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STRATEGIC INVESTMENTS AND BUSINESS COMBINATIONS
 3 Months Ended
Mar. 31, 2022
Business Combination and Asset Acquisition [Abstract]  
STRATEGIC INVESTMENTS AND BUSINESS COMBINATIONS

NOTE 3. STRATEGIC INVESTMENTS AND BUSINESS COMBINATIONS

 

As of March 31, 2022, we have acquired nine insurance brokerages (see table below), including both acquisitions of affiliated companies (i.e., owned by Reliance Holdings before the acquisition) and unaffiliated companies. As our acquisition strategy continues, our reach within the insurance arena can provide us with the ability to offer lower rates, which could boost our competitive position within the industry.

 

Acquired   Date   Location   Line of Business   Status
U.S. Benefits Alliance, LLC (USBA)   October 24, 2018   Michigan   Health Insurance   Affiliated
                 
Employee Benefit Solutions, LLC (EBS)   October 24, 2018   Michigan   Health Insurance   Affiliated
                 
Commercial Solutions of Insurance Agency, LLC (CCS or Commercial Solutions)   December 1, 2018   New Jersey   P&C – Trucking Industry   Unaffiliated
                 
Southwestern Montana Insurance Center, Inc. (Southwestern Montana or Montana)   April 1, 2019   Montana   Group Health Insurance   Unaffiliated
                 
Fortman Insurance Agency, LLC (Fortman or Fortman Insurance)   May 1, 2019   Ohio   P&C and Health Insurance   Unaffiliated
                 
Altruis Benefits Consultants, Inc. (Altruis)   September 1, 2019   Michigan   Health Insurance   Unaffiliated
                 
UIS Agency, LLC (UIS)   August 17, 2020   New York   Health Insurance   Unaffiliated
                 
J.P. Kush and Associates, Inc. (Kush)   May 1, 2021   Michigan   Health Insurance   Unaffiliated
                 
Medigap Healthcare Insurance Company, LLC (Medigap)    January 10, 2022   Florida   Health Insurance   Unaffiliated

 

 

J.P. Kush and Associates, Inc. Transaction

 

On May 1, 2021, the Company entered into a Purchase Agreement with J.P. Kush and Associates, Inc. whereby the Company shall purchase the business and certain assets noted within the Purchase Agreement (the “Kush Acquisition”) for a total purchase price of $3,644,166. The purchase price was paid with a cash payment of $1,900,000, $50,000 in restricted shares of the Company’s common stock, in a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and an earn-out payment.

 

The Kush 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 Kush Acquisition was calculated as follows:

 

Description  Fair Value  

Weighted Average

Useful Life

(Years)

Accounts receivable  $291,414    
Trade name and trademarks   685,400   5
Customer relationships   551,000   10
Non-competition agreements   827,800   5
Goodwill   1,288,552   Indefinite
Purchase consideration allocated  $3,644,166    

 

Goodwill of $1,288,552 arising from the Kush 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 Kush Acquisition is currently expected to be deductible for income tax purposes. Total acquisition costs for the Kush Acquisition incurred were $58,092 recorded as a component of General and administrative expenses. The approximate revenue and net profit for the acquired business as a standalone entity per ASC 805 from January 1, 2021 to April 30, 2021 was $500,000 and $219,097, respectively.

 

Pro Forma Information

 

The results of operations of J.P. Kush and Associates, Inc. will be included in the Company’s consolidated financial statements as of the date of acquisition through the current period end. The following supplemental approximate pro forma combined financial information assumes that the acquisition had occurred at the beginning of the three months ended March 31, 2021:

SCHEDULE OF PRO FORMA INFORMATION RELATED TO ACQUISITION

     March 31, 
   2021 
Revenue  $2,695,843 
Net Income (Loss)  $(450,868)
Earnings (Loss) per common share, basic  $(0.90)
Earnings (Loss) per common share, diluted  $(0.90)

 

Medigap Healthcare Insurance Company, LLC Transaction

 

On January 10, 2022, the Company completed the acquisition of all assets of Medigap Healthcare Insurance Company, LLC (“Medigap”) pursuant to which the Company purchased all of the assets of Medigap for a purchase price in the amount of $20,096,250 consisting of payment to Medigap of (i) $18,138,750 in cash and (ii) issuing to seller 40,402 shares of the Company’s restricted common stock in a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. The purchase price is subject to post-closing adjustment to reconcile certain pre-closing credits and liabilities of the parties. The shares issued to Medigap as part of the purchase price are subject to lock up arrangements pursuant to which 50% of those shares may be sold after the one-year anniversary of the date of Closing the APA and the balance of the shares after the second-year anniversary of the date of closing under the APA.

 

 

The acquisition of Medigap was accounted for as a business combination in accordance with the acquisition method pursuant to FASB Topic No. 805, Business Combination (ASC 805). Accordingly, the total purchase consideration was allocated to the 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 preliminary allocation of the purchase price in connection with the acquisition of Medigap was calculated as follows:

 

Description  Fair Value   Weighted Average Useful Life (Years)
Property, plant and equipment  $20,666   5
Right-of-use asset   317,787    
Trade names   340,000   15
Customer relationships   4,550,000   12
Technology   67,000   3
Backlog   210,000   1
Chargeback reserve   (1,484,473)   
Lease liability   (317,787)   
Goodwill   19,199,008   Indefinite
   $22,902,201    

 

Trade name was measured at fair value using the relief-from-royalty method under the income approach. Significant inputs used to measure the fair value include an estimate of projected revenue from the trade name, a pre-tax royalty rate of 0.5% and a discount rate of 11.0%.

 

Customer relationships were measured at fair value using the multiple-period excess earnings method under the income approach. Significant inputs used to measure the fair value include an estimate of projected revenue and costs associated with existing customers, and a discount rate of 11.0%.

 

Technology was measured at fair value using the cost replacement method of the cost approach. Significant inputs used to measure the fair value include an estimate of cost to replace, an obsolescence rate of 40.3%.

 

The value assigned to backlog acquired was estimated based upon the contractual nature of the backlog as of the acquisition date, using the income approach to discount back to present value the cash flows attributable to the backlog, using a discount rate of 11.0%.

 

Goodwill of $19,199,008 arising from the acquisition of Medigap consisted of the value of the employee workforce and the residual value after all identifiable intangible assets were valued. Goodwill recognized pursuant to the acquisition of Medigap is currently expected to be deductible for income tax purposes. Total acquisition costs for the acquisition of Medigap incurred were $94,065 recorded as a component of General and administrative expenses.

 

The approximate revenue and net profit or loss for the acquired business as a standalone entity per ASC 805 from January 10, 2022 to March 31, 2022 was $1,177,000 and a loss of $148,000, respectively.

 

Pro Forma Information

 

The results of operations of Medigap will be included in the Company’s consolidated financial statements as of the date of acquisition through the current period end. The following supplemental pro forma approximate combined financial information assumes that the acquisition had occurred at the beginning of the three months ended March 31, 2022 and 2021:

     March 31,     March 31, 
   2022   2021 
Revenue  $4,659,451   $3,602,106 
Net Income (Loss)  $9,355,584   $(566,903)
Earnings (Loss) per common share, basic  $7.65   $1.2)
Earnings (Loss) per common share, diluted  $1.80   $1.2)