain assets of the Company. The borrowing rate under the Facility
is a variable rate equal to Prime + 2.00% and matures 10 years from the closing date. For the year ended December 31, 2019, the
Company incurred debt issuance costs associated with the Term Loan in the amount of $58,171, which were deferred and are amortized
to interest expense over the length of the Term Loan. The proceeds of the Term Loan were to be used for the purpose of acquiring
an entity through FIS.
On
September 5, 2019, ABC entered into a Credit Agreement with Oak Street Funding LLC (“Oak Street”) whereby ABC borrowed
$4,128,000 from Oak Street under a Term Loan. The Term Loan is secured by certain assets of the Company. The borrowing rate under
the Facility is a variable rate equal to Prime + 2.00% and matures 10 years from the closing date.
For
the year ended December 31, 2019, the Company incurred debt issuance costs associated with the Term Loan in the amount of $94,105,
which were deferred and are amortized to interest expense over the length of the Term Loan. The proceeds of the term loan were
to be used for the purpose of acquiring ABC.
Oak
Street Funding LLC – Senior Secured Amortizing Credit Facility (“Facility”)
On
December 7, 2018, CCS entered into a Facility with Oak Street whereby CCS borrowed $1,025,000 from Oak Street under a senior secured
amortizing credit facility. The borrowing rate under the Facility is a variable rate equal to Prime +1.50% and matures 10 years
from the closing date. For the period from August 1, 2018 to December 31, 2018, the Company incurred debt issuance costs associated
with the Facility in the amount of $25,506, which were deferred and are amortized over the length of the Facility. The proceeds
of the term loan were to be used for the purpose of acquiring CSIA.
Aggregated
cumulative maturities of long-term obligations (including the Term Loan and the Facility), net of deferred financing costs,
as of December 31, 2020 are:
Years ending December 31,
|
|
Maturities of Long-Term Debt
|
|
2021
|
|
$
|
963,450
|
|
2022
|
|
|
963,450
|
|
2023
|
|
|
963,450
|
|
2024
|
|
|
963,450
|
|
2025
|
|
|
963,450
|
|
Thereafter
|
|
|
4,032,030
|
|
Total
|
|
$
|
8,849,280
|
|
As
of December 31, 2020, the Company was in compliance with a covenant due to start up initiatives that were funded by Reliance
Holdings.
Loans
Payable
Paycheck
Protection Program
On
April 4, 2020, the Company entered into a loan agreement with First Financial Bank for a loan of $673,700 pursuant to the Paycheck
Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020
(the “CARES Act”). This loan is evidenced by a promissory note dated April 4, 2020 and matures two years from the
disbursement date. This loan bears interest at a rate of 1.00% per annum, with the first six months of interest deferred. Principal
and interest are payable monthly commencing one year after the disbursement date and may be prepaid by the Company at any time
prior to maturity with no prepayment penalties. This loan contains customary events of default relating to, among other things,
payment defaults or breaches of the terms of the loan. Upon the occurrence of an event of default, the lender may require immediate
repayment of all amounts outstanding under the note. The principal and interest of the loan are repayable in 18 monthly equal
installments of $37,913 each. Interest accrued in the first six months is included in the monthly installments. Installments must
be paid on the 24th day of each month. As of December 31, 2020, the Company has repaid a total of $165,000 on this
loan. On November 17, 2020 the Company received notification from the SBA that the PPP loan has been forgiven in its entirety.
Under
the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent loan proceeds are
used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business
Administration under the PPP. The Company intends to use the entire loan amount for designated qualifying expenses and to apply
for forgiveness in accordance with the terms of the PPP.
NOTE
10. SIGNIFICANT CUSTOMERS
Carriers
representing 10% or more of total revenue are presented in the table below:
Insurance Carrier
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
BlueCross BlueShield
|
|
|
25.1
|
%
|
|
|
26.2
|
%
|
Priority Health
|
|
|
25.5
|
%
|
|
|
19.7
|
%
|
No
other single insurance carrier accounted for more than 10% of the Company’s commission revenues. The loss of any significant
customer, including Priority Health and BCBS, could have a material adverse effect on the Company.
