RELI Reliance Global Group Inc

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

(Amendment No. 1)

 

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2022

 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

Commission file number: 001-40020

 

RELIANCE GLOBAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Florida		46-3390293
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
300 Blvd. of the Americas, Suite 105 Lakewood, NJ		08701
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (732) 380-4600

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		RELI		The Nasdaq Capital Market
Series A Warrants		RELIW		Nasdaq Capital Market

  

Securities registered pursuant to section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company, in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Yes ☐ No ☒

 

The aggregate market value of the common stock, $0.086 par value per share, held by non-affiliates of the registrant, based on the closing sale price of registrant’s common stock ($31.65) as quoted on the NASDAQ on June 30, 2022 (the last business day of the registrant’s most recently completed second fiscal quarter), was approximately $21 million.

 

At March 30, 2023, the registrant had 1,566,048 shares of common stock, par value $0.086 per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

 

EXPLANATORY NOTE

 

On March 30, 2023, Reliance Global Group, Inc. (the “Company”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Original 2022 10-K”), with the Securities and Exchange Commission (“SEC”). This Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) is being filed to:

 

	(i)	Include the conformed signature of Mazars USA LLP (“Mazars”), the Company’s independent registered public accounting firm, on Mazars’ Report of Independent Registered Public Accounting Firm (the “Audit Report”);
	(ii)	Revise Part II, Item 9A to indicate that the Company’s disclosure controls and procedures and the Company’s internal control over financial reporting were not effective as of December 31, 2022; and
	(iii)	Provide current dated certifications.

 

With respect to (i) above, although Mazars delivered to the Company a manually signed copy of the Audit Report, the version of the Original 2022 10-K that was filed with the SEC inadvertently omitted Mazar’s conformed signature on the copy of the Audit Report included in Part II, Item 8 of the 2022 10-K. Therefore, in this Amendment No. 1, Part IV, Item 15 has been replaced in its entirety, solely to include Mazars’ conformed signature on the Audit Report. No changes to the financial statements or notes have been made in Amendment No. 1.

 

With respect to (ii) above, as disclosed by the Company in a Current Report on Form 8-K filed on May 18, 2023 with the SEC, on May 12, 2023, subsequent to the filing of the Original 2022 10-K, the Company determined that the following financial statements should be restated and should no longer be relied upon:

 

	(i)	The Company’s unaudited consolidated financial statements for the three months ended March 31, 2022 included in the Company’s Quarterly Report on Form 10-Q, filed with the SEC on May 16, 2022 (the “Q1 2022 10-Q”);
	(ii)	The Company’s unaudited consolidated financial statements for the three and six months ended June 30, 2022 included in the Company’s Quarterly Report on Form 10-Q, filed with the SEC on August 15, 2022 (the “Q2 2022 10-Q”)
	(iii)	The Company’s unaudited consolidated financial statements for the three and nine months ended September 30, 2022 included in the Company’s Quarterly Report on Form 10-Q, filed with the SEC on November 14, 2022 (the “Q3 2022 10-Q” and collectively with the Q1 2022 10-Q and the Q2 2022 10-Q, the “10-Qs”).

 

Subsequent to the Company’s filing with the SEC of the 10-Qs, the Company performed an evaluation of its accounting in connection with the calculation of its basic earnings per share (“EPS”) and diluted EPS and identified errors in such calculations. The errors resulted from improper application of sequencing rules, a miscalculation of the numerator used in the determination of diluted EPS, and a miscalculation of the denominator used in the determination of weighted average shares outstanding for both basic EPS and diluted EPS, and the Company determined that the errors required adjustments of the previously issued financial statements in the 10-Qs.

 

The Company determined that the reporting effects of the above errors had a material impact to the Company’s unaudited consolidated financial statements included in the 10-Qs. As a result, the unaudited consolidated financial statements for the three months ended March 31, 2022, the unaudited consolidated financial statements for the three and six months ended June 30, 2022, and the unaudited consolidated financial statements for the three and nine months ended September 30, 2022 were restated, and the Company filed an amendment to each of the 10-Qs with the SEC on May 18, 2023.

 

The Company’s management concluded that in light of the errors mentioned above, a material weakness existed in the Company’s internal control over financial reporting as of March 31, 2022, June 30, 2022 and September 30, 2022, and the Company’s disclosure controls and procedures were not effective as of such dates. The material weakness was disclosed in the amendment to each of the 10-Qs, as filed with the SEC on May 18, 2023, as well as in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2023, as filed with the SEC on May 18, 2023.

 

Although the Company was not aware of any material weaknesses, as of December 31, 2022, in its internal control over financial reporting and in its disclosure controls and procedures as of the filing date of the Original 2022 10-K, in this Amendment No. 1, the Company is replacing Part II, Item 9A (Controls and Procedures) in its entirety to disclose the existence of such material weaknesses as of December 31, 2022.

