Fundamental Global Inc

Note 1. Nature of Business

Fundamental Global Inc. (“FGF”, the “Company”, “we”, or “us”), formerly known as FG Financial Group, Inc., is a reinsurance, merchant banking and asset management holding company. We focus on opportunistic collateralized and loss capped reinsurance, while allocating capital to merchant banking activities. The Company’s principal business operations are conducted through its subsidiaries and affiliates.

As of December 31, 2023, FG Financial Holdings, LLC (“FG”), a private partnership focused on long-term strategic holdings, and its affiliated entity, collectively beneficially owned approximately 54.6% of our common stock. D. Kyle Cerminara, Chairman of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FG.

Reincorporation

Effective at 5:01 p.m. ET on December 9, 2022, the Company completed its reincorporation from a Delaware corporation to a Nevada corporation (the “Reincorporation”). The Reincorporation was accomplished by means of a merger by and between the Company and its former wholly owned subsidiary FG Financial Group, Inc., a Nevada corporation. As of December 9, 2022, the rights of the Company’s stockholders began to be governed by the Nevada corporation laws, our Amended and Restated Nevada Articles of Incorporation and our Nevada Bylaws. The Reincorporation was approved by the Company’s stockholders at a special meeting held on December 6, 2022.

Other than the change in the state of incorporation, the Reincorporation did not result in any change in the business, physical location, management, assets, liabilities or net worth of the Company, nor did it result in any change in location of the Company’s employees, including the Company’s management.

The Reincorporation did not alter any stockholder’s percentage ownership interest or number of shares owned in the Company and the Company’s common stock continues to be quoted on the Nasdaq Global Market under the same symbol “FGF” and the 8.00% Cumulative Preferred Stock, Series A of the Company continues to be quoted on the Nasdaq Global Market under the same symbol, “FGFPP.”

Current Business

Our strategy has evolved to focus on opportunistic collateralized and loss capped reinsurance, with capital allocation to merchant banking activities with asymmetrical risk/reward opportunities.

Currently, the business operates as a diversified holding company of insurance, reinsurance, asset management, our Special purpose acquisition corporation “SPAC” Platform businesses, and our merchant banking division.

Insurance

Sponsor Protection Coverage and Risk, Inc. has been formed as a special purpose captive in South Carolina to provide reinsurance coverage for Sides A, B, & C Directors and Officers Liability insurance coverage for related and unrelated entities of FG Reinsurance Ltd. (“FGRe”). These will include SPAC entities engaged in the services or business of taking companies public, as well as small cap businesses performing an initial public offering. Sponsor Protection Coverage and Risk, Inc. has yet to write any business.

Reinsurance

The Company’s wholly owned reinsurance subsidiary, 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 Act (as revised) of the Cayman Islands 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.

As of December 31, 2023, the Company hadeight active reinsurance contracts, including participating in a Funds at Lloyds (“FAL”) syndicate covering risks written by the syndicate during the 2021, 2022 and 2023 calendar years.

In addition, during 2023, the Company began to focus on growing fee-based revenue through FG Re Solutions, Ltd.

Asset Management

FG Strategic Consulting, LLC, (“FGSC”) a wholly-owned subsidiary of the Company, provides investment advisory services, 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.

SPAC Platform and Merchant Banking

On December 21, 2020, we formed FG Management Solutions LLC (“FGMS”), formerly known as FG SPAC Solutions, LLC, a Delaware company, to facilitate the launch of our “SPAC Platform.” Under the SPAC Platform, we provide various strategic, administrative, and regulatory support services to newly formed SPACs for a monthly fee. Additionally, the Company co-founded a partnership, FG Merchant Partners, LP (“FGMP”), formerly known as FG SPAC Partners, LP, to participate as a co-sponsor for newly formed SPACs.

In the third quarter of 2022, the Company announced the expansion of its growth strategy through the formation of a merchant banking division.

In the fourth quarter of 2022, the Company invested $2.0 million into its first merchant banking project, FG Communities, Inc. (“FGC”). FGC is a self-managed real estate company focused on a growing portfolio of manufactured housing communities which are owned and operated by FGC.

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 the FG Special Situations Fund, LP (“The Fund”). The Fund, a VIE which the Company was required to consolidate through November 30, 2021, was considered an investment company for GAAP purposes and followed 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. 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 thus, began to account for its investment in the Fund under the equity method of accounting.