NOTE
11. EQUITY
Preferred
Stock
The
Company has been authorized to issue 750,000,000 shares of $0.086 par value Preferred Stock. The Board of Directors is expressly
vested with the authority to divide any or all of the Preferred Stock into series and to fix and determine the relative rights
and preferences of the shares of each series so established, within certain guidelines established in the Articles of Incorporation.
As
of December 31, 2020 and 2019, there were 395,640 shares of Series A Convertible Preferred Stock issued and outstanding. Each
share of Series A Convertible Preferred Stock shall have ten (10) votes per share and may be converted into ten (10) shares of
$0.086 par value common stock. The holders of the Series A Convertible Preferred Stock shall be entitled to receive, when, if
and as declared by the Board, out of funds legally available therefore, cumulative dividends payable in cash. The annual interest
rate at which cumulative preferred dividends will accrue on each share of Series A Convertible Preferred Stock is 0%. In the event
of any voluntary or involuntary liquidation, dissolution or winding up of the Company, before any distribution of assets of the
Corporation shall be made to or set apart for the holders of the Common Stock and subject and subordinate to the rights of secured
creditors of the Company, the holders of Series A Preferred Stock shall receive an amount per share equal to the greater of (i)
one dollar ($1.00), adjusted for any recapitalization, stock combinations, stock dividends (whether paid or unpaid), stock options
and the like with respect to such shares, plus any accumulated but unpaid dividends (whether or not earned or declared) on the
Series A Convertible Preferred Stock, and (ii) the amount such holder would have received if such holder has converted its shares
of Series A Convertible Preferred Stock to common stock, subject to but immediately prior to such liquidation.
Common
Stock
The
Company has been authorized to issue 2,000,000,000 shares of common stock, $0.086 par value. Each share of issued and outstanding
common stock shall entitle the holder thereof to fully participate in all shareholder meetings, to cast one vote on each matter
with respect to which shareholders have the right to vote, and to share ratably in all dividends and other distributions declared
and paid with respect to common stock, as well as in the net assets of the corporation upon liquidation or dissolution.
In
February 2020, the Company issued 46,667 shares of common stock to a third-party individual for the purpose of raising capital
to fund the Company’s investment in NSURE, Inc discussed in Note 3. The Company received proceeds of $1,000,000 for the
issuance of these common shares.
In
August 2020, the Company issued 8,102 shares to an employee according to an employment agreement.
In
August 2020, the Company issued 17,943 shares of common stock according to an asset purchase agreement for the acquisition of
UIS Agency, LLC for proceeds of $200,000.
In
September 2020, the Company issued 21,875 shares according to an earnout agreement regarding the acquisition of SWMT.
In
September 2020, the Company issued 31,111 shares of stock according to a stock purchase agreement and received proceeds of $200,000.
Reliance Holdings guaranteed the recipient that after 12 months of the purchase of these shares they will be worth at least $200,000
total or $100,000 respectively to each of the two recipients. If the shares at the end of 12 months are not equal to $100,000
Reliance Holdings will either transfer some of its own shares or give cash for the difference.
In
January 2019, Reliance Global Holdings, LLC, a related party, converted 63,995 shares of Series A Convertible Preferred Stock
into 639,995 shares of common stock.
In
February 2019, Reliance Global Holdings, LLC, a related party, converted 3,711 shares of Series A Convertible Preferred Stock
into 37,112 shares of common stock.
In
May 2019, the Company was to issue 33,201 shares of common stock to the members of Fortman Insurance Agency, LLC as a result of
the FIS Acquisition (see Note 4). In September 2019, Reliance Global Holdings, LLC, a related party, converted 3,321 shares of
Series A Convertible Preferred Stock into 33,201 shares of common stock which were immediately cancelled. The Company then issued
33,201 new shares of common stock to the members of Fortman Insurance Agency, LLC.