 

Amendment No. 1 speaks as of the filing date of the Original 2022 10-K, and does not reflect events that may have occurred subsequent to the filing date of the Original 2022 10-K. Except as described above, no other changes have been made to the Original 2022 10-K, and Amendment No. 1 does not modify, amend or update in any way revenue, expenses, net income (loss), or any of the financial or other information contained in the Original 2022 10-K. Amendment No. 1 should be read in conjunction with the Original 2022 10-K and the Company’s other filings with the SEC. The filing of this Amendment No. 1 is not an admission that the Original 2022 10-K, when filed, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.

 

 

Item 9A. Controls and Procedures

 

Controls and Procedure Requirements

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this annual report, is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our current chief executive officer and chief financial officer (our “Certifying Officers”), the effectiveness of our disclosure controls and procedures as of December 31, 2022, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of December 31, 2022, our disclosure controls and procedures were not effective.

 

The Company determined it had a material weakness in its disclosure controls and procedures as it pertains to earnings per share (EPS) for the fiscal year ended December 31, 2022. During the quarter ended March 31, 2023, the Company mitigated this deficiency by consulting with qualified advisors that have in-depth EPS expertise. These advisors will assist the Company in the calculations and disclosures of EPS for future reporting periods.

 

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 14d-14(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial reporting reliability and financial statement preparation and presentation. In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making the assessment, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO – 2013) in Internal Control-Integrated Framework. Based on its assessment, management concluded that, as of December 31, 2022, our Company’s internal control over financial reporting was not effective due to the material weakness in disclosure controls and procedures discussed above.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

a)	The following documents are filed as part of this Annual Report on Form 10-K
	(1)	Financial Statements
		See Index to Financial Statements on page F-1 of this Annual Report on Form 10-K
	(2)	Financial Statement Schedules
		Schedules not listed above have been omitted because they are not required, not applicable, or the required information is otherwise included elsewhere in Annual Report on Form 10-K.
	(3)	Exhibits

 

 

Report of Independent Registered Public Accounting Firm PCAOB ID 339

 

To the Stockholders and the Board of Directors of Reliance Global Group, Inc. and Subsidiaries

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Reliance Global Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period December 31, 2022 and 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period December 31, 2022 and 2021, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

 

 

Impairment Evaluation of Goodwill

 

Critical Audit Matter Description

 

As described in Note 6 to the consolidated financial statements, the Company’s consolidated goodwill balance was approximately $19 million as of December 31, 2022. Management tests goodwill for impairment on October 1 of each year, or more frequently should an event or a change in circumstances occur that would indicate the carrying value may be impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment is recorded equal to the amount by which the carrying value exceeds the fair value, up to the amount of goodwill associated with the reporting unit. As a result of management’s assessment, the Company recognized impairment charges of $14.3 million related to goodwill during the year ended December 31, 2022.

 

The principal considerations for our determination that the goodwill impairment assessment was a critical audit matter are that there is significant judgment in selection of the valuation methods to use along with assumptions used to estimate the future revenues and cash flows, including revenue growth rates, operating expenses and cash outflows necessary to support the cash flows, weighted average costs of capital and future market conditions as well as the valuation methodologies applied by the Company. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to managements inputs and selection of methods used. In addition, the audit effort involved the use of auditor employed professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

 

How the Critical Matter Was Addressed in the Audit

 

The primary audit procedures we performed to address this critical audit matter included:

 

-

Obtaining an understanding over the Company’s process for evaluation whether an event of a change in circumstances occur that would indicate the carrying value of goodwill may be impaired.

 

-

Utilizing a firm employed valuation specialist with the skills and knowledge to assist in: (i) evaluating and challenging the reasonableness of the valuation methods selected by management to determine the fair value of the Company, (ii) evaluating management’s significant assumptions by comparing inputs to market data (iii) performing a control premium sensitivity study to determine the impact to market approach, and (iv) performing recalculations of the method utilized by management.

 

-

Testing the completeness and accuracy of the underlying data utilized by management in their evaluation of goodwill impairment.

 

We have served as the Company’s auditor since 2020.

 

/s/ Mazars USA LLP

 

Fort Washington, Pennsylvania

 

March 30, 2023

 

 

Reliance Global Group, Inc. and Subsidiaries

Consolidated Balance Sheets

 