During the first quarter of 2023, it was determined that the Fund would begin the process of winding down, and all investment holdings held in the name of the Fund would be transferred and distributed to members within the Fund based on their ownership percentage of each respective holding. Prior to the unwinding, through the Fund, the Company held underlying investments in FGAC Investors LLC, FG Merger Investors LLC, Greenfirst Forest Products Holdings LLC, and OppFi. The Fund, an investment company, carried each of these investments at fair value. In June 2023, all transfers were completed, resulting in the Company being transferred direct limited partner interests in FGAC Investors LLC, with a carrying value of $8.9 million, FG Merger Investors LLC, with a carrying value of $3.4 million, and Greenfirst Forest Products Holdings, LLC, with a carrying value of $1.4 million. The carrying value of these direct limited partner interests approximate to ownership of 29% of FGAC Investors LLC,19% of FG Merger Investors LLC, and 16% of Greenfirst Forest Products Holdings, LLC. The Fund also distributed OppFi publicly traded securities to the Company with a carrying value of $1.9 million.

As a result of the winddown, the Company now holds direct limited partner interests in FGAC Investors LLC, FG Merger Investors LLC, and Greenfirst Forest Products Holdings, LLC. The Company has determined that each of these entities meets the criteria of a VIE. For each new position, the Company analyzed ASC 810 –Consolidation and has determined it is not the primary beneficiary of FGAC Investors LLC, FG Merger Investors LLC or Greenfirst Forest Products Holdings LLC, but does have the ability to exercise significant influence over each of these. Therefore, the Company applies the equity method of accounting for each of these investments.

In October of 2022, the Company invested $2.0 million into FGC, which the Company has determined meets the criteria of a VIE. The Company holds this investment at cost, subject to any adjustment from time to time due to impairment or observable price changes in orderly transactions. Due to its minority interest and inability to govern the financial and operating policies of FGC, the Company has determined it is not the primary beneficiary of FGC, and thus does not consolidate FGC.

The Company’s risk of loss associated with its non-consolidated VIEs is limited. As of December 31, 2023, and December 31, 2022, the carrying value and maximum loss exposure of the Company’s non-consolidated VIE’s was $16.6 million and $18.8 million, respectively.

See Note 4 for further information regarding the Company’s investments.

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 significant estimates in the accompanying consolidated financial statements include the valuation of our other investments, the valuation of net deferred income taxes, premium revenue recognition, and reserves for loss and loss adjustment expenses.

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. In the case of a limited partnership with specific ownership accounts,3-5% is presumed to provide an investor with the ability to exercise significant influence. These presumptions 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. Any increase or decrease recorded is included in Net investment income on the consolidated statements of operations. 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.

When we receive distributions from our equity method investments, we utilize the cumulative earnings approach. When classifying the related cash flows under this approach, the Company compares the cumulative distributions received, less distributions received in prior periods, with the Company’s cumulative equity in earnings. Cumulative distributions that do not exceed cumulative equity in earnings represent returns on investment and are classified as cash inflows from operating activities. Cumulative distributions in excess of cumulative equity in earnings represent returns on investment and are classified as cash inflows from investing activities.

In addition to investments accounted for under the equity method of accounting, other investments also consist of equity we have purchased in a limited partnership, a limited liability company, and a corporation 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 investments by the same issuer. When the Company observes an orderly transaction of an investee’s identical or similar equity securities, the Company adjusts the carrying value based on the observable price as of the transaction date. Once the Company records such an adjustment, the investment is considered an asset measured at fair value on a nonrecurring basis. Any profit distributions the Company receives on these investments are included in net investment income.

Other investments also include senior unsecured promissory notes, which are carried at amortized cost on the Company’s consolidated balance sheet under the caption “other investments.”

See Note 4 for additional information regarding the Company’s investments.

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments with original maturities of 90 days or less.

Pursuant to the Company’s insurance license, the Cayman Islands Monetary Authority (“Authority”) has required that FGRe hold a minimum capital requirement of $200,000 in cash in a bank in the Cayman Islands which holds an “A” license issued under the Banks and Trust Companies Act (2020 Revision).

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 it is more likely than not to 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. Liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions, in our judgment, do not meet a more-likely-than-not threshold based on the technical merits of the positions. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit). 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, 2023, 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 reinsurance quota-share contracts and estimates the ultimate premiums for the contract period. These estimates are based on information received from the Company’s cedants, 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.