On
July 22, 2019, the Company entered into a purchase agreement with The Referral Depot, LLC (TRD) to purchase a client referral
software created exclusively for the insurance industry. The total purchase price of the software is $250,000 cash and 23,333
restricted common shares of the Company. Per the agreement the Company paid an initial payment of $50,000 at closing and the remaining
$200,000 will be paid with forty-eight equal monthly payments commencing on the first anniversary of the effective date, or July
22, 2020. As of December 31, 2019, no shares related to this acquisition have been issued. The Company has recorded the 23,333
shares as common stock issuable as of December 31, 2019.
In
September 2019, Reliance Global Holdings, LLC transferred its ownership in SWMT and FIS to the Company in exchange for 173,122
shares of restricted common stock.
In
September 2019, the Company issued 138,843 shares of common stock to the former sole shareholder of Altruis Benefits Consulting,
Inc. as a result of the ABC Acquisition (see Note 4).
In
November 2018, 26,903 shares of the Company’s common stock were transferred to EMA Financial LLC (“EMA”). The
transfer was the result of an obligation of Ethos prior to the recapitalization. The Company contested this transfer as it was
represented that the obligation was settled prior to the recapitalization. Subsequently, on May 24, 2019, the Company entered
into a Confidential Settlement Agreement and General Release to settle its dispute with EMA. Under the terms of this settlement
agreement the Company agreed to allow EMA to retain 20,177 shares of the Company’s common stock in which the Company received
6,726 of the Company’s common stock back which was subsequently cancelled. At the date of the transfer the Company’s
common stock was valued at $15.21 based on its closing price. Accordingly, the Company recorded a settlement charge of $306,981
based upon the common stock retained by EMA.
Stock
Options
During
the year ended December 31, 2019, the Company adopted the Reliance Global Group, Inc. 2019 Equity Incentive Plan (the “Plan”)
under which options exercisable for shares of common stock have been or may be granted to employees, directors, consultants, and
service providers. A total of 700,000 shares of common stock are reserved for issuance under the Plan. At December 31, 2020, there
were 466,083 shares of common stock reserved for future awards under the Plan. The Company issues new shares of common stock from
the shares reserved under the Plan upon exercise of options.
The
Plan is administered by the Board of Directors (the “Board”). The Board is authorized to select from among eligible
employees, directors, and service providers those individuals to whom options are to be granted and to determine the number of
shares to be subject to, and the terms and conditions of the options. The Board is also authorized to prescribe, amend, and rescind
terms relating to options granted under the Plan. Generally, the interpretation and construction of any provision of the Plan
or any options granted hereunder is within the discretion of the Board.
The
Plans provide that options may or may not be Incentive Stock Options (ISOs) within the meaning of Section 422 of the Internal
Revenue Code. Only employees of the Company are eligible to receive ISOs, while employees, non-employee directors, consultants,
and service providers are eligible to receive options which are not ISOs, i.e. “Non-Statutory Stock Options.” The
options granted by the Board in connection with its adoption of the Plan were Non-Statutory Stock Options.
The
fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model or the value of
the services provided, whichever is more readily determinable. The Black-Scholes option pricing model takes into account, as of
the grant date, the exercise price and expected life of the option, the current price of the underlying stock and its expected
volatility, expected dividends on the stock and the risk-free interest rate for the term of the option.