		2022				2021
		December 31				December 31,
		2022				2021
Assets
Current assets:
Cash		$	505,410			$	4,136,180
Restricted cash			1,404,359				484,542
Accounts receivable			1,067,544				1,024,831
Accounts receivable, related parties			21,887				7,131
Other receivables			16,852				-
Prepaid expense and other current assets			249,327				2,328,817
Total current assets			3,265,379				7,981,501
Property and equipment, net			186,883				130,359
Right-of-use assets			1,182,079				1,067,734
Investment in NSURE, Inc.			900,000				1,350,000
Intangibles, net			13,757,370				7,078,900
Goodwill			19,112,733				10,050,277
Other non-current assets			23,284				16,792
Total assets		$	38,427,729			$	27,675,563
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable and other accrued liabilities		$	1,457,967			$	2,759,160
Short term financing agreements			154,017				-
Chargeback reserve			915,934				-
Other payables			1,476,113				81,500
Current portion of long-term debt			1,118,721				913,920
Current portion of leases payable			518,054				276,009
Earn-out liability, current portion			2,153,478				3,297,855
Warrant commitment			-				37,652,808
Total current liabilities			7,794,284				44,981,252
Loans payable, related parties, less current portion			1,669,514				353,766
Long term debt, less current portion			12,349,673				7,085,325
Leases payable, less current portion			714,068				805,326
Earn-out liability, less current portion			556,000				516,023
Warrant liabilities			6,433,150				-
Total liabilities			29,516,689				53,741,692
Stockholders’ equity (deficit):
Preferred stock, $0.086 par value; 750,000,000 shares authorized and 0 issued and outstanding as of December 31, 2022 and December 31, 2021, respectively			-				-
Common stock, $0.086 par value; 133,333,333 shares authorized and 1,219,573 and 730,407 issued and outstanding as of December 31, 2022 and December 31, 2021, respectively			104,883				62,815
Additional paid-in capital			35,798,139				27,329,201
Stock subscription receivable			-				(20,000,000	)
Accumulated deficit			(26,991,983	)			(33,458,145	)
Total stockholders’ equity (deficit)			8,911,039				(26,066,129	)
Total liabilities and stockholders’ equity		$	38,427,729			$	27,675,563

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Reliance Global Group, Inc. and Subsidiaries

Consolidated Statements of Operations

 

		Year ended				Year ended
		December 31, 2022				December 31, 2021
Revenue
Commission income		$	16,755,884			$	9,710,334
Total revenue			16,755,884				9,710,334
Operating expenses
Commission expense			3,384,734				2,427,294
Salaries and wages			8,592,051				4,672,988
General and administrative expenses			6,717,889				3,589,221
Marketing and advertising			2,584,895				325,838
Depreciation and amortization			2,801,824				1,607,313
Goodwill impairment			14,373,374				-
Total operating expenses			38,454,767				12,622,654
Loss from operations			(21,698,883	)			(2,912,320	)
Other income (expense)
Other expense, net			(899,913	)			(533,337	)
Recognition and change in fair value of warrant liabilities			29,064,958				(17,652,808	)
Total other income (expense)			28,165,045				(18,186,145	)
Net income (loss)		$	6,466,162			$	(21,098,465	)
Basic and diluted earnings (loss) per share		$	(0.42	)		$	(31.34	)
Weighted average number of shares outstanding – Basic and diluted			1,094,989				673,137

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Reliance Global Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

 

		Reliance Global Group, Inc.
		Preferred stock								Common stock								Common stock issuable								Additional paid-in				Subscription				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				capital				Receivable				Deficit				Total
Balance, December 31, 2021			-			$	-				730,407			$	62,815				-			$	-			$	27,329,201			$	(20,000,000	)		$	(33,458,145	)		$	(26,066,129	)
Share based compensation			-				-				-				-				-				-				1,249,873				-				-				1,249,873.00
Shares issued in private placement			9,076				781				178,060				15,313				-				-				(16,043	)			20,000,000				-				20,000,051.00
Shares issued pursuant to acquisition of Medigap			-				-				40,402				3,475				-				-				4,759,976				-				-				4,763,451.00
Series A warrants			-				-				25,000				2,150				-				-				2,472,850				-				-				2,475,000.00
Issuance of Series C warrants in exchange for common shares											(218,462	)			(18,788	)			-				-				18,788				-				-				-
Shares issued for vested stock awards			-				-				14,675				1,262				-				-				(1,262	)			-				-				-
Issuance of common stock for conversion of Series C warrants			-				-				218,462				18,788				-				-				(17,452	)			-				-				1,336.00
Issuance of common stock for conversion of Series D warrants			-				-				81,423				7,002				-				-				(6,207	)			-				-				795.00
Issuance of common stock for conversion of Series B warrants			-				-				1,667				143				-				-				12,357				-				-				12,500.00
Warrant liability reclassified to equity upon exercise of Series B Warrants			-				-				-				-				-				-				8,000				-				-				8,000.00
Shares issued due to conversion of preferred stock			(9,076	)			(781	)			147,939				12,723				-				-				(11,942	)			-				-				-
Net Income			-				-				-				-				-				-				-				-				6,466,162				6,466,162
Balance, December 31, 2022			-				-				1,219,573			$	104,883				-				-			$	35,798,139				-			$	(26,991,983	)		$	8,911,039

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Reliance Global Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

 

