UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2021
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 001-36366
FG Financial Group, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 46-1119100 | |
(State of incorporation) |
(I.R.S Employer Identification No.) |
| 360 Central Ave, Suite 800, St. Petersburg, FL | 33701 | |
| (Address of principal executive offices) | (Zip Code) |
(727)-304-5666
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
| The Stock Market LLC | ||||
| The Stock Market LLC |
| 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 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
On June 30, 2021, the aggregate market value of the Registrant’s common stock held by non-affiliates was $18,588,942, computed on the basis of the closing sale price of the Registrant’s common stock on that date.
As of March 28, 2022, the total number of shares outstanding of the Registrant’s common stock was .
DOCUMENTS INCORPORATED BY REFERENCE
None.
FG FINANCIAL GROUP, INC.
Table of Contents
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FG FINANCIAL GROUP, INC.
PART I
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “budget,” “can,” “contemplate,” “continue,” “could,” “envision,” “estimate,” “expect,” “evaluate,” “forecast,” “goal,” “guidance,” “indicate,” “intend,” “likely,” “may,” “might,” “outlook,” “plan,” “possibly,” “potential,” “predict,” “probable,” “probably,” “pro-forma,” “project,” “seek,” “should,” “target,” “view,” “will,” “would,” “will be,” “will continue,” “will likely result” or the negative thereof or other variations thereon or comparable terminology. In particular, discussions and statements regarding the Company’s future business plans and initiatives are forward-looking in nature. We have based these forward-looking statements on our current expectations, assumptions, estimates, and projections. While we believe these to be reasonable, such forward-looking statements are only predictions and involve a number of risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance, or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements, and may impact our ability to implement and execute on our future business plans and initiatives. Management cautions that the forward-looking statements in this Annual Report on Form 10-K are not guarantees of future performance, and we cannot assume that such statements will be realized or the forward-looking events and circumstances will occur. Factors that might cause such a difference include, without limitation, general conditions in the global economy, including the impact of health and safety concerns from the COVID-19 coronavirus pandemic; our lack of operating history or established reputation in the reinsurance industry; our inability to obtain or maintain the necessary approvals to operate reinsurance subsidiaries; risks associated with operating in the reinsurance industry, including inadequately priced insured risks, credit risk associated with brokers we may do business with, and inadequate retrocessional coverage; our inability to execute on our investment and investment management strategy and potential loss of value of investments; risk of becoming an investment company; fluctuations in our short-term results as we implement our new business strategy; risks of not being unable to attract and retain qualified management and personnel to implement and execute on our business and growth strategy; failure of our information technology systems, data breaches and cyber-attacks; our ability to establish and maintain an effective system of internal controls; our limited operating history as a public company; the requirements of being a public company and losing our status as a smaller reporting company or becoming an accelerated filer; any potential conflicts of interest between us and our controlling stockholders and different interests of controlling stockholders; potential conflicts of interest between us and our directors and executive officers; volatility or decline of the shares of FedNat Holding Company common stock received by us as consideration in the sale of our insurance business or limitations and restrictions with respect to our ownership of such shares; and risks of being a minority stockholder of FedNat Holding Company.
Our expectations and future plans and initiatives may not be realized. If one of these risks or uncertainties materializes, or if our underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected. You are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included or incorporated by reference to the Form 10-K are made only as of the date hereof and do not necessarily reflect our outlook at any other point in time. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect new information, future events or developments.
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FG FINANCIAL GROUP, INC.
ITEM 1. BUSINESS
Overview
FG Financial Group, Inc. (“FGF”, the “Company”, “we”, or “us”) is a reinsurance and investment management holding company. We focus on opportunistic collateralized and loss-capped reinsurance, while allocating capital in partnership with Fundamental Global® to SPAC and SPAC sponsor-related “SPAC Platform” businesses. The Company’s principal business operations are conducted through its subsidiaries and affiliates. The Company also provides investment management services. From our inception in October 2012 through December 2019, we operated as an insurance holding company, writing property and casualty insurance throughout the states of Louisiana, Florida, and Texas. On December 2, 2019, we sold our three former insurance subsidiaries, and embarked upon our current strategy focused on reinsurance and asset management.
As of December 31, 2021, Fundamental Global GP, LLC, a privately owned investment management company, and its affiliates, or “FG,” beneficially owned approximately 56% of our common stock. D. Kyle Cerminara, Chairman of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FG.
Sale of the Insurance Business
On December 2, 2019, we completed the sale of our insurance subsidiaries to FedNat Holding Company for a combination of cash and FedNat common stock (the “Asset Sale”). The shares of FedNat common stock we received in the Asset Sale were issued to us pursuant to a standstill agreement which provides certain limitations and restrictions with respect to the voting and sale or transfer of the securities until December 2024. As of December 31, 2021, we continue to hold 1,007,871 shares of FedNat common stock.
Current Business
Our strategy has evolved to focus on opportunistic collateralized and loss-capped reinsurance, with capital allocation to special purpose acquisition companies (“SPACs”) and SPAC sponsor-related businesses. As part of our refined focus, we have adopted the following capital allocation philosophy:
“Grow intrinsic value per share with a long-term focus using fundamental research, allocating capital to asymmetric risk/reward opportunities.”
Currently, the business operates as a diversified holding company of insurance, reinsurance, asset management and our SPAC Platform businesses.
Insurance
We are establishing and seeking regulatory approvals for a Risk Retention Group (“RRG”) to provide directors and officers insurance coverage to SPACs and their sponsors. We intend to provide capital, along with other participants, to facilitate underwriting such insurance coverage. The Company will focus on fee income derived from originating, underwriting, and servicing the insurance business, while mitigating our financial risk with external reinsurance partners.
Reinsurance
The Company’s wholly owned reinsurance subsidiary, FG Reinsurance Ltd. (“FGRe”), a Cayman Islands limited liability company, provides specialty property and casualty reinsurance. FGRe has been granted a Class B (iii) insurer license in accordance with the terms of The Insurance Law, 2010 and is subject to regulation by the Cayman Islands Monetary Authority (the “Authority”). The terms of the license require advance approval from the Authority, should FGRe wish to enter into any reinsurance agreements which are not fully collateralized to their aggregate exposure limit. FGRe participates in a Funds at Lloyds syndicate covering all risks written by the syndicate during the 2021 and 2022 calendar years. On April 1, 2021, FGRe entered into its second reinsurance contract with a leading insurtech company that provides automotive insurance utilizing driver monitoring to predictively segment and price drivers. FGRe’s exposure is limited by a loss-cap stipulated in the quota-share agreement.
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FG FINANCIAL GROUP, INC.
Asset Management
Pursuant to an investment advisory agreement, FG Strategic Consulting, LLC (“FGSC”) a wholly-owned subsidiary of the Company, has agreed to provide investment advisory services to FedNat, including identifying, analyzing and recommending potential investments, advising as to existing investments and investment optimization, recommending investment dispositions, and providing advice regarding macro-economic conditions. In exchange for providing the investment advisory services, FedNat has agreed to pay FGSC an annual fee of $100,000. The Investment Advisory Agreement expires in December 2024.
SPAC Platform
On December 21, 2020, we formed FG SPAC Solutions LLC (“FGSS”), a Delaware company, to facilitate the launch of our SPAC Platform. Under the SPAC Platform, we plan to provide various strategic, administrative, and regulatory support services to newly formed SPACs, for a monthly fee. Additionally, the Company co-founded a partnership, FG SPAC Partners, LP (“FGSP”) to participate as a co-sponsor for newly formed SPACs. The Company also participates in the risk capital investments associated with the launch of such SPACs through its Asset Management business, specifically FG Special Situations Fund, LP. The SPAC Platform entered into its first transaction with Aldel Investors, LLC, the sponsor of Aldel Financial, Inc. (“Aldel”), a special purpose acquisition company, which completed its business combination with The Hagerty Group, an automotive and marine insurer, on December 2, 2021. FGSS provided accounting, regulatory, strategic advisory, and other administrative services to Aldel, which included assistance with negotiations with potential merger targets for the SPAC, as well as assistance with the de-SPAC process. Additional information regarding our formation of FGSS and our SPAC Platform can be found in Note 9 – Related Party Transactions.
Employees
As of December 31, 2021 we had nine employees. We are not a party to any collective bargaining agreement and believe that relations with our employees are satisfactory. Each of our employees has entered into confidentiality agreements with us.
Website
Our corporate website is www.fgfinancial.com. A copy of our Code of Ethics can be found in the Governance Documents section of our website. Information contained at the website is not a part of this report.
ITEM 1A. RISK FACTORS
Risks Relating to Our Industry, Business and Operations
We have had limited operations upon which to predict our future performance, since the sale of our former insurance business.
Since we sold our former insurance business, at the end of 2019, we have transitioned to operate as a reinsurance and investment management holding company. Accordingly, our historical financial statements provide little basis upon which to predict our future performance. Our revenue has been reduced, as we have limited assets with which to generate revenue. Our failure to secure additional sources of revenue may have a material impact on our results of operations and financial condition. In addition, the uncertainty surrounding our future operations and business prospects may negatively impact the value and liquidity of our stock. If we are unable to implement our business plans successfully, our financial condition and results of operations will be impaired, and your investment in our Company will be at risk.
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FG FINANCIAL GROUP, INC.
We have incurred substantial losses following the sale of our former insurance business.
We sustained losses of approximately $7,188,000 and $22,457,000 for the years ended December 31, 2021 and 2020, respectively, the first two years following the sale of our former insurance business, due, in part, to our limited business operations as we formulated our new strategy. If we continue to incur such losses, and are unable to raise additional capital, we may be unable to continue our business, and you could lose your entire investment in the Company.
We intend to participate in a risk retention group which will provide director’s and officer’s insurance to special purpose acquisition companies and represents a line of insurance for which we do not have previous experience.
Risk retention groups (“RRG”) are mutual companies, or companies owned by the members of the group that allow businesses with similar insurance needs to pool their risks and form an insurance company that operates under state regulated guidelines. Risk retention groups are treated differently from traditional insurance companies in that they are exempted from having to obtain a license in every state in which they write insurance, and are also exempt from other various state laws that regulate insurance. As a result, a RRG may not be adequately capitalized and able to remain solvent if faced with continuing losses. While we intend to mitigate this risk through the purchase of reinsurance, there can be no guarantee that we will be able to purchase adequate reinsurance on favorable terms. Due to our inexperience in providing director’s and officer’s insurance, we run the risk of underwriting our coverage at levels that do not provide adequate returns for our shareholders. Furthermore, we run the risk of not generating external interest in our RRG after incurring significant start-up and regulatory costs associated with the formation of the group.
We do not have an operating history or established reputation in the reinsurance industry, and our lack of an established operating history and reputation may make it difficult for us to attract or retain business.
As part of our business plan, we intend to provide specialty property and casualty reinsurance through FGRe. We do not have an operating history on which we can base an estimate of our future earnings prospects. We also do not have an established reputation in the reinsurance industry. Reputation is a very important factor in the reinsurance industry, and competition for business is, in part, based on reputation. Although we expect that our reinsurance policies will be fully collateralized, we are a relatively newly formed reinsurance company and do not yet have a well-established reputation in the industry. Our lack of an established reputation may make it difficult for us to attract or retain business. We will compete with major reinsurers, all of which have substantially greater financial marketing and management resources than we do, which may make it difficult for us to effectively market our products or offer our products at a profit. In addition, we do not have or currently intend to obtain financial strength ratings, which may discourage certain counterparties from entering into reinsurance contracts with us.
As a reinsurer, we will depend on our clients’ evaluations of the risks associated with their insurance underwriting, which may subject us to reinsurance losses.
In the proportional reinsurance business, in which we will assume an agreed percentage of each underlying insurance contract being reinsured, or quota-share contracts, we do not plan to separately evaluate each of the original individual risks assumed under these reinsurance contracts. We will therefore be largely dependent on the original underwriting decisions made by ceding companies, which will subject us to the risk that the clients may not have adequately evaluated the insured risks and that the premiums ceded may not adequately compensate us for the risks we assume. We also do not plan to separately evaluate each of the individual claims made on the underlying insurance contracts under quota-share arrangements, in which case we will be dependent on the original claims decisions made by our clients.
The involvement of reinsurance brokers may subject us to their credit risk.
As a standard practice of the reinsurance industry, reinsurers frequently pay amounts owed on claims under their policies to reinsurance brokers, and these brokers, in turn, remit these amounts to the ceding companies that have reinsured a portion of their liabilities with the reinsurer. In some jurisdictions, if a broker fails to make such a payment, the reinsurer might remain liable to the client for the deficiency notwithstanding the broker’s obligation to make such payment. Conversely, in certain jurisdictions, when the client pays premiums for policies to reinsurance brokers for payment to the reinsurer, these premiums are considered to have been paid and the client will no longer be liable to the reinsurer for these premiums, whether or not the reinsurer has actually received them from the broker. Consequently, as a reinsurer, we expect to assume a degree of credit risk associated with the brokers that we intend to do business with.
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FG FINANCIAL GROUP, INC.
We may not be successful in carrying out our investment and investment management strategy, and the fair value of our investments will be subject to a loss in value.
Through our SPAC sponsorships, we may be subject to lock-up agreements, and our ability to access the capital used to sponsor SPACs may be limited for a defined period, which may increase a risk of loss of all or a significant portion of value. Our investments may also become concentrated. A significant decline in the values of these investments may produce a large decrease in our consolidated shareholders’ equity and can have a material adverse effect on our consolidated book value per share and earnings.
We have formed an investment advisory subsidiary, FGSC, to carry out our investment advisory services. As discussed above, under Item 1. “Business,” FGSC has agreed to provide investment advisory services to FedNat, including identifying, analyzing and recommending potential investments, advising as to existing investments and investment optimization, recommending investment dispositions, and providing advice regarding macro-economic conditions. Any fees received for such services may not be commensurate with the services provided. We also may not be able to enter into such advisory management agreements with other entities on favorable terms, or at all. Any of these events could have a material adverse effect on our business.
The insurance and reinsurance businesses are highly competitive, and we may not be able to compete successfully in those industries.
The reinsurance business, in which we participate, and the insurance business that we plan to enter are highly competitive. We compete and will compete with major U.S. and non-U.S. reinsurers and insurers, many of which have greater financial, marketing and management resources than we do. There has been significant consolidation in the insurance and reinsurance sector in recent years, and we may experience increased competition as a result of that consolidation, with consolidated entities having enhanced market power. These consolidated entities may use their enhanced market power and broader capital base to negotiate price reductions for products and services that compete with ours, and we may experience rate declines and possibly write less business. Any failure by us to effectively compete could adversely affect our financial condition and results of operations.
The insurance and reinsurance industries are highly cyclical, and we may at times experience periods characterized by excess underwriting capacity and unfavorable premium rates.
Historically, insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of capacity, general economic conditions, changes in equity, debt and other investment markets, changes in legislation, case law and prevailing concepts of liability, and other factors. Demand for reinsurance is influenced significantly by the underwriting results of primary insurers and prevailing general economic conditions. The supply of insurance and reinsurance is related to prevailing prices and levels of surplus capacity that, in turn, may fluctuate in response to changes in rates of return on both underwriting and investment sides. As a result, the insurance and reinsurance businesses historically have been cyclical, characterized by periods of intense price competition, due to excessive underwriting capacity, as well as periods when shortages of capacity permitted favorable premium levels and changes in terms and conditions. Until recently, the supply of insurance and reinsurance had increased over the past several years, and may again in the future, either as a result of capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers. Continued increases in the supply of insurance and reinsurance may have consequences for us, including fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention, and less favorable policy terms and conditions.
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FG FINANCIAL GROUP, INC.
Climate change, as well as increasing regulation in the area of climate change, may adversely affect our insurance and reinsurance business, financial condition and results of operations.
Changing weather patterns and climatic conditions, such as global warming, may have added to the unpredictability and frequency of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposures. Although the loss experience of catastrophe insurers and reinsurers has historically been characterized as low frequency, there is a growing concern today that climate change increases the frequency and severity of extreme weather events, and, in recent years, the frequency of major catastrophes appears to have resumed historical levels or increased and may continue to increase in the future.
Claims for catastrophic events, or an unusual frequency of smaller losses in a particular period, could expose us to large losses, cause substantial volatility in our results of operations and could have a material adverse effect on our ability to write new business if we are not able to adequately assess and reserve for the increased frequency and severity of catastrophes resulting from these environmental factors. Additionally, catastrophic events could result in declines in the value of investments we hold and significant disruptions to our physical infrastructure, systems, and operations. Climate change-related risks may also specifically adversely impact the value of the securities that we hold.
Changes in security asset prices may impact the value of our investments, resulting in realized or unrealized losses on our invested assets. These risks are not limited to, but can include: (i) changes in supply/demand characteristics for fossil fuels (e.g., coal, oil, natural gas); (ii) advances in low-carbon technology and renewable energy development; and (iii) effects of extreme weather events on the physical and operational exposure of industries and issuers, and the transition that these companies make towards addressing climate risk in their own businesses.
However, we cannot predict how legal, regulatory and/or social responses to concerns around global climate change may impact our business. There can be no assurance that our reinsurance coverage and other measures taken will be sufficient to mitigate losses resulting from one or more catastrophic events. As a result, the occurrence of one or more catastrophic events and the continuation and worsening of recent trends could have an adverse effect on our results of operations and financial condition.
Environmental, Social and Governance and sustainability have become major topics that encompass a wide range of issues, including climate change and other environmental risks. We are also subject to complex and changing laws, regulation and public policy debates relating to climate change which are difficult to predict and quantify and may have an adverse impact on our business. Changes in regulations relating to climate change or our own leadership decisions implemented as a result of assessing the impact of climate change on our business may result in an increase in the cost of doing business or a decrease in premiums in certain lines of business.
Underwriting risks and reserving for losses are based on probabilities and related modeling, which are subject to inherent uncertainties.
Our success is dependent upon our ability to assess accurately the risks associated with the businesses that we insure and reinsure. We establish reserves for losses and loss adjustment expenses which represent estimates based on actuarial and statistical projections, at a given point in time, of our and our cedent’s expectations of the ultimate future settlement and administration costs of losses incurred. We utilize actuarial models as well as available historical insurance industry loss ratio experience and loss development patterns to assist in the establishment of loss reserves. Most or all of these factors are not directly quantifiable, particularly on a prospective basis, and the effects of these and unforeseen factors could negatively impact our ability to accurately assess the risks of the policies that we write. Changes in the assumptions used by these models or by management could lead to an increase in our estimate of ultimate losses in the future. In addition, there may be significant reporting lags between the occurrence of the insured event and the time it is reported to the insurer and additional lags between the time of reporting and final settlement of claims. In addition, the estimation of loss reserves is more difficult during times of adverse economic and market conditions due to unexpected changes in behavior of claimants and policyholders, including an increase in fraudulent reporting of exposures and/or losses, reduced maintenance of insured properties or increased frequency of small claims. Changes in the level of inflation also result in an increased level of uncertainty in our estimation of loss reserves. As a result, actual losses and loss adjustment expenses paid can deviate, perhaps substantially, from the reserve estimates reflected in our financial statements.
If our loss reserves are determined to be inadequate, we will be required to increase loss reserves at the time of such determination with a corresponding reduction in our net income in the period when the deficiency becomes known. It is possible that claims in respect of events that have occurred could exceed our claim reserves and have a material adverse effect on our results of operations, in a particular period, or our financial condition in general. As a compounding factor, although most insurance contracts have policy limits, the nature of property and casualty insurance and reinsurance is such that losses and the associated expenses can exceed policy limits for a variety of reasons and could significantly exceed the premiums received on the underlying policies, thereby further adversely affecting our financial condition.
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FG FINANCIAL GROUP, INC.
Risks Related to Investment Performance
Our results of operations will fluctuate from period to period and may not be indicative of our long-term prospects.
We anticipate that the performance of our reinsurance operations and our investment portfolio will fluctuate from period to period. In addition, because we plan to underwrite products and make investments to achieve favorable return on equity over the long-term, our short-term results of operations may not be indicative of our long-term prospects. Our results of operations may also be adversely impacted by general economic conditions and the conditions and outlook of the reinsurance markets and capital markets.
Changes in the value of the investments we own could materially affect our income and increase the volatility of our earnings.
As of December 31, 2021 we have invested approximately $4 million as a seed investment to sponsor the launch of FG New America Acquisition Corp, a special purpose acquisition company which completed its business combination in July 2021 and now operates as OppFi, Inc. (NYSE: OPFI). Our investment consists of approximately 1.4 million common shares of OPFI as well as approximately 0.4 million warrants to purchase common shares of OPFI at a price of $11.50 per share. We are potentially restricted from selling our OPFI common shares for one year following the date of OPFI’s business combination, or July 20, 2022.
We also own approximately 1.0 million shares of FedNat common stock as of December 31, 2021. The value of this investment has declined considerably since our initial investment, and could continue to decline, materially affecting our income and causing volatility in our earnings. We agreed to transfer restrictions on the shares and may be unable to reduce or liquidate our investment, if needed to maintain our liquidity or for any other reason.
Adverse developments in the financial markets could have a material adverse effect on our results of operations, financial position and our businesses, and may also limit our access to capital.
Adverse developments in the financial markets, such as disruptions, uncertainty or volatility in the capital and credit markets, may result in realized and unrealized capital losses that could have a material adverse effect on our results of operations, financial position and our businesses, and may also limit our access to capital required to operate our business. Depending on market conditions, we could incur additional realized and unrealized losses on our investment portfolio in future periods, which could have a material adverse effect on our results of operations, financial condition and business. Economic conditions could also have a material impact on the frequency and severity of claims and therefore could negatively impact our underwriting returns. The volatility in the financial markets could continue to significantly affect our investment returns, reported results, and shareholders’ equity.
The capital requirements of our businesses depend on many factors, including regulatory and rating agency requirements, the performance of our investment portfolio, our ability to write new business successfully, the frequency and severity of catastrophe events and our ability to establish premium rates and reserves at levels sufficient to cover losses.
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FG FINANCIAL GROUP, INC.
Our investments in special purpose acquisition companies as well as the sponsors of special purpose acquisition companies involve a high degree of risk.
We expect to invest in initial public offerings (“IPOs”) of special purpose acquisition companies (“SPACs”), including SPACs that are sponsored by our affiliates. In general, a SPAC is a special purpose vehicle that is formed to raise capital from the public through an IPO with the purpose, usually, of using the proceeds to acquire a single unspecified business or assets to be identified after the IPO. The IPO proceeds are held in a trust account until released to fund a business combination or used to redeem shares sold in the IPO. SPACs are required to either consummate a business combination or liquidate within a set period of time following their IPO. Because, at the time of the IPO, the SPAC has no operating history or any plans, arrangements or understandings with any prospective investment targets, we will have no basis upon which to evaluate the SPAC’s ability to achieve its business objectives. If a SPAC fails to complete its initial business transaction within the required time period, it will never generate any operating revenues and our SPAC investment may receive only a fixed dollar amount per share upon redemption, or less than such fixed amount in certain circumstances which could significantly affect our operating results and shareholders’ equity.