The
following is a summary of the stock options granted, forfeited or expired, and exercised under the Plan for the year ended December
31, 2020:
|
|
Options
|
|
|
Weighted Average Exercise Price Per Share
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2019
|
|
|
229,833
|
|
|
$
|
15.43
|
|
|
|
4.62
|
|
|
|
2,995,640
|
|
Granted
|
|
|
27,417
|
|
|
|
30.86
|
|
|
|
4.28
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
(23,333
|
)
|
|
|
33.43
|
|
|
|
4.23
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2020
|
|
|
233,917
|
|
|
$
|
15.43
|
|
|
|
3.63
|
|
|
|
-
|
|
The
following is a summary of the Company’s non-vested stock options as of December 31, 2019, and changes during the year ended
December 31, 2020:
|
|
Options
|
|
|
Weighted Average Exercise Price Per Share
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Non-vested at December 31, 2019
|
|
|
212,333
|
|
|
$
|
15.43
|
|
|
|
4.30
|
|
Granted
|
|
|
27,417
|
|
|
|
30.86
|
|
|
|
4.28
|
|
Vested
|
|
|
(56,875
|
)
|
|
|
13.39
|
|
|
|
2.53
|
|
Forfeited or expired
|
|
|
(23,333
|
)
|
|
|
33.43
|
|
|
|
4.23
|
|
Non-vested at December 31, 2020
|
|
|
159,542
|
|
|
$
|
13.39
|
|
|
|
2.53
|
|
During
the year ended December 31, 2020, the Board approved options to be issued pursuant to the Plan to a certain current employee totaling
23,333 shares and another employee totaling 4,083. These options have been granted with an exercise price greater than the market
value of the common stock on the date of grant and have a contractual term of 5 years. The options vest ratably over a 4-year
period through August 2024 and remain subject to forfeiture if vesting conditions are not met. Compensation cost is recognized
on a straight-line basis over the vesting period or requisite service period. During the year ended December 31, 2020 an employee
was terminated and forfeited 23,333 options that were previously issued to him.
During
the year ended December 31, 2019, the Board approved options to be issued pursuant to the Plan to certain current employees totaling
140,000 shares. These options have been granted with an exercise price equal to the market value of the common stock on the date
of grants and have a contractual term of 5 years. The options vest ratably over a 3-year period through August 2022 and remain
subject to forfeiture if vesting conditions are not met. Compensation cost is recognized on a straight-line basis over the vesting
period or requisite service period.
During
the year ended December 31, 2019, the Board approved options to be issued pursuant to the Plan to consultants totaling 46,667
shares. These options have been granted with an exercise price equal to the market value of the common stock on the date of grants
and have a contractual term of 5 years. The options vest ratably over a 3-year period through August 2022 and remain subject to
forfeiture if vesting conditions are not met. Compensation cost is recognized on a straight-line basis over the vesting period
or requisite service period.
During
the year ended December 31, 2019, the Board approved options to be issued pursuant to the Plan to nonemployee directors totaling
8,167 shares. These options have been granted with an exercise price equal to the market value of the common stock on the date
of grants and have a contractual term of 5 years. The options vest ratably over a 4-year period through November 2023 and remain
subject to forfeiture if vesting conditions are not met. Compensation cost is recognized on a straight-line basis over the vesting
period or requisite service period.
During
the year ended December 31, 2019, the Board approved options to be issued pursuant to the Plan to a service provider totaling
35,000 shares. These options have been granted with an exercise price equal to the market value of the common stock on the date
of grant and have a contractual term of 5 years. One half of these options, or 17,500 shares, vested immediately upon issuance;
the other half of these options vest on the one-year anniversary of the grant date, or March 14, 2020, unless the Company deems
the services provided to be unhelpful, in which case the second half of the options shall be void. The service period per the
agreement was from February 2019 to February 2020. As of December 31, 2019, the Company determined the services were no longer
needed, as such no services were provided subsequent to December 31, 2019. The Company deemed the services provided to be helpful
and allowed the second half of the options to vest as scheduled. As services were only provided during the year ended December
31, 2019, the full compensation cost associated with these options was recognized during the year.
The
Company determined that the options granted had a total fair value of $3,386,156 which will be amortized in future periods through
November 2023. During the year ended December 31, 2020, the Company recognized $1,304,401 of compensation expense relating to
the stock options granted to employees, directors, and consultants. As of December 31, 2020, unrecognized compensation expense
totaled $1,034,381 which will be recognized on a straight-line basis over the vesting period or requisite service period through
November 2023.