Current Expected Credit Loss

On January 1, 2023, the Company adopted Accounting Standards Codification (“ASC”) Topic 326, as amended,Financial Instruments – Credit Losses (“ASU 326”), which requires an entity to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The financial assets included in the caption “Reinsurance balances recoverable” in the Company’s consolidated balance sheets are carried at amortized cost and therefore within the scope of ASU 326. Upon adoption of ASC 326, the Company calculated an allowance for expected credit losses for its reinsurance balances receivable by applying a Probability of Default / Loss Given Default model. The model considers both the external collectability history as well as external loss history, forecasts provided by cedants, and general economic conditions. The external loss history that the Company used included a long-term probability of liquidation study specific to insurance companies. Additionally, the life of each of the Company’s reinsurance treaties was also considered as the probability of default was calculated over the contractual length of the reinsurance contracts. The credit worthiness of a counterparty is evaluated by considering the credit ratings assigned by independent agencies and individually evaluating all the counterparties. The adoption resulted in a cumulative-effect adjustment to increase accumulated deficit by $0.1 million as of January 1, 2023. The Company updates the model each quarter and adjusts the balance accordingly. As of December 31, 2023, the allowance remains at approximately $0.1 million.

The Company also has invested in promissory notes which are carried at amortized cost in Other Investments on the consolidated balance sheets, and is an investment that is within the scope of ASC 326. The amount invested in the aggregate is $450,000.

The Company does not have a current expected credit allowance for the promissory note, as the promissory note is not material.

Deferred Policy Acquisition Costs

Policy acquisition costs are costs that vary with, and are directly related to, the successful production of new and renewal of reinsurance business, and consist principally of commissions, premium taxes and brokerage expenses. The acquisition costs are deferred and amortized over the period in which the related premiums are earned. If the sum of a contract’s expected losses and loss expenses and deferred acquisition costs exceed the related 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 Deposited with Reinsured Companies

“Funds Deposited with Reinsured Companies” on the Company’s consolidated balance sheets includes amounts held to support our reinsurance contracts. As of December 31, 2023 and December 31, 2022, the total cash collateral posted to support all of our reinsurance treaties was approximately $8.0 million and $9.3 million, respectively.

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 our cedants and their actuarial teams. 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 cedents; (2) expected loss ratios by type of business; (3) actuarial methodologies which analyze loss reporting and payment experience, reports from our cedants and historical trends; (4)loss development factor selections, initial expected loss ratio selections, and weighting of methods used; and (5) general economic conditions. The Company also engages an independent specialist in order to assist management in establishing reasonable 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. Cedent 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 cedent 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

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. Stock compensation expense is included in General and administrative expenses on the consolidated statements of operations.

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. 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.

Forfeitures for stock options and RSU’s are accounted for as they occur. The Company has not made any adjustment to stock compensation expense for forfeitures as of December 31, 2023.

Fair Value of Financial Instruments

The carrying values of certain financial instruments, including cash and short-term investments, approximate fair value due to their short-term nature, and are therefore considered Level 1 in the fair value hierarchy. 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.

Earnings (Loss) Per Common Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the 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. Under the treasury stock method, potential common shares outstanding are excluded from the calculation of diluted earnings (loss) per share if their effect is anti-dilutive.

Leases

We determine if an arrangement contains a lease at inception, and leases are classified as either operating or finance leases at the lease commencement date. An arrangement contains a lease if it implicitly or explicitly identifies an asset to be used and conveys the right to control the use of the identified asset in exchange for consideration. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized upon commencement of the lease based on the present value of the lease payments over the lease term. ROU assets and operating lease liabilities are recognized in Other Assets and Other liabilities on our consolidated balance sheets, respectively. When readily determinable, we use the implicit rate within the lease. As most of our leases do not provide an implicit interest rate, we generally use our incremental borrowing rate. The incremental borrowing rate is based on the estimated rate of interest for fully collateralized and fully amortizing borrowings over a similar term as the lease payments at commencement date. The incremental borrowing rate is used to determine the present value of lease payments.

Our expected lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Expenses associated with operating leases are recorded in General and administrative expenses on our Consolidated Statements of Operations. Short-term leases with a term of 12 months or less are not capitalized.

Note 3. Recently Adopted and Issued Accounting Standards

As discussed, the Company adopted ASC 326 during the first quarter of 2023 using a modified retrospective transition method. The adoption resulted in a cumulative-effect adjustment to increase accumulated deficit by $0.1 million as of January 1, 2023.