		Reliance Global Group, Inc.
		Preferred stock								Common stock								Common stock issuable								Additional paid-in				Subscription				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				capital				Receivable				Deficit				Total
Balance, December 31, 2020			395,640			$	33,912				282,735			$	24,315				1,556			$	340,000			$	11,898,441			$	-			$	(12,359,680	)		$	(63,012	)
Balance			395,640			$	33,912				282,735			$	24,315				1,556			$	340,000			$	11,898,441			$	-			$	(12,359,680	)		$	(63,012	)
Share based compensation			-				-				-				-				-				-				658,077				-				-				658,077
Shares issued for services			-				-				1,000				86				-				-				90,964				-				-				91,050
Shares issued due to public offering, net of offering costs of $1,672,852			-				-				120,000				10,320				-				-				9,098,828				-				-				9,109,148
Over-allotment shares from offering, net of offering costs of $250,928			-				-				18,000				1,548				-				-				1,364,825				-				-				1,366,373
Warrants sold during public offering at quoted price			-				-				-								-				-				20,700				-				-				20,700
Shares issued due to conversion of preferred stock			(395,660	)			(33,912	)			263,773				22,685				-				-				11,227				-				-				-
Shares issued due to conversion of debt			-				-				42,222				3,631				-				-				3,796,369				-				-				3,800,000
Rounding shares related to initial public offering			20				-				126				10				-				-				(10	)			-				-				-
Shares issued pursuant to software purchase			-				-				1,556				134				(1,556	)			(340,000	)			339,866				-				-				-
Shares issued pursuant to acquisition of Kush			-				-				995				86				-				-				49,914				-				-				50,000
Stock subscriptions			-				-				-				-				-				-				-				(20,000,000	)			-				(20,000,000	)
Net loss			-				-				-				-				-				-				-				-				(21,098,465	)			(21,098,465	)
Balance, December 31, 2021			-			$	-				730,407			$	62,815				-			$	-			$	27,329,201			$	(20,000,000	)		$	(33,458,145	)		$	(26,066,129	)
Balance			-			$	-				730,407			$	62,815				-			$	-			$	27,329,201			$	(20,000,000	)		$	(33,458,145	)		$	(26,066,129	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Reliance Global Group, Inc. and Subsidiaries and Predecessor

Consolidated Statements of Cash Flows

 

		2022				2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	6,466,162			$	(21,098,465	)
Adjustment to reconcile net income to net cash used in operating activities:
Depreciation and amortization			2,801,824				1,607,313
Goodwill impairment			14,373,374
Amortization of debt issuance costs and accretion of debt discount			41,875				22,822
Non-cash lease expense			36,442				7,329
Stock compensation expense			1,249,873				749,127
Earn-out fair value and write-off adjustments			524				(359,470	)
Change in fair value of warrant liability			(29,064,958	)			17,652,808
Change in operating assets and liabilities:
Accounts payables and other accrued liabilities			(1,304,652	)			(531,123	)
Accounts receivable			49,876				(162,234	)
Accounts receivable, related parties			(14,756	)			(7,131	)
Note receivables			-				3,825
Other receivables			(16,852	)			1,952
Other payables			269,613				19,000
Chargeback reserve			(568,539	)			-
Other non-current assets			(6,492	)			(14,992	)
Prepaid expense and other current assets			2,496,689				(144,036	)
Net cash used in operating activities			(3,189,997	)			(2,253,275	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from partial sale of investment in NSURE			450,000
Purchase of property and equipment			(71,212	)			(71,108	)
Business acquisitions, net of cash acquired			(24,138,750	)			(1,608,586	)
Purchase of intangibles			(882,350	)			(619,666	)
Net cash used in investing activities			(24,642,312	)			(2,299,360	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings of debt			-				-
Principal repayments of debt			(875,010	)			(887,455	)
Debt issuance costs			(214,257	)			-
Loans acquired through acquisitions			6,520,000				-
Issuance of common shares in exchange for Series C and D warrants			2,131				-
Proceeds from loans payable, related parties			1,500,000				2,931
Payments of loans payable, related parties			(184,252	)			(515,685	)
Earn-out liability			(1,704,925	)			(452,236	)
Exercise of warrants into common stock			2,475,000				-
Repayments on short term financing			(263,182	)
Private Placement of shares and warrants			17,853,351				10,496,221
Issuance of common shares in exchange for Series B warrants			12,500				-
Net cash provided by financing activities			25,121,356				8,643,776
Net increase (decrease) in cash and restricted cash			(2,710,953	)			4,091,141
Cash and restricted cash at beginning of year			4,620,722				529,581
Cash and restricted cash at end of year			1,909,769				4,620,722
SUPPLEMENTAL DISCLOSURE OF CASH AND NON-CASH TRANSACTIONS:
Cash paid for interest			863,936				456,482
Issuance of Series D warrants			6,930,335				-
Issuance of placement agent warrants			1,525,923				-
Prepaid insurance acquired through short-term financing			417,199				-
Conversion of preferred stock into common stock			190,069				340,268
Conversion of debt into equity			-				3,800,000
Cashless conversion of Series D Warrants for common stock			36,761				-
Common stock issued pursuant to acquisition			4,763,451				50,000
Common stock issued in lieu of services			-				91,050
Issuance of common stock pursuant to the purchase of software			-				340,000
Unpaid deferred transaction costs			-				2,146,700
Stock subscriptions			-				20,000,000
Acquisition of business deferred purchase price			1,125,000				-
Warrant liability reclassified to equity upon exercise of Series B Warrants			8,000
Lease assets acquired in exchange for lease liabilities			628,004				861,443

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Reliance Global Group, Inc. and Subsidiaries

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”), a related party acquired control of the Company. Ethos Media Network, Inc. was then renamed on October 18, 2018.

