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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date
of Report (Date of earliest event reported): June
18, 2024
FUNDAMENTAL
GLOBAL INC.
(Exact
name of registrant as specified in charter)
Nevada |
|
001-36366 |
|
46-1119100 |
(State
or other jurisdiction
of
incorporation) |
|
(Commission
File
Number) |
|
(I.R.S.
Employer
Identification
No.) |
108
Gateway Blvd, Suite 204
Mooresville,
NC |
|
28117 |
(Address
of principal executive offices) |
|
(Zip
Code) |
(704)
994-8279
(Registrant’s
telephone number, including area code)
N/A
(Former
name or former address, if changed since last report)
Check
the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under
any of the following provisions:
|
☐ |
Written
communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|
|
|
|
☐ |
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
|
|
|
|
☐ |
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
|
|
|
|
☐ |
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
|
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class |
|
Trading
Symbol(s) |
|
Name
of each exchange on which registered |
Common
Stock, $0.001 par value per share |
|
FGF |
|
The
Nasdaq Stock Market LLC |
8.00%
Cumulative Preferred Stock, Series A, $25.00 par value per share |
|
FGFPP |
|
The
Nasdaq Stock Market LLC |
Indicate
by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405
of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2 of this chapter).
Emerging
growth company ☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item
2.02 |
Results
of Operations and Financial Condition. |
On
February 29, 2024, FG Financial Group, Inc., a Nevada corporation (“FGF” or the “Company”),
and FG Group Holdings Inc., a Nevada corporation (“FGH”) completed a merger transaction pursuant to which FGH common
stockholders received one share of FGF common stock for each share of common stock of FGH held by such stockholder (“FGF Merger”).
In connection with the FGF Merger, the Company changed its name to Fundamental Global Inc. The FGF Merger involved a change of control
between two businesses and was accounted for as a reverse acquisition in accordance with ASC 805 – Business Combinations. A reverse
acquisition occurs when the entity that issues securities (the legal acquirer) is identified as the acquiree for accounting purposes
and the entity whose equity interests are acquired (the legal acquiree) is identified as the acquirer for accounting purposes. FGH was
determined to be the accounting acquirer. 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 FGF Merger,
the condensed consolidated financial statements represent the combined results of FGH and FGF. We are including in this Current Report
on Form 8-K the audited financial statements of FGH for the years ended December 31, 2023 and 2022, which are now the historical audited
financial statements of the Company following the consummation of the FGF Merger, as Exhibit 99.1, which is incorporated by reference
herein.
Item
9.01 |
Financial
Statements and Exhibits. |
(d)
Exhibits
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
|
|
FUNDAMENTAL
GLOBAL INC. |
|
|
|
Date: |
June
18, 2024 |
By: |
/s/
Mark D. Roberson |
|
|
Name: |
Mark
D. Roberson |
|
|
Title: |
Chief
Financial Officer |
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the inclusion in this Form 8-K of Fundamental Global Inc. of our report dated May 17, 2024, relating to our audit of the consolidated
financial statements of FG Group Holdings Inc. (the “Company”) as of December 31, 2023 and 2022, and for the years then ended.
|
/s/ Haskell & White LLP |
|
HASKELL
& WHITE LLP |
Irvine,
California
June
18, 2024
Exhibit
99.1
FG
GROUP HOLDINGS INC.
Consolidated
Financial Statements
For
the Years Ended December 31, 2023 and 2022
FG
Group Holdings Inc. and Subsidiaries
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholder and Board of Directors
Fundamental
Global Inc. (as the sole stockholder of FG Group Holdings Inc.)
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of FG Group Holdings Inc. (formerly, Ballantyne Strong, Inc.) (the “Company”)
as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders’ equity,
and cash flows for each of the years then ended, and the related notes (collectively, the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for each of the years
then ended, in conformity with U.S. generally accepted accounting principles.
Emphasis
of Matters
As
summarized in Note 1 to the consolidated financial statements, the Company has historically conducted a large portion of its operations
primarily through its Strong Entertainment operating segment. Strong Global Entertainment, Inc. become a standalone publicly traded company
in May 2023 (the “Separation”). Following the Separation, the Company continues to be the majority shareholder of Strong
Global Entertainment, Inc. and as a result, the financial results of Strong Global Entertainment, Inc. are presented on a consolidated
basis in the consolidated financial statements.