The
intrinsic value is calculated as the difference between the market value and the exercise price of the shares on December 31,
2020. The market values as of December 31, 2020 was $6.43 based on the closing bid price for December 31, 2020.
As
of December 31, 2019 the Company determined that the options granted had a total fair value of $3,343,861. During the year ended
December 31, 2019, the Company recognized $465,377 of compensation expense relating to the stock options granted to employees,
directors, and consultants and $581,999 of compensation expense relating to the stock options granted to service providers. As
of December 31, 2019, unrecognized compensation expense totaled $2,296,485.
The
intrinsic value is calculated as the difference between the market value and the exercise price of the shares on December 31,
2019. The market values as of December 31, 2019 was $28.29 based on the closing bid price for December 31, 2019.
The
Company estimated the fair value of each stock option on the grant date using a Black-Scholes option-pricing model. Black-Scholes
option-pricing models requires the Company to make predictive assumptions regarding future stock price volatility, recipient exercise
behavior, and dividend yield. The Company estimated the future stock price volatility using the historical volatility over the
expected term of the option. The expected term of the options was computed by taking the mid-point between the vesting date and
expiration date. The following assumptions were used in the Black-Scholes option-pricing model:
|
|
Year Ended December 31, 2020
|
|
|
Year Ended
December 31, 2019
|
|
Exercise price
|
|
|
$0.16 - $0.39
|
|
|
|
$0.17 - $0.27
|
|
Expected term
|
|
|
3.25 to 3.75 years
|
|
|
|
3.25 to 3.75 years
|
|
Risk-free interest rate
|
|
|
0.26% - 2.43
|
%
|
|
|
1.35% - 2.43
|
%
|
Estimated volatility
|
|
|
293.07% - 517.13
|
%
|
|
|
484.51% - 533.64
|
%
|
Expected dividend
|
|
|
-
|
|
|
|
-
|
|
Option price at valuation date
|
|
|
$0.12 - $0.31
|
|
|
|
$0.16 - $0.27
|
|
NOTE
12. EARNINGS (LOSS) PER SHARE
Basic
earnings per common share (“EPS”) applicable to common stockholders is computed by dividing earnings applicable to
common stockholders by the weighted-average number of common shares outstanding.
If
there is a loss from operations, diluted EPS is computed in the same manner as basic EPS is computed. Similarly, if the Company
has net income but its preferred dividend adjustment made in computing income available to common stockholders results in a net
loss available to common stockholders, diluted EPS would be computed in the same manner as basic EPS. Accordingly, the outstanding
Series A Convertible Preferred Stock is considered anti-dilutive in which 395,640 were issued and outstanding at December 31,
2020 and 2019, respectively. Series A Convertible Preferred Stock is convertible into common stock on a 10 for 1 basis. The outstanding
stock options are considered anti-dilutive in which 233,917 were issued and outstanding at December 31, 2020.
The
calculations of basic and diluted EPS, are as follows:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,699,005
|
)
|
|
$
|
(3,495,481
|
)
|
Basic weighted average shares outstanding
|
|
|
4,183,625
|
|
|
|
2,877,655
|
|
Basic and diluted loss per common share:
|
|
$
|
(0.88
|
)
|
|
$
|
(1.21
|
)
|
NOTE
13. LEASES
Operating
Leases
The
Company adopted ASU 2016-02, Leases, effective January 1, 2019. The standard requires a lessee to record a right-of-use asset
and a corresponding lease liability at the inception of the lease, initially measured at the present value of the lease payments.
As a result, we recorded right-of-use assets aggregating $684,083 as of January 1, 2019, utilizing a discount rate of 7.45%. That
amount consists of operating leases on buildings and office space.
ASU
2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is
allocated over the lease term, generally on a straight-line basis. As of December 31, 2020, the Company reflected accumulated
amortization of right of use assets of $437,881 related to these leases and $439,801 for the total lease liability.
In
accordance with ASU 2016-02, the right-of-use assets are being amortized over the life of the underlying leases.