Additionally, as of December 31, 2020, we have invested $4.0 million to acquire equity interests in the sponsor of a SPAC (“Sponsor”) and expect to acquire additional interests in sponsors of SPACs in the future. By investing in a Sponsor, we have provided risk capital which allows the Sponsor to launch the IPO of the SPAC. In exchange for this investment, we own interests in the Sponsor that entitle us to receive distributions of shares and warrants in the SPAC after the lock-up period following the SPACs IPO has expired. These Sponsor interests do not have redemption rights to receive any portion of our original investment back from the trust account of the SPAC, as is normally associated with an IPO investment directly into a SPAC. Accordingly, an investment in a Sponsor is subject to a much higher degree of risk than an investment in a SPAC because the entire investment may be lost if the SPAC is not successful in consummating a business combination. Such potential loss could have a material effect on our financial results and shareholders’ equity.
Risks Relating to Sale of our Former Insurance Business
The shares of FedNat common stock we have received as part of the consideration for the Asset Sale are subject to certain limitations and restrictions.
The shares of FedNat common stock we have received in the Asset Sale were issued pursuant to the terms of a standstill agreement entered into between the Company and FedNat upon the closing of the Asset Sale. The standstill agreement imposes certain limitations and restrictions with respect to our ownership of FedNat common stock, including, among other things, requiring us to vote all of the voting securities of FedNat we own in accordance with the recommendation of FedNat’s board of directors and prohibiting us from publicly advising or influencing any person with respect to the voting of any shares of FedNat common stock and taking any action to nominate any person for election to FedNat’s board of directors. Our status as a minority stockholder of FedNat as well as the limitations and restrictions expected to be set forth in the standstill agreement may limit our ability to exert significant influence on FedNat’s management and operations and matters requiring approval of FedNat’s stockholders. FedNat’s management and holders of a larger percentage of FedNat’s common stock may also take or encourage actions that decrease the value of our shares of FedNat common stock or are not in our best interests as a minority stockholder.
We are subject to non-competition and non-solicitation covenants under the Asset Sale agreement, which may limit our operations in certain respects.
We are subject to the non-competition and non-solicitation covenants in the Asset Sale agreement, until December 2, 2024. During this period of time, subject to certain exceptions, we will generally be prohibited from (i) marketing, selling and issuing residential property and casualty insurance policies to residential consumers anywhere in the States of Alabama, Florida, Georgia, Louisiana, South Carolina and Texas (a “Restricted Business”), and owning the equity securities of, managing, operating or controlling any person that engages in a Restricted Business, (ii) hiring or soliciting certain FedNat employees, and (iii) soliciting or accepting business from certain third parties in connection with a Restricted Business. The non-competition covenant does not apply to our reinsurance business, and we will be permitted to enter into reinsurance contracts in the States of Alabama, Florida, Georgia, Louisiana, South Carolina and Texas.
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FG FINANCIAL GROUP, INC.
Legal and Regulatory Risks
Our failure to obtain or maintain approval of insurance regulators and other regulatory authorities as required for the operations of our reinsurance subsidiary may have a material adverse effect on our future business, financial condition, results of operations and prospects.
FGRe has a Class B (iii) insurer license in accordance with the terms of The Insurance Law, 2010 and is subject to regulation by the Cayman Islands Monetary Authority. Failure to comply with the laws, regulations and requirements applicable to a Cayman Islands-domiciled reinsurance subsidiary could result in consequences which may have a material adverse effect on our business and results of operations. Our future business plans, such as the formation of a risk retention group to provide directors and officers insurance coverage will also require advance approval of our insurance operations. Failure to receive or maintain the licenses necessary to execute on our strategy may have a material adverse effect on our future business.
We will be subject to the risk of becoming an investment company under the Investment Company Act.
We will be subject to the risk of inadvertently becoming an investment company, which would require us to register under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Registered investment companies are subject to extensive, restrictive and potentially adverse regulations relating to, among other things, operating methods, management, capital structure, dividends and transactions with affiliates. Registered investment companies are not permitted to operate their business in the manner in which we currently operate and plan to operate our business in the future.
We plan to monitor the value of our investments and structure our operations and transactions to qualify for exemptions under the Investment Company Act. Accordingly, we may structure transactions in manners less advantageous than if we did not have Investment Company Act concerns, or we may avoid otherwise economically desirable transactions due to those concerns. In addition, adverse developments with respect to our ownership of our operating subsidiaries, including significant appreciation or depreciation in the market value of certain of our publicly traded holdings, could result in our inadvertently becoming an investment company. If it were established that we were an investment company, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, in an action brought by the SEC, that we would be unable to enforce contracts with third parties, or that third parties could seek to obtain rescission of transactions with us undertaken during the period it was established that we were an unregistered investment company.
We have a limited operating history as a publicly traded company. Our inexperience as a public company and the requirements of being a public company may strain our resources, divert management’s attention, affect our ability to attract and retain qualified board members and have a material adverse effect on us and our stockholders.
We have a limited operating history as a publicly traded company. As a publicly traded company, we are required to develop and implement substantial control systems, policies and procedures to satisfy our periodic SEC reporting and Nasdaq obligations. Management’s past experience may not be sufficient to successfully develop and implement these systems, policies and procedures and to operate our Company. Failure to do so could jeopardize our status as a public company, and the loss of such status may have a material adverse effect on us and our stockholders.
In addition, as a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, and Nasdaq rules, including those promulgated in response to the Sarbanes-Oxley Act. The requirements of these rules and regulations increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we need to continually commit significant resources, maintain staff and provide additional management oversight. In addition, implementing our business strategy and sustaining our growth will require us to commit additional management, operational and financial resources to identify new professionals to join our organization and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
As a public company, we incur significant annual expenses related to these steps associated with, among other things, director fees, reporting requirements, transfer agent fees, accounting, administrative personnel, auditing and legal fees and similar expenses. We also incur higher costs for director and officer liability insurance. Any of these factors make it more difficult for us to attract and retain qualified members of our Board of Directors. Finally, we expect to incur additional costs once we lose smaller reporting company status or are required to provide an auditor attestation report on the effectiveness of our internal control over financial reporting.
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FG FINANCIAL GROUP, INC.
If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to report our financial results accurately, which could have a material adverse effect on our business, financial condition and results of operations.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that we will need to evaluate frequently. Section 404 of the Sarbanes-Oxley Act requires public companies to conduct an annual review and evaluation of their internal controls and attestations of the effectiveness of internal controls by independent auditors. We currently qualify as a smaller reporting company under the regulations of the Securities and Exchange Commission (the “SEC”). As a smaller reporting company we are exempt from the requirement to include the auditor’s report of the effectiveness of internal control over financial reporting until such time as we no longer qualify as a smaller reporting company, based on our public float and reporting more than $100 million in annual revenues in a fiscal year. Regardless of our qualification status, we have implemented control systems and procedures to satisfy the reporting requirements under the Exchange Act and applicable requirements of Nasdaq, among other items. Maintaining these internal controls is costly and may divert management’s attention.
Our evaluation of our internal controls over financial reporting may identify material weaknesses that may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC, or violations of Nasdaq’s listing rules. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This may have a material adverse effect on our business, financial condition and results of operations and could also lead to a decline in the price of our common stock.
While we currently qualify as a smaller reporting company under SEC regulations, we cannot be certain, if we take advantage of the reduced disclosure requirements applicable to these companies, that we will not make our stock less attractive to investors. Once we lose smaller reporting company status, the costs and demands placed upon our management are expected to increase.
The SEC’s rules exempt smaller reporting companies like us from various reporting requirements applicable to public companies that are not smaller reporting companies. As long as we qualify as a smaller reporting company, based on our public float, and report less than $100 million in annual revenues in a fiscal year, we are permitted, and we intend, to omit the auditor’s attestation on internal control over financial reporting that would otherwise be required by the Sarbanes-Oxley Act.
Until such time that we lose smaller reporting company status, it is unclear if investors will find our stock less attractive because we may rely on certain disclosure exemptions. If some investors find our stock less attractive as a result, there may be a less active trading market for the stock, and our stock price may be more volatile and could cause our stock price to decline. Even if we remain a smaller reporting company, if our public float exceeds $75 million and we report $100 million or more in annual revenues in a fiscal year, we will become subject to the provisions of Section 404(b) of the Sarbanes-Oxley Act, requiring our independent registered public accounting firm to provide an attestation report on the effectiveness of our internal control over financial reporting, making the public reporting process more costly.
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FG FINANCIAL GROUP, INC.
Holders of our outstanding shares of 8.00% Cumulative Preferred Stock, Series A, have dividend, liquidation and other rights that are senior to the rights of holders of our common shares.
As of December 31, 2021, we have issued and outstanding 894,580 shares of preferred stock designated as 8.00% Cumulative Preferred Stock, Series A, par value $25.00 per share (the “Series A Preferred Stock”). The aggregate liquidation preference with respect to the outstanding shares of Series A Preferred Stock is approximately $22.4 million, and annual dividends on the outstanding shares of Series A Preferred Stock are approximately $1.8 million. Holders of our Series A Preferred Stock are entitled to receive, when, as and if declared by our Board of Directors cumulative cash dividends from and including the original issue date at the rate of 8.00% of the $25.00 per share liquidation preference per annum (equivalent to $2.00 per annum per share). Upon our voluntary or involuntary liquidation, dissolution or winding up, before any payment is made to holders of our common shares, holders of these preferred shares are entitled to receive, for each share held, an amount equal to the $25.00 liquidation preference and unpaid dividends. This would reduce the remaining amount of our assets, if any, available to distribute to holders of our common shares.
Our Board of Directors has the authority to designate and issue additional preferred shares with liquidation, dividend and other rights that are senior to those of our common shares, similar or senior to the rights of the holders of our Series A Preferred Stock. Because our decision to issue additional securities will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings. Thus, our stockholders bear the risk that future securities issuances might dilute their interests and reduce the market price of our stock.
We may fail to satisfy the continued listing standards of Nasdaq, in which case our stock might be delisted.
Even though we currently satisfy the continued listing standards for Nasdaq and expect to continue to do so, we can provide no assurance that we will continue to satisfy the continued listing standards in the future. In the event that we are unable to satisfy the continued listing standards of Nasdaq, our stock may be delisted from that market. Any delisting of our stock from Nasdaq could:
| ● | adversely affect our ability to attract new investors; | |
| ● | decrease the liquidity of our outstanding stock; | |
| ● | reduce our flexibility to raise additional capital; | |
| ● | reduce the price at which our stocks trade; and | |
| ● | increase the transaction costs inherent in trading our stock, with overall negative effects for our stockholders. |
In addition, delisting our stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our stock and might deter some institutions or others from investing in our securities at all. For these reasons and others, delisting could adversely affect the price of our stock and our business, financial condition and results of operations.
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FG FINANCIAL GROUP, INC.
Technology and Operational Risks
Our information technology systems may fail or suffer a loss of security which may have a material adverse effect on our business.
Our business is highly dependent upon the successful and uninterrupted functioning of our computer and data processing systems. Our operations are dependent upon our ability to process our business timely and efficiently and protect our information systems from physical loss or unauthorized access. In the event that our systems cannot be accessed due to a natural catastrophe, terrorist attack or power outage, or systems and telecommunications failures or outages, external attacks such as computer viruses, malware or cyber-attacks, or other disruptions occur, our ability to perform business operations on a timely basis could be significantly impaired and may cause our systems to be inaccessible for an extended period of time. A sustained business interruption or system failure could adversely impact our ability to perform necessary business operations in a timely manner, hurt our relationships with our business partners and customers and have a material adverse effect our financial condition and results of operations.
Our operations also depend on the reliable and secure processing, storage and transmission of confidential and other information in our computer systems and networks. From time to time, we may experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, systems failures and disruptions. Computer viruses, hackers, phishing attacks, social engineering schemes, ransomware, employee misconduct and other external hazards could expose our data systems to security breaches, cyber-attacks or other disruptions. In addition, we routinely transmit and receive personal, confidential and proprietary information by electronic means. Our systems and networks may be subject to breaches or interference. Any such event may result in operational disruptions as well as unauthorized access to or the disclosure or loss of our proprietary information or our customers’ information or theft of funds and other monetary loss, which in turn may result in legal claims, regulatory scrutiny and liability, damage to our reputation, the incurrence of costs to eliminate or mitigate further exposure, the loss of customers or affiliated advisers or other damage to our business.
Risks Related to Our Significant Shareholder
Fundamental Global GP, LLC and its affiliates control a substantial interest in us and thus may exert substantial influence on actions requiring a stockholder vote, potentially in a manner that you do not support.
As of December 31, 2021, FG and its affiliates own approximately 56% of our issued and outstanding common stock. Accordingly, they may exert a substantial influence on actions requiring a stockholder vote, including election of directors, potentially in a manner that you do not support. D. Kyle Cerminara, Chairman of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FG. Due to his position as a member of our Board of Directions as well as his positions at FG, he has considerable influence on actions requiring a stockholder vote. See Item 13. Certain Relationships and Related Transactions, and Director Independence.
Risks Related to Human Capital
We may be unable to attract and retain key personnel and management, which could adversely impact our ability to successfully implement and execute our business and growth strategy.
The successful implementation of our business and growth strategy depends in large part upon the ability and experience of members of our management and other personnel. Our performance will be dependent on our ability to identify, hire, train, motivate and retain qualified management and personnel with experience in the reinsurance industry, investment advisory services, and in real estate investments. We may not be able to attract and retain such personnel on acceptable terms, or at all. If we lose the service of qualified management or other personnel or are unable to attract and retain the necessary members of management or personnel, we may not be able to successfully execute on our business strategy, which could have an adverse effect on our business.
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FG FINANCIAL GROUP, INC.
Some of our directors also serve as directors and/or executive officers for other public companies or for our controlling stockholders or their affiliates, which may lead to conflicting interests.
Some of our directors serve as executive officers and/or directors of Fundamental Global GP, LLC (“FG”) and its affiliates, which together, as of December 31, 2021, beneficially owned approximately 56% of our outstanding shares of common stock. One of our directors serves as an executive officer and director of Atlas Financial Holdings, Inc. (Nasdaq: AFH) (“Atlas”), a specialty commercial automobile insurance company. Our chief executive officer and director, Mr. Swets serves as director of GreenFirst Forest Products Inc. (TSXV: FGP), Harbor Custom Development, Inc. (Nasdaq: HCDI) and Ballantyne Strong, Inc. (NYSE American: BTN). He also serves as chief executive officer of FG New America Acquisition II Corp., a special purpose acquisition company in the process of going public.
Our executive officers and members of our Company’s Board of Directors have fiduciary duties to our stockholders; likewise, persons who serve in similar capacities at the public companies have fiduciary duties to those companies’ investors. There may be potential conflicts of interest if our Company and one or more of these other companies pursue acquisitions, investments and other business opportunities that may be suitable for each of us. Our directors who find themselves in these multiple roles may, as a result, have conflicts of interest or the appearance of conflicts of interest with respect to matters involving or affecting more than one of the companies to which they owe fiduciary duties. Furthermore, our directors who find themselves in these multiple roles own stock options, shares of common stock and other securities in some of these entities. These ownership interests could create, or appear to create potential conflicts of interest when the applicable individuals are faced with decisions that could have different implications for our Company and these other entities. From time to time, we may enter into transactions with or participate jointly in investments with those other entities or their affiliates. We may create new situations in the future in which our directors serve as directors or executive officers in future investment holdings of such entities. See Item 13. Certain Relationships and Related Transactions, and Director Independence.
Our executive officers and directors will allocate their time to our and other businesses in which they are involved, in their discretion, potentially to the detriment of the Company.
Our executive officers and directors are not required to, and will not, commit their full time to our affairs, which may result in conflicts of interest in allocating their time between our operations and those other businesses in which they are involved. Our chief executive officer is engaged in other business endeavors for which he may be entitled to substantial compensation, and our executive officers are not obligated to contribute any specific amount of time to our affairs. Our directors also serve as officers and board members for other entities. If our executive officers’ and directors’ elect to devote substantial amounts of time to the affairs of other businesses, in excess of current levels, they might not assign sufficient attention to the Company, potentially impairing our results of operations, financial condition, and prospects and the value of our securities.
Members of our management and companies with which they are affiliated in the past have been, and may in the future be, involved in civil disputes and litigation and governmental investigations relating to their business affairs unrelated to our company. Any such claims or investigations may divert management’s attention from our business or be detrimental to our reputation, resulting in adverse effects upon our results of operations, financial condition, and prospects and the value of our securities held by investors.
General Risk Factors
Unfavorable global economic conditions, including as a result of health and safety concerns, could adversely affect our business, financial condition or results of operations.
Our results of operations and the implementation of our new business strategy could be adversely affected by general conditions in the global economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the COVID-19 coronavirus pandemic, which resulted in volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business and could delay the implementation of our new business strategy.
In the event of a major disruption caused by the pandemic, we may lose the services of our employees, experience system interruptions or face challenges accessing the capital or credit markets, 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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FG FINANCIAL GROUP, INC.
ITEM 2. PROPERTIES
Our executive offices are located at 360 Central Avenue, Suite 800, St. Petersburg, FL 33701. Our lease term expires in July 2022. Total minimum rent over the twelve-month term is expected to be $17,000.
In the opinion of the Company’s management, our executive offices are suitable for our current business and are adequately maintained.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2021, the Company was not a party to any legal proceedings and was not aware of any material claims or actions pending or threatened against us. From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. Currently, it is not possible to predict legal outcomes and their impact on the future development of claims. Any such development will be affected by future court decisions and interpretations. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Company’s current reserves.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrant’s Common Stock
Our common stock is traded on the Nasdaq Global Market tier of the Nasdaq Stock Market, LLC under the symbol “FGF.” Our Series A Preferred Stock is also traded on the Nasdaq Global Market tier of the Nasdaq Stock Market under the symbol “FGFPP.”
Number of Common Stockholders
As of December 31, 2021, we had 6,497,205 shares of common stock outstanding, which were held by 13 stockholders of record, including Cede & Co., which holds shares on behalf of the beneficial owners of the Company’s common stock. Because brokers and other institutions hold many of our shares on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. It is the present policy of our Board of Directors to retain earnings, if any, for use in developing and expanding our business. In the future, our payment of dividends on our common stock will also depend on the amount of funds available, our financial condition, capital requirements and such other factors as our Board of Directors may consider.
Holders of our Series A Preferred Stock are entitled to receive quarterly cash dividends at a rate of 8.00% per annum of the $25.00 per share liquidation preference (equivalent to $2.00 per annum per share). We intend to declare regular quarterly dividends on the shares of Series A Preferred Stock.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12.
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FG FINANCIAL GROUP, INC.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our consolidated financial statements and related notes and information included elsewhere in this annual report on Form 10-K. You should review the “Risk Factors” section of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Some of the information contained in this discussion and analysis and set forth elsewhere in this annual report on Form 10-K includes forward-looking statements that involve risks and uncertainties.
Unless context denotes otherwise, the terms “Company,” “FGF,” “we,” “us,” and “our,” refer to FG Financial Group, Inc., and its subsidiaries.
Overview
FG Financial Group, Inc. (“FGF”, the “Company”, “we”, or “us”) is a reinsurance and investment management holding company. We focus on opportunistic collateralized and loss-capped reinsurance, while allocating capital in partnership with Fundamental Global® to SPAC and SPAC sponsor-related businesses. The Company’s principal business operations are conducted through its subsidiaries and affiliates. The Company also provides investment management services. From our inception in October 2012 through December 2019, we operated as an insurance holding company, writing property and casualty insurance throughout the states of Louisiana, Florida, and Texas. On December 2, 2019, we sold our three former insurance subsidiaries, and embarked upon our current strategy focused on reinsurance and asset management.
As of December 31, 2021, Fundamental Global GP, LLC, a privately owned investment management company, and its affiliates, or “FG,” beneficially owned approximately 56% of our common stock. D. Kyle Cerminara, Chairman of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FG.
Sale of Insurance Business
On December 2, 2019, we completed the sale of our insurance subsidiaries to FedNat Holding Company for a combination of cash and FedNat common stock. For more information on the Asset Sale and the Company’s future plans, see “Item 1. Business.”
Coronavirus Impact
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. Adverse events such as health-related concerns about working in our offices, the inability to travel and other matters affecting the general work environment have negatively impacted and could continue to harm our business and our business strategy. The extent to which our operations and investments may continue to be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new developments concerning the severity of the pandemic and actions by government authorities to contain the pandemic or treat its impact. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown. In the event of a major disruption caused by the pandemic, we may lose the services of our employees, experience system interruptions or face challenges accessing the capital or credit markets, 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.
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FG FINANCIAL GROUP, INC.
Critical Accounting Estimates
Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Actual results may differ materially from these estimates. The business and economic uncertainty resulting from the coronavirus (COVID-19) pandemic has made such estimates and assumptions difficult to calculate. Set forth below is qualitative and quantitative information necessary to understand the estimation uncertainty and the impact the critical accounting estimate has had or is reasonably likely to have on financial condition or results of operations, to the extent the information is material and reasonably available.
Investments in Equity Securities
Investments in equity securities are carried at fair value with subsequent changes in fair value recorded to the Consolidated Statements of Operations as a component of net investment income.
Other Investments
Other investments consist, in part, of equity investments made in privately held companies accounted for under the equity method. We utilize the equity method to account for investments when we possess the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when the investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. We apply the equity method to investments in common stock and to other investments when such other investments possess substantially identical subordinated interests to common stock.
In applying the equity method, we record the investment at cost and subsequently increase or decrease the carrying amount of the investment by our proportionate share of the net earnings or losses and other comprehensive income of the investee. We record dividends or other equity distributions as reductions in the carrying value of the investment. Should net losses of the investee reduce the carrying amount of the investment to zero, additional net losses may be recorded if other investments in the investee are at-risk, even if we have not committed to provide financial support to the investee. Such additional equity method losses, if any, are based upon the change in our claim on the investee’s book value.
As of December 31, 2020, other investments also consisted of private placement securities reported at fair value and characterized under Level 3 of the fair value hierarchy as promulgated by the Financial Accounting and Standards Board.
Other investments also consist of equity we have purchased in a limited partnership and a limited liability company for which there does not exist a readily determinable fair value. The Company accounts for these investments at their cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investment of the same issuer. Any profit distributions the Company receives on these investments are included in net investment income.
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FG FINANCIAL GROUP, INC.
Consolidation of Variable Interest Entities
The determination of whether or not to consolidate a variable interest entity under GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interests. To make these judgments, management has conducted an analysis, on a case-by-case basis, of whether we are the primary beneficiary and are therefore required to consolidate the entity. Upon the occurrence of certain events, such as modifications to organizational documents and investment management agreements, management will reconsider its conclusion regarding the status of an entity as a variable interest entity.
