Fundamental Global Inc

Previous wording

Management cautions that the forward-looking statements in this Quarterly Report on Form 10-Q 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: failure to realize cost savings, efficiencies and other expected benefits from recent acquisition and sale transactions and the anticipated Arrangement; general conditions in the global economy; 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, including our strategy to invest in the risk capital of special purpose acquisition companies (SPACs); 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 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; risks associated with our related party transactions and investments; and risks associated with our investments in SPAC, including the failure of any such SPAC to complete its initial business combination. 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 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.

Current wording

Management cautions that the forward-looking statements in this Quarterly Report on Form 10-Q 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: failure to realize cost savings, efficiencies and other expected benefits from recent acquisition and sale transactions and the anticipated Arrangement; general conditions in the global economy; 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, including our strategy to invest in the risk capital of special purpose acquisition companies (SPACs); potential loss of value of holdings; risk of becoming an investment company; fluctuations in our short-term results as we implement our new business strategy; risks of 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; risks associated with our related party transactions and holdings; and risks associated with our holdings in SPAC’s, including the failure of any such SPAC to complete its initial business combination. 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 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.

Previous wording

Fundamental Global Inc. (“Fundamental Global”, the “Company”, “we”, or “us”), formerly known as FG Financial Group, Inc. (“FGF”), is engaged in diverse business activities including reinsurance, asset management, merchant banking, manufacturing and managed services The Company’s principal business operations are conducted through its subsidiaries and affiliates.

Current wording

Fundamental Global Inc. (“Fundamental Global”, the “Company”, “we”, or “us”), formerly known as FG Financial Group, Inc. (“FGF”), is engaged in reinsurance, asset management/merchant banking, and managed services. The Company’s principal business operations are conducted through its subsidiaries and affiliates.

Previous wording

On May 3, 2024, Strong Global Entertainment, Inc. (“Strong Global Entertainment”) entered into an acquisition agreement (the “Acquisition Agreement”) with FG Acquisition Corp., a special purpose acquisition company (“FGAC”), Strong/MDI, FGAC Investors LLC, and CG Investments VII Inc. (together with FGAC Investors LLC, the “Sponsors”), pursuant to which FGAC intends to acquire, directly or indirectly, all of the outstanding shares in the capital of one of its wholly-owned subsidiary, Strong/MDI Screen Systems, Inc. (“Strong/MDI”). As a result of the acquisition, Strong/MDI will become a wholly-owned subsidiary of FGAC. As a result, we have presented the operating results of Strong/MDI as discontinued operations for all periods presented. See Note 4 for additional details

Current wording

On May 3, 2024, Strong Global Entertainment, Inc. (“Strong Global Entertainment”) entered into an acquisition agreement (the “Acquisition Agreement”) with FG Acquisition Corp., a special purpose acquisition company (“FGAC”), Strong/MDI Screen Systems, Inc. (“Strong/MDI”), FGAC Investors LLC, and CG Investments VII Inc. The transaction closed on September 25, 2024. As part of the closing, FGAC was renamed Saltire Holdings, Ltd (“Saltire”), and Saltire acquired all of the outstanding shares of one of our wholly-owned subsidiaries, Strong/MDI. As a result of the acquisition, Strong/MDI became a wholly-owned subsidiary of Saltire. See Note 4 for additional details.

Previous wording

On May 30, 2024, we and Strong Global Entertainment entered into a definitive arrangement agreement and plan of arrangement to combine the companies in an all-stock transaction. Upon completion of the Arrangement, the stockholders of Strong Global Entertainment will receive 1.5 of our common shares for each share of Strong Global Entertainment. The transaction is expected to close in the third quarter of 2024, subject to customary closing conditions, including any necessary stockholder approval. Following the closing, Strong Global Entertainment will cease to exist, and its Common Shares will be delisted from NYSE American and deregistered under the Exchange Act.

Current wording

On May 30, 2024, we and Strong Global Entertainment, an operating company in which we held approximately 76% of the Class A common shares, entered into a definitive arrangement agreement and plan of arrangement (the “Arrangement”) to combine the companies in an all-stock transaction. Upon completion of the arrangement, the stockholders of Strong Global Entertainment received 1.5 common shares of the Company for each share of Strong Global Entertainment. The transaction closed on September 30, 2024. Following the closing, Strong Global Entertainment ceased to exist, and its Class A Voting Common Shares without par value were delisted from NYSE American LLC and deregistered under the Exchange Act.