In July 2023, the FASB issued ASU 2023-03 “Presentation of Financial Statements, Income Statement-Reporting Comprehensive Income, Distinguishing Liabilities from Equity, Equity, and Compensation-Stock Compensation” to amend various SEC paragraphs in the Accounting Standards Codification to primarily reflect the issuance of SEC Staff Accounting Bulletin No. 120. Staff Accounting Bulletin No. 120 provides guidance to companies issuing share-based awards shortly before announcing material, nonpublic information to consider such material nonpublic information to adjust observable market prices if the release of material nonpublic information is expected to affect the share price. The ASU does not provide any new guidance so there is no transition or effective date associated with it. The Company expects to adopt this standard sometime in 2024 and does not expect an impact to our consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07,*“Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.”*The updated accounting guidance requires enhanced reportable segment disclosures, primarily related to significant segment expenses which are regularly provided to the chief operating decision maker. The guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Retrospective application is required and early adoption is permitted. The Company is currently evaluating the impact of this standard on the disclosures within the consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09,“Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. Early adoption is permitted. A public entity should apply the amendments in ASU 2023-09 prospectively to all annual periods beginning after December 15, 2024. The Company is currently evaluating the impact of this standard on the disclosures within the consolidated financial statements.

Note 4. Investments and Fair Value Disclosures

The following table summarizes the Company’s equity securities held at fair value as of December 31, 2023 and 2022.

OppFi Common Stock

As a result of the Fund unwinding, the Company received approximately 860,000 shares of OppFi common stock and approximately 360,000 $11.50 strike warrants. On the date of the distribution, the securities had an aggregate fair value of approximately $1.9 million.

Hagerty Common Stock

On December 15, 2022, FGMP distributed 99,999 common shares of Hagerty to the Company. On the date of distribution, the common shares had an aggregate fair value of approximately $889,000. The Company sold the common shares during the first quarter of 2023 for a realized loss of approximately $16,000.

The following table summarizes the Company’s other investments as of December 31, 2023 and 2022:

Equity Method Investments

On January 4, 2021, FGMP was formed as a Delaware limited partnership to co-sponsor newly formed SPACs with their founders or partners, as well as other merchant banking interests. The Company is the sole managing member of the general partner of FGMP and holds a limited partner interest of approximately 46% in FGMP directly and through its subsidiaries. FGMP participates as a co-sponsor of the SPACs launched under our SPAC Platform as well as merchant banking initiatives.

For the year ended December 31, 2023, the Company contributed $0.1 million into FGMP and has recorded equity method gains of approximately $3.0 million. Of the $8.8 million carrying value of our investment in FGMP at December 31, 2023 the Company may allocate up to approximately $0.4 million to incentivize and compensate individuals and entities for the successful merger of SPACs launched under our platform.

Equity method investments previously included our investment in the Fund. However, during the first quarter of 2023, it was determined that the Fund would begin the process of winding down, and all investment holdings held in the name of the Fund would be transferred and distributed to members within the Fund based on their ownership percentage of each respective holding. Prior to the unwinding, through the Fund, the Company held underlying investments in FGAC Investors LLC, FG Merger Investors LLC, and Greenfirst Forest Products Holdings LLC. The Fund, an investment company, carried each of these investments at fair value. In June 2023, all transfers were completed, resulting in the Company being transferred direct limited partner interests in FGAC Investors LLC, with a carrying value of $8.9 million, FG Merger Investors LLC, with a carrying value of $3.4 million, and Greenfirst Forest Products Holdings, LLC, with a carrying value of $1.4 million. The carrying value of these direct limited partner interests approximate to ownership of 29% of FGAC Investors LLC, 19% of FG Merger Investors LLC, and 16% of Greenfirst Forest Products Holdings, LLC. The Company determined that it has the ability to exercise significant influence over FGAC Investors LLC, FG Merger Investors LLC and Greenfirst Forest Products Holdings LLC, and thus will account for each of these investments under the equity method of accounting.

Subsequent to June 2023, the Company contributed $0.4 million into FG Merger Investors LLC, and recorded an equity method gain of approximately $2.4 million. In addition, the Company recorded an equity method loss from Greenfirst Forest Products Holdings LLC of approximately $0.1 million and a gain of $0.1 million from FGAC Investors LLC.

Financial information for our investments accounted for under the equity method, in the aggregate, is as follows:

Investments held by our equity method investees, such as private placement investments held in sponsor shares and warrants for special purpose acquisition companies, 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 well as consideration of price and volatility of relevant publicly traded securities such as SPAC warrants. Our investees also consider the probability of a successful merger when valuing equity for SPACs that have not yet closed.

Investments Without Readily Determinable Fair Value

In addition to our equity method investments, other investments, as listed on our consolidated balance sheets, consist of equity we have purchased in companies for which there does not exist a readily determinable fair value. The Company accounts for these investments at their cost, subject to any adjustment from time to time due to impairment or observable price changes in orderly transactions. When the Company observes an orderly transaction of an investee’s identical or similar equity securities, the Company adjusts the carrying value based on the observable price as of the transaction date. Any profit distributions the Company receives on these investments are included in net investment income.