As
of December 31, 2020, the weighted average remaining lease term for the operating leases is 2.63 years. The weighted average discount
rate for the operating leases is 7.45%.
Future
minimum lease payment under these operating leases consisted of the following:
Year ending December 31,
|
|
Operating Lease Obligations
|
|
2021
|
|
$
|
203,023
|
|
2022
|
|
|
164,660
|
|
2023
|
|
|
85,440
|
|
2024
|
|
|
33,000
|
|
2025
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total undiscounted operating lease payments
|
|
|
486,123
|
|
Less: Imputed interest
|
|
|
46,322
|
|
Present value of operating lease liabilities
|
|
$
|
439,801
|
|
NOTE
14. COMMITMENTS AND CONTINGENCIES
Legal
Contingencies
The
Company is subject to various legal proceedings and claims, either asserted or unasserted, arising in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty, management does not believe the outcome of any of these
matters will have a material adverse effect on our business, financial position, results of operations, or cash flows, and accordingly,
no legal contingencies are accrued as of December 31, 2020 and 2019. Litigation relating to the insurance brokerage industry is
not uncommon. As such the Company, from time to time have been, subject to such litigation. No assurances can be given with respect
to the extent or outcome of any such litigation in the future.
NOTE
15. INCOME TAXES
The
difference between the actual income tax rate versus the tax computed at the Federal Statutory rate follows:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Federal rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State net of federal
|
|
|
2.5
|
%
|
|
|
3.0
|
%
|
PPP loan forgiveness
|
|
|
2.9
|
%
|
|
|
|
|
Non-deductible acquired intangible assets
|
|
|
15
|
%
|
|
|
(18.0
|
)%
|
Valuation allowance
|
|
|
(41.4
|
)%
|
|
|
(6.0
|
)%
|
Effective income tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
The
Company did not have any material uncertain tax positions. The Company’s policy is to recognize interest and penalties accrued
related to unrecognized benefits as a component income tax expense (benefit). The Company did not recognize any interest or penalties,
nor did it have any interest or penalties accrued as of December 31, 2020 and 2019.
Deferred
income tax assets and (liabilities) consist of the following:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Deferred tax assets (liabilities)
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
1,415,227
|
|
|
$
|
1,013,793
|
|
Stock based compensation
|
|
|
540,086
|
|
|
|
-
|
|
Goodwill
|
|
|
(52,783
|
)
|
|
|
81,790
|
|
Intangibles
|
|
|
225,434
|
|
|
|
(536,411
|
)
|
Fixed assets
|
|
|
(37,976
|
)
|
|
|
3
|
|
Right of use assets
|
|
|
(99,560
|
)
|
|
|
-
|
|
Lease liabilities
|
|
|
101,000
|
|
|
|
-
|
|
Other
|
|
|
753
|
|
|
|
-
|
|
Total deferred tax assets
|
|
|
2,092,181
|
|
|
|
559,175
|
|
Valuation allowance
|
|
|
(2,092,181
|
)
|
|
|
(559,175
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company has approximately $6,580,000 of Federal Net Operating Loss Carry forwards, of which $1.3 million will begin to expire
beginning 2031 and $4.8 million will not expire but are limited to use of 80% of current year taxable income.
The
Company has approximately $1,907,000 of state net operation loss carry forward to offset future taxable income in the states in
which it currently operates, these carryforward start expiring in 2029.
Internal Revenue Code Section 382 limits the
ability to utilize net operating losses if a 50% change in ownership occurs over a three-year period. Such limitation of the net
operating losses may have occurred, but we have not analyzed it at this time as the deferred tax asset is fully reserved. On March
27, 2020, the US government signed the Coronavirus Aid, Relief and Economic Security (CARES) Act into law, a $2 trillion relief
package to provide support to individuals, businesses and government organizations during the COVID-19 pandemic. In November of
2020 $508,700 in relief was received from the PPP under the CARES Act was forgiven free of taxation.
During
the year ended December 31, 2020 and 2019, the valuation allowance increased $1,533,006 and $205,228, respectively.