Valuation of Net Deferred Income Taxes
The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in the Company’s consolidated financial statements. In determining its provision for income taxes, the Company interprets tax legislation in a variety of jurisdictions and makes assumptions about the expected timing of the reversal of deferred income tax assets and liabilities and the valuation of net deferred income taxes.
The ultimate realization of the deferred income tax asset balance is dependent upon the generation of future taxable income during the periods in which the Company’s temporary differences reverse and become deductible. A valuation allowance is established when it is more likely than not that all or a portion of the deferred income tax asset balance will not be realized. In determining whether a valuation allowance is needed, management considers all available positive and negative evidence affecting specific deferred income tax asset balances, including the Company’s past and anticipated future performance, the reversal of deferred income tax liabilities, and the availability of tax planning strategies. To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the consolidated statements of income and comprehensive income.
Premium Revenue Recognition
The Company participates in a quota-share contract under a Funds at Lloyds (“FAL”) transaction and estimates the ultimate premiums for the contract period. These estimates are based on information received from the ceding companies, whereby premiums are recorded as written in the same periods in which the underlying insurance contracts are written and are based on cession statements from cedents. These statements are received quarterly, in arrears and thus for any reporting lag, premiums written are estimated based on the portion of the ultimate estimated premiums relating to the risks underwritten during the lag period.
Premium estimates are reviewed by management periodically. Such review includes a comparison of actual reported premiums to expected ultimate premiums. Based on management’s review, the appropriateness of the premium estimates is evaluated, and any adjustments to these estimates are recorded in the period in which they are determined. Changes in premium estimates, including premiums receivable, are not unusual and may result in significant adjustments in any period. A significant portion of amounts included in the caption “Reinsurance balances receivable” in the Company’s consolidated balance sheets represent estimated premiums written, net of commissions, brokerage, and loss and loss adjustment expense, and are not currently due based on the terms of the underlying contracts.
Premiums written are generally recognized as earned over the contract period in proportion to the risk covered. Additional premiums due on a contract that has no remaining coverage period are earned in full when written. Unearned premiums represent the unexpired portion of reinsurance provided.
Policy Acquisition Costs
Policy acquisition costs are costs that vary with, and are directly related to, the successful production of new and renewal business, and consist principally of commissions, taxes, and brokerage expenses. If the sum of a contract’s expected losses and loss expenses and deferred acquisition costs exceeds associated unearned premiums and expected investment income, a premium deficiency is determined to exist. In this event, deferred acquisition costs are written off to the extent necessary to eliminate the premium deficiency. If the premium deficiency exceeds deferred acquisition costs, then a liability is accrued for the excess deficiency. There were no premium deficiency adjustments recognized during the periods presented herein.
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FG FINANCIAL GROUP, INC.
Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserve estimates are based on estimates derived from reports received from ceding companies. These estimates are periodically reviewed by the Company’s management and adjusted as necessary. Since reserves are estimates, the final settlement of losses may vary from the reserves established and any adjustments to the estimates, which may be material, are recorded in the period they are determined.
Loss estimates may also be based upon actuarial and statistical projections, an assessment of currently available data, predictions of future developments, estimates of future trends and other factors. The final settlement of losses may vary, perhaps materially, from the reserves recorded. All adjustments to the estimates are recorded in the period in which they are determined. U.S. GAAP does not permit establishing loss reserves, which include case reserves and IBNR loss reserves, until the occurrence of an event which may give rise to a claim. As a result, only loss reserves applicable to losses incurred up to the reporting date are established, with no allowance for the establishment of loss reserves to account for expected future loss events.
Generally, the Company obtains regular updates of premium and loss related information for the current and historical periods, which are utilized to update the initial expected loss ratio. We also experience lag between (i) claims being reported by the underlying insured to the Company’s cedent and (ii) claims being reported by the Company’s cedent to the Company. This lag may impact the Company’s loss reserve estimates. Client reports have pre-determined due dates (for example, thirty days after each month end). As a result, the lag depends in part upon the terms of the specific contract. The timing of the reporting requirements is designed so that the Company receives premium and loss information as soon as practicable once the client has closed its books. Accordingly, there should be a short lag in such reporting. Additionally, most of the contracts that have the potential for large single event losses have provisions that such loss notifications are provided to the Company immediately upon the occurrence of an event.
Stock-Based Compensation Expense
The Company uses the fair-value method of accounting for stock-based compensation awards granted. The Company has determined the fair value of its outstanding stock options on their grant date using the Black-Scholes option pricing model along with multiple Monte Carlo simulations to determine a derived service period as the options vest based upon meeting certain performance conditions. The Company determines the fair value of restricted stock units (“RSUs”) on their grant date using the fair value of the Company’s common stock on the date the RSUs were issued (for those RSU which vest solely based upon the passage of time), as well as using multiple Monte Carlo simulations for those RSUs with market-based vesting conditions. The fair value of these awards is recorded as compensation expense over the requisite service period, which is generally the expected period over which the awards will vest, with a corresponding increase to additional paid-in capital. When the stock options are exercised, or correspondingly, when the RSUs vest, the amount of proceeds together with the amount recorded in additional paid-in capital is recorded in shareholders’ equity.
Recent Accounting Pronouncements
See Item 8, Note 3 – Recently Adopted and Issued Accounting Standards in the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on the Company.
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FG FINANCIAL GROUP, INC.
Analysis of Financial Condition
As of December 31, 2021 compared to December 31, 2020
Investments
The table below summarizes, by type, the Company’s investments held at fair value as of December 31, 2021 and 2020.
| ($ in thousands) | ||||||||||||||||
| As of December 31, 2021 | Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Amount | ||||||||||||
| FedNat common stock | $ | 14,495 | $ | – | $ | 13,074 | $ | 1,421 | ||||||||
| Total investments | $ | 14,495 | $ | – | $ | 13,074 | $ | 1,421 | ||||||||
| As of December 31, 2020 | Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Amount | ||||||||||||
| FedNat common stock | $ | 20,751 | $ | – | $ | 12,209 | $ | 8,542 | ||||||||
| Private placements | 4,012 | – | – | 4,012 | ||||||||||||
| Total investments | $ | 24,763 | $ | – | $ | 12,209 | $ | 12,554 |
FedNat Common Stock
As of December 31, 2021, the Company held 1,007,871 shares of FedNat Holding Company common stock (Nasdaq: FNHC). Of the total 1,773,102 shares of FedNat common stock which the Company had received as consideration for the Asset Sale, the Company has disposed of 765,231 shares. The first transaction occurred on September 15, 2020, whereby the Company sold 330,231 shares of FedNat common stock to the Hale Parties as further discussed in Note 9 – Related Party Transactions. Additionally, during the fourth quarter 2021, the Company sold an additional 435,000 shares of FedNat common stock on the open market. Pursuant to the Standstill Agreement entered into between the Company and FedNat at the closing of the Asset Sale, the Company is restricted as to the number of FedNat shares it can dispose of.
Private Placements
Private placements listed in the table above consist of the $4.0 million invested in FG New America Investors, LLC (the “Sponsor”) as part of a total $8.6 million of risk capital used to launch FG New America Acquisition Corp (“FGNA”), a special purpose acquisition company, which consummated its initial public offering on October 2, 2020. On July 20, 2021, FGNA completed its definitive business combination with Opportunity Financial, LLC and began operating as OppFi Inc. (“OppFi”), with OppFi’s common stock trading on the NYSE under the ticker symbol “OPFI”. The Sponsor interests currently represent beneficial ownership of approximately 0.86 million common shares of OPFI as well as approximately 0.36 million warrants to purchase common shares of OPFI at a price of $11.50 per share. We are restricted from selling our OPFI common shares until the earlier of i) July 20, 2022; or ii) the date upon which the closing price of OPFI stock is greater than or equal to $12.00 per share for any 20 trading days within a 30-trading day window.
Deconsolidation of Subsidiary
The investment into the Sponsor was made by FG Special Situations Fund, LP (the “Fund”), a Delaware limited partnership in which the Company had initially invested in through its general partner. At the time of the Company’s initial investment into the Fund, in September 2020, the Company had determined that its investment represented an investment in a variable interest entity (“VIE”), in which the Company was the primary beneficiary, and, as such, had consolidated the financial results of the Fund through November 30, 2021. At each reporting date, the Company evaluates whether it remains the primary beneficiary and continuously reconsiders that conclusion. On December 1, 2021, the Company’s investment became that of a limited partner, and it no longer had the power to govern the financial and operating policies of the Fund and accordingly derecognized the related assets, liabilities, and noncontrolling interests of the Fund as of that date. The Company did not receive any consideration in the deconsolidation of the Fund, nor did it record any gain, or loss upon deconsolidation. The assets and liabilities of the Fund, over which the Company lost control are as follows:
| As of December 1, 2021 (in thousands) | ||||
| Cash and cash equivalents | $ | 100 | ||
| Investments in private placements | 15,734 | |||
| Investments in public SPACs | 22 | |||
| Other assets | 18 | |||
| Other liabilities | (34 | ) | ||
| Net assets deconsolidated | $ | 15,840 | ||
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FG FINANCIAL GROUP, INC.
While the Company’s investments in the Fund are no longer consolidated, the Company has retained all of the investments held at the Fund, including its beneficial ownership of approximately 0.86 million common shares of OPFI and approximately 0.36 million warrants to purchase common shares of OPFI at $11.50 per share. Effective December 1, 2021, the Company began accounting for its investment in the Fund via the equity method of accounting.
Equity Method Investments
Equity method investments included our investment of $4.0 million in FGI Metrolina Property Income Fund, LP (“Metrolina”), which invested in real estate through a real estate investment trust that was wholly owned by Metrolina. We have recorded equity method earnings from our investment in Metrolina of approximately $326,000 and $186,000 for the years ended December 31, 2021 and 2020, respectively. In the third quarter 2021, Metrolina indicated that it would be liquidating and returning investor capital. Accordingly, in the fourth quarter 2021, we received approximately $5.0 million in cash from Metrolina, representing our initial investment of $4.0 million plus approximately $1.0 million in distributed earnings. As a result, our investment in Metrolina was fully liquidated as of December 31, 2021.
Equity method investments also include our investment in FG SPAC Partners, LP (“FGSP”). We formed FGSP in January 2021, to co-sponsor newly formed SPACs with their founders or partners. The Company is the sole managing member of the general partner of FGSP and holds an approximate 46% limited partner interest in FGSP. Subsequently, FGSP bought founders shares in Aldel Financial, Inc. (“Aldel”) as well as warrants to purchase Aldel Class A common stock, at an exercise price of $15.00 per share (the “OTM Warrants”). On December 2, 2021, Aldel completed its business combination with Hagerty, an auto and marine insurance carrier, and began operating as Hagerty, Inc., trading on the NYSE under the ticker “HGTY.” As of December 31, 2021, FGSP had beneficial ownership of 500,000 HGTY common shares and warrants to purchase 650,000 HGTY common shares, at an exercise price of $15.00 per share. Through our 46% limited partner interest in FGSP, the Company has beneficial ownership of approximately 230,000 HGTY common shares and approximately 300,000 warrants. We have recorded equity method earnings from our investment in FGSP of approximately $3.78 million for the year ended December 31, 2021. The carrying value of our investment in FGSP as of December 31, 2021 was approximately $3.85 million, representing $3.78 million in undistributed earnings.
Certain investments held by our equity method investees are valued using Monte-Carlo simulation and option pricing models. Inherent in Monte-Carlo simulation and option pricing models are assumptions related to expected volatility and discount for lack of marketability of the underlying investment. Our investees estimate the volatility of these investments based on the historical performance of various broad market indices blended with various peer companies which they consider as having similar characteristics to the underlying investment.
As previously discussed under the heading “Deconsolidation of Subsidiary,” equity method investments also include our investment in the Fund, as of December 31, 2021. We had consolidated the Fund as a variable interest entity; however, effective December 1, 2021, we began accounting for this investment under the equity method of accounting. For the year ended December 31, 2021, we recognized approximately $3.0 in pretax income through our investment in the Fund, which consists of consolidated pretax income in the amount of approximately $3.7 million, for the period of January 1, 2021, through November 30, 2021, and equity method losses of approximately $0.7 million for the month of December 2021. As of December 31, 2021, the carrying value of our Fund investment was approximately $9.7 million, including $3.0 million in undistributed earnings.
Through the Fund, the Company has invested $1.0 million in the risk capital of Aldel Investors, LLC, the sponsor of Hagerty, Inc. This investment represents the beneficial ownership of approximately 286,000 HGTY common shares. Altogether, the Company’s investment in Hagerty, Inc., through both FGSP and the Fund, represents beneficial interests of approximately 516,000 HGTY common shares and approximately 300,000 warrants to purchase HGTY common shares at an exercise price of $15.00 per share.
Investments without Readily Determinable Fair Value
In addition to our equity method investments, other investments, as listed on our balance sheet, consist of equity we have purchased in a limited partnership and a limited liability company for which there do not exist readily determinable fair values. The Company accounts for these investments at their cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. Any profit distributions the Company receives on these investments are included in net investment income. The Company’s total investment in these two entities was approximately $483,000 as of December 31, 2021. For the years ended December 31, 2021, and 2020, the Company has received profit distributions of $101,000 and $80,000 on these investments, respectively, which has been included in income. Furthermore, both investments began returning capital to investors beginning in 2020. As of December 31, 2021, the Company has received approximately 38% of its initial $776,000 investment in these entities.
| 21 |
FG FINANCIAL GROUP, INC.
Funds Deposited with Reinsured Companies
On November 12, 2020, FGRe, our Cayman Islands-based reinsurance subsidiary, initially funded a trust account at Lloyd’s with approximately $2.4 million in cash, to collateralize its obligations under a quota-share agreement with a Funds at Lloyds syndicate. The initial contract covered our quota-share percentage of all risks written by the syndicate for the 2021 calendar year. On November 30, 2021, we entered into an agreement with the same syndicate, slightly increasing our quota-share percentage of the risks the syndicate writes for the 2022 calendar year. This resulted in FGRe’s posting an additional $1.3 million in cash collateral to the account. We have also posted cash collateral in the approximate amount of $0.7 million, to support our automotive insurance quota-share agreement entered into on April 1, 2021. As of December 31, 2021, the total cash collateral posted to support all of our reinsurance treaties was approximately $4.4 million.
Current Income Taxes Recoverable
Current income taxes recoverable were $0 as of December 31, 2021, compared to approximately $1.7 million as of December 31, 2020, representing the estimate of both the Company’s state and federal income taxes receivable as of each date. In the third quarter of 2021, we received a refund on our federal taxes in the amount of approximately $1.5 million associated with a carryback refund request filed for our 2018, 2017 and 2014 tax years.
Reinsurance Balances Receivable
Reinsurance balances receivable were $3.9 million as of December 31, 2021, compared to $0 as of December 31, 2020, representing net amounts due to the Company under our quota-share agreements. As the Company estimates the ultimate premiums, loss expenses and other costs associated with some of these contracts, based on information received by us from the ceding companies, a significant portion of this balance is based on estimates and, ultimately, may not be collected by the Company.
Net Deferred Taxes
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes, as compared to the amounts used for income tax purposes. The Company’s gross deferred tax assets and liabilities are $6.2 million and $0.5 million as of December 31, 2021. The Company has recorded a valuation allowance against its deferred tax assets of $5.7 million, as of December 31, 2021, due to the uncertain nature surrounding our ability to realize these tax benefits in the future. Significant components of the Company’s net deferred taxes are as follows:
| ($ in thousands) | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| Deferred income tax assets: | ||||||||
| Net operating loss carryforward | $ | 3,010 | $ | 1,143 | ||||
| Loss and loss adjustment expense reserve | 25 | – | ||||||
| Unearned premium reserves | 152 | – | ||||||
| Capital loss carryforward | 1,114 | – | ||||||
| Share-based compensation | 253 | 216 | ||||||
| Investments | 1,692 | 2,570 | ||||||
| Other | 3 | 5 | ||||||
| Deferred income tax assets | $ | 6,249 | $ | 3,934 | ||||
| Less: Valuation allowance | (5,715 | ) | (3,934 | ) | ||||
| Deferred income tax assets net of valuation allowance | $ | 534 | $ | – | ||||
| Deferred income tax liabilities: | ||||||||
| Investments | $ | 369 | $ | – | ||||
| Deferred policy acquisition costs | 165 | – | ||||||
| Deferred income tax liabilities | $ | 534 | $ | – | ||||
| Net deferred income tax asset (liability) | $ | – | $ | – | ||||
As of December 31, 2021, the Company had net operating loss carryforwards (“NOLs”) for federal income tax purposes of approximately $14.3 million, which will be available to offset future taxable income. Approximately $0.5 million will expire on December 31, 2039, $0.1 million will expire on December 31, 2040, and $1.6 million of the Company’s NOLs will expire on December 31, 2041. The remaining $12.1 million of the Company’s NOLs do not expire under current tax law. Additionally, the Company has approximately $5.3 million of capital loss carryforward that can only be used to offset capital gains and which will expire in December 2026 if not used prior.
| 22 |
FG FINANCIAL GROUP, INC.
Loss and Loss Adjustment Expense Reserves
A significant degree of judgment is required to determine amounts recorded in the consolidated financial statements for the provision for loss and loss adjustment expense (“LAE”) reserves. The process for establishing this provision reflects the uncertainties and significant judgmental factors inherent in predicting future results of both known and unknown loss events. The process of establishing the provision for loss and LAE reserves relies on the judgment and opinions of many individuals, including the opinions of the Company’s management, as well as the management of ceding companies and their actuaries.
The COVID-19 pandemic is unprecedented, and the Company does not have previous loss experience on which to base the associated estimate for loss and loss adjustment expenses. In estimating losses, the Company may assess any of the following:
| ● | a review of in-force treaties that may provide coverage and incur losses; |
| ● | general forecasts, catastrophe and scenario modelling analyses and results shared by cedents; |
| ● | reviews of industry insured loss estimates and market share analyses; and |
| ● | management’s judgment. |
Assumptions which served as the basis for the Company’s estimates of reserves for the COVID-19 pandemic losses and loss adjustment expenses include:
| ● | the scope of coverage provided by the underlying policies, particularly those that provide for business interruption coverage; |
| ● | the regulatory, legislative, and judicial actions that could influence contract interpretations across the insurance industry; |
| ● | the extent of economic contraction caused by the COVID-19 pandemic and associated actions; and |
| ● | the ability of the cedents and insured to mitigate some or all of their losses. |
Under the terms of certain of our quota-share agreements, and due to the nature of claims and premium reporting, a lag exists between (i) claims being reported by the underlying insured to the Company’s cedent and (ii) claims being reported by the Company’s cedent to the Company. This lag may impact the Company’s loss reserve estimates. The reports we receive from our cedents have pre-determined due dates. In the case of the Company’s FAL contract, fourth quarter 2021 premium and loss information will not be made available to the Company until subsequent to the filing of this annual report. Thus, our fourth quarter results, including the loss and loss adjustment expense reserves presented herein, have been based upon a combination of first, second, and third quarter actual results as well as full-year forecasts reported to us by the ceding companies, which we used to approximate fourth quarter results. The Company obtains regular updates of premium and loss related information for the current and historical periods, which we use to update the initial expected loss ratios on our reinsurance contracts.
| 23 |
FG FINANCIAL GROUP, INC.
While the Company believes its estimate of loss and loss adjustment expense reserves are adequate as of December 31, 2021, based on available information, actual losses may ultimately differ materially from the Company’s current estimates. The Company will continue to monitor the appropriateness of its assumptions as new information is provided.
A summary of changes in outstanding loss and loss adjustment expense reserves for the year ended December 31, 2021, is as follows and includes reserves related to both our FAL contract, as well as our automotive insurance quota-share agreement which became effective April 1, 2021. There was no activity with respect to loss and loss adjustment expense reserves for the for the year ended December 31, 2020.
Off Balance Sheet Arrangements
None.
Shareholders’ Equity
Share Repurchase Transaction
On September 15, 2020, the Company repurchased all of the 1,130,152 shares of the Company’s common stock, owned by Hale Partnership Capital Management, LLC and certain of its affiliates (collectively, the “Hale Parties”), for an aggregate of approximately $2.8 million in cash and 330,231 shares of FedNat common stock having an estimated fair value of approximately $2.7 million, which included reimbursement of certain expenses incurred by the Hale Parties. Prior to the transaction, the Hale Parties owned more than 18% of the Company’s outstanding common stock.
As the total consideration paid in the transaction exceeded the fair value of the treasury shares repurchased by the Company, the Company recorded a charge of approximately $0.2 million to general and administrative expense for the year ended December 31, 2020, representing the estimated fair value of the rights conveyed to the Company pursuant to the standstill provisions in the repurchase agreement. The fair value of the 1,130,152 shares of Company common stock, or approximately $5.2 million, was recorded to treasury stock.
8.00% Cumulative Preferred Stock, Series A
On May 21, 2021, we completed the underwritten public offering of an additional 194,580 shares of our preferred stock designated as 8.00% Cumulative Preferred Stock, Series A, par value $25.00 per share (the “Series A Preferred Stock”), for net proceeds of approximately $4.2 million, bringing the total number of Series A Preferred Stock shares outstanding to 894,580 as of December 31, 2021.
Dividends on the Series A Preferred Stock are cumulative from the date of original issue and are payable quarterly on the 15th day of March, June, September and December of each year, when, as and if declared by our Board of Directors. Dividends are payable out of amounts legally available therefor at a rate equal to 8.00% per annum per $25.00 of stated liquidation preference per share, or $2.00 per share of Series A Preferred Stock per year. Our Board of Directors declared the first quarter 2022 dividend on the shares of Series A Preferred Stock on February 10, 2022. The Series A Preferred Stock shares trade on the Nasdaq Stock Market under the symbol “FGFPP”.
| 24 |
FG FINANCIAL GROUP, INC.
Common Stock
In the 2021 fourth quarter, we sold, a total of 750,000 shares of our common stock, at a price of $4.00 per share, for net proceeds to us of approximately $2.5 million. Also in the fourth quarter, the Company completed a rights offering to holders of its common stock. Pursuant to the rights offering, 691,735 shares were subscribed for, for net proceeds of approximately $2.7 million. The Company intends to use the net proceeds from the issuance of its common shares for working capital and other general corporate purposes.
Retirement of Treasury Stock
On August 19, 2021, the Board approved the retirement of all 1,281,511 common stock treasury shares owned by the Company. Accordingly, these shares have been classified as authorized, but unissued shares on the Company’s balance sheet, as of December 31, 2021.