 

On May 1, 2021, the Company acquired the assets of J.P. Kush and Associates, Inc., an independent healthcare insurance agency headquartered in Michigan (see Note 3).

 

On January 10, 2022, the Company acquired the assets of Medigap Healthcare Insurance Company, LLC, an unaffiliated insurance brokerage company headquartered in Florida (see Note 3).

 

On April 26, 2022, the Company acquired the assets of Barra & Associates, LLC., an unaffiliated full-service insurance agency headquartered in Illinois (see Note 3).

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying consolidated 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.

 

Liquidity

 

As of December 31, 2022, the Company’s reported cash and restricted cash aggregated balance was approximately $1,910,000, current assets were approximately $3,265,000, while current liabilities were approximately $7,794,000. As of December 31, 2022, the Company had a working capital deficit of approximately $4,529,000 and stockholders’ equity of approximately $8,911,039. For the year ended December 31, 2022, the Company reported net income of approximately $6,466,162, which includes a non-cash goodwill impairment of approximately $14,373,000, offset by a non-cash, non-operating measurement gain on the warrant commitment of approximately $29,065,000. The Company reported negative cash flows from operations of approximately $3,190,000. The Company completed a capital offering in February 2021 and January 2022 that raised net proceeds of approximately $10,496,000 and $17,853,000, respectively. As noted in Note 17 - Subsequent Events, pursuant to a securities purchase agreement which closed on March 16, 2023, the Company received funds net of transaction costs of approximately $3,446,000, to be used primarily for working capital.

 

Management believes the company’s financial position and continued ability to raise capital to be reasonable and sufficient. Based on our assessment, we do not believe there are any conditions or events that, in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern within one year of filing these financial statements with the Securities and Exchange Commission (“SEC”).

 

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 its estimates on historical experience and on assumptions believed to be reasonable under the circumstances. Actual results could differ materially from those estimates.

 

Cash and Restricted 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 includes cash pledged as collateral to secure obligations and/or all cash whose use is otherwise limited by contractual provisions.

 

At times, some cash balances held in banks may exceed the Federal Deposit Insurance Corporation, or FDIC, standard deposit insurance limit of $250,000.

 

F-8

 

The reconciliation of cash and restricted cash reported within the applicable balance sheet accounts that sum to the total of cash and restricted cash presented in the statement of cash flows is as follows:

 SCHEDULE OF RESTRICTED CASH IN STATEMENT OF CASH FLOW

		December 31, 2022				December 31, 2021
Cash		$	505,410			$	4,136,180
Restricted cash			1,404,359				484,542
Total cash and restricted cash		$	1,909,769			$	4,620,722

 

Property and Equipment

 

Property and equipment is stated at cost, less accumulated depreciation. Depreciation is recognized over an asset’s estimated useful life 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. Certain capitalized software has been reclassified in the consolidated balance sheet from property and equipment, net to intangibles, net and comparative periods have been adjusted accordingly. Maintenance and repairs are charged to expense as incurred. Estimated useful lives of the Company’s Property and Equipment are as follows:

 SCHEDULE OF ESTIMATED USEFUL LIVE PROPERTY AND EQUIPMENT

		Useful Life (in years)
Computer equipment		5
Office equipment and furniture		7
Leasehold improvements		Shorter of the useful life or the lease term

 

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 — Observable inputs that reflect quoted prices (unadjusted) in active markets for identical assets and liabilities;

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.

 

As of December 31, 2022 and 2021 respectively, the Company’s balance sheet includes certain financial instruments, including cash, notes receivables, accounts payable, 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 a market index.

 

Warrant Liabilities: The Company’s warrant liabilities (see Note 9, Warrant Liabilities) represent liability-classified derivative financial instruments recorded at fair value on a recurring basis. The fair value of the Warrant Liabilities includes significant inputs unobservable in the market and thus are considered Level 3. The Company measured the fair value of the warrant liabilities at the issuance date, December 22, 2022, and subsequently at the balance sheet date, using a binomial option pricing model. The following summarizes the significant unobservable inputs, not accounting for the Reverse Split-2023:

 SCHEDULE OF EARN OUT LIABILITY

		December 22, 2022				December 22, 2021
Stock price		$	0.57			$	6.44
Volatility			105.0	%			90	%
Time to Expiry			4.01				5
Dividend yield			0	%			0	%
Risk free rate			4.1	%			1.10	%

 

F-9

 

The following reconciles the warrant liabilities for the years ended December 31, 2022 and 2021:

 SCHEDULE OF RECONCILES WARRANT COMMITMENT

		Years ended December 31, 2022 and 2021
		Series B Warrant Commitment				Series B warrant liabilities				Placement agent warrants				Total
Beginning balance, December 31, 2020			-				-				-				-
Initial recognition			20,244,497				-				-				20,244,497
Unrealized (gain) loss			17,408,311				-				-				17,408,311
Ending balance, December 31, 2021		$	37,652,808			$	-			$	-			$	37,652,808
Beginning balance, December 31, 2021		$	37,652,808			$	-			$	-			$	37,652,808
Initial recognition			-				55,061,119				1,525,924				56,587,043
Unrealized (gain) loss			17,408,311				(48,668,869	)			(1,477,024	)			(32,737,582	)*
Warrants exercised or transferred			(55,061,119	)			(8,000	)			-				(55,069,119	)
Ending balance, December 31, 2022			-				6,384,250				48,900				6,433,150

 

*	Recognition and change in fair value of warrant liabilities per income statement is $29,064,958. The difference of $3,672,624 is made up of the Warrant issuance costs.

 

Earn-out liabilities: The Company generally values its Level 3 earn-out liabilities using the income valuation approach. Key valuation inputs include contingent payment arrangement terms, projected revenues and cash flows, rate of return, and probability assessments. The following table summarizes the significant unobservable inputs used in the fair value measurements:

 SCHEDULE OF FAIR VALUE MEASUREMENTS

		December 31, 2022		December 31, 2021
Valuation technique		Discounted cash flow		Discounted cash flow
Significant unobservable input		Projected revenue and probability of achievement		Projected revenue and probability of achievement

 

The Company values its Level 3 earn-out liability related to the Barra Acquisition using a Monte Carlo simulation in a risk-neutral framework (a special case of the Income Approach). The following summarizes the significant unobservable inputs:

 SCHEDULE OF EARN OUT LIABILITY

		December 31, 2022
WACC Risk Premium:			14.0	%
Volatility			50.0	%
Credit Spread:			7.7	%
Payment Delay (days)			90
Risk free rate			USD Yield Curve
Discounting Convention:			Mid-period
Number of Iterations			100,000

 

Undiscounted remaining earn out payments are approximately $2,967,592 as of December 31, 2022. The following table reconciles fair value of earn-out liabilities for the years ending December 31, 2022 and 2021:

 SCHEDULE OF GAIN OR LOSSES RECOGNIZED FAIR VALUE

		December 31, 2022				December 31, 2021
Beginning balance – January 1		$	3,813,878			$	2,931,418
Acquisitions and Settlements			(1,104,925	)			1,160,562
Period adjustments:
Fair value changes included in earnings*			524				(278,102	)
Ending balance		$	2,709,478			$	3,813,878
Less: Current portion			(2,153,478	)			(3,297,855	)
Ending balance, less current portion			556,000				516,023

 

*	Recorded as a reduction to general and administrative expenses

 

F-10

 

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, 2022, and 2021, unamortized deferred financing costs were $313,829, and $134,528, 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, assets acquired, liabilities assumed, and 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 such as earn-outs, the Company records the contingent consideration at fair value at the acquisition date. The Company remeasures fair value as of each reporting date and changes resulting from events after the acquisition date, 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 and accretion costs 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. No impairment was recognized during the periods presented.

 

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 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 (if any) other than goodwill 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.

 

Financial Instruments

 

The Company evaluates issued financial instruments for classification as either equity or liability based on an assessment of the financial instrument’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the financial instruments issued are freestanding pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and, if applicable whether the financial instruments meet all of the requirements for equity classification under ASC 815, including whether the financial instruments are indexed to the Company’s own Common Stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of issuance and as of each subsequent reporting period end date while the financial instruments are outstanding. Financial instruments that are determined to be liabilities under ASC 480 or ASC 815 are held at their initial fair value and remeasured to fair value at each subsequent reporting date, with changes in fair value recorded as a non-operating, non-cash loss or gain, as applicable.

 

The Company’s financial instruments consist of derivatives related to the warrants issued with the securities purchase agreement as discussed in Note 9, Warrant Liabilities. The accounting treatment of derivative financial instruments requires that we record the derivatives at their fair values as of the inception date of the debt agreements and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense at each balance sheet date. Upon the determination that an instrument is no longer subject to derivative accounting, the fair value of the derivative instrument at the date of such determination will be reclassified to paid in capital.

 

F-11

 

Revenue Recognition

 

The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606 Revenue from Contracts with Customers which at its core, recognizes 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.

 

The Company’s revenue is primarily comprised of agency commissions earned from insurance carriers (the “Customer” or “Carrier”) related to insurance plans produced through brokering, producing and servicing agreements between insurance carriers and members. The Company defines a “Member” as an individual, family or entity currently covered or seeking insurance coverage.

 

The Company focuses primarily on agency services for insurance products in the “Healthcare” and property and casualty, which includes auto (collectively “P&C”) space, with nominal activity in the life insurance and bond sectors. Healthcare includes plans for individuals and families, Medicare supplements, ancillary and small businesses. The Company also earns revenue in the “Insurance Marketing” space as discussed further below.