The
tax periods ending December 31, 2017, 2018 & 2019 are open for examination.
NOTE
16. RELATED PARTY TRANSACTIONS
The
Company has entered into a Loan Agreement with Reliance Global Holdings, LLC, a related party under common control. There is no
term to the loan, and it bears no interest. Repayment will be made as the Company has business cash flows. The proceeds from the
various loans were utilized to fund the USBA Acquisition, the EBS Acquisition, CCS Acquisition, SWMT Acquisition, FIS Acquisition,
ABC Acquisition, and UIS Agency LLC.
As
of December 31, 2020, and the 2019 the related party loan payable was $4,666,520 and $3,462,630 respectively.
Reliance
Holdings provided $300,981 for funding of the USBA Acquisition and paid $83,162 in transaction costs on behalf of the Company.
Reliance
Holdings provided $160,523 for funding the EBS Acquisition and paid $44,353 in transaction costs on behalf of the Company.
Reliance
Holdings provided $242,484 for funding of the CCS acquisition and paid $113,247 in transaction costs on behalf of the Company.
Included in the funding this acquisition is the balance of the purchase price, having a value of $120,000, that is to be paid
in the form 8,889 shares of common stock in the Company. The Closing Shares are to be transferred from the shares owned by Reliance
Holdings and were transferred subsequent to December 31, 2018; and as a result, is a component of Loans payables, related parties
on the accompanying Consolidated Balance Sheets.
Reliance
Global Holdings, LLC provided $335,169 for funding of the SWMT Acquisition and paid $122,660 in transaction costs on behalf of
the Company.
Reliance
Global Holdings, LLC provided $779,099 for funding of the FIS Acquisition and paid $63,663 in transaction costs on behalf of the
Company.
Reliance
Global Holdings, LLC provided $1,378,961 for funding of the ABC Acquisition.
Reliance
Global Holdings, LLC provided $50,000 for funding of the purchase of software from The Referral Depot, LLC.
In
October 2019, the Company began sharing leased office space with Reliance Global Holdings, LLC. Reliance Global Holdings, LLC
leases the office space from an unrelated third party and is the only lessee listed per the lease agreement. Both Reliance Global
Holdings, LLC and the Company each pay 50% of the monthly rent payments. As the Company is not legally obligated to make payments
on the lease, this is treated as a month-to-month expense. For the year ended December 31, 2019, the Company’s paid $16,153
towards the lease and recorded as rent expense in the Statement of Operations.
At
December 31, 2020 and 2019, Reliance Holdings owned approximately 26% and 32%, respectively, of the common stock of the Company.
NOTE
17. SUBSEQUENT EVENTS
On
January 21, 2021 pursuant to authority granted by the Board of Directors of the Company, the Company implemented a 1-for-85.71
reverse split of the Company’s issued and outstanding common stock simultaneously with its up listing to the Nasdaq Capital
Market (the “Reverse Split”). The number of authorized shares remains unchanged. All share and per share information
has been retroactively adjusted to reflect the Reverse Split for all periods presented, unless otherwise indicated.
The Company filed a Form 424(b)(4) on February
8, 2021 to offer 1,800,000 shares of common stock and accompanying Series A warrants at a public offering price of $6.00 per share
and accompanying Series A warrant for aggregate gross proceeds of $10,800,000 prior to deducting underwriting discounts, commissions,
and other offering expenses.
On February 11, 2021 the Company’s
Chief Executive Officer, Ezra Beyman converted 394,493 shares of Series A Preferred Stock into common shares. The preferred stock
to common stock conversion ratio is 1:10, for a total of 3,944,930 common shares issued.
On February 11, 2021 the Company’s
Chief Executive Officer, Ezra Beyman converted approximately $3.8 million dollars of debt owed by Reliance Global Group, Inc.
into equity for a price of $6 per share. The total amount of common shares issued after conversion were 633,333.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The
following exhibits are filed with this Form 10-K.