Change in Shareholders’ Equity
The table below presents the primary components of changes to total shareholders’ equity for the years ended December 31, 2021 and 2020.
| ($ in thousands) | Preferred Shares Outstanding | Common Shares Outstanding | Treasury Shares | Total Shareholders’ Equity | ||||||||||||
| Balance, January 1, 2020 | 700,000 | 6,065,948 | 151,359 | $ | 62,915 | |||||||||||
| Dividends declared on Series A Preferred Stock ($2.00 per share) | – | – | – | (1,400 | ) | |||||||||||
| Stock compensation expense | – | 52,514 | – | 311 | ||||||||||||
| Share Repurchase Transaction | – | (1,130,152 | ) | 1,130,152 | (5,176 | ) | ||||||||||
| Net loss | – | – | – | (22,457 | ) | |||||||||||
| Balance, December 31, 2020 | 700,000 | 4,988,310 | 1,281,511 | $ | 34,193 | |||||||||||
| Retirement of Treasury Stock | – | – | (1,281,511 | ) | – | |||||||||||
| Series A Preferred Share issuance | 194,580 | – | – | 4,217 | ||||||||||||
| Common stock issuance | – | 1,441,735 | – | 5,246 | ||||||||||||
| Stock compensation expense | – | 67,160 | – | 559 | ||||||||||||
| Dividends declared on Series A Preferred Stock ($2.00 per share) | – | – | – | (1,692 | ) | |||||||||||
| Net loss | – | – | – | (8,514 | ) | |||||||||||
| Balance, December 31, 2021 | 894,580 | 6,497,205 | – | $ | 34,009 | |||||||||||
Results of Operations
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Net Premiums Earned
Net premiums earned represent actual premiums earned on our quota-share agreements as well as estimated premiums earned on our FAL agreement for the fourth quarter 2021 and is approximately $4.9 million for the year ended December 31, 2021. Our FAL estimates are based on information received from the ceding companies, whereby premiums are recorded, as written, in the same periods in which the underlying insurance contracts are written and are based on cession statements from cedents. These statements are received quarterly, in arrears; so, for any reporting lag, premiums written are estimated based on the portion of the ultimate estimated premiums relating to the risks underwritten during the lag period. As our quota-share agreements became effective in 2021, we had no corresponding net earned premiums for the year ended December 31, 2020.
| 25 |
FG FINANCIAL GROUP, INC.
Net Investment Income
Net investment income (loss) for the years ended December 31, 2021 and 2020 is as follows:
| (in thousands) | Year Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Investment income (loss): | ||||||||
| Unrealized holding loss on FedNat common stock | $ | (865 | ) | $ | (16,196 | ) | ||
| Unrealized holding gain on private placement investments | 5,267 | – | ||||||
| Realized loss on FedNat common stock | (5,452 | ) | (2,110 | ) | ||||
| Dividend income from FedNat common stock | – | 609 | ||||||
| Equity method earnings | 3,448 | 265 | ||||||
| Other | 147 | 172 | ||||||
| Net investment income (loss) | $ | 2,545 | $ | (17,260 | ) | |||
Other Income
Other income was $186,000, compared to $104,000, for the years ended December 31, 2021, and 2020, respectively, and is comprised of fees earned under the investment advisory and transition services agreements between the Company and FedNat. Also included in other income for current year is approximately $86,000 in service fee revenue we have earned under our new SPAC Platform, whereby we have provided certain accounting, regulatory, strategic advisory, and other administrative services to Aldel, prior to its business combination transaction with Hagerty.
Net Losses and Loss Adjustment Expenses
Net losses and loss adjustment expenses (“LAE”) for the year ended December 31, 2021, represent charges associated with the establishment of loss and LAE reserves under our quota-share reinsurance agreements. Also included in this figure are loss and LAE payments in the approximate amount of $2.2 million. As discussed under the heading “Loss and Loss Adjustment Expense Reserves”, a portion of this charge represents an estimate based upon a full calendar year forecast of results provided to us by the ceding companies under our FAL arrangement.
General and Administrative Expenses
General and administrative expenses increased by $3.2 million for the years ended December 31, 2021, as compared to 2020. The increase was primarily due to underwriting expenses allocated to us pursuant to our two quota-share reinsurance contracts, which accounted for approximately $0.6 million of the increase, as our reinsurance agreements became effective in 2021. Also included in general and administrative expenses are payments to Fundamental Global Management, LLC (“FGM”), pursuant to a shared services agreement entered into on March 31, 2020. Under the agreement, FGM provides the Company with certain services related to the day-to-day management of the Company, including assisting with regulatory compliance, evaluating the Company’s financial and operational performance, providing a management team to supplement the executive officers of the Company, and such other services consistent with those customarily performed by executive officers and employees of a public company. In exchange for these services, the Company pays FGM a fee of approximately $456,000 per quarter, plus reimbursement of expenses incurred by FGM in connection with the performance of the services, subject to certain limitations approved by the Company’s Board of Directors or Compensation Committee, from time to time. The Company paid $1.9 million and $1.4 million to FGM under the agreement, for the years ended December 31, 2021 and 2020, respectively. FGM is an affiliate of FG, the Company’s largest shareholder.
Personnel costs have also increased as our employee count has increased from three to nine when comparing twelve-month periods. Employee salaries and benefits including associated payroll taxes account for approximately $1.5 million of the increase to general and administrative expenses when comparing twelve-month periods.
| 26 |
FG FINANCIAL GROUP, INC.
Income Tax Expense (Benefit)
Our actual effective tax rate varies from the statutory federal income tax rates as shown in the following table.
| ($ in thousands) | Year Ended December 31, | |||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
| Provision for taxes at U.S. statutory marginal income tax rate of 21% | $ | (1,540 | ) | 21.0 | % | $ | (4,856 | ) | 21.0 | % | ||||||
| Valuation allowance for deferred tax assets deemed unrealizable | 1,782 | (24.3 | )% | 3,934 | (17.0 | )% | ||||||||||
| Rate differential due to CARES Act | – | – | % | (214 | ) | 0.9 | % | |||||||||
| Non-deductible expenses associated with the Share Repurchase Transaction | – | – | % | 516 | 2.2 | % | ||||||||||
| Net operating loss carryback | – | – | % | – | – | % | ||||||||||
| State income tax (net of federal benefit) | (114 | ) | 1.6 | % | – | – | % | |||||||||
| Minority Interest | (279 | ) | 3.8 | % | ||||||||||||
| Other | 6 | (0.1 | )% | (45 | ) | 0.2 | % | |||||||||
| Income tax benefit | $ | (145 | ) | 2.0 | % | $ | (665 | ) | 2.9 | % | ||||||
| Income tax benefit – from continuing operations | $ | – | – | % | $ | (665 | ) | 2.9 | % | |||||||
| Income tax benefit – from discontinued operations | $ | (145 | ) | 2.0 | % | $ | – | – | % | |||||||
Due to the sale of our former insurance business, these operations have been classified as discontinued operations in the Company’s financial statements presented herein. For the year ended December 31, 2021, we recognized a gain from the sale of these operations of approximately $145,000, related to a final true-up and settlement for income taxes due to the Company under the sale agreement.
As a result of the passage of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company recorded a credit of $214,000 against its income tax expense for the year ended December 31, 2020, due to a provision in the CARES Act that allows for the five-year carryback of net operating losses. Prior to the passage of the CARES Act, these net operating losses were only available to offset future taxable income generated by the Company.
We have also recorded charges of $1,782 and $3,934 for the years ended December 31, 2021 and 2020, respectively, as a valuation allowance against all of our net deferred tax assets, due to uncertainty regarding our ability to realize these tax benefits in the future, reducing the net deferred income tax asset to $0, as of December 31, 2021.
Net Loss
Information regarding our net loss and loss per share for the years ended December 31, 2021 and 2020 is as shown in the following table:
| ($ in thousands) | Year Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Basic and diluted: | ||||||||
| Net loss from continuing operations | $ | (7,333 | ) | $ | (22,457 | ) | ||
| Income attributable to noncontrolling interest | (1,326 | ) | – | |||||
| Dividends declared on Series A Preferred Shares | (1,692 | ) | (1,400 | ) | ||||
| Loss attributable to FG Financial Group, Inc. common shareholders | (10,351 | ) | (23,857 | ) | ||||
| Weighted average common shares | 5,212,772 | 5,746,259 | ||||||
| Loss per common share from continuing operations | $ | (1.99 | ) | $ | (4.15 | ) | ||
| Gain on sale of former insurance business | $ | (145 | ) | $ | – | |||
| Weighted average common shares outstanding | 5,212,772 | – | ||||||
| Income per common share from discontinued operations | $ | 0.03 | $ | – | ||||
| Loss per share attributable to common shareholders | $ | (1.96 | ) | $ | (4.15 | ) | ||
| 27 |
FG FINANCIAL GROUP, INC.
Liquidity and Capital Resources
The purpose of liquidity management is to ensure that there is sufficient cash to meet all financial commitments and obligations as they fall due. The liquidity requirements of the Company and its subsidiaries have been met primarily from the cash proceeds of the Asset Sale, by funds generated from operations, and from the proceeds from the sales of our common and preferred stock. Cash provided from these sources has historically been used for loss and loss adjustment expense payments, as well as other operating expenses.
For the year ended December 31, 2021, the Company sold common and preferred stock to the public, for total net proceeds of $9.4 million. Additional information regarding the public offering of our common stock and Series A Preferred Stock can be found under the heading “Shareholders’ Equity.”
Cash Flows
The following table summarizes the Company’s consolidated cash flows for the years ended December 31, 2021 and 2020.
| ($ in thousands) | Year ended December 31, | |||||||
| Summary of Cash Flows | 2021 | 2020 | ||||||
| Cash and cash equivalents – beginning of period | $ | 12,132 | $ | 28,509 | ||||
| Net cash used by operating activities | (14,406 | ) | (11,283 | ) | ||||
| Net cash provided (used) by investing activities | 5,898 | (1,156 | ) | |||||
| Net cash provided (used) by financing activities | 11,918 | (3,938 | ) | |||||
| Net decrease in cash and cash equivalents | 3,410 | (16,377 | ) | |||||
| Cash and cash equivalents – end of period | $ | 15,542 | $ | 12,132 | ||||
For the year ended December 31, 2021, the Company’s net cash used by operating activities was approximately $14.4 million, the major drivers of which were as follows:
| ● | Our net loss of approximately $7.2 million for the year. | |
| ● | Approximately $7.8 million for a non-cash charge related to the unrealized holding gains on our various investments, offset by $5.5 million in realized loss on sale associated with our shares of FedNat common stock. | |
| ● | A cash outflow of approximately $2.0 million representing cash placed in trust as collateral, pursuant to our quota-share agreements. | |
| ● | A cash outflow of approximately $6.5 million for our investment in our SPAC sponsorships through the Fund. As this investment was made by our former investment company subsidiary, we are required to show these cash outflows as operating activities. |
For the year ended December 31, 2021, the Company’s net cash provided by financing activities consist primarily of proceeds of approximately $5.9 million from the sale of a portion of our FedNat shares as well as the complete liquidation of our Metrolina investment.
For the year ended December 31, 2021, the Company’s net cash used by financing activities consist of:
| ● | The payments of dividends in the amount of $1.7 million on our Series A Preferred Shares. | |
| ● | Net proceeds from the issuance of our Series A Preferred Shares in the amount of approximately $4.2 million. | |
| ● | Net proceeds from the issuance of our common stock in the amount of approximately $5.2 million. |
For the year ended December 31, 2020, the Company’s net cash used by operating activities was approximately $11.3 million. The major drivers of which were as follows:
| ● | Our net loss of approximately $22.5 million for the year, offset by approximately $16.0 million for a non-cash charge related to the unrealized losses associated with our shares of FedNat common stock. | |
| ● | A cash outflow of approximately $2.4 million representing cash placed in trust as collateral, pursuant to our Funds at Lloyd’s quota-share agreement, effective January 1, 2021. | |
| ● | A cash outflow of approximately $4.0 million for our investment in the Class A and Class A-1 interests in the Sponsor of FGNA. As this investment was made by our former investment company subsidiary, we are required to show these cash outflows as operating activities. |
For the year ended December 31, 2020, the Company’s net cash used by financing activities consist of:
| ● | Payments of dividends in the amount of $1.4 million on our Series A Preferred Shares. | |
| ● | The payment of $2.5 million in cash to the Hale Parties in connection with the repurchase transaction. |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
| 28 |
FG FINANCIAL GROUP, INC.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| Index to the Consolidated Financial Statements | ||
| Report of Independent Registered Public Accounting Firm (BDO USA, LLP; St. Petersburg, FL; PCAOB ID#243) | 30 | |
| Consolidated Balance Sheets as of December 31, 2021 and 2020 | 31 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020 | 32 | |
| Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2021 and 2020 | 33 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 | 34 | |
| Notes to the Consolidated Financial Statements | 35 | |
| 29 |
FG FINANCIAL GROUP, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
FG Financial Group, Inc.
St. Petersburg, FL
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of FG Financial Group, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 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 at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 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 Matters
The critical audit matters communicated below are matters 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 our 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 separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Incurred But Not Reported (IBNR) Loss Reserves
As described in Note 2 and Note 5 to the Company’s consolidated financial statements, the Company’s loss and loss adjustment expense reserve was $2,133 at December 31, 2021. The total reserve was made up of $841 of case reserves and $1,292 of incurred but not reported (IBNR) loss reserves. Case reserves have resulted from claims notified to the Company by its cedants. IBNR loss reserves relate to claims that have been incurred by insureds and reinsureds but have not yet been reported to the insurer or reinsurer, including unknown future developments on amounts already known by the insurer or reinsurer. The establishment of IBNR loss reserves is an inherently difficult and subjective process, as there is significant judgment in the assumptions used in determining management’s best estimate of the IBNR component. The significant judgments are (1) the types of exposures and projected ultimate premium to be written by cedants; (2) expected loss ratios by type of business; (3) actuarial methodologies which analyze loss reporting and payment experience, reports from ceding companies and historical trends; and (4) general economic conditions. In particular, the estimate relies on the judgment and opinions of the involved individuals, including the opinions of the Company’s management and independent actuarial specialists, as well as the management of ceding companies and their actuaries.
We identified the IBNR component of the Company’s loss and loss adjustment expense reserves as a critical audit matter. Auditing the valuation of the reserve for IBNR was complex and required the involvement of our actuarial specialists due to the highly judgmental nature of the actuarial methods and significant assumptions used in the valuation of the estimate.
The primary procedures we performed to address this critical audit matter included:
| ● | Testing the completeness and accuracy of the source information used by the Company’s management and independent actuarial specialists to calculate the IBNR loss reserves. | |
| ● | Utilizing personnel with specialized knowledge and skill in actuarial methods to assist in evaluating the appropriateness of the methodologies and the reasonableness of significant assumptions used by the Company’s management and independent actuarial specialists. | |
| ● | Comparing the results of the reserve study prepared by independent actuarial specialists to management’s best estimate and evaluating the differences. |
Valuation of Equity Method Investments
As described in Note 4 to the consolidated financial statements, the Company’s equity method investments include private placement investments held in sponsor shares and warrants for special purpose acquisition companies (SPAC), for which management estimates the valuation using complex valuation methods (Monte-Carlo simulation and option pricing models) and significant assumptions regarding unobservable inputs. The significant unobservable inputs are the estimate of the volatility of the common stock based on the selection of historical performance market indices blended with various peer companies which the Company considers having similar characteristics to the underlying investment and the discount for lack of marketability).
We identified the valuation of these private placement investments as a critical audit matter. The valuation of the private placement investments involved significant auditor judgment and required the involvement of our valuation specialists in evaluating the (1) relevant valuation methodologies and (2) unobservable inputs used in determining the fair value of these investments.
The primary procedures we performed to address this critical audit matter included:
| ● | Utilizing valuation specialists to assist us in evaluating the appropriateness of management’s valuation methodologies. | |
| ● | Utilizing valuation specialists to assist us in evaluating the appropriateness of unobservable inputs. |
| /s/ BDO USA, LLP | |
| We have served as the Company’s auditor since 2012. | |
| Grand Rapids, Michigan | |
| March 30, 2022 |
| 30 |
FG FINANCIAL GROUP, INC.
Consolidated Balance Sheets
($ in thousands, except per share data)
| December 31, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Equity securities, at fair value (cost basis of $14,495 and $20,751, respectively) | $ | 1,421 | $ | 8,542 | ||||
| Other investments (includes $0 and $4,013 held by the Company’s previously consolidated VIE, respectively) | 14,040 | 9,346 | ||||||
| Cash and cash equivalents (including $0 and $987 held by the Company’s previously consolidated VIE, respectively) | 15,542 | 12,132 | ||||||
| Deferred policy acquisition costs | 786 | |||||||
| Reinsurance balances receivable | 3,853 | |||||||
| Funds deposited with reinsured companies | 4,442 | 2,444 | ||||||
| Current income taxes recoverable | 1,724 | |||||||
| Other assets | 745 | 517 | ||||||
| Total assets | $ | 40,829 | $ | 34,705 | ||||
| LIABILITIES | ||||||||
| Loss and loss adjustment expense reserves | $ | 2,133 | $ | |||||
| Unearned premium reserves | 3,610 | |||||||
| Accounts payable | 502 | 455 | ||||||
| Other liabilities | 575 | 57 | ||||||
| Total liabilities | $ | 6,820 | $ | 512 | ||||
| Commitments and contingencies (Note 12) | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Series A Preferred Shares, $ par and liquidation value, shares authorized; and shares issued and outstanding as of December 31, 2021 and 2020, respectively | $ | 22,365 | $ | 17,500 | ||||
| Common stock, $ par value; and shares authorized; and shares issued as of December 31, 2021 and 2020, respectively, and, and shares outstanding as of December 31, 2021 and 2020, respectively | 6 | 6 | ||||||
| Additional paid-in capital | 46,037 | 47,065 | ||||||
| Accumulated deficit | (34,399 | ) | (24,193 | ) | ||||
| 34,009 | 40,378 | |||||||
| Less: treasury stock at cost, and shares as of December 31, 2021 and 2020, respectively | (6,185 | ) | ||||||
| Total shareholders’ equity | 34,009 | 34,193 | ||||||
| Total liabilities and shareholders’ equity | $ | 40,829 | $ | 34,705 | ||||
See accompanying notes to consolidated financial statements.
| 31 |
FG FINANCIAL GROUP, INC.
Consolidated Statements of Operations
($ in thousands, except per share data)
| Year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenue: | ||||||||
| Net premiums earned | $ | 4,864 | $ | |||||
| Net investment income (loss) | 2,545 | (17,260 | ) | |||||
| Other income | 186 | 104 | ||||||
| Total revenue | 7,595 | (17,156 | ) | |||||
| Expenses: | ||||||||
| Net losses and loss adjustment expenses | 4,338 | |||||||
| Amortization of deferred policy acquisition costs | 1,407 | |||||||
| General and administrative expenses | 9,183 | 5,966 | ||||||
| Total expenses | 14,928 | 5,966 | ||||||
| Loss from continuing operations before income tax benefit | (7,333 | ) | (23,122 | ) | ||||
| Income tax benefit from continuing operations | (665 | ) | ||||||
| Net loss from continuing operations | (7,333 | ) | (22,457 | ) | ||||
| Discontinued operations (Note 2): | ||||||||
| Gain from sale of former insurance business | (145 | ) | ||||||
| Net income from discontinued operations | (145 | ) | ||||||
| Net loss | $ | (7,188 | ) | $ | (22,457 | ) | ||
| Income attributable to noncontrolling interest | 1,326 | |||||||
| Dividends declared on Series A Preferred Shares | 1,692 | 1,400 | ||||||
| Loss attributable to common shareholders | $ | (10,206 | ) | $ | (23,857 | ) | ||
| Basic and diluted net earnings (loss) per common share: | ||||||||
| Continuing operations | $ | (1.99 | ) | $ | (4.15 | ) | ||
| Discontinued operations | 0.03 | |||||||
| Loss per share attributable to common shareholders | $ | (1.96 | ) | $ | (4.15 | ) | ||
| Weighted average common shares outstanding: | ||||||||
| Basic and diluted | 5,212,772 | 5,746,259 | ||||||
See accompanying notes to consolidated financial statements.
| 32 |
FG FINANCIAL GROUP, INC.
Consolidated Statements of Shareholders’ Equity
($ in thousands)
| Preferred Stock | Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||
| Shares Outstanding | Amount | Shares Outstanding | Amount | Shares Outstanding | Amount | Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity Attributable to FG Financial Group Inc. | Non- controlling Interests | |||||||||||||||||||||||||||||||
| Balance, January 1, 2020 | 700,000 | $ | 17,500 | 6,065,948 | $ | 6 | 151,359 | $ | (1,009 | ) | $ | 46,754 | $ | (336 | ) | $ | 62,915 | $ | ||||||||||||||||||||||
| Stock based compensation | 52,514 | – | 311 | 311 | ||||||||||||||||||||||||||||||||||||
| Share repurchase transaction | (1,130,152 | ) | 1,130,152 | (5,176 | ) | (5,176 | ) | |||||||||||||||||||||||||||||||||
| Dividends declared on Series A Preferred Shares ($per share) | – | – | – | (1,400 | ) | (1,400 | ) | |||||||||||||||||||||||||||||||||
| Net loss | – | – | – | (22,457 | ) | (22,457 | ) | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 700,000 | $ | 17,500 | 4,988,310 | $ | 6 | 1,281,511 | $ | (6,185 | ) | $ | 47,065 | $ | (24,193 | ) | $ | 34,193 | $ | ||||||||||||||||||||||
| Stock based compensation | 67,160 | – | 559 | 559 | ||||||||||||||||||||||||||||||||||||
| Interests issued for contributed cash | – | – | – | 4,147 | ||||||||||||||||||||||||||||||||||||
| Deconsolidation of variable interest entity | – | – | – | (5,473 | ) | |||||||||||||||||||||||||||||||||||
| Issuance of Series A Preferred shares | 194,580 | 4,865 | – | – | (648 | ) | 4,217 | |||||||||||||||||||||||||||||||||
| Retirement of treasury shares | (1 | ) | (1,281,511 | ) | 6,185 | (6,184 | ) | |||||||||||||||||||||||||||||||||
| Issuance of common stock | – | 1,441,735 | 1 | – | 5,245 | 5,246 | ||||||||||||||||||||||||||||||||||
| Dividends declared on Series A Preferred Shares ($per share) | – | – | – | (1,692 | ) | (1,692 | ) | |||||||||||||||||||||||||||||||||
| Net loss | – | – | – | (8,514 | ) | (8,514 | ) | 1,326 | ||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 894,580 | $ | 22,365 | 6,497,205 | $ | 6 | $ | $ | 46,037 | $ | (34,399 | ) | $ | 34,009 | $ | |||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
| 33 |
FG FINANCIAL GROUP, INC.