The carrying value of investments without readily determinable fair value was increased by $0.3 million for the year ended December 31, 2023, as compared tozero for the year ended December 31, 2022. The increase was due to an observable price change in FGC during the second quarter of 2023. This amount is included in net investment income on the Company’s consolidated statements of operations. For the year ended December 31, 2023, the Company received distributions from investments without readily determinable fair values in the amount of $0.3 million, as compared to $0.2 million for the year ended December 31, 2022.

A summary of changes in investments without a readily determinable fair value for the year ended December 31, 2023, and 2022, is as follows:

Other

Other investments, in addition to equity method investments and investments without readily determinable fair value, include promissory notes, which are carried at amortized cost on the consolidated balance sheets.

On September 29, 2023, the Company invested $250,000 in a promissory note with ThinkMarkets. The promissory note has an interest rate of 15% annually. Originally, upon a closing of the contemplated business combination, the Company would have the option to convert any unpaid loan amount and all accrued and unpaid interest into fully paid shares of FGAC common stock, at a conversion price of $5.00 per share. However, on December 6, 2023, a settlement agreement was reached that terminated the contemplated business combination between ThinkMarkets and FGAC, and ThinkMarkets agreed to pay the promissory note back in two installments during the first half of 2024. As of December 31, 2023, the entire principal amount of $250,000 as well as approximately $37,000 of accrued interest was outstanding.

On March 16, 2023, the Company invested $200,000 in a senior unsecured loan to Craveworthy LLC (“Craveworthy”). The loan has an interest rate of 13% and a maturity of March 15, 2024. The $200,000 principal and any interest accrued may be prepaid voluntarily by Craveworthy but is not required to be paid until the date of maturity. As of December 31, 2023, the entire principal amount of $200,000 as well as approximately $20,000 of accrued interest was outstanding.

On March 15, 2023, the Company invested $500,000 in a convertible promissory note with iCoreConnect, Inc. During the third quarter, the Company elected to convert all unpaid principal and interest due from the convertible promissory note with iCoreConnect, Inc. into fully paid common shares of iCoreConnect, Inc. As part of the conversion, the Company received approximately 219,000 common shares of iCoreConnect, Inc. During the third quarter, the Company sold all of the common shares received from conversion for approximately $3.7 million in cash proceeds, resulting in a realized gain of approximately $3.1 million.

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.

For equity method investments, 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:

We have not recorded an impairment on our investments for either of the years ended December 31, 2023 and 2022.

Net investment income (loss) for the years ended December 31, 2023 and 2022 is as follows:

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:

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.

Financial instruments measured, on a recurring basis, at fair value as of December 31, 2023 and December 31, 2022 are as follows.

Investments without a readily determinable fair value are measured at fair value on a nonrecurring basis. For the year ended December 31, 2023, the Company recorded adjustments to increase the fair value for observable price changes of $0.3 million, which is included in net investment income in the consolidated statements of operations. The Company did not record any impairments. To determine the fair value of investments without readily determinable fair value, the Company considered rounds of financing and third-party transactions. The Company has classified the fair value measurements of these investments as Level 3 because they involve significant unobservable inputs.

The following tables provide a reconciliation of the fair value of recurring Level 3 fair value measurements for the years ended December 31, 2023 and December 31, 2022:

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.

In estimating losses, the Company may assess any of the following:

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 2023 premium and loss information was not made available to the Company in a manner that allowed for the timely filing of this annual report. Thus, our fourth quarter results, including the loss and LAE 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 LAE reserves are adequate as of December 31, 2023, based on available information, actual losses may ultimately differ materially from the Company’s current estimates. The Company will continue to monitor the reasonableness of its assumptions as new information is provided.

The information about incurred and paid claims development for the year ended December 31, 2023 and 2022, is shown below. 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 for the Company’s cedants to provide this information. The ceding companies to which we provide reinsurance only report summary information to us via bordereau statements. This summary information does not include the number of reported claims underlying the paid and reported losses. The information about incurred and paid claims development for the year ended December 31, 2022 is presented as unaudited supplementary information.