Previous wording

As a result of the reverse merger of FGF and FGH, the condensed consolidated financial statements for the periods prior to the merger represent the results of FGH, as the accounting acquirer. For periods subsequent to the merger, the condensed consolidated financial statements represent the combined results of FGH and FGF. In addition, Strong Studios and Strong/MDI, Inc are presented as discounted operations in the accompanying condensed consolidated financial statements.

Current wording

As a result of the reverse merger of FGF and FGH, the condensed consolidated financial statements for the periods prior to the merger represent the results of FGH, as the accounting acquirer. For periods subsequent to the merger, the condensed consolidated financial statements represent the combined results of FGH and FGF. In addition, Strong Studios, Inc. and Strong/MDI, Inc are presented as discounted operations in the accompanying condensed consolidated financial statements.

Previous wording

The primary driver of revenue growth was the addition of $3.7 million of reinsurance premium revenue resulting from the Merger in February 2024 and a $1.3 million increase in revenue from Strong Entertainment, partially offset by a slight increase in investment losses compared with the prior year period. The growth in revenue from Strong Entertainment was due to the acquisition of the net assets of Innovative Cinema Solutions, LLC (“ICS”) in late 2023 and increased demand from cinema operators for installation services. Net investment income was unfavorable as the Company’s equity method losses were higher in the current year period. The second quarter of 2024 was the first reporting period that reflects a full quarter of reinsurance and investment operating results from the acquired FG Financial business lines.

Current wording

The primary driver of revenue growth was the addition of $4.3 million of reinsurance premium revenue resulting from the Merger in February 2024 and a $2.2 million increase in revenue from STS. The growth in revenue from STS was due to the acquisition of the net assets of Innovative Cinema Solutions, LLC (“ICS”) in late 2023 combined with increased demand from cinema operators for installation services.

Previous wording

Total expenses increased $4.4 million or 46.0% to $13.9 million for the three months ended June 30, 2024 from $9.5 million for the three months ended June 30, 2023. Expenses are comprised of cost of sales related to the Strong Entertainment operating business, costs of the reinsurance and asset management business and selling, general and administrative expenses.

Current wording

Total expenses increased $7.4 million or 91.1% to $15.5 million for the three months ended September 30, 2024 from $8.1 million for the three months ended September 30, 2023. Expenses are comprised of cost of sales related to the Strong Entertainment operating business, costs of the reinsurance and asset management business and selling, general and administrative expenses.

Previous wording

The increase in total expenses was primarily due to the addition of the FGF business following the merger in February 2024 which added $4.2 million in new reinsurance expenses and general and administrative expenses in the second quarter. In addition, the Company’s costs of revenue and selling, general and administrative expenses increased with growth at Strong Entertainment and as a result of operating Strong Entertainment as a separate public company.

Current wording

The increase in total expenses was primarily due to the addition of the FGF business operations following the merger in February 2024 which added $6.0 million in reinsurance expenses and general and administrative expenses in the third quarter. In addition, the Company’s costs of revenue increased commensurate with the revenue growth at STS.

Previous wording

Net loss from continuing operations decreased $0.2 million or 3.3% for the three months ended June 30, 2024 from $6.3 million during the first quarter of 2023. Improvements in gross profit from Strong Entertainment were partially offset by increased unrealized investment losses and increase general and administrative costs related to both operating Strong Entertainment as a separate public company and the addition of FGF which is not included in the prior period comparisons.

Current wording

Net loss from continuing operations increased to $5.2 million for the three months ended September 30, 2024 from $3.9 million during the third quarter of 2023. Improvements in gross profit from Strong Entertainment were partially offset by increased general and administrative costs related to both operating Strong Entertainment as a separate public company and the addition of FGF, which is not included in the prior period comparisons.

Previous wording

Six Months Ended June 30, 2024 Compared with Six Months Ended June 30, 2023

Current wording

Nine Months Ended September 30, 2024 Compared with Nine Months Ended September 30, 2023

Previous wording

The primary driver of revenue growth was the addition of $4.5 million of reinsurance premium revenue resulting from the merger in February 2024 and a $2.4 million increase in revenue from Strong Entertainment. The growth in revenue from Strong Entertainment was due to the acquisition of the net assets of ICS in late 2023 and increased demand from cinema operators for installation services. Investment income was unfavorable as the Company’s equity method losses were higher in the current year period. The six months ended June 30, 2024 includes four months of reinsurance and investment operating results from the acquired FG Financial business lines.