Consolidated Statements of Cash Flows
($ in thousands)
| Year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities: | ||||||||
| Net loss | $ | (7,188 | ) | $ | (22,457 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Unrealized holding (gains) losses on equity investments | (7,851 | ) | 16,010 | |||||
| Net realized loss in Share Repurchase Transaction | 2,111 | |||||||
| Net realized loss on sale of investments | 5,456 | |||||||
| Net deferred income taxes | (106 | ) | ||||||
| Stock compensation expense | 559 | 311 | ||||||
| Purchases of investments by consolidated investment company subsidiary | (6,479 | ) | (4,013 | ) | ||||
| Cash relinquished upon deconsolidation of investment company subsidiary (note 4) | (100 | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Funds deposited with reinsured companies | (1,998 | ) | (2,444 | ) | ||||
| Amounts due under reinsurance agreements | (3,853 | ) | ||||||
| Deferred policy acquisition costs | (786 | ) | ||||||
| Other assets | (233 | ) | (315 | ) | ||||
| Loss and loss adjustment expense reserves | 2,133 | |||||||
| Unearned premium reserves | 3,610 | |||||||
| Accounts payable and other accrued expenses | 600 | 79 | ||||||
| Current income taxes recoverable | 1,724 | (459 | ) | |||||
| Net cash used by operating activities | (14,406 | ) | (11,283 | ) | ||||
| Investing activities: | ||||||||
| Purchases of furniture and equipment | (14 | ) | (13 | ) | ||||
| Sales of equity securities | 803 | |||||||
| Sales of other investments | 5,109 | 138 | ||||||
| Purchases of other investments | (1,281 | ) | ||||||
| Net cash provided (used) by investing activities | 5,898 | (1,156 | ) | |||||
| Financing activities: | ||||||||
| Payment of dividends on preferred shares | (1,692 | ) | (1,400 | ) | ||||
| Proceeds from issuance preferred stock, net | 4,217 | |||||||
| Proceeds from issuance common stock, net | 5,246 | |||||||
| Capital contribution from non-controlling interest | 4,147 | |||||||
| Purchase of treasury shares | (2,538 | ) | ||||||
| Net cash provided (used) by financing activities | 11,918 | (3,938 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 3,410 | (16,377 | ) | |||||
| Cash and cash equivalents at beginning of period | 12,132 | 28,509 | ||||||
| Cash and cash equivalents at end of period | $ | 15,542 | $ | 12,132 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Net refunds received during the period for income taxes | $ | 1,471 | $ | (100 | ) | |||
| Non-cash financing activities: | ||||||||
| Sale of equity investments to purchase treasury shares | $ | $ | 2,639 | |||||
See accompanying notes to consolidated financial statements.
| 34 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business
FG Financial Group, Inc. (“FGF”, the “Company”, “we”, or “us”) is a reinsurance and investment management holding company. We focus on opportunistic collateralized and loss capped reinsurance, while allocating capital in partnership with Fundamental Global® to SPAC and SPAC sponsor-related businesses. The Company’s principal business operations are conducted through its subsidiaries and affiliates. The Company also provides investment management services. From our inception in October 2012 through December 2019, we operated as an insurance holding company, writing property and casualty insurance throughout the states of Louisiana, Florida, and Texas. On December 2, 2019, we sold our three former insurance subsidiaries, and embarked upon our current strategy focused on reinsurance and asset management.
As of December 31, 2021, Fundamental Global GP, LLC, a privately owned investment management company, and its affiliates, or “FG,” beneficially owned approximately 56% of our common stock. D. Kyle Cerminara, Chairman of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FG.
Sale of the Insurance Business
On December 2, 2019, we completed the sale of our insurance subsidiaries to FedNat Holding Company for a combination of cash and FedNat common stock. The shares of FedNat common stock we received in the Asset Sale were issued to us pursuant to a standstill agreement which provides certain limitations and restrictions with respect to the voting and sale or transfer of the securities until December 2024. As of December 31, 2021, we continue to hold 1,007,871 shares of FedNat common stock.
Current Business
Our strategy has evolved to focus on opportunistic collateralized and loss capped reinsurance, with capital allocation to special purpose acquisition companies (“SPACs”) and SPAC sponsor-related businesses. As part of our refined focus, we have adopted the following capital allocation philosophy:
“Grow intrinsic value per share with a long-term focus using fundamental research, allocating capital to asymmetric risk/reward opportunities.”
Currently, the business operates as a diversified holding company of insurance, reinsurance, asset management and our “SPAC Platform” businesses.
Insurance
We are in the process of establishing and seeking regulatory approvals for a Risk Retention Group (“RRG”) for the purpose of providing directors and officers insurance coverage to special purpose acquisition vehicles. We intend to provide capital, along with other participants, to facilitate the underwriting of such insurance coverage. The Company will focus on fee income derived from originating, underwriting, and servicing the insurance business, while mitigating our financial risk with external reinsurance partners.
Reinsurance
The Company’s wholly owned reinsurance subsidiary, Fundamental Global Reinsurance Ltd. (“FGRe”), a Cayman Islands limited liability company, provides specialty property and casualty reinsurance. FGRe has been granted a Class B (iii) insurer license in accordance with the terms of The Insurance Law, 2010 and underlying regulations thereto and is subject to regulation by the Cayman Islands Monetary Authority (the “Authority”). The terms of the license require advance approval from the Authority should FGRe wish to enter into any reinsurance agreements which are not fully collateralized to their aggregate exposure limit. FGRe participates in a Funds at Lloyds syndicate covering all risks written by the syndicate during the 2021 and 2022 calendar years. On April 1, 2021, FGRe entered into its second reinsurance contract with a leading insurtech company that provides automotive insurance utilizing driver monitoring to predictively segment and price drivers. FGRe’s exposure is limited by a loss-cap stipulated within the quota-share agreement.
| 35 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Management
Pursuant to the Investment Advisory Agreement, FG Strategic Consulting, LLC (“FGSC”) a wholly-owned subsidiary of the Company has agreed to provide investment advisory services to FedNat, including identifying, analyzing and recommending potential investments, advising as to existing investments and investment optimization, recommending investment dispositions, and providing advice regarding macro-economic conditions. In exchange for providing the investment advisory services, FedNat has agreed to pay FGSC an annual fee of $100,000. The term of the Investment Advisory Agreement is five years, expiring on December 2, 2024.
SPAC Platform
On December 21, 2020, we formed FG SPAC Solutions LLC (“FGSS”), a Delaware company, to facilitate the launch of our “SPAC Platform”. Under the SPAC Platform, we plan to provide various strategic, administrative, and regulatory support services to newly formed SPACs for a monthly fee. Additionally, the Company co-founded a partnership, FG SPAC Partners, LP (“FGSP”) to participate as a co-sponsor for newly formed SPACs. The Company also participates in the risk capital investments associated with the launch of such SPACs through its Asset Management business, specifically FG Special Situations Fund, LP. (“Fund”). As discussed in Note 4, the Company has consolidated the results of the Fund through November 30, 2021, however, effective December 1, 2021, the Company began accounting for its investment in the Fund under the equity method. The first transaction entered into under the SPAC Platform occurred on January 11, 2021, by and among FGSS and Aldel Investors, LLC, the sponsor of Aldel Financial, Inc. (“Aldel”), a special purpose acquisition company which completed its business combination with Hagerty on December 2, 2021. Under the services agreement between FGSS and Aldel Investors, LLC (the “Agreement”), FGSS provided accounting, regulatory, strategic advisory, and other administrative services to Aldel, which included assistance with negotiations with potential merger targets for the SPAC as well as assistance with the de-SPAC process.
Note 2. Significant Accounting Policies
Basis of Presentation
These statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Consolidation Policies
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation.
The consolidated financial statements include the accounts of the Company and entities in which it is required to consolidate under either the Variable Interest Entity (“VIE”) or Voting Interest Entity (“VOE”) models. Both models require the reporting entity to identify whether it has a controlling financial interest in a legal entity and is therefore required to consolidate the legal entity. Under the VOE model, a reporting entity with ownership of a majority of the voting interest of a legal entity is generally considered to have a controlling financial interest. The VIE model was established for situations in which control may be demonstrated other than by the possession of voting rights in a legal entity and instead focuses on the power to direct the activities that most significantly impact the legal entity’s economic performance, as well as the rights to receive benefits and obligations to absorb losses that could potentially be significant to the legal entity.
The determination of whether a legal entity is consolidated under either model is reassessed where there is a substantive change in the governing documents or contractual arrangements of the entity, to the capital structure of the entity or in the activities of the entity. The Company continuously reassesses whether it should consolidate under either model.
In September 2020, the Company invested approximately $5.0 million to sponsor the launch of Fund. The Fund, a VIE which the Company was required to consolidate through November 30, 2021, is considered an investment company for GAAP purposes and follows the accounting and reporting guidance in the Financial Accounting Standards Codification (“ASC”) Topic 946, Financial Services-Investment Companies, which includes the presentation of its investments at fair value.
See Note 4 for additional information regarding the Company’s consolidated investments.
| 36 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Discontinued Operations
Due to the sale of all of the issued and outstanding equity of our previous insurance business on December 2, 2019, these operations have been classified as discontinued operations in the Company’s financial statements presented herein. For the year ended December 31, 2021, we recognized a gain from the sale of this business for approximately $145,000. This was related to a final true-up and settlement in the first quarter 2021, for income taxes due to the Company under the sale agreement. The following table presents a reconciliation of the major classes of line items constituting pretax profit (loss) of discontinued operations to the after-tax profit (loss) of discontinued operations that are presented in the Company’s consolidated statements of operations for the years ended December 31, 2021 and 2020:
| (in thousands) | Year ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Gain from sale of former insurance business | (145 | ) | ||||||
| Net income from discontinued operations | $ | (145 | ) | $ | ||||
The Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined. The critical accounting estimates and assumptions in the accompanying consolidated financial statements include the valuation of our investments, the valuation of net deferred income taxes and deferred policy acquisition costs, premium revenue recognition, reserves for loss and loss adjustment expenses, and stock-based compensation expense.
Investments in Equity Securities
Investments in equity securities are carried at fair value with subsequent changes in fair value recorded to the Consolidated Statements of Operations as a component of net investment income.
Other Investments
Other investments consist, in part, of equity investments made in privately held companies accounted for under the equity method. We utilize the equity method to account for investments when we possess the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when the investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. We apply the equity method to investments in common stock and to other investments when such other investments possess substantially identical subordinated interests to common stock.
In applying the equity method, we record the investment at cost and subsequently increase or decrease the carrying amount of the investment by our proportionate share of the net earnings or losses and other comprehensive income of the investee. We record dividends or other equity distributions as reductions in the carrying value of the investment. Should net losses of the investee reduce the carrying amount of the investment to zero, additional net losses may be recorded if other investments in the investee are at-risk, even if we have not committed to provide financial support to the investee. Such additional equity method losses, if any, are based upon the change in our claim on the investee’s book value.
As of December 31, 2020, other investments also consisted of private placement securities reported at fair value and characterized under Level 3 of the fair value hierarchy as promulgated by the Financial Accounting and Standards Board.
Other investments also consist of equity we have purchased in a limited partnership and a limited liability company for which there does not exist a readily determinable fair value. The Company accounts for these investments at their cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investment of the same issuer. Any profit distributions the Company receives on these investments are included in net investment income.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with original maturities of 90 days or less.
| 37 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company follows the asset and liability method of accounting for income taxes, whereby deferred income tax assets and liabilities are recognized for (i) the differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and (ii) loss and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not and a valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit).
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk include investments, cash, and deposits with reinsured companies. The Company maintains its cash with a major U.S. domestic banking institution which is insured by the Federal Deposit Insurance Corporation (“FDIC”) for up to $250,000. As of December 31, 2021 the Company held funds in excess of these FDIC insured amounts. The terms of these deposits are on demand to mitigate some of the associated risk. The Company has not incurred losses related to these deposits.
Premium Revenue Recognition
The Company participates in a quota-share contracts and estimates the ultimate premiums for the contract period. These estimates are based on information received from the ceding companies, whereby premiums are recorded as written in the same periods in which the underlying insurance contracts are written and are based on cession statements from cedents. These statements are received quarterly and in arrears, and thus for any reporting lag, premiums written are estimated based on the portion of the ultimate estimated premiums relating to the risks underwritten during the lag period.
Premium estimates are reviewed by management periodically. Such review includes a comparison of actual reported premiums to expected ultimate premiums. Based on management’s review, the appropriateness of the premium estimates is evaluated, and any adjustments to these estimates are recorded in the period in which they are determined. Changes in premium estimates, including premiums receivable, are not unusual and may result in significant adjustments in any period. A significant portion of amounts included in the caption “Reinsurance balances receivable” in the Company’s consolidated balance sheets represent estimated premiums written, net of commissions, brokerage, and loss and loss adjustment expense, and are not currently due based on the terms of the underlying contracts. Additional premiums due on a contract that has no remaining coverage period are earned in full when written.
Premiums written are generally recognized as earned over the contract period in proportion to the risk covered. Unearned premiums represent the unexpired portion of reinsurance provided.
Policy Acquisition Costs
Policy acquisition costs are costs that vary with, and are directly related to, the successful production of new and renewal business, and consist principally of commissions, taxes and brokerage expenses. If the sum of a contract’s expected losses and loss expenses and deferred acquisition costs exceeds associated unearned premiums and expected investment income, a premium deficiency is determined to exist. In this event, deferred acquisition costs are written off to the extent necessary to eliminate the premium deficiency. If the premium deficiency exceeds deferred acquisition costs then a liability is accrued for the excess deficiency. There were no premium deficiency adjustments recognized during the periods presented herein.
Funds Held by Cedents
The caption “Funds Deposited with Reinsured Companies” in the Company’s consolidated balance sheets includes amounts held by cedents provided to support our reinsurance contracts. On November 12, 2020, FGRe, our Cayman Islands based reinsurance subsidiary, initially funded a trust account at Lloyd’s with approximately $2.4 million cash, to collateralize its obligations under a quota-share agreement with a Funds at Lloyds syndicate. The initial contract covered our quota-share percentage of all risks written by the syndicate for the 2021 calendar year. On November 30, 2021, we entered into an agreement with the same syndicate, slightly increasing our quota-share percentage of the risks the syndicate writes for the 2022 calendar year. This resulted in FGRe’s posting an additional $1.0 million in cash collateral to the account. We have also posted cash collateral in the approximate amount of $1.0 million, to support our automotive insurance quota-share agreement entered into on April 1, 2021. As of December 31, 2021, the total cash collateral posted to support all of our reinsurance treaties was approximately $4.4 million.
| 38 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss and Loss Adjustment Expense Reserves
The Company maintains reserves equal to our estimated ultimate liability for losses and loss adjustment expense for reported and unreported claims from our reinsurance business. Loss and loss adjustment reserve estimates are based primarily on estimates derived from reports the Company has received from ceding companies. The Company then uses a variety of statistical and actuarial techniques to monitor reserve adequacy. When setting reserves, the Company considers many factors including: (1) the types of exposures and projected ultimate premium to be written by our cedants; (2) expected loss ratios by type of business; (3) actuarial methodologies which analyze loss reporting and payment experience, reports from ceding companies and historical trends; and (4) general economic conditions. The Company also engages independent actuarial specialists in order to assist management in establishing appropriate reserves. Since reserves are estimates, the final settlement of losses may vary from the reserves established and any adjustments to the estimates, which may be material, are recorded in the period they are determined. The final settlement of losses may vary, perhaps materially, from the reserves recorded.
U.S. GAAP does not permit establishing loss reserves, which include case reserves and IBNR loss reserves, until the occurrence of an event which may give rise to a claim. As a result, only loss reserves applicable to losses incurred up to the reporting date are established, with no allowance for the establishment of loss reserves to account for expected future loss events.
Generally, the Company obtains regular updates of premium and loss related information for the current and historical periods, which are utilized to update the initial expected loss ratio. We also experience a lag between (i) claims being reported by the underlying insured to the Company’s cedent and (ii) claims being reported by the Company’s cedent to the Company. This lag may impact the Company’s loss reserve estimates. Client reports have pre-determined due dates (for example, thirty days after each month end). As a result, the lag depends in part upon the terms of the specific contract. The timing of the reporting requirements is designed so that the Company receives premium and loss information as soon as practicable once the client has closed its books. Accordingly, there should be a short lag in such reporting. Additionally, most of the contracts that have the potential for large single event losses have provisions that such loss notifications are provided to the Company immediately upon the occurrence of an event.
The Company has accounted for stock-based compensation under the provisions of ASC Topic 718 – Stock Compensation which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model using assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate along with multiple Monte Carlo simulations to determine a derived service period as the options vest based upon meeting certain performance conditions. The fair value of each stock option award is recorded as compensation expense on a straight-line basis over the requisite service period, which is generally the period in which the stock options vest, with a corresponding increase to additional paid-in capital.
The Company has also issued restricted stock units (“RSUs”) to certain of its employees and directors which have been accounted for as equity-based awards since, upon vesting, they are required to be settled in the Company’s common shares. We have used the fair value of the Company’s common stock on the date the RSUs were issued to estimate the grant date fair value of those RSUs which vest solely based upon the passage of time, as well as a Monte Carlo valuation model to estimate the fair value of those RSUs which vest solely upon market-based conditions. The fair value of each RSU is recorded as compensation expense over the requisite service period, which is generally the expected period over which the awards will vest. In the case of those RSUs which vest upon market-based conditions, should the market-based condition be achieved prior to the expiration of the derived service period, any unrecognized cost will be recorded as compensation expense in the period in which the RSUs actually vest.
Based upon the Company’s historical forfeiture rates relating to stock options and RSUs, the Company has not made any adjustment to stock compensation expense for expected forfeitures as of December 31, 2021.
Fair Value of Financial Instruments
The carrying values of certain financial instruments, including cash, short-term investments, deposits held, accounts payable, and other accrued expenses approximate fair value due to their short-term nature. The Company measures the fair value of financial instruments in accordance with GAAP which defines fair value as the exchange price that would be received for an asset (or paid to transfer a liability) in the principal or most advantageous market for the asset (or liability) in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 4 for further information on the fair value of the Company’s financial instruments.
| 39 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic earnings (loss) per common share is computed using the weighted average number of shares outstanding during the respective period.
Diluted earnings (loss) per common share assumes conversion of all potentially dilutive outstanding stock options, restricted stock units, warrants or other convertible financial instruments. Potential common shares outstanding are excluded from the calculation of diluted earnings (loss) per share if their effect is anti-dilutive.
Note 3. Recently Adopted and Issued Accounting Standards
Accounting Standards Pending Adoption
ASU 2016-13: Financial Instruments – Credit Losses
In June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was issued to provide financial statement users with more useful information regarding the expected credit losses on financial instruments held as assets. Under current GAAP, financial statement recognition for credit losses on financial instruments is generally delayed until the occurrence of the loss was probable. The amendments of ASU 2016-13 eliminate this probable initial recognition threshold and instead reflect an entity’s current estimate of all expected credit losses. The amendments also broaden the information that an entity must consider in developing its expected credit loss estimates for those assets measured at amortized cost by using forecasted information instead of the current methodology which only considered past events and current conditions. Under ASU 2016-13, credit losses on available-for-sale debt securities will be measured in a manner similar to current GAAP; however, the amendments require that credit losses be presented as an allowance against the investment, rather than as a write-down. The amendments also allow the entity to record reversals of credit losses in current period net income, which is prohibited under current GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted, however smaller reporting companies, like the Company, may delay adoption until January 2023. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
Note 4. Investments and Fair Value Disclosures
The following table summarizes the Company’s investments held at fair value as of December 31, 2021 and 2020.
| ($ in thousands) | ||||||||||||||||
| As of December 31, 2021 | Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Amount | ||||||||||||
| FedNat common stock | $ | 14,495 | $ | $ | 13,074 | $ | 1,421 | |||||||||
| Total investments | $ | 14,495 | $ | $ | 13,074 | $ | 1,421 | |||||||||
| As of December 31, 2020 | Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Amount | ||||||||||||
| FedNat common stock | $ | 20,751 | $ | $ | 12,209 | $ | 8,542 | |||||||||
| Private placements | 4,012 | 4,012 | ||||||||||||||
| Total investments | $ | 24,763 | $ | $ | 12,209 | $ | 12,554 | |||||||||
FedNat Common Stock
As of December 31, 2021, the Company held shares of FedNat Holding Company common stock (Nasdaq: FNHC). Of the total shares of FedNat common stock which the Company had received as consideration for the Asset Sale, the Company has disposed of shares. The first transaction occurred on September 15, 2020, whereby the Company sold shares of FedNat common stock to the Hale Parties as further discussed in Note 9 – Related Party Transactions. Additionally, during the fourth quarter 2021, the Company sold an additional shares of FedNat common stock on the open market. Pursuant to the Standstill Agreement entered into between the Company and FedNat at the closing of the Asset Sale, the Company is restricted as to the timing and number of FedNat shares it can dispose of. For the years ended December 31, 2021 and 2020, the Company had gross realized losses of $5.5 million and $2.1 million, respectively, associated with the sale of its FedNat shares.
| 40 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Private Placements
Private placements listed in the table above consists of the $4.0 million which was invested in FG New America Investors, LLC (the “Sponsor”) as part of a total $8.6 million of risk capital used to launch FG New America Acquisition Corp (“FGNA”), a special purpose acquisition company which consummated its initial public offering on October 2, 2020. On July 20, 2021, FGNA completed its definitive business combination with Opportunity Financial, LLC and began operating as OppFi Inc. (“OppFi”), with OppFi’s common stock trading on the NYSE under the ticker symbol “OPFI”. The Company’s initial investment consisted of both class A and class A-1 interests of the Sponsor. On July 15, 2021, the Sponsor entered into a sponsor forfeiture agreement with FGNA and Opportunity Financial, LLC, under which the Sponsor agreed to forfeit a portion of FGNA Class B common stock as well as a portion of warrants to purchase FGNA Class A common stock which the Sponsor previously held. As a result, the Sponsor interests currently represent beneficial ownership of approximately million common shares of OPFI as well as approximately 0.36 million warrants to purchase common shares of OPFI at a price of $ per share. We are restricted from selling our OPFI common shares until the earlier of i) July 20, 2022; or ii) the date upon which the closing price of OPFI stock is greater than or equal to $12.00 per share for any 20 trading days within a 30-trading day window.