 

Consideration for all agency services typically is based on commissions calculated by applying contractual commission rates to policy premiums. For P&C, commission rates are applied to premiums due, whereas for healthcare, commission rates, including override commissions, are applied to monthly premiums received by the Carrier.

 

The Company has two forms of billing practices, “Direct Bill” and “Agency Bill”. With Direct Bill, Carriers bill and collect policy premium payments directly from Members without any involvement from the Company. Commissions are paid to the Company by the Carrier in the following month. With Agency Bill, the Company bills Members premiums due and remits them to Carriers net of commission earned.

 

The following outlines the core principles of 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.

 

F-12

 

Healthcare revenue recognition:

 

The Company identifies a contract when it has a binding agreement with a Carrier, the Customer, to provide agency services to Members.

 

There typically is one performance obligation in contracts with Carriers, to perform agency services that culminate in monthly premium cash collections by the Carrier. The performance obligation is satisfied through a combination of agency services including, marketing carrier’s insurance plans, soliciting Member applications, binding, executing and servicing insurance policies on a continuous basis throughout a policy’s life cycle which includes and culminates with the Customer’s collection of monthly premiums. No commission is earned if cash is not received by Carrier. Thus, commission revenue is earned only after a month’s cash receipts from Members’ dues is received by the Customer. Each month’s Carrier cash collections is considered a separate unit sold and transferred to the Customer i.e., the satisfaction of that month’s performance obligation.

 

Transaction price is typically stated in a contract and usually based on a commission rate applied to Member premiums paid and received by Carrier. The Company generally continues to receive commission payments from Carriers until a Member’s plan is cancelled or the Company terminates its agency agreement with the Carrier. Upon termination, the Company normally will no longer receive any commissions from Carriers even on business still in place. In some instances, trailing commissions could occur which would be recognized similar to other Healthcare revenue. With one performance obligation, allocation of transaction price is normally not necessary.

 

Healthcare typically utilizes the Direct Bill method.

 

The Company recognizes revenue at a point in time, when it satisfies its monthly performance obligation and control of the service transfers to the Customer. Transfer occurs when Member insurance premium cash payments are received by the Customer. The Customer’s receipt of cash is the culmination and complete satisfaction of the Company’s performance obligation, and the earnings process is complete.

 

With Direct Bill, since the amount of monthly Customer cash receipts is unknown to the Company until the following month when notice is provided by Customer to Company, the Company accrues revenue at each period end. Any estimated revenue accrued and recognized at a period-end is trued up for financial reporting per actual revenue earned as provided by the Customer during the following month.

 

P&C revenue recognition:

 

The Company identifies a contract when it has a binding agreement with a Carrier, the Customer, to provide agency services to Members.

 

There typically is one performance obligation in contracts with Customers, to perform agency services to solicit, receive proposals and bind insurance policies culminating with policy placement. Commission revenue is earned at the time of policy placement.

 

Transaction price is typically stated in a contract and usually based on commission rates applied to Member premiums due. With one performance obligation, allocation of transaction price is normally not necessary.

 

P&C utilizes both the Agency Bill and Direct Bill methods, depending on the Carrier.

 

The Company recognizes revenue at a point in time when it satisfies its performance obligation and control of the service transfers to the Customer. Transfer occurs when the policy placement process is complete.

 

With both Direct Bill and Agency Bill, the Company accrues commission revenue in the period policies are placed. With Agency Bill, payment is typically received from Members in the month earned, however with Direct Bill, payment is typically received from Carriers in the month subsequent to the commissions being earned.

 

F-13

 

Insurance Marketing revenue recognition:

 

Medigap, a consolidated wholly owned subsidiary of the Company earns commission revenue by selling bound insurance policies with all renewal rights to insurance marketing organizations (the “IM Customer”). The IM Customers utilize innovative actuarial models to value and price policies purchased based on future projections. IM Customers pay a one-time commission per policy purchased to selling agencies based on a pre-agreed formula outlined in the parties’ contractual agreement. Commission payments are subject to chargeback in the event a policy is cancelled or lapses within 3 months of a policy’s effective date or until the first three payments are received from the insured party, depending on the IM Customer Contract.

 

The Company identifies a contract when it has a binding agreement to sell issued insurance policies to the IM Customer.

 

There is one performance obligation in IM Customer contracts, to sell the rights in Company procured issued insurance policies to the IM Customer. The performance obligation is satisfied when the rights to an issued policy have been transferred to the IM Customer.