Current wording

The primary driver of revenue growth was the addition of $8.8 million of reinsurance premium revenue resulting from the Merger in February 2024 and a $4.7 million increase in revenue from STS, partially offset by a $0.2 million increase in holdings losses compared with the prior year period. The growth in revenue from STS was due to the acquisition of the net assets of ICS in late 2023 and increased demand from cinema operators for installation services. Holdings income was unfavorable as the Company’s non-cash equity method losses were higher in the current year period. The nine months ended September 30, 2024 includes seven months of reinsurance and holdings operating results from the acquired FGF business lines.

Previous wording

Total expenses increased $8.6 million or 49.3% to $26.0 million for the six months ended June 30, 2024 from $17.4 million for the six months ended June 30, 2023. Expenses are comprised of cost of sales related to the Strong Entertainment operating business, costs of the reinsurance and asset management business and selling, general and administrative expenses.

Current wording

Total expenses increased $15.8 million or 61.7% to $41.3 million for the nine months ended September 30, 2024 from $25.5 million for the nine months ended September 30, 2023. Expenses are comprised of cost of sales related to STS operating business, costs of the reinsurance and asset management business and selling, general and administrative expenses.

Previous wording

The increase in total expenses was primarily due to the addition of the FGF business following the merger in February 2024 which added $5.3 million in new reinsurance expenses and general and administrative expenses in the six-month period. In addition, the Company’s costs of revenue and selling, general and administrative expenses increased with growth at Strong Entertainment and as a result of operating Strong Entertainment as a separate public company. The Company also recognized a $1.4 million non-cash impairment related to the sale of the Digital Ignition building.

Current wording

The increase in total expenses was primarily due to the addition of the FGF business operations the Merger in February 2024 which added $11.0 million in reinsurance expenses and general and administrative expenses in the nine-month period. In addition, the Company’s costs of revenue and selling, general and administrative expenses increased with growth at STS and as a result of operating Strong Entertainment as a separate public company. The Company also recognized a $1.4 million non-cash impairment related to the sale of the Digital Ignition building.

Previous wording

Loss from operations increased $1.9 million or 17.6% to $12.9 million for the six months ended June 30, 2024 from $10.9 million during the first quarter of 2023. Improved gross profit contributions from Strong Entertainment were offset by increased general and administrative costs related to both operating Strong Entertainment as a separate public company and the addition of FGF which is not included in the prior period comparisons as well as a non-cash impairment loss of $1.4 million related to the sale of Digital Ignition.

Current wording

Loss from operations increased $2.7 million or 18.3% to $17.7 million for the nine months ended September 30, 2024 from $15.0 million during the first quarter of 2023. Improved gross profit contributions from STS were offset by increased general and administrative costs related to both operating Strong Entertainment as a separate public company and the addition of FGF, which is not included in the prior period comparisons, as well as a non-cash impairment loss of $1.4 million related to the sale of Digital Ignition.

Previous wording

Net loss from continuing operations increased $0.1 million or 0.7% for the six months ended June 30, 2024 from $11.1 million during the first half of 2023. Improved gross profit contributions from Strong Entertainment and a $1.8 million gain related to the FGF merger transaction were offset by increased general and administrative costs related to both operating Strong Entertainment as a separate public company and the addition of FGF which is not included in the prior period comparisons as well as a non-cash impairment loss of $1.4 million related to the sale of Digital Ignition.

Current wording

Net loss from continuing operations increased $1.2 million or 8.3% for the nine months ended September 30, 2024 from $14.9 million during the first nine months of 2023. Improved gross profit contributions from STS and a $1.8 million gain related to the FGF merger transaction were offset by increased general and administrative costs related to both operating Strong Entertainment as a separate public company and the addition of FGF which is not included in the prior period comparisons as well as a non-cash impairment loss of $1.4 million related to the sale of Digital Ignition.

Previous wording

Other investments consist, in part, of equity investments made in privately held companies accounted for under the equity method. As discussed further in Note 5, 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 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 completed a business combination.