Cumulative Incurred Loss and Allocated LAE, net of reinsurance for the years ended December 31:

Cumulative Paid Loss and Allocated LAE, net of reinsurance for the years ended December 31:

A reconciliation of the net incurred and paid loss development tables to the liability for loss and loss adjustment expenses on the Company’s consolidated balance sheets is as follows:

A summary of changes in outstanding loss and loss adjustment expense reserves for the years ended December 31, 2023 and 2022 is as follows:

The following is unaudited supplementary information about average historical claims duration as of December 31, 2023:

Note 6. Income Taxes

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:

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 $8.5 million and $3.8 million as of December 31, 2023. The Company has recorded a valuation allowance against its deferred tax assets of $4.7 million, as of December 31, 2023, 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:

As of December 31, 2023, the Company had net operating loss carryforwards (“NOLs”) for federal income tax purposes of approximately $24.4 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 $22.2 million of the Company’s NOLs do not expire under current tax law. Additionally, the Company has approximately $11.3 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. A valuation allowance is established when the Company considers it more-likely-than-not that all or a portion of the deferred income tax assets will not be realized. When determining if a valuation allowance is necessary against the Company’s deferred tax assets, management considers available positive and negative evidence, including the Company’s historical and anticipated future performance as well as the timing of when positive income of the appropriate character will develop, taxes available to be recovered from prior years in accordance with existing carryback statutes, the reversal of deferred income tax liabilities, and the availability of tax planning strategies. The Company has established a valuation allowance against its deferred tax assets to the extent they are not available be utilized in the future against its deferred income tax liabilities primarily due to the Company’s historical capital and operating loss history.

As of December 31, 2023, 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 years 2020 and forward are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities.

Note 7. Equity Incentive Plans

On December 15, 2021, our shareholders approved the 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 stock units (“RSUs”, and other share-based awards, and provides for a maximum of 1,500,000 shares available for issuance.

On March 24, 2023, the Company’s board of directors approved an amendment to the 2021 Plan to increase the number of shares available for issuance from 1,500,000 to 2,000,000.

In addition, on March 24, 2023, the board of directors approved an employee purchase plan (“ESPP Plan”) whereby qualifying employees can choose each year to have up to 5% of their annual base earnings withheld to purchase the Company’s common shares in the open market. The Company matches 100% of the employee’s contribution amount after twelve months of employment.

RSUs Outstanding

The following table summarizes RSU activity for the years ended December 31, 2023:

The aggregate intrinsic value of restricted stock units vested for the years ended December 31, 2023 and 2022 was approximately $585,000 and $190,000, respectively.

On August 19, 2022, we issued a total of 158,225 RSUs to our non-employee directors. The RSUs vest in five equal annual installments, beginning with the first anniversary of the grant date.

On February 17, 2023, we granted a total of 415,000 RSUs to various members of the Company’s management. The RSUs vest in three equal annual installments, beginning with the date the shares were granted. The vested shares for the first vesting date were delivered in fourth quarter of 2023.

In the third quarter of 2023, we granted a total of 34,765 RSUs to all non-executive members of our Company’s board of directors. The RSU’s vest immediately. These RSUs were in lieu of third quarter cash director fee.

In the fourth quarter of 2023, we granted a total of 45,938 RSUs to all non-executive members of our Company’s board of directors. The RSU’s vest immediately. These RSUs were in lieu of fourth quarter cash director fee.

In the fourth quarter of 2023, we issued a total of 183,820 RSUs to our non-employee directors. The RSUs vest in five equal annual installments, beginning with the first anniversary of the grant date.

On January 18, 2021, the 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 370,000 stock options, restricted shares or restricted stock units pursuant to a future award, subject to the approval of an amended and/or new equity plan, among other conditions. On February 17, 2023, in satisfaction of the obligations in the letter agreement, the Company granted 370,000 RSUs to Mr. Swets. The RSU’s fully vested on the first anniversary of the grant date.

Restricted Shares

During the fourth quarter of 2023, the Company issued 25,000 restricted shares under the 2021 Equity Incentive Plan to an employee of the Company. The restriction will be lifted on the first anniversary of the grant date.

On July 31, 2022, the Company issued 25,000 restricted shares under the 2021 Equity Incentive Plan to an employee of the Company. The restriction was lifted on the first anniversary of the grant date.

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 130,000 shares of the Company’s common stock at an exercise price of $3.38 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 January 11, 2031.

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 3.3 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:

The following table summarizes activity for stock options issued for the years ended December 31, 2023 and 2022:

Total stock-based compensation expense for the years ended December 31, 2023 and 2022 was approximately $2.0 million and $255,000, respectively. As of December 31, 2023, total unrecognized stock compensation expense of $1.3 million remains, which will be recognized through December 31, 2028. 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 years ended December 31, 2023 and 2022. On February 24, 2022,1,500,000 warrants with an exercise price of $15.00 expired.