Deconsolidation of Subsidiary
The investment into the Sponsor was made by FG Special Situations Fund, LP (the “Fund”), a Delaware limited partnership in which the Company had also invested as both a limited and general partner. At the time of the Company’s initial investment into the Fund, in September 2020, the Company had determined that its investment represented an investment in a variable interest entity (“VIE”) in which the Company was the primary beneficiary and as such, had consolidated the financial results of the Fund through November 30, 2021. At each reporting date, the Company evaluates whether it remains the primary beneficiary and continuously reconsiders that conclusion. On December 1, 2021, the Company no longer had the power to govern the financial and operating policies of the Fund, and accordingly derecognized the related assets, liabilities, and noncontrolling interests of the Fund as of that date. The Company did not receive any consideration in the deconsolidation of the Fund, nor did it record any gain, or loss upon deconsolidation as the Company carried its investment at fair value. The assets and liabilities of the Fund, over which the Company lost control were as follows:
| As of December 1, 2021 (in thousands) | ||||
| Cash and cash equivalents | $ | 100 | ||
| Investments in private placements | 15,734 | |||
| Investments in public SPACs | 22 | |||
| Other assets | 18 | |||
| Other liabilities | (34 | ) | ||
| Net assets deconsolidated | $ | 15,840 | ||
While the Company’s investments in the Fund are no longer consolidated, the Company has retained all of the investments held at the Fund, including its beneficial ownership of approximately million common shares of OPFI and approximately 0.36 million warrants to purchase common shares of OPFI at $ per share. Accordingly, the Company has not presented its investment in the Fund as a discontinued operation. Effective December 1, 2021, the Company began accounting for its investment in the Fund via the equity method of accounting.
Equity Method Investments
Equity method investments included our investment of $4.0 million in FGI Metrolina Property Income Fund, LP (“Metrolina”), which invested in real estate through a real estate investment trust which was wholly owned by Metrolina. We have recorded equity method earnings from our investment in Metrolina of approximately $326,000 and $186,000 for the years ended December 31, 2021 and 2020, respectively. In the third quarter, 2021, Metrolina indicated that it would be liquidating and returning investor capital. Accordingly, in the fourth quarter 2021, we received approximately $5.0 million in cash back from the Fund, representing our initial investment of $4.0 million plus approximately $1.0 million in distributed earnings. As a result, our investment in Metrolina was fully liquidated as of December 31, 2021.
| 41 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity method investments also include our investment in FG SPAC Partners, LP (“FGSP”). On January 4, 2021, FGSP was formed as a Delaware limited partnership to co-sponsor newly formed SPACs with their founders or partners. The Company is the sole managing member of the general partner of FGSP and holds an approximate 46% limited partner interest in FGSP directly and through its subsidiaries. FGSP’s initial investment was the purchase, on January 11, 2021, of founder shares of Aldel Financial, Inc. (“Aldel”), for total consideration of $4,674. On March 25, 2021, FGSP entered into a forfeiture agreement with Aldel whereby FGSP agreed to transfer of these founder shares back to Aldel at no cost. Concurrent with Aldel’s initial public offering, on April 12, 2021, FGSP also purchased 650,000 warrants at a price of $0.10 per warrant, each exercisable to purchase one share of Aldel’s Class A common stock at an exercise price of $15.00 per share (the “OTM Warrants”), for a purchase price of $65,000. On December 2, 2021, Aldel completed its business combination Hagerty, an automotive enthusiast brand and began operating as Hagerty, Inc., trading on the NYSE under the ticker “HGTY” on December 3, 2021. Accordingly, as of December 31, 2021, FGSP had beneficial ownership of HGTY common shares and warrants to purchase HGTY common shares at an exercise price of $15.00 per share. Through our 46% limited partner interest in FGSP, the Company has beneficial ownership of approximately HGTY common shares and approximately warrants. We have recorded equity method earnings from our investment in FGSP of approximately $3.78 million for the year ended December 31, 2021. The carrying value of our investment in FGSP as of December 31, 2021 was approximately $3.85 million, representing $3.78 million in undistributed earnings.
Certain investments held by our equity method investees are valued using Monte-Carlo simulation and option pricing models. Inherent in Monte-Carlo simulation and option pricing models are assumptions related to expected volatility and discount for lack of marketability of the underlying investment. Our investees estimate the volatility of these investments based on the historical performance of various broad market indices blended with various peer companies which they consider as having similar characteristics to the underlying investment.
As previously discussed under the heading “Deconsolidation of Subsidiary,” equity method investments also include our investment in the Fund as of December 31, 2021. Until December 1, 2021, we had consolidated the Fund as a variable interest entity, however, effective December 1, 2021, we began accounting for this investment under the equity method of accounting. For the year ended December 31, 2021, we recognized approximately $3.0 in pretax income through our investment in the Fund, which consists of pretax income in the amount of approximately $3.7 million for the period of January 1, 2021, through November 30, 2021 through our consolidation of the Fund, as well as equity method losses of approximately $0.7 million for the month of December 2021. As of December 31, 2021, the carrying value of our investment in the Fund was approximately $9.7 million, representing $3.0 million in undistributed earnings.
Through the Fund, the Company has invested $1.0 million in the risk capital of Aldel Investors, LLC, the sponsor of Hagerty, Inc. This investment represents the beneficial ownership of approximately HGTY shares. Altogether, the Company’s investment in Hagerty, Inc, through both FGSP and the Fund, represents beneficial interests of approximately HGTY common shares and approximately warrants to purchase HGTY common shares at an exercise price of $15.00 per share.
Financial information, for our investments accounted for under the equity method, in the aggregate, is as follows:
| As of December 31, | ||||||||
| (in thousands) |
2021 |
2020 | ||||||
| Other investments | $ | 25,936 | $ | 9,040 | ||||
| Cash | 72 | 63 | ||||||
Other assets | 16 | 219 | ||||||
| Total assets | 26,024 | 9,322 | ||||||
| Accounts payable | $ | 19 | $ | 9 | ||||
| Other liabilities | 218 | |||||||
| Total liabilities | 19 | 227 | ||||||
| For the year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net investment income | $ | 15,312 | $ | 819 | ||||
| General and administrative expenses | (273 | ) | (404 | ) | ||||
| Net income | 15,039 | 415 | ||||||
Investments without Readily Determinable Fair Value
In addition to our equity method investments, other investments as listed on our balance sheet also consist of equity we have purchased in a limited partnership and a limited liability company for which there does not exist readily determinable fair values. The Company accounts for these investments at their cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investment of the same issuer. Any profit distributions the Company receives on these investments are included in net investment income. The Company’s total investment in these two entities was approximately $483,000 as of December 31, 2021. For the years ended December 31, 2021 and 2020, the Company has received profit distributions of $101,000 and $80,000 on these investments, respectively, which has been included in income. Furthermore, both investments began the process of returning capital back to its investors beginning in 2020. As of December 31, 2021, the Company has received approximately 38% of its initial $776,000 investment back from these investments. There have been no upward or downward price adjustments to these investments for the years ended December 31, 2021 and 2020.
Impairment
For equity securities without readily determinable fair values, impairment is determined via a qualitative assessment which considers indicators to evaluate whether the investment is impaired. Some of these indicators include a significant deterioration in the earnings performance or asset quality of the investee, a significant adverse change in regulatory, economic or general market conditions in which the investee operates, or doubt over an investee’s ability to continue as a going concern. If the investment is deemed to be impaired after conducting this analysis, the Company would estimate the fair value of the investment to determine the amount of impairment loss.
| 42 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For equity method investments, such as the Company’s investments in FGSP and the Fund, evidence of a loss in value might include a series of operating losses of an investee, the absence of an ability to recover the carrying amount of the investment, or a deterioration in the value of the investee’s underlying assets. If these, or other indicators lead to the conclusion that there is a decrease in the value of the investment that is other than temporary, the Company would recognize that decrease in value even though the decrease may be in excess of what would otherwise be recognized under the equity method of accounting.
The risks and uncertainties inherent in the assessment methodology used to determine impairment include, but may not be limited to, the following:
| ● | the opinions of professional investment managers and appraisers could be incorrect; | |
| ● | the past operating performance and cash flows generated from the investee’s operations may not reflect their future performance; and | |
| ● | the estimated fair values for investment for which observable market prices are not available are inherently imprecise. |
We have not recorded an impairment on our investments for either of the years ended December 31, 2021 and 2020.
Net investment income (loss) for the years ended December 31, 2021 and 2020 is as follows:
| (in thousands) | Year Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Investment income (loss): | ||||||||
| Unrealized holding loss on FedNat common stock | $ | (865 | ) | $ | (16,196 | ) | ||
| Unrealized holding gain on private placement investments | 5,267 | |||||||
| Realized loss on FedNat common stock | (5,452 | ) | (2,110 | ) | ||||
| Dividend income from FedNat common stock | 609 | |||||||
| Equity method earnings | 3,448 | 265 | ||||||
| Other | 147 | 172 | ||||||
| Net investment income (loss) | $ | 2,545 | $ | (17,260 | ) | |||
Fair Value Measurements
The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. The FASB has issued guidance that defines fair value as the exchange price that would be received for an asset (or paid to transfer a liability) in the principal, or most advantageous market in an orderly transaction between market participants. This guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance categorizes assets and liabilities at fair value into one of three different levels depending on the observation of the inputs employed in the measurements, as follows:
| ● | Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets providing the most reliable measurement of fair value since it is directly observable. | |
| ● | Level 2 – inputs to the valuation methodology which include quoted prices for similar assets or liabilities in active markets. These inputs are observable, either directly or indirectly, for substantially the full-term of the financial instrument. | |
| ● | Level 3 - inputs to the valuation methodology which are unobservable and significant to the measurement of fair value. |
The availability of valuation techniques and observable inputs can vary from investment to investment and are affected by a variety of factors, including the type of investment, whether the investment is new and not yet established in the marketplace, the liquidity of markets and other characteristics specific to the individual investment. In some cases, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the hierarchy based on the lowest level input that is significant to the fair value measurement. When determining fair value, the Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
| 43 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have valued our investment in FedNat at its last reported sales price as the shares and units are traded on a national exchange. They have been characterized in Level 1 of the fair value hierarchy.
The private placement securities held as of December 31, 2020 have been characterized in Level 3 of the fair value hierarchy. This consisted of the Fund’s investment in the equity interests of the sponsor company of OppFi (formerly FGNA). The estimated fair value of our OppFi sponsor interests consisted of both class A and A-1 interests in the Sponsor, which, represented the beneficial interest of approximately common shares of OppFi as well as approximately 360,000 warrants to purchase OppFi common stock at $ per share as of December 31, 2020.
For private operating companies, the transaction price, excluding transaction costs, is typically the best estimate of fair value at acquisition. As of December 31, 2020, the Fund’s investment in the class A and class A-1 interests in the Sponsor were valued at their transaction price, excluding transaction costs, because: 1) the Fund had just recently acquired these securities, in September 2020; 2) there had not been any additional transactions in these securities, or in substantially similar securities, since our original purchase; and 3) no significant events had occurred with respect to the Sponsor or to FGNA that would have warranted an adjustment to fair value.
Financial instruments measured, on a recurring basis, at fair value as of December 31, 2021 and December 31, 2020 in accordance with the guidance promulgated by the FASB are as follows.
| (in thousands) | ||||||||||||||||
| As of December 31, 2021 | Level 1 | Level 2 | Level 3 |
Total | ||||||||||||
| FedNat common stock | $ | 1,421 | $ | $ | $ | 1,421 | ||||||||||
| $ | 1,421 | $ | $ | $ | 1,421 | |||||||||||
| As of December 31, 2020 | ||||||||||||||||
| FedNat common stock | $ | 8,542 | $ | $ | $ | 8,542 | ||||||||||
| Private placements | 4,012 | 4,012 | ||||||||||||||
| $ | 8,542 | $ | $ | 4,012 | $ | 12,554 | ||||||||||
The following table presents the changes in assets classified in Level 3 of the fair value hierarchy for the years ended December 31, 2021 and 2020.
| (in thousands) | 2021 | 2020 | ||||||
| Balance, January 1 | $ | 4,012 | $ | |||||
| Purchases | 1,667 | 4,012 | ||||||
| Unrealized holding gains | 4,976 | |||||||
| Transfers out (deconsolidation of subsidiary) | (10,655 | ) | ||||||
| Balance, December 31 | $ | $ | 4,012 | |||||
Note 5. Loss and Loss Adjustment Expense Reserves
A significant degree of judgment is required to determine amounts recorded in the consolidated financial statements for the provision for loss and loss adjustment expense (“LAE”) reserves. The process for establishing this provision reflects the uncertainties and significant judgmental factors inherent in predicting future results of both known and unknown loss events. The process of establishing the provision for loss and LAE reserves relies on the judgment and opinions of many individuals, including the opinions of the Company’s management, as well as the management of ceding companies and their actuaries.
| 44 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The COVID-19 pandemic is unprecedented, and the Company does not have previous loss experience on which to base the associated estimate for loss and loss adjustment expenses. In estimating losses, the Company may assess any of the following:
| ● | a review of in-force treaties that may provide coverage and incur losses; |
| ● | general forecasts, catastrophe and scenario modelling analyses and results shared by cedents; |
| ● | reviews of industry insured loss estimates and market share analyses; and |
| ● | management’s judgement. |
Assumptions which served as the basis for the Company’s estimates of reserves for the COVID-19 pandemic losses and loss adjustment expenses include:
| ● | the scope of coverage provided by the underlying policies, particularly those that provide for business interruption coverage; |
| ● | the regulatory, legislative, and judicial actions that could influence contract interpretations across the insurance industry; |
| ● | the extent of economic contraction caused by the COVID-19 pandemic and associated actions; and |
| ● | the ability of the cedents and insured to mitigate some or all of their losses. |
Under the terms of certain of our quota-share agreements, and due to the nature of claims and premium reporting, a lag exists between (i) claims being reported by the underlying insured to the Company’s cedent and (ii) claims being reported by the Company’s cedent to the Company. This lag may impact the Company’s loss reserve estimates. The reports we receive from our cedents have pre-determined due dates. In the case of the Company’s FAL contract, fourth quarter 2021 premium and loss information will not be made available to the Company until subsequent to the filing of this annual report. Thus, our fourth quarter results, including the loss and loss adjustment expense reserves presented herein, have been based upon a combination of first, second, and third quarter actual results as well as full-year forecasts reported to us by the ceding companies for which we used to approximate fourth quarter results. The Company obtains regular updates of premium and loss related information for the current and historical periods, which are utilized to update the initial expected loss ratios on our reinsurance contracts.
While the Company believes its estimate of loss and loss adjustment expense reserves are adequate as of December 31, 2021, based on available information, actual losses may ultimately differ materially from the Company’s current estimates. The Company will continue to monitor the appropriateness of its assumptions as new information is provided.
The information about incurred and paid claims development for the year ended December 31, 2021, is as follows and includes activity related to both our FAL contract, as well as our automotive insurance quota-share agreement, which became effective April 1, 2021. The tables also include IBNR reserves plus expected development on reported claims. The Cumulative Number of Reported Claims has not been reported as it is impracticable to provide this information. The ceding companies to which we provide reinsurance only report summary information to us via a bordereau statement. This summary information does not include the number of reported claims underlying the paid and reported losses. Therefore, it is not possible to provide this information. There was no activity with respect to incurred and paid claims development for the year ended December 31, 2020.
| ($ in thousands) | ||||||||||||
| Cumulative Incurred Losses and LAE, Net of Reinsurance For the Years Ended December 31, | As of December 31, 2021 | |||||||||||
| Accident Year | 2021
(unaudited) | Total of IBNR Liabilities Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims | |||||||||
| 2021 | $ | 4,338 | $ | 1,292 | N/A | |||||||
Cumulative
Paid For the year ended | ||||
| Accident Year |
(unaudited) | |||
| 2021 | $ | 2,205 | ||
| 45 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the net incurred and paid loss development tables to the liability for loss and loss adjustment expenses on the balance sheet is as follows. There was no activity with respect to net incurred and paid loss development as of December 31, 2020.
| (in thousands) | As of December 31, 2021 | |||
| Net Outstanding Liabilities | ||||
| Liability for unpaid loss and LAE - net of reinsurance | $ | 2,133 | ||
| Reinsurance Recoverable on Loss and LAE Reserves | ||||
| Total reinsurance recoverable on unpaid loss and LAE | ||||
| Total gross liability for unpaid claims and LAE | $ | 2,133 | ||
A summary of changes in outstanding loss and loss adjustment expense reserves for the year ended December 31, 2021 is as follows. There was no activity with respect to loss and loss adjustment expense reserves for the year ended December 31, 2020.
| (in thousands) | Year ended December 31, 2021 | |||
| Balance, January 1, gross of reinsurance | $ | |||
| Less reinsurance recoverable on loss and LAE expense reserves | ||||
| Balance, January 1, net of reinsurance | ||||
| Incurred related to: | ||||
| Current year | 4,338 | |||
| Prior years | ||||
| Paid related to: | ||||
| Current year | (2,205 | ) | ||
| Prior years | ||||
| Balance, December 31, net of reinsurance | 2,133 | |||
| Plus reinsurance recoverable related to loss and LAE expense reserves | ||||
| Balance, December 31, gross of reinsurance | $ | 2,133 | ||
The following supplementary information provides average historical claims duration as of December 31, 2021.
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance (unaudited) | ||||||||||||||||||||||||
| Age of loss (in years) | 1 | 2 | 3 | 4 | 5 | 6 | ||||||||||||||||||
| All Lines | 50.8 | % | % | % | % | % | % | |||||||||||||||||
Note 6. Income Taxes
A summary of income tax expense (benefit) is as follows:
| ($ in thousands) | Year Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Current income tax benefit – from continuing operations | $ | $ | (559 | ) | ||||
| Current income tax benefit – from discontinued operations | ||||||||
| Total current income tax benefit | (559 | ) | ||||||
| Deferred income tax benefit – from continuing operations | (106 | ) | ||||||
| Deferred income tax benefit – from discontinued operations | ||||||||
| Total deferred income tax benefit | (106 | ) | ||||||
| Total income tax benefit – from continuing operations | (665 | ) | ||||||
| Total income tax benefit – from discontinued operations | $ | (145 | ) | |||||
| Total income tax benefit | $ | (145 | ) | $ | (665 | ) | ||
| 46 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Actual income tax expense (benefit) differs from the income tax expense computed by applying the applicable effective federal and state tax rates to income before income tax expense as follows:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
| Provision for taxes at U.S. statutory marginal income tax rate of 21% | $ | (1,540 | ) | 21.0 | % | $ | (4,856 | ) | 21.0 | % | ||||||
| Valuation allowance for deferred tax assets deemed unrealizable | 1,782 | (24.3 | )% | 3,934 | (17.0 | )% | ||||||||||
| Rate differential due to CARES Act | –% | (214 | ) | 0.9 | % | |||||||||||
| Non-deductible expenses associated with the Share Repurchase Transaction | –% | 516 | 2.2 | % | ||||||||||||
| Net operating loss carryback | –% | –% | ||||||||||||||
| State income tax (net of federal benefit) | (114 | ) | 1.6 | % | –% | |||||||||||
| Non-controlling interest | (279 | ) | 3.8 | % | –% | |||||||||||
| Other | 6 | (0.1 | )% | (45 | ) | 0.2 | % | |||||||||
| Income tax benefit | $ | (145 | ) | 2.0 | % | $ | (665 | ) | 2.9 | % | ||||||
As a result of the passage of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company recorded a credit of $214,000 against its income tax expense for the year ended December 31, 2020, due to a provision in the CARES Act which allows for the five-year carryback of net operating losses. Prior to the passage of the CARES Act, these net operating losses were only available to offset future taxable income generated by the Company. There was no credit for the “CARES Act” for December 31, 2021.
As a result of the Share Repurchase Transaction, discussed in further detail in Note 9 – “Related Party Transactions”, the Company has permanent non-deductible expenses of approximately $2.5 million, which are comprised of the cost of purchasing the Company’s own stock as well as the legal fees associated with the transaction. These are shown at the tax effected rate of 21%, or $ in the preceding table for the year ended December 31, 2020.
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes as compared to the amounts used for income tax purposes. For the year ended December 31, 2021, the Company recorded an unrealized loss of approximately $13.1 million on its investment of FedNat common stock, resulting in a deferred tax asset of approximately $2.7 million. The Company’s gross deferred tax assets and liabilities are $6.2 million and $0.5 million as of December 31, 2021. The Company has recorded a valuation allowance against its deferred tax assets of $5.7 million, as of December 31, 2021, due to the uncertain nature surrounding our ability to realize these tax benefits in the future. Significant components of the Company’s net deferred tax assets are as follows:
| ($ in thousands) | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| Deferred income tax assets: | ||||||||
| Net operating loss carryforward | $ | 3,010 | $ | 1,143 | ||||
| Loss and loss adjustment expense reserves | 25 | |||||||
| Unearned premium reserves | 152 | |||||||
| Capital loss carryforward | 1,114 | |||||||
| Share-based compensation | 253 | 216 | ||||||
| Investments | 1,692 | 2,570 | ||||||
| Other | 3 | 5 | ||||||
| Deferred income tax assets | $ | 6,249 | $ | 3,934 | ||||
| Less: Valuation allowance | (5,715 | ) | (3,934 | ) | ||||
| Deferred income tax assets net of valuation allowance | $ | 534 | $ | |||||
| Deferred income tax liabilities: | ||||||||
| Investments | $ | 369 | $ | |||||
| Deferred policy acquisition costs | 165 | |||||||
| Deferred income tax liabilities | $ | 534 | $ | |||||
| Net deferred income tax asset (liability) | $ | $ | ||||||
As of December 31, 2021, the Company had net operating loss carryforwards (“NOLs”) for federal income tax purposes of approximately $14.3 million, which will be available to offset future taxable income. Approximately $0.5 million expire on December 31, 2039, $0.1 million expire on December 31, 2040, and $1.6 million of the Company’s NOLs will expire on December 31, 2041. The remaining $12.1 million of the Company’s NOLs do not expire under current tax law. Additionally, the Company has approximately $5.3 million of capital loss carryforward that can only be used to offset capital gains and which will expire in December 2026 if not used prior.
As of December 31, 2021, the Company had no unrecognized tax benefits. The Company analyzed its tax positions in accordance with the provisions of Accounting Standards Codification Topic 740, Income Taxes, and has determined that there are currently no uncertain tax positions. The Company generally recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for the years 2017 through 2020 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities.
| 47 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 15, 2021, our shareholders approved the FG Financial Group, Inc. 2021 Equity Incentive Plan (the “2021 Plan”). The purpose of the 2021 Plan is to attract and retain directors, consultants, officers and other key employees of the Company and its subsidiaries and to provide to such persons incentives and rewards for superior performance. The 2021 Plan is administered by the Compensation and Management Resources Committee of the Board and has a term of ten years. The 2021 Plan awards may be in the form of stock options (which may be incentive stock options or nonqualified stock options), stock appreciation rights (or “SARs”), restricted shares, restricted share units, and other share-based awards, and provides for a maximum of shares available for issuance.
As of December 31, 2021, the Company had RSUs outstanding and non-qualified stock options outstanding under its equity incentive plans.