As
summarized in Note 3 to the consolidated financial statements, the board of directors of Strong Global Entertainment approved the Company’s
plan to exit its content business, including Strong Studios, Inc. and Unbounded Media Corporation (collectively, the “Content Business”)
and authorized management to proceed with such plan. As a result, the Content Business has been presented as discontinued operations
for all periods presented in the consolidated financial statements.
As
summarized in Note 18 to the consolidated financial statements, on February 29, 2024, the Company completed a merger transaction and
became a wholly owned subsidiary of Fundamental Global Inc. In connection therewith, the Company filed with the SEC a certification on
Form 15 requesting the deregistration of its common stock under Section 12(g) of the Exchange Act and the suspension of the Company’s
obligations under Sections 13 and 15(d) of the Exchange Act.
Our
opinion is not modified with respect to these matters.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (CONTINUED)
Critical
Audit Matters
The
critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements
that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are
material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole,
and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Revenue
Recognition
Critical
Audit Matter Description
The
Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration
the Company expects to receive in exchange for those products or services. The Company may enter into contracts to sell their products
and services that contain non-standard terms and conditions and multiple performance obligations. For such contracts, significant judgment
may be required to determine the appropriate accounting, including the identification of all performance obligations, determination of
when performance obligations are distinct and when they should be combined, allocation of the transaction price among performance obligations
in the arrangement, and the timing of the transfer of control of promised products or services.
Our
assessment of management’s evaluation of the appropriate accounting for revenue recognition is significant to our audit because
the revenue amounts are material to the consolidated financial statements, the Company earns revenues from a variety of products and
services, management’s assessment process involves significant judgment, and the application of U.S. generally accepted accounting
principles in this area are complex.
How
the Critical Audit Matter Was Addressed in the Audit
Our
principal audit procedures related to the Company’s revenue recognition for customer contracts included the following:
|
●
|
We
obtained an understanding of management’s significant accounting policies related to revenue from contracts with customers,
and we evaluated such policies for compliance with U.S. generally accepted accounting principles. |
|
|
|
|
●
|
We
tested management’s identification of performance obligations and its assessment of whether or not the performance obligations
are distinct. |
|
|
|
|
●
|
We
evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services and the allocation
of the transaction price among the identified performance obligations. |
|
|
|
|
●
|
We
tested the mathematical accuracy of management’s calculations of revenue and the related timing of revenue recognized in the
consolidated financial statements. |
|
|
|
|
●
|
We
selected a sample of revenue transactions for each of the Company’s significant revenue streams, obtained the related customer
agreement and performed the following procedures for each selection: |
|
○
|
Examined
source documents, including master agreements, customer purchase orders, shipping documents and/or other evidence of delivery, and
other documentation to corroborate the arrangement with the customer. |
|
|
|
|
○
|
Tested
management’s identification and treatment of key contract terms for compliance with the Company’s revenue recognition
policies. |
|
|
|
|
○
|
Assessed
the terms in the customer arrangement and evaluated the appropriateness of management’s application of the Company’s
accounting policies, including its use of estimates, in the determination of revenue recognition amounts. |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (CONTINUED)
Accounting
for Equity Investments
Critical
Audit Matter Description
The
Company’s equity investments comprise a significant portion of its total assets as of December 31, 2023, and management uses several
methods of accounting to determine the appropriate accounting for each of its holdings based on management’s evaluation of current
facts and circumstances. Significant judgment is required to determine if or when the Company has significant influence, or a controlling
interest, with respect to an investee. Also, it is inherently difficult to assess the financial position, financial performance and valuation
of entities that are privately held.
Our
assessment of management’s determination of the appropriate accounting method and resulting valuations for the Company’s
equity investments is significant to our audit because equity investments are material to the consolidated financial statements and management’s
assessment process involves significant judgment.