As of December 31, 2023, the Company didnot have any warrants outstanding.

Note 8. Shareholders’ Equity

8.00% Cumulative Preferred Stock, Series A

As of both December 31, 2023, and December 31, 2022, the Company had 894,580 Series A Preferred Stock shares outstanding.

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 $2.00 per share of Series A Preferred Stock per year. The Series A Preferred Stock shares trade on the Nasdaq Stock Market under the symbol “FGFPP”.

Common Stock

In June 2022, we sold a total of 2,750,000 shares of our common stock in an underwritten public offering, at a price of $1.58 per share, for net proceeds of approximately $3.8 million. On August 2, 2022, ThinkEquity, the underwriter with respect to the public offering, partially exercised its overallotment option and we sold an additional 71,770 shares of our common stock, at a price of 1.58 per share, for net proceeds of $0.1 million.

On November 3, 2022, the Company entered into a Sales Agreement with ThinkEquity LLC, pursuant to which the Company may offer and sell, from time to time through ThinkEquity LLC, shares of the Company’s common stock, subject to the terms and conditions of the Sales Agreement. During the first quarter of 2023, the Company sold approximately 27,000 shares under the Sales Agreement for net proceeds of approximately $74,000. On May 26, 2023, the Sales Agreement was terminated.

In June of 2023, the Company sold a total of 865,000 shares of common stock in an underwritten public offering, at a price of $1.85 per share, for net proceeds of approximately $1.3 million.

The total number of common stock outstanding as of December 31, 2023 is 10,558,931, compared to 9,410,473 as of December 31, 2022.

Statutory Capital and Surplus

FGRe is subject to the Cayman Islands’ Insurance (Capital and Solvency) (Classes B, C, and D Insurers) Regulations. In accordance with the terms of The Insurance Regulations, as a Class B(iii)insurer under the Act, the Company is required to maintain a minimum capital of $200,000 and a prescribed capital of $1,622,324 in line with the Regulations based on 15% of the first $5 million in net earned premium and 7.5% of additional net earned premium up to $20,000,000. The Company was in compliance with these requirements as of December 31, 2023.

FGRe is not required to prepare separate statutory financial statements for filing with CIMA. There were no material differences between FGRe’s GAAP capital, surplus, and net income and its statutory capital, surplus, and net income at December 31, 2023 and 2022, and for the years then ended.

At December 31, 2023, FGRe was not restricted from payment of dividends to the Company. Any dividends declared and paid from FGRe to the Company would require CIMA’s approval.

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.

FG Special Situations Fund

The Company participated as a limited partner in the Fund. The general partner of the Fund, and the investment advisor of the Fund, was ultimately controlled by Mr. Cerminara, the Chairman of the Company’s Board of Directors. Portions of the Company’s investment into the Fund were used to sponsor the launch of SPACs affiliated with certain of our officers and directors.

The Fund began the process of winding down in the first quarter of 2023 and completed the process in the second quarter of 2023. As a result of the winddown, the Company now holds direct limited partner interests in FGAC Investors LLC, FG Merger Investors LLC, and Greenfirst Forest Products Holdings, LLC. Mr. Cerminara, Mr. Swets and Mr. Baqar, our Executive Vice President and Chief Financial Officer, serve as managers of FGAC Investors LLC and FG Merger Investors LLC, while Mr. Cerminara ultimately controls Greenfirst Forest Products Holdings, LLC.

FG Merchant Partners

FGMP was formed to co-sponsor newly formed SPACs with their founders or partners. Certain of our directors and officers also hold limited partner interests in FGMP. 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.

FGMP has investments in the founder shares and warrants of FG Acquisition Corp, FGC and Craveworthy. Certain of our directors and officers are affiliated with these entities.

FG Communities

In October 2022, the Company directly invested $2.0 million into FGC , which is included in other investments on the consolidated balance sheets. The Company also holds an interest through its ownership in FGMP. FGC is a self-managed real estate company focused on a growing portfolio of manufactured housing communities which are owned and operated by FGC. Mr. Cerminara is the President and a director of FGC.

There was an observable price change in FGC during the second quarter of 2023, resulting in $0.3 million increase in the carrying value. This amount is included in net investment income on the Company’s consolidated statements of operations.

Craveworthy

On March 16, 2023, the Company invested $200,000 in a senior unsecured loan to Craveworthy. Mr. Swets has an indirect interest in Craveworthy, independent from the interests held by the Company through its ownership in FGMP.