RSUs Outstanding
| Restricted Stock Units | Number of Units | Weighted Average Grant Date Fair Value | ||||||
| Non-vested units, January 1, 2020 | 140,002 | $ | 5.93 | |||||
| Granted | 60,998 | 4.59 | ||||||
| Vested | (52,514 | ) | 5.75 | |||||
| Forfeited | ||||||||
| Non-vested units, December 31, 2020 | 148,486 | $ | 5.44 | |||||
| Granted | 83,329 | 3.45 | ||||||
| Vested | (67,160 | ) | 5.64 | |||||
| Forfeited | ||||||||
| Non-vested units, December 31, 2021 | 164,655 | $ | 4.35 | |||||
On August 12, 2020, the Board issued RSUs to the Company’s then serving non-employee directors, representing a value of $40,000 per director, pursuant to the Company’s compensation program in effect for all non-employee directors. The RSUs vest in five equal annual installments, beginning with the first anniversary of the grant date. On July 27, 2021, the Compensation and Management Resource Committee of the Board approved an increase to the amount of RSUs granted annually to non-employee directors to $50,000 from $40,000 and authorized the issuance of the 2021 award of RSUs upon the availability of sufficient stock under the Company’s equity incentive plan. Accordingly, on December 17, 2021, we issued a total of RSUs to our non-employee directors. Similar to the August 2020 award, the RSUs vest in five equal annual installments, beginning with the first anniversary of the grant date, other than those RSUs granted to Mr. Wong. As Mr. Wong made himself available to serve on the Board but was not elected to do so at the Company’s 2021 annual meeting of shareholders, the Board accelerated the vesting of Mr. Wong’s RSUs such that all of Mr. Wong’s outstanding RSUs vested on January 1, 2022. This included RSUs granted to Mr. Wong on December 17, 2021, as well as an additional RSUs previously granted to Mr. Wong for his service on our Board.
Upon the resignation of Marsha G. King and Lewis M. Johnson on December 14, 2020, and March 12, 2021, respectively, the Board accelerated the vesting of RSUs that had been previously granted to Ms. King, and RSUs that had been previously granted to Mr. Johnson. On August 6, 2021, in connection with Mr. Hill’s retirement from the Company, the Company’s Compensation Committee approved the vesting of a total of RSUs previously granted to Mr. Hill.
Stock Options Outstanding
On January 12, 2021, in connection with Larry G. Swets, Jr.’s appointment as Chief Executive Officer, the Company entered into a Stock Option Agreement (the “Stock Option”) with Mr. Swets. The Stock Option entitles Mr. Swets to purchase up to shares of the Company’s common stock at an exercise price of $ per share. The Stock Option becomes vested and fully exercisable in 20% increments on each anniversary of the grant date, provided that Mr. Swets remains in the continuous service of the Company through each applicable vesting date and that the Company’s book value per share shall have increased by 15% or more as compared to the Company’s book value per share as of the fiscal year end prior. The Stock Option expires on .
| 48 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Stock Option contains performance and service conditions that affect vesting. Pursuant to ASC Topic 718- Stock Compensation, these conditions have not been reflected in estimating the fair value of the award upon its grant date; however, the Company employed a Monte-Carlo model to estimate the likelihood of satisfaction of the required performance and service conditions. This resulted in a derived service period of approximately years under the grant.
In estimating the fair value of the Stock Option, the Company estimated volatility based on the historical volatility of our stock. The risk-free interest rate is based on the U.S. Treasury Constant Maturity similar to the expected remaining life of the Stock Option. The expected life of the Stock Option is assumed to be equivalent to its contractual term. The dividend rate is based on our historical rate, which the Company anticipates will remain at zero. The following assumptions were used to determine the estimated fair value of the Stock Option:
| Expected volatility | % | |||
| Expected life (years) | ||||
| Risk-free interest rate | % | |||
| Dividend yield | % |
| Common Stock Options | Shares | Weighted Ave Exercise Price | Weighted Ave Remaining Contractual Term (yrs) | Weighted Ave Grant Date Fair Value | Aggregate Intrinsic Value | |||||||||||||||
| Outstanding, January 1, 2021 | $ | – | $ | $ | ||||||||||||||||
| Exercisable, January 1, 2021 | $ | – | $ | $ | ||||||||||||||||
| Granted | 130,000 | 3.38 | 1.88 | |||||||||||||||||
| Exercised | – | |||||||||||||||||||
| Cancelled | – | |||||||||||||||||||
| Outstanding, December 31, 2021 | 130,000 | $ | 3.38 | $ | 1.88 | $ | 49,400 | |||||||||||||
| Exercisable, December 31, 2021 | $ | – | $ | $ | ||||||||||||||||
On January 18, 2021, Company entered into an Equity Award Letter Agreement (the “Letter Agreement”) with Mr. Swets, pursuant to which the Company clarified its intention to grant an additional stock options, restricted shares or restricted stock units pursuant to a future award (the “Future Award”), subject to the approval of an amended and/or new equity plan, among other conditions. Specifically, under the Letter Agreement, no such Future Award may be granted until there is a determination by the Compensation Committee of the specific vesting and other terms of the award, and an amended and/or new equity plan, in a form to be prepared and reviewed by the Board of Directors of the Company (the “Board”), has been approved by the Board and Company stockholders that authorizes a sufficient number of shares of common stock to make such Future Award.
Total stock-based compensation expense for the years ended December 31, 2021 and 2020 was approximately $ and $, respectively. As of December 31, 2021, total unrecognized stock compensation expense of $ remains, which will be recognized through December 31, 2026. Stock compensation expense has been reflected in the Company’s financial statements as part of general and administrative expense.
Warrants
No warrants were granted or exercised during the two years ended December 31, 2021. As of December 31, 2021, the Company had warrants outstanding with an exercise price of $15.00, which expired on February 24, 2022.
Note 8. Shareholders’ Equity
Share Repurchase Transaction
On September 15, 2020, the Company entered into a Share Repurchase and Cooperation Agreement (the “Share Repurchase Agreement”) with Hale Partnership Capital Management, LLC and certain of its affiliates (collectively, the “Hale Parties”), which, prior to the transaction, owned more than % of the Company’s outstanding common stock (the “Share Repurchase Transaction”).
| 49 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the Share Repurchase Agreement, the Company agreed to purchase all of the shares of the Company’s common stock, owned, of record or beneficially, by the Hale Parties, in exchange for an aggregate of approximately $ million in cash and shares of FedNat common stock previously owned by the Company (the “FedNat Shares”) having an estimated fair value of approximately $ million on September 15, 2020. As acknowledged by the Hale Parties in the Share Repurchase Agreement, that certain Standstill Agreement, dated December 2, 2019, by and between FedNat Holding Company and the Company, imposes certain restrictions in respect of the FedNat Shares transferred by the Company to the Hale Parties. FedNat Holding Company is not party to, or a third-party beneficiary of, the agreement.
As the total consideration paid in the Share Repurchase Transaction exceeded the fair value of the treasury shares repurchased by the Company, the Company recorded a charge of approximately $ million to general and administrative expense for the year ended December 31, 2020, representing the estimated fair value of the rights conveyed to the Company pursuant to the standstill provisions in the agreement. The fair value of the shares of Company common stock, or approximately $ million, was recorded to treasury stock.
8.00% Cumulative Preferred Stock, Series A
On May 21, 2021, we completed the underwritten public offering of an additional shares of our preferred stock designated as, 8.00% Cumulative Preferred Stock, Series A, par value $ per share (the “Series A Preferred Stock”), for net proceeds of approximately $4.2 million, after deducting underwriting commissions and offering expenses. This included the exercise in full by the underwriters of their over-allotment option to purchase up to an additional shares, bringing the total number of Series A Preferred Stock shares outstanding to as of December 31, 2021.
Dividends on the Series A Preferred Stock are cumulative from the date of original issue and are payable quarterly on the 15th day of March, June, September and December of each year, when, as and if declared by our Board of Directors or a duly authorized committee thereof. Dividends are payable out of amounts legally available therefor at a rate equal to 8.00% per annum per $25.00 of stated liquidation preference per share, or $ per share of Series A Preferred Stock per year. Our Board of Directors declared the first quarter 2022 dividend on the shares of Series A Preferred Stock on February 10, 2022. The Series A Preferred Stock shares trade on the Nasdaq Stock Market under the symbol “FGFPP”.
Common Stock
On October 28, 2021, we closed the underwritten public offering of shares of our common stock at a public offering price of $ per share. Furthermore, on November 3, 2021, the underwriters exercised their over-allotment option, closing on the sale of an additional shares of our common stock under the same terms. The issuance, including the exercise of the over-allotment, resulted in approximately $2.5 million in net proceeds to us, after deducting underwriting commissions and other offering expenses.
On November 29, 2021,
A maximum of 757,720 shares of common stock were issuable pursuant to the rights, of which were subscribed for, for total net proceeds of approximately $2.7 million, after deducting underwriting commissions and other offering expenses. The Company intends to use the net proceeds from this offering for working capital and other general corporate purposes.
Retirement of Treasury Stock
On August 19, 2021, the Board approved the retirement of all common stock treasury shares owned by the Company. Accordingly, these shares have been classified as authorized, but unissued shares on the Company’s balance sheet as of December 31, 2021.
Note 9. Related Party Transactions
Related party transactions are carried out in the normal course of operations and are measured in part by the amount of consideration paid or received, as established and agreed by the parties. Management believes that consideration paid for such services in each case approximates fair value. Except where disclosed elsewhere in these consolidated financial statements, the following is a summary of related party transactions.
| 50 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment in Metrolina
The Company had previously invested $4.0 million as a limited partner in Metrolina, which invested in real estate through a real estate investment trust wholly owned by Metrolina. The general partner of Metrolina, FGI Metrolina GP, LLC, is managed, in part, by Mr. Cerminara, the Chairman of the Board of Directors of the Company. Metrolina’s investment program was managed by FGI Funds Management LLC, an affiliate of FG, which, with its affiliates, is the largest stockholder of the Company. In the third quarter, 2021, Metrolina indicated that it would be liquidating and returning capital to its investors. Accordingly, in the fourth quarter 2021, we received approximately $5.0 million in cash from Metrolina, representing our initial investment of $4.0 million plus approximately $1.0 million in distributed earnings. As a result, our investment in Metrolina was fully liquidated as of December 31, 2021.
Joint Venture Agreement
On March 31, 2020, the Company entered into the Limited Liability Company Agreement of Fundamental Global Asset Management, LLC (“FGAM”), a newly-formed joint venture owned 50% by each of the Company and FG. The purpose of FGAM is to sponsor, capitalize and provide strategic advice to investment managers in connection with the launch and/or growth of their asset management business and the investment products they sponsor (each, a “Sponsored Fund”).
FGAM is governed by a Board of Managers consisting of four managers, two of which have been appointed by each Member. The Company has appointed two of its independent directors to the Board of Managers of FGAM. Certain major actions, including any decision to sponsor a new investment manager, require the prior consent of both Members.
FG Special Situations Fund
As of December 31, 2021, the Company had invested $6.65 million as a limited partner in FG Special Situations Fund, LP (the “Fund”), a Delaware limited partnership formed on September 2, 2020. The general partner of the Fund, and the investment advisor of the Fund are ultimately controlled by Mr. Cerminara, the Chairman of the Company’s Board of Directors. Portions of the Company’s investment into the Fund was used to sponsor the launch of special purpose acquisition companies, including FGNA and Aldel.
Mr. Cerminara, and Mr. Swets, our Chief Executive Officer, are managers of the sponsor companies FG New America Investors, LLC and Aldel Financial, LLC. Mr. Swets, was the Chief Executive Officer and a director of FGNA and Hassan R. Baqar, our Chief Financial Officer of FGNA until FGNA’s business combination with OppFi. Mr. Swets served as Senior Advisor to Aldel; Mr. Baqar served as Director and Chief Financial Officer of Aldel; and Mr. Cerminara served as a director of Aldel; until Aldel’s business combination with Hagerty.
FG SPAC Partners
On January 4, 2021, FGSP was formed as a Delaware limited partnership to co-sponsor newly formed SPACs with their founders or partners. The Company is the sole managing member of the general partner of FGSP and holds an approximate 46% limited partner interest in FGSP. Certain of our directors and officers also hold limited partner interests in FGSP. Mr. Swets holds a limited partner interest through Itasca Financial LLC, an advisory and investment firm for which Mr. Swets is managing member. Mr. Baqar also holds a limited partner interest through Sequoia Financial LLC, an advisory firm for which Mr. Baqar is managing member. Mr. Cerminara also holds a limited partner interest through Fundamental Global, LLC, a holding company for which Mr. Cerminara is the manager and one of the members.
FGSP has invested in the founder shares and warrants of Aldel. Mr. Swets served as Senior Advisor to Aldel, Mr. Baqar served as Director and Chief Financial Officer of Aldel, and Mr. Cerminara serves as a director of Aldel; until Aldel’s business combination with Hagerty.
Investment Advisory Agreement
Pursuant to the Investment Advisory Agreement, FGSC, a wholly-owned subsidiary of the Company, has agreed to provide investment advisory services to FedNat, including identifying, analyzing and recommending potential investments, advising as to existing investments and investment optimization, recommending investment dispositions, and providing advice regarding macro-economic conditions. In exchange for providing the investment advisory services, FedNat has agreed to pay FGSC an annual fee of $100,000. The Investment Advisory Agreement expires on December 2, 2024.
Shared Services Agreement
On March 31, 2020, the Company entered into a Shared Services Agreement (the “Shared Services Agreement”) with Fundamental Global Management, LLC (“FGM”), an affiliate of FG, pursuant to which FGM provides the Company with certain services related to the day-to-day management of the Company, including assisting with regulatory compliance, evaluating the Company’s financial and operational performance, providing a management team to supplement the executive officers of the Company, and such other services consistent with those customarily performed by executive officers and employees of a public company. In exchange for the these services, the Company pays FGM a fee of $ per quarter (the “Shared Services Fee”), plus reimbursement of expenses incurred by FGM in connection with the performance of the Services, subject to certain limitations approved by the Company’s Board of Directors or Compensation Committee from time to time.
| 51 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Shared Services Agreement has an initial term of three years, and thereafter renews automatically for successive one-year terms unless terminated in accordance with its terms. The Shared Services Agreement may be terminated by FGM or by the Company, by a vote of the Company’s independent directors, at the end of the initial or automatic renewal term upon 120 days’ notice, subject to payment by the Company of certain costs incurred by FGM to wind down the provision of services and, in the case of a termination by the Company without cause, payment of a termination fee equal to the Shared Services Fee paid for the two quarters preceding termination.
For the years ended December 31, 2021 and 2020, the Company paid approximately $ and $ million, respectively, to FGM under the Shared Services Agreement.
Share Repurchase Transaction
On September 15, 2020, the Company entered into a Share Repurchase and Cooperation Agreement (the “Share Repurchase Agreement”) with Hale Partnership Capital Management, LLC and certain of its affiliates (collectively, the “Hale Parties”), which, prior to the transaction, owned more than of our outstanding common stock (the “Share Repurchase Transaction”).
Pursuant to the Share Repurchase Agreement, the Company agreed to purchase (exclusive of any fees or expenses) all of the shares of the Company’s common stock, owned, of record or beneficially, by the Hale Parties, in exchange for an aggregate $ in cash and shares of common stock of FedNat Holding Company previously owned by the Company (the “FedNat Shares”). As acknowledged by the Hale Parties in the Share Repurchase Agreement, that certain Standstill Agreement, dated December 2, 2019, by and between FedNat Holding Company and the Company, imposes certain restrictions in respect of the FedNat Shares transferred by the Company to the Hale Parties. FedNat Holding Company is not party to, or a third-party beneficiary of, the Share Repurchase Agreement.
. The Company and the Hale Parties further agreed that they will not disparage each other and that they will not initiate any lawsuit, claim or proceeding with respect to any claims against the Company or any of the Hale Parties, as applicable, based on facts known as of the Effective Date, in each case applicable during the Standstill Period, and to a mutual release of claims.
Each of the Company and the Hale Parties has the right to terminate the Share Purchase Agreement prior to the end of the Standstill Period if (i) any of the Hale Parties, in the case of the Company, or (ii) the Company, in the case of the Hale Parties, commits a material breach of the Share Purchase Agreement, and such breach is not cured within days after notice is given to the breaching party.
As the total consideration paid in the Share Repurchase transaction exceeded the fair value of the treasury shares repurchased by the Company, the Company recorded a charge of approximately $ million to general and administrative expense for the year ended December 31, 2020, representing the estimated fair value of the rights conveyed to the Company pursuant to the standstill provisions in the repurchase agreement. The fair value of the shares of Company common stock, or approximately $ million, was recorded to treasury stock.
Net earnings per share is computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding during the periods presented. In calculating diluted earnings per share, those potential common shares that are found to be anti-dilutive are excluded from the calculation. The table below provides a summary of the calculations used in determining basic and diluted earnings per share for the years ended December 31, 2021 and 2020.
| 52 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| ($ in thousands) | Year Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Basic and diluted: | ||||||||
| Net loss from continuing operations | $ | (7,333 | ) | $ | (22,457 | ) | ||
| Income attributable to noncontrolling interest | (1,326 | ) | ||||||
| Dividends declared on Series A Preferred Shares | (1,692 | ) | (1,400 | ) | ||||
| Loss attributable to FG Financial Group, Inc. common shareholders from continuing operations | (10,351 | ) | (23,857 | ) | ||||
| Weighted average common shares | 5,212,772 | 5,746,259 | ||||||
| Loss per common share from continuing operations | $ | (1.99 | ) | $ | (4.15 | ) | ||
| Gain from sale of former insurance business | $ | (145 | ) | $ | ||||
| Weighted average common shares outstanding | 5,212,772 | |||||||
| Income per common share from discontinued operations | $ | 0.03 | $ | |||||
| Loss per share attributable to common shareholders | $ | (1.96 | ) | $ | (4.15 | ) | ||
| As of December 31, | ||||||||
| 2021 | 2020 | |||||||
| Warrants to purchase common stock | 1,500,000 | 1,500,000 | ||||||
| Options to purchase common stock | 130,000 | |||||||
| Restricted stock units | 164,655 | 152,731 | ||||||
| 1,794,655 | 1,652,731 | |||||||
The FG Financial Group, Inc. 401(k) Plan (the “Retirement Plan”) was established effective January 1, 2015, as a defined contribution plan. The Retirement Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”); eligible employees of the Company and its subsidiaries may participate in the plan. Employees who have completed one month of service are eligible to participate and are permitted to make annual pre and post-tax salary reduction contributions not to exceed the limits imposed by the Internal Revenue Code of 1986, as amended. Contributions are invested at the direction of the employee participant in various money market and mutual funds. The Company matches 100% of each participant’s initial contributions up to 3% of a participant’s eligible earnings and 50% of each participant’s contributions up to an additional 2% of a participant’s eligible earnings. The Company may also elect to make a profit-sharing contribution to the Retirement Plan based upon discretionary amounts and percentages authorized by the Company’s Board of Directors. For the years ended December 31, 2021 and 2020, the Company made matching contributions to the Retirement Plan in the amounts of approximately $42,000 and $18,000, respectively, but did not make any profit-sharing contributions to the Retirement Plan in either year.
Note 12. Commitments and Contingencies
Legal Proceedings:
As of December 31, 2021, the Company was not a party to any legal proceedings and was not aware of any material claims or actions pending or threatened against us. From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. Currently, it is not possible to predict legal outcomes and their impact on the future development of claims. Any such development will be affected by future court decisions and interpretations. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Company’s current reserves.
Operating Lease Commitments:
In July 2021, the Company entered into a lease agreement for office space in St. Petersburg, FL. The lease has a term of 12 months. Total minimum rent over the 12-month term is expected to be approximately $17,000. Due to the short-term nature of the lease, the Company has recognized lease expense on a straight line basis over the term of the lease, with any variable lease payments recognized in the period in which the obligation for the payment occurred. Rent expense was approximately $19,000 and $32,000 for the years ended December 31, 2021 and 2020, respectively.
| 53 |
FG FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impact of Coronavirus (COVID-19) Pandemic
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. Adverse events such as health-related concerns about working in our offices, the inability to travel and other matters affecting the general work environment have negatively impacted and could continue to harm our business and our business strategy. The extent to which our operations and investments may continue to be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new developments concerning the severity of the pandemic and actions by government authorities to contain the pandemic or treat its impact. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown. In the event of a major disruption caused by the pandemic, we may lose the services of our employees, experience system interruptions or face challenges accessing the capital or credit markets, 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.
Note 13. Segment Reporting
The Company has two operating segments; insurance and asset management. The chief operating decision maker (“CODM”) is the Company’s Chief Executive Officer. The measure of profit or loss used by the CODM to identify and measure the Company’s reportable segments is income before income tax. Our insurance segment consists of the operations of our Cayman Islands-based reinsurance subsidiary, FGRe, which, as of December 31, 2021, included our two quota-share reinsurance agreements, as well as the returns associated with the investments made by our reinsurance operations, which include the Company’s FedNat common stock investment, as well as a portion of our investment in Hagerty. Our asset management segment includes our investment in the Fund, as well as our investments in Metrolina and our investment advisory agreement with FedNat.
The following table presents the financial information for each segment that is specifically identifiable or based on allocations using internal methodology as of and for the years ended December 31, 2021 and 2020. The ‘other’ category in the table below consists largely of corporate general and administrative expenses which have not been allocated to a specific segment. Segment assets for the “other” category primarily consist of unrestricted cash in the amounts of $14.2 million and $10.1 million for the years ended December 31, 2021 and 2020, respectively.
(in thousands)
For the year ended December 31, 2021 | Insurance | Asset Management | Other | Total | ||||||||||||
| Net premiums earned | $ | 4,864 | $ | $ | $ | 4,864 | ||||||||||
| Net investment (loss) income | (2,535 | ) | 5,080 | 2,545 | ||||||||||||
Other income | 186 | 186 | ||||||||||||||
| Total revenue | 2,329 | 5,266 | 7,595 | |||||||||||||
| Income (loss) before income tax | (4,173 | ) | 4,665 | (7,825 | ) | (7,333 | ) | |||||||||
| As of December 31, 2021 | ||||||||||||||||
| Segment assets | $ | 14,657 | $ | 11,413 | $ | 14,759 | $ | 40,829 | ||||||||
| For the year ended December 31, 2020 | ||||||||||||||||
Net investment (loss) income | $ | (17,692 | ) | $ | 432 | $ | $ | (17,260 | ) | |||||||
Other income | 100 | 4 | 104 | |||||||||||||
| Total revenue | (17,692 | ) | 532 | 4 | (17,156 | ) | ||||||||||
| Income (loss) before income tax | (17,812 | ) | 532 | (5,842 | ) | (23,122 | ) | |||||||||
| As of December 31, 2020 | ||||||||||||||||
| Segment assets | $ | 11,898 | $ | 10,421 | $ | 12,386 | $ | 34,705 | ||||||||
| 54 |
FG FINANCIAL GROUP, INC.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management performed an evaluation under the supervision and with the participation of the Company’s principal executive officer and principal financial officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2021. Based upon this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; | |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; | |
| ● | provide reasonable assurance that the Company’s receipts and expenditures are made in accordance with proper authorizations from the Company’s management and directors; and | |
| ● | provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based upon this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2021.