 

Transaction price is stated in a contract and is a set range of commission amounts based on each policy sold. There are two variable components to consideration received:

 

	a)	Commissions are only earned once a policy is “Placed”, defined as, an active policy sold to the IM Customer where the IM Customer has received the initial insurance carrier payment with respect to such policy. The Company requires end-user insured parties to pay the initial premium to the insurance carrier upon issuance of a policy. Insurance carrier in turn pays IM Customer its initial payment soon thereafter. Thus, upon sale of an issued policy to IM Customer, the Company has provided a bound issued policy and ensured first premium payment has been completed by insured party. This results in virtual assurance that the IM Customer will receive its initial insurance carrier payment, and it is more than probable that a significant revenue reversal will not occur. The Company thus considers all policies sold to the IM Customer to be Placed for revenue recognition purposes.
	b)	Commission revenue is subject to chargeback in full if a policy is cancelled or lapses within three months from the policy effective date or if the insured party does not make the first three payments of the policy. The Company uses historical activity as well as current factors to estimate the unconstrained variable consideration for recognition per the expected value method. A chargeback reserve liability is credited for the difference between cash consideration received and variable consideration recognized. At each reporting period, the Company remeasures the chargeback reserve liability and recognizes any change as an increase or decrease to the then current period revenue. As of March 31, 2022 and December 31, 2021, the chargeback reserve liability was $1,585,435 and $0, respectively.

 

With one performance obligation, allocation of transaction price is normally not necessary.

 

The Company recognizes revenue at a point in time when it satisfies its performance obligation and control of an insurance policy transfers to the IM Customer. Transfer of control occurs when the Company submits the Policy to the IM Customer.

 

IM Customers generally pay the Company weekly, and accruals are recorded as necessary at period end.

 

Other revenue policies: 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 condensed consolidated statements of operations.

 

F-14

 

When applicable, commission revenue is recognized net of any deductions for estimated commission adjustments due to lapses, policy cancellations, and revisions in coverage.

 

The Company could earn additional revenue from contingent commissions, profit-sharing, override and bonuses based on meeting certain revenue or profit targets established periodically by the Carriers (collectively, “Contingent Commissions”). Contingent Commissions are earned when the Company achieves targets established by Carriers. The Carriers notify the Company when it has achieved the target. The Company recognizes revenue for any Contingent Commissions at the time it is reasonably assured that a significant revenue reversal is not probable, which is generally when a Carrier notifies the Company that it is on track or has earned a Contingent Commission.

 

The following table disaggregates the Company’s revenue by line of business, showing commissions earned:

 SCHEDULE OF DISAGGREGATION REVENUE

Year ended December 31, 2022		Medical/Life				Property and Casualty				Total
Regular
EBS		$	798,412			$	-			$	798,412
USBA			52,470				-				52,470
CCS/UIS			-				254,325				254,325
Montana			1,868,137				-				1,868,137
Fortman			1,274,649				842,961				2,117,610
Altruis			4,044,449				-				4,044,449
Kush			1,536,456				-				1,536,456
Medigap			4,994,002				-				4,994,002
RELI Exchange			312,239				777,784				1,090,023
Revenue		$	14,880,814			$	1,875,070			$	16,755,884

 

Year ended December 31, 2021		Medical/Life				Property and Casualty				Total
Regular
EBS		$	799,474			$	-			$	799,474
USBA			60,129				-				60,129
CCS/UIS			-				333,874				333,874
Montana			1,744,515				-				1,744,515
Fortman			1,173,215				958,521				2,131,736
Altruis			3,313,453				-				3,313,453
Kush			1,327,153				-				1,327,153
Revenue		$	8,417,939			$	1,292,395			$	9,710,334

 

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.

 

F-15

 

Stock-Based Compensation

 

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. To the extent possible, the Company will estimate and recognize expected forfeitures.

 

Leases

 

The Company recognizes leases in accordance with Accounting Standards Codification Topic 842, “Leases” (“ASC 842” or “ASU 2016-12”). This standard provides 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 are recognized as a single lease expense, generally on a straight-line basis.

 

The Company is the lessee in a contract when the Company obtains the right to use an asset. We currently lease real estate and office space under non-cancelable operating lease agreements. When applicable, consideration in a contract is allocated between lease and non-lease components. Lease payments are discounted using the implicit discount rate in the lease. If the implicit discount rate for the lease cannot be readily determined, the Company uses an estimate of its incremental borrowing rate. The Company did not have any contracts accounted for as finance leases as of December 31, 2022, or 2021. Operating leases are included in the line items right-of-use assets, current portion of leases payable, and leases payable, less current portion in the consolidated balance sheets. 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 the consolidated statement of operations. The Company determines a lease’s term by agreement with lessor and includes lease extension options and variable lease payments when option and/or variable payments are reasonably certain of being exercised or paid.

 

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.

 

Prior Period Adjustments

 

The Company identified certain immaterial adjustments impacting the prior reporting period. Specifically, the Company identified adjustments to correct certain asset and equity accounts in relation to historical purchase price allocation accounting and adjustments to true up retained earnings for certain historical accrued revenues.

 

F-16

 

The Company assessed the materiality of the adjustments to prior period financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. (SAB) 99, Materiality, and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, and ASC 250, Accounting Changes and Error Corrections.

 

Accordingly, the Company’s comparative consolidated financial statements and impacted notes have been revised from amounts previously reported to reflect these adjustments. The following table illustrates the impact on previously reported amounts and adjusted balances presented in the consolidated financial statements for the year ended December 31, 2021.

 SUMMARIZES THE CHANGES TO THE PREVIOUSLY ISSUED FINANCIAL INFORMATION

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