Current wording

Other holdings consist, in part, of equity holdings made in privately held companies accounted for under the equity method. As discussed further in Note 5, certain holdings 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 holding. Our investees estimate the volatility of these holdings 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 holding, 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 completed a business combination.

Previous wording

Upon adoption of ASU 2016-13, 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. 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.

Current wording

Upon adoption of ASU 2016-13, as amended, Financial Instruments – Credit Losses, 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. 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.

Previous wording

Policy acquisition costs are costs that vary with, and are directly related to, the successful production of new and renewal reinsurance 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.

Current wording

Policy acquisition costs are costs that vary with, and are directly related to, the successful production of new and renewal reinsurance 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 income on holdings, 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.

Previous wording

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. Significant assumptions used by the Company’s management and third-party actuarial specialists include loss development factor selections, initial expected loss ratio selections, and weighting of methods used. 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. 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.

Current wording

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. Significant assumptions used by the Company’s management and third-party actuarial specialists include loss development factor selections, initial expected loss ratio selections, and weighting of methods used. 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. GAAP does not permit establishing loss reserves, which include case reserves and incurred but not reported 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. 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.

Previous wording

The following table summarizes the Company’s consolidated cash flows for the six months ended June 30, 2024 and 2023 (in thousands).

Current wording

The following table summarizes the Company’s consolidated cash flows for the nine months ended September 30, 2024 and 2023 (in thousands).

Previous wording

For the six months ended June 30, 2024, net cash used in operating activities from continuing operations was approximately $3.2 million, compared to $0.3 for the six months ended June 30, 2023. Cash from operations decreased due to a net cash outflow for working capital, including an increase in net outflows related to our insurance business, which were partially offset by an improvement in Strong Global Entertainments’s results from operations.

Current wording

For the nine months ended September 30, 2024, net cash used in operating activities from continuing operations was approximately $3.1 million, compared to $1.6 for the nine months ended September 30, 2023. Cash from operations decreased due to a net cash outflow for working capital, including an increase in net outflows related to our insurance business, which were partially offset by an improvement in Strong Global Entertainment’s results from operations.

Previous wording

For the six months ended June 30, 2024, net cash provided by investing activities from continuing operations was approximately $4.3 million, compared to $0.1 million for the six months ended June 30, 2023. Cash provided by investing activities during the six months ended June 30, 2024 included $1.9 million of an increase in cash as a result of the merger of FGF and FGH, $1.2 million of proceeds from the sale of equity securities and $1.3 million from the sale of the Digital Ignition building. Investing cash flows during the six months ended June 30, 2024 and 2023, included approximately $20,000 and $0.1 million, respectively, of capital expenditures in the Strong Entertainment business.

Current wording

For the nine months ended September 30, 2024, net cash provided by investing activities from continuing operations was approximately $10.4 million, compared to $0.1 million for the nine months ended September 30, 2023. Cash provided by investing activities during the nine months ended September 30, 2024 included $1.9 million of an increase in cash as a result of the Merger of FGF and FGH, $2.3 million of proceeds from the sale of equity securities and $6.1 million from the sale of the Digital Ignition building. Investing cash flows during each of the nine months ended September 30, 2024 and 2023 included approximately $0.1 million of capital expenditures in the managed services business.

Previous wording

For the six months ended June 30, 2024, net cash used in financing activities from continuing operations was approximately $1.3 million, compared to cash provided by financing activities of $2.0 million for the six months ended June 30, 2023. Cash used in financing activities during the six months ended June 30, 2024 included $0.4 million of principal payments on debt and finances leases and $0.9 million of payments of dividends on our Series A Preferred Shares. Cash by financing activities during the six months ended June 30, 2023 included $2.4 million of net proceeds from the IPO of Strong Global Entertainment, partially offset by $0.3 million of principal payments on debt and finances leases.

Current wording

For the nine months ended September 30, 2024, net cash used in financing activities from continuing operations was approximately $6.9 million, compared to cash provided by financing activities of $1.6 million for the nine months ended September 30, 2023. Cash used in financing activities during the nine months ended September 30, 2024 included $5.5 million of principal payments on debt and finances leases and $1.3 million of payments of dividends on our Series A Preferred Shares. Cash by financing activities during the nine months ended September 30, 2023 included $2.4 million of net proceeds from the IPO of Strong Global Entertainment, partially offset by $0.7 million of principal payments on debt and finances leases.