This Annual Report on Form 10-K does not include a report of our independent registered public accounting firm regarding the effectiveness of our internal control over financial reporting. SEC’s rules permit smaller reporting companies like ours to provide only management’s report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 55 |
FG FINANCIAL GROUP, INC.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to sections of the Proxy Statement for the Company’s 2022 Annual Meeting of Stockholders or Annual Report on Form 10-K/A for the fiscal year ended December 31, 2021 (“Form 10-K/A”), which we expect to file with the Securities and Exchange Commission no later than April 29, 2022.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to sections of the Proxy Statement for the Company’s 2022 Annual Meeting of Stockholders or Form 10-K/A, which we expect to file with the Securities and Exchange Commission no later than April 29, 2022.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to sections of the Proxy Statement for the Company’s 2022 Annual Meeting of Stockholders or Form 10-K/A, which we expect to file with the Securities and Exchange Commission no later than April 29, 2022.
Equity Compensation Plans
The following table provides information as of December 31, 2021 with respect to the Company’s 2021 Equity Incentive Plan, under which the Company’s common stock is authorized for issuance, and the Company’s 2018 Equity Incentive Plan and the Company’s Amended and Restated 2014 Equity Incentive Plan, under which the Company has awards outstanding.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights(1) | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(2) | |||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by security holders | 294,655 | $ | – | 1,416,671 | ||||||||
| Equity compensation plans not approved by security holders | – | – | – | |||||||||
| Total | 294,655 | $ | – | 1,416,671 | ||||||||
| (1) | Includes 3,999 common shares to be issued upon vesting of restricted stock units issued under our Amended and Restated 2014 Equity Incentive Plan; includes 77,327 common shares to be issued upon vesting of restricted stock units and 130,000 common shares to be issued upon vesting of stock options issued under our 2018 Equity Incentive Plan; and includes 83,329 common shares to be issued upon vesting of restricted stock units issued under our 2021 Equity Incentive Plan. | |
| (2) | Represents shares available for future issuance under the 2021 Equity Incentive Plan. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to sections of the Proxy Statement for the Company’s 2022 Annual Meeting of Stockholders or Form 10-K/A, which we expect to file with the Securities and Exchange Commission no later than April 29, 2022.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to sections of the Proxy Statement for the Company’s 2022 Annual Meeting of Stockholders or Form 10-K/A, which we expect to file with the Securities and Exchange Commission no later than April 29, 2022.
| 56 |
FG FINANCIAL GROUP, INC.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report
| (a) | Financial Statements – The following consolidated financial statements of the Company and the reports of independent audit thereon are filed with this report: |
| i. | Independent Auditor’s Report | |||
| ii. | Consolidated Balance Sheets as of December 31, 2021 and 2020 | |||
| iii. | Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020 | |||
| iv. | Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2021 and 2020 | |||
| v. | Consolidated Statements of Cash Flows for the Years ended December 31, 2021 and 2020 | |||
| vi. | Notes to the Consolidated Financial Statements for the Years ended December 31, 2021 and 2020 |
| (b) | Financial Statement Schedules – Not applicable. | |
| (c) | Exhibits - the exhibits listed below are filed or incorporated by reference as part of this report. |
| 57 |
FG FINANCIAL GROUP, INC.
* Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan or arrangement
[1] Registrant’s Current Report on Form 8-K filed December 17, 2020
[2] Registrant’s Current Report on Form 8-K filed May 21, 2021
[3] Registrant’s Current Report on Form 8-K filed December 17, 2021
[4] Registrant’s Registration Statement on Form S-1/A1 (Reg. no. 333-193314), filed January 30, 2014
[5] Registrant’s Current Report on Form 8-K filed February 27, 2015
[6] Registrant’s Registration Statement on Form S-1/A1 (Reg. no. 333-222470), filed February 5, 2018
[7] Registrant’s Annual Report on Form 10-K for year ended December 31, 2019, filed March 30, 2020
[8] Registrant’s Definitive Proxy Statement on Schedule 14A filed April 30, 2015
[9] Registrant’s Current Report on Form 8-K filed June 1, 2018
[10] Registrant’s Current Report on Form 8-K filed January 19, 2021
[11] Registrant’s Annual Report on Form 10-K for year ended December 31, 2020, filed March 18, 2021
[12] Registrant’s Current Report on Form 8-K filed June 1, 2018
[13] Registrant’s Current Report on Form 8-K filed June 2, 2015
[14] Registrant’s Quarterly Report on Form 10-Q for quarter ended September 30, 2018, filed November 13, 2018
[15] Registrant’s Current Report on Form 8-K filed December 19, 2017
[16] Registrant’s Current on Report on Form 8-K filed August 28, 2018
[17] Registrant’s Current Report on Form 8-K filed December 2, 2019
[18] Registrant’s Current Report on Form 8-K filed November 16, 2020
[19] Registrant’s Current Report on Form 8-K filed April 6, 2020
[20] Registrant’s Definitive Proxy Statement on Schedule 14A filed April 30, 2015
[21] Registrant’s Current Report on Form 8-K filed December 2, 2019
[22] Registrant’s Quarterly Report on Form 10-Q for quarter ended June 30, 2021, filed August 16, 2021
[23] Registrant’s Current Report on Form 8-K filed October 26, 2021
[24] Registrant’s Current Report on Form 8-K filed May 19, 2021
ITEM 16. FORM 10-K SUMMARY
None.
| 58 |
FG FINANCIAL GROUP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FG FINANCIAL GROUP, INC. | |||
| Date: | March 30, 2022 |
By: | /s/ Larry G. Swets, Jr. |
| Name: | Larry G. Swets, Jr. | ||
| Title: | Principal Executive Officer | ||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Brian D. Bottjer, the true and lawful attorney-in-fact and agent of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully as to all intents and purposes as each of the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| /s/ Larry G. Swets, Jr. | President, Chief Executive Officer and Director | |||
| Larry G. Swets, Jr. | (Principal Executive Officer) | March 30, 2022 | ||
| /s/ Brian D. Bottjer | Senior Vice President, Secretary, and Chief Accounting Officer | |||
| Brian D. Bottjer | (Principal Financial Officer) | March 30, 2022 | ||
| /s/ Hassan R. Baqar | Executive Vice President and Chief Financial Officer | March 30, 2022 | ||
| Hassan R. Baqar | ||||
| /s/ D. Kyle Cerminara | ||||
| D. Kyle Cerminara | Director, Chairman of the Board | March 30, 2022 | ||
| /s/ Rita Hayes | ||||
| Rita Hayes | Director | March 30, 2022 | ||
| /s/ E. Gray Payne | ||||
| E. Gray Payne | Director | March 30, 2022 | ||
| /s/ Scott D. Wollney | ||||
| Scott D. Wollney | Director | March 30, 2022 | ||
| /s/ Richard Govignon | ||||
| Richard Govignon | Director | March 30, 2022 |
| 59 |
Exhibit 10.16
FG Financial Group, Inc.
2021 Equity Incentive Plan
NON-EMPLOYEE DIRECTOR RESTRICTED SHARE UNIT AGREEMENT
Summary of Restricted Share Unit Award
FG Financial Group, Inc. (the “Company”) grants to the Grantee named below, in accordance with the terms of the FG Financial Group, Inc. 2021 Equity Incentive Plan (the “Plan”) and this Non-Employee Director Restricted Share Unit Agreement (the “Agreement”), the following number of Restricted Share Units, on the Date of Grant set forth below. Capitalized terms used in this Agreement without definition shall have the meanings assigned to them in the Plan.
| Name of Grantee: | XXXX | |
| Number of Restricted Share Units: | XXXX | |
| Date of Grant: | December 17, 2021 | |
| Vesting Dates: | In 20% annual installments on the first, second, third, fourth and fifth anniversaries of the Grant Date |
Terms of Agreement
1. Grant of Restricted Share Units. Subject to and upon the terms, conditions, and restrictions set forth in this Agreement and in the Plan, the Company hereby grants to the Grantee as of the Date of Grant, the number of Restricted Share Units set forth above (the “Restricted Share Units”). Each Restricted Share Unit shall represent the contingent right to receive one Share and shall at all times be equal in value to one Share. The Restricted Share Units shall be credited in a book entry account established for the Grantee until payment in accordance with Section 4 hereof.
2. Vesting of Restricted Share Units.
(a) A ratable portion of the Restricted Share Units (subject to such rounding conventions as maintained by the Company from time to time) shall vest on each of the Vesting Dates set forth above (each, a “Vesting Date”), provided that the Grantee shall have remained in the Continuous Service of the Company or a Subsidiary through the applicable Vesting Date.
(b) Notwithstanding Section 2(a), (i) if the Grantee makes himself or herself available and consents to be nominated by the Company for Continued Service as a director of the Company, but is not nominated by the Board for election by the shareholders, other than for good reason as determined by the Board in its discretion, then the next tranche of the Restricted Share Units shall vest as of the Grantee’s last date of service as a director with the Company; (ii) upon the occurrence of a Change in Control prior to a Vesting Date and during the Grantee’s Continuous Service, the Committee may, in its sole discretion, accelerate the vesting of the Restricted Share Units in full or in part; (iii) in the event of the termination of the Grantee’s Continuous Service as a result of his or her “Disability” (defined as the Grantee’s permanent and total disability (within the meaning of Section 22(e) of the Code), as determined by a medical doctor satisfactory to the Company) or death, any outstanding unvested Restricted Share Units shall automatically become vested in full; and (iv) the Committee may, in its sole discretion, provide for the full or partial acceleration of vesting of the Restricted Share Units in connection with the termination of the Grantee’s Continuous Service for any other reason prior to a Vesting Date.
(c) For the purposes of this Agreement, “Change in Control” shall mean the occurrence of any of the following:
i. The acquisition by any Person of Beneficial Ownership of 50% or more of either (x) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”); or (y) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”) (the foregoing Beneficial Ownership hereinafter being referred to as a “Controlling Interest”); excluding, however, the following: (A) any acquisition directly from the Company (excluding any acquisition resulting from the exercise of an exercise, conversion or exchange privilege unless the security being so exercised, converted or exchanged was acquired directly from the Company); (B) any acquisition by the Company; (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; (D) any acquisition by Fundamental Global, LLC, Ballantyne Strong, Inc., Kingsway Financial Services Inc. or any of their affiliates (collectively, the “Excluded Holders”); or (E) any acquisition by any entity pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (ii) of this Section 2(c); provided further, that for purposes of clause (B), if any Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company, any corporation controlled by the Company, or any of the Excluded Holders) shall become the beneficial owner of a Controlling Interest by reason of an acquisition by the Company, and such Person shall, after such acquisition by the Company, acquire Beneficial Ownership of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Company Voting Securities and such Beneficial Ownership is publicly announced, such additional Beneficial Ownership shall constitute a Change in Control; or
ii. The consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Corporate Transaction”); excluding, however, a Corporate Transaction pursuant to which (A) all or substantially all of the individuals or entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 50% of, respectively, the outstanding shares of common stock, and the combined voting power of the outstanding securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or indirectly) in substantially the same proportions relative to each other as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (other than (I) the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company, or any corporation controlled by the Company; (II) any Excluded Holder; (III) the corporation resulting from such Corporate Transaction; or (IV) any Person which beneficially owned (directly or indirectly) a Controlling Interest immediately prior to such Corporate Transaction) will beneficially own, directly or indirectly, 50% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding securities of such corporation entitled to vote generally in the election of directors, and (C) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or
iii. The consummation of a plan of complete liquidation or dissolution of the Company.
3. Forfeiture of Restricted Share Units. The Restricted Share Units that have not yet vested pursuant to Section 2(a) shall be forfeited automatically without further action or notice if the Grantee’s Continuous Service with the Company or a Subsidiary terminates prior to a Vesting Date other than as provided pursuant to Section 2(b).
4. Payment.
(a) Except as may be otherwise provided in this Section, the Company shall deliver to the Grantee (or the Grantee’s estate in the event of death) the Shares underlying the vested Restricted Share Units, together with cash dividend equivalents, if any, as provided pursuant to Section 6(b), within thirty (30) days following the date that the Restricted Share Units become vested in accordance with Section 2.
(b) Notwithstanding Section 4(a), to the extent that the Grantee’s right to receive payment of the Restricted Share Units constitutes a “deferral of compensation” within the meaning of Section 409A of the Code, payment of any vested Restricted Share Units shall be subject to the following rules, to the extent necessary to comply with Section 409A of the Code:
(i) Except as provided in Section 4(b)(ii), the Shares underlying the vested Restricted Share Units (and any related cash dividend equivalents pursuant to Section 6(b)) shall be delivered to the Grantee (or the Grantee’s estate in the event of death) within thirty (30) days after the earlier of: (A) the Grantee’s “separation from service” within the meaning of Section 409A of the Code; (B) the occurrence of a “change in the ownership,” a “change in the effective control” or a “change in the ownership of a substantial portion of the assets” of the Company within the meaning of Section 409A of the Code; or (C) the applicable Vesting Date.
(ii) If the Restricted Share Units become payable as a result of Section 4(b)(i)(A), but not as a result of the Grantee’s death, and the Grantee is a “specified employee” at that time within the meaning of Section 409A of the Code, then the Shares underlying the vested Restricted Share Units (and any related cash dividend equivalents pursuant to Section 6(b)) shall instead be delivered to the Grantee within thirty (30) days after the first business day that is more than six months after the date of his or her separation from service (or, if the Grantee dies during such six-month period, within thirty (30) days after the Grantee’s death).
(c) The Company’s obligations with respect to the Restricted Share Units shall be satisfied in full upon the delivery of the Shares underlying the vested Restricted Share Units and the payment of any related dividend cash equivalents pursuant to Section 6(b).
5. Transferability. The Restricted Share Units (including any related cash dividend equivalents pursuant to Section 6(b)) may not be transferred, assigned, pledged or hypothecated in any manner, or be subject to execution, attachment or similar process, by operation of law or otherwise, unless otherwise provided under the Plan. Any purported transfer or encumbrance in violation of the provisions of this Section 5 shall be void, and the other party to any such purported transaction shall not obtain any rights to or interest in such Restricted Share Units.
6. No Dividend, Voting or Other Rights; Dividend Equivalents.
(a) The Grantee shall not possess any incidents of ownership (including, without limitation, dividend and voting rights) in the Shares underlying the Restricted Share Units until such Shares have been delivered to the Grantee in accordance with Section 4 hereof. The obligations of the Company under this Agreement will be merely that of an unfunded and unsecured promise of the Company to deliver Shares in the future (and cash dividend equivalents pursuant to Section 6(b)), and the rights of the Grantee will be no greater than that of an unsecured general creditor. No assets of the Company will be held or set aside as security for the obligations of the Company under this Agreement.
(b) From and after the Date of Grant and until the earlier of (i) the time when the Shares underlying the vested Restricted Share Units (if any) are delivered to you in accordance with this Agreement, or (ii) the time that the Restricted Share Units are forfeited in accordance with this Agreement, on each date that the Company pays a cash dividend to holders of its Shares generally, the Company will credit to your account hereunder the right to receive a cash amount equal to the product of (x) the dollar amount of the cash dividend paid per Share paid to stockholders on such date multiplied by (y) the total number of unpaid Restricted Share Units credited to your account under this Agreement as of such date. Subject to and conditioned upon the vesting of the underlying Restricted Share Units, the aggregate amount of all such dividend equivalents credited to your account hereunder shall be paid to you in cash (without interest), at the same time that the Shares underlying your vested Restricted Share Units are delivered to you, and your right to receive any such dividend equivalents shall be automatically and correspondingly forfeited to the extent that the underlying Restricted Share Units are forfeited pursuant to the terms of this Agreement and the Plan.
7. No Retention Rights. Nothing contained in this Agreement shall confer upon the Grantee any right with respect to continuance of service as a director of the Company, nor limit or affect in any manner the right of the Company and its shareholders to terminate the service of the Grantee as a director of the Company or adjust the compensation of the Grantee.
8. Relation to Other Benefits. Any economic or other benefit to the Grantee under this Agreement or the Plan shall not be taken into account in determining any benefits to which the Grantee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Company or a Subsidiary.
9. Taxes and Withholding. To the extent the Company or any Subsidiary is required to withhold any federal, state, local or other taxes in connection with the delivery of Shares under this Agreement, then the Company or Subsidiary (as applicable) shall retain a number of Shares otherwise deliverable hereunder with a value equal to the applicable tax withholding (based on the Fair Market Value of the Shares on the date of delivery); provided that in no event shall the value of the Shares retained exceed the amount of taxes required to be withheld based on the maximum statutory tax rates in the Grantee’s applicable taxing jurisdictions. If the Company or any Subsidiary is required to withhold any federal, state, local or other taxes other than upon delivery of the Shares under this Agreement, then the Company or Subsidiary (as applicable) shall have the right in its sole discretion to (a) require the Grantee to pay or provide for payment of the required tax withholding, or (b) deduct the required tax withholding from any dividend equivalent payments and/or from any amount of salary, bonus, incentive compensation or other amounts otherwise payable in cash to the Grantee (other than deferred compensation subject to Section 409A of the Code).
10. Adjustments. The number and kind of Shares deliverable pursuant to the Restricted Share Units are subject to adjustment as provided in Section 14 of the Plan.
11. Compliance with Law. The Company shall make reasonable efforts to comply with all applicable federal and state securities laws and listing requirements with respect to the Restricted Share Units; provided, however, notwithstanding any other provision of this Agreement, and only to the extent permitted under Section 409A of the Code, the Company shall not be obligated to deliver any Shares pursuant to this Agreement if the delivery thereof would result in a violation of any such law or listing requirement.
12. Amendments. Subject to the terms of the Plan, the Committee may modify this Agreement upon written notice to the Grantee. Any amendment to the Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto. Notwithstanding the foregoing, no amendment of the Plan or this Agreement shall adversely affect the rights of the Grantee under this Agreement without the Grantee’s consent unless the Committee determines, in good faith, that such amendment is required for the Agreement to either be exempt from the application of, or comply with, the requirements of Section 409A of the Code, or as otherwise may be provided in the Plan.
13. Entire Agreement, Relation to Plan. This Agreement is subject to the terms and conditions of the Plan. This Agreement and the Plan contain the entire agreement and understanding of the parties with respect to the subject matter contained in this Agreement, and supersede all prior written or oral communications, representations and negotiations in respect thereto. In the event of any inconsistency between the provisions of this Agreement and the Plan, the Plan shall govern. The Committee acting pursuant to the Plan, as constituted from time to time, shall, except as expressly provided otherwise herein, have the right to determine any questions which arise in connection with the grant of the Restricted Share Units.
14. Successors and Assigns. Without limiting Section 5, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the permitted successors, administrators, heirs, legal representatives and assigns of the Grantee, and the successors and assigns of the Company.
15. Choice of Law. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Delaware, without giving effect to any rule or principle of conflicts or choice of law that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
16. Data Privacy. In order to administer the Plan, the Company may process personal data about the Grantee. Such data includes, but is not limited to the information provided in this Agreement and any changes thereto, other appropriate personal and financial data about the Grantee such as home address and business addresses and other contact information, and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan. By signing this Agreement, the Grantee gives explicit consent to the Company to process any such personal data. The Grantee also gives explicit consent to the Company to transfer any such personal data outside the country in which the Grantee works or is employed, including, if the Grantee is not a U.S. resident, to the United States, to transferees that shall include the Company and other persons who are designated by the Company to administer the Plan.
17. Plan and Prospectus Delivery. By signing this Agreement, the Grantee acknowledges that a copy of the Plan, the Plan Summary and Prospectus, and the Company’s most recent Annual Report and Proxy Statement (the “Prospectus Information”) either have been received by or provided to the Grantee, and the Grantee consents to receiving the Prospectus Information electronically, or, in the alternative, agrees to contact the Chief Accounting Officer of the Company to request a paper copy of the Prospectus Information at no charge. The Grantee also represents that he or she is familiar with the terms and provisions of the Prospectus Information and hereby accepts this Award on the terms and subject to the conditions set forth herein and in the Plan. The Grantee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan or this Agreement.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Date of Grant.
| FG FINANCIAL GROUP, INC. |
| By: | ||
| Name: | ||
| Title: |
| GRANTEE |
| Name: | ||
| Address: | ||
Exhibit 21.1
SUBSIDIARIES
FG Reinsurance, Ltd., a Cayman Islands Company
FG Strategic Consulting, LLC, a Delaware Company
FG SPAC Solutions, LLC, a Delaware Company
Fundamental Global Asset Management, LLC, a Delaware Company
FG Reinsurance Holdings, LLC, a Delaware Company
FG Re Solutions, Ltd, a Bermuda Company
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
FG Financial Group, Inc.
St. Petersburg, FL
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-253285) and Form S-8 (No. 333-262041, 333-225362 and 333-195000) of FG Financial Group, Inc. of our report dated March 30, 2022, relating to the consolidated financial statements, which appears in this Form 10K.
/s/ BDO USA LLP
Grand Rapids, Michigan
March 30, 2022
Exhibit 31.1
CERTIFICATION
I, Larry G. Swets, Jr., certify that:
| 1. | I have reviewed this annual report on Form 10-K of FG Financial Group, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and | |
| b. | Any fraud, whether material or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: | March 30, 2022 | |
| By: | /s/ Larry G. Swets, Jr. | |
| Larry G. Swets, Jr., President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Brian D. Bottjer, certify that:
| 1. | I have reviewed this annual report on Form 10-K of FG Financial Group, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and | |
| b. | Any fraud, whether material or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: | March 30, 2022 | |
| By: | /s/ Brian D. Bottjer | |
Brian D. Bottjer, Sr. Vice President, Secretary, and Chief Accounting Officer (Principal Financial Officer) |
Exhibit 32.1
STATEMENTS REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of FG Financial Group, Inc. (the “Company”), for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Larry G. Swets, Jr., Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
| 1. | The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and | |
| 2. | The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and result of operations of the Company. |
| Dated: | March 30, 2022 | |
| By: | /s/ Larry G. Swets, Jr. | |
Larry G. Swets, Jr., Chief Executive Officer (Principal Executive Officer) |
Exhibit 32.2
STATEMENTS REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of FG Financial Group, Inc. (the “Company”), for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian D. Bottjer, Chief Accounting Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
| 1. | The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and | |
| 2. | The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and result of operations of the Company. |
| Dated: | March 30, 2022 | |
| By: | /s/ Brian D. Bottjer | |
Brian D. Bottjer, Chief Accounting Officer (Principal Financial Officer) |