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 these services, the Company pays FGM a fee of $456,000 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.

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. In the third quarter of 2022, the Shared Services Agreement was amended to eliminate termination fees and to increase the termination notice from 120 days to 365 days.

The Company paid $1,825,000 to FGM under the Shared Services Agreement for each of the years ended December 31, 2023 and 2022, respectively. This amount is included in General and administrative expenses on the consolidated statement of operations.

Note 10. Net Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted earnings per share gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method. 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, 2023 and 2022.

The following potentially dilutive securities outstanding as of December 31, 2023 and 2022 have been excluded from the computation of diluted weighted-average shares outstanding as their effect would be anti-dilutive under the treasury stock method.

Note 11. Retirement plans

The 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, 2023 and 2022, the Company made matching contributions to the Retirement Plan in the amounts of approximately $26,000 and $44,000, respectively, but did not make any profit-sharing contributions to the Retirement Plan in either year. The 401K matching contributions are included within general and administrative expenses on the consolidated statement of operations.

On March 24, 2023, the board of directors approved an employee purchase plan (“ESPP Plan”) whereby qualifying employees can choose each year to have up to 5% of their annual base earnings withheld to purchase the Company’s common shares in the open market. The Company matches 100% of the employee’s contribution amount after thirty days of employment. The Company’s contribution is expensed as paid and for the years ended December 31, 2023 and December 31, 2022 totaled approximately $18,000 andzero, respectively. The ESPP matching contributions are included within general and administrative expenses on the consolidated statement of operations.

Note 12. Commitments and Contingencies

Legal Proceedings:

As of December 31, 2023, 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.

Note 13. Leases

Operating Lease Commitments:

In July 2021, the Company entered into a lease agreement for office space in St. Petersburg, FL. The lease had a term of 12 months and was not renewed upon expiration. Due to the short-term nature of the lease, the Company 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. Short-term lease expense related to the St. Petersburg office was approximately $10,000 for the year ended December 31, 2022.

In April 2022, the Company entered into a lease agreement for office space in Itasca, IL. The lease has a term of 44 months beginning on May 1, 2022. Total minimum rent over the term of the lease is expected to be approximately $77,000. The annual discount rate used for the Itasca office was 8%. As of December 31, 2023 and December 31, 2022, the right of use asset and lease liability are approximately $39,000 and $56,000, each, respectively, and held in “Other assets” and “Other liabilities” on the balance sheet, respectively. Rent expense related to the Itasca office was approximately $15,000 and $17,000 for the years ended December 31, 2023 and December 31, 2022, respectively. Future payments under operating lease liabilities are as follows:

Total operating lease expense included in general and administrative expenses on the Company’s consolidated statements of operations was approximately $15,000 and $27,000 for the years ended December 31, 2023, and 2022, respectively.

Note 14. 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, 2023, included our eight reinsurance agreements, as well as the returns associated with the investments made by our reinsurance operations. Net premiums earned within this segment relates entirely to property and casualty assumed premium. Our asset management segment includes our investments made outside of reinsurance operations.

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 year ended December 31, 2023 and 2022. 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 $1.7 million and $3.0 million as of December 31, 2023 and 2022, respectively.

Note 15. Subsequent Events

On January 3, 2024, FG Financial Group, Inc. (“FGF”) and FG Group Holdings, Inc. (NYSE American: FGH) (“FGH”), signed a definitive plan of merger to combine the companies in an all-stock transaction. The plan of merger and transaction were unanimously approved by the independent members of the Board of Directors of both FGF and FGH. Under the plan of the merger, FGH common stockholders would receive one share of FGF common stock for each share of common stock of FGH held by such stockholder. Upon completion of the merger, the combined company would be renamed to Fundamental Global Inc. and the common stock and Series A cumulative preferred stock of the combined company would continue to trade on the Nasdaq under the tickers “FGF” and “FGFPP,” respectively.

On February 29, 2024, FGF and FGH completed the previously announced merger transaction pursuant to the Plan of Merger, dated as of January 3, 2024 (the “Merger Agreement”), by and among FGF, FGH and FG Group LLC, a Nevada limited liability company and wholly owned subsidiary of FGF (the “Merger Sub”). Pursuant to the terms of the Merger Agreement and in accordance with the Nevada Revised Statutes, FGH merged with and into the Merger Sub (the “Merger”), with the Merger Sub as the surviving entity and wholly owned subsidiary of FGF. Following the Merger, on February 29, 2024, the Company amended its Amended and Restated Articles of Incorporation to change its name to Fundamental Global Inc.