How
the Critical Audit Matter Was Addressed in the Audit
Our
principal audit procedures related to the Company’s equity investments included the following:
|
●
|
We
obtained an understanding of management’s significant accounting policies related to equity investments, and we evaluated such
policies for compliance with U.S. generally accepted accounting principles. |
|
|
|
|
●
|
We
corroborated the existence of each of the Company’s equity investments and evaluated management’s determination of the
appropriate accounting method for each investment (i.e., fair value, equity method, cost plus) based on current facts and circumstances. |
|
|
|
|
●
|
We
tested management’s application of the applicable accounting method to each investment, as well as management’s assessment
of potential impairment to determine the accuracy of reported balances. |
|
|
|
|
●
|
For
material purchases, exchanges or disposition of equity securities, we performed the following procedures: |
|
○
|
Examined
source documents corroborating the transactions, including agreements, disbursement records, brokerage statements and bank statements. |
|
|
|
|
○
|
Recalculated
related gains and losses. |
|
|
|
|
○
|
Assessed
the impact of the transaction on the accounting method used by management to account for the investment. |
|
●
|
For
each applicable investment, we reviewed management’s consideration of the applicability of variable interest entity guidance. |
We
have served as the Company’s auditor since 2019.
Irvine,
California
May
17, 2024
FG
Group Holdings Inc. and Subsidiaries
Consolidated
Balance Sheets
(In
thousands, except par values)
| |
December 31,
2023 | | |
December 31,
2022 | |
Assets | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 6,644 | | |
$ | 3,789 | |
Accounts receivable, net | |
| 6,477 | | |
| 6,167 | |
Inventories, net | |
| 4,079 | | |
| 3,389 | |
Assets of discontinued operations | |
| 940 | | |
| 3,167 | |
Other current assets | |
| 1,220 | | |
| 3,205 | |
Total current assets | |
| 19,360 | | |
| 19,717 | |
Property, plant and equipment, net | |
| 12,220 | | |
| 12,649 | |
Operating lease right-of-use assets | |
| 371 | | |
| 310 | |
Finance lease right-of-use assets | |
| 1,258 | | |
| 666 | |
Equity holdings | |
| 28,021 | | |
| 37,522 | |
Goodwill | |
| 903 | | |
| 882 | |
Other assets | |
| 10 | | |
| 7 | |
Total assets | |
$ | 62,143 | | |
$ | 71,753 | |
| |
| | | |
| | |
Liabilities and Stockholders’ Equity | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 3,667 | | |
$ | 4,371 | |
Accrued expenses | |
| 3,542 | | |
| 3,366 | |
Short-term debt | |
| 4,732 | | |
| 2,510 | |
Current portion of long-term debt | |
| 457 | | |
| 216 | |
Current portion of operating lease obligations | |
| 206 | | |
| 116 | |
Current portion of finance lease obligations | |
| 268 | | |
| 117 | |
Deferred revenue and customer deposits | |
| 1,336 | | |
| 1,787 | |
Liabilities of discontinued operations | |
| 1,392 | | |
| 1,805 | |
Total current liabilities | |
| 15,600 | | |
| 14,288 | |
Operating lease obligations, net of current portion | |
| 215 | | |
| 257 | |
Finance lease obligations, net of current portion | |
| 1,015 | | |
| 550 | |
Long-term debt, net of current portion and deferred debt issuance costs, net | |
| 5,004 | | |
| 5,004 | |
Deferred income taxes | |
| 3,200 | | |
| 4,851 | |
Other long-term liabilities | |
| 102 | | |
| 105 | |
Total liabilities | |
| 25,136 | | |
| 25,055 | |
| |
| | | |
| | |
Commitments, contingencies and concentrations (Note 16) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Preferred stock, par value $.01 per share; authorized 1,000 shares, none outstanding | |
| - | | |
| - | |
Common stock, par value $.01 per share; authorized 50,000 shares; issued 22,503 and 22,264 shares at December 31, 2023 and December 31, 2022, respectively; outstanding 19,709 and 19,470 shares at December 31, 2023 and December 31, 2022, respectively | |
| 225 | | |
| 223 | |
Additional paid-in capital | |
| 55,856 | | |
| 53,882 | |
Retained earnings | |
| 2,336 | | |
| 16,437 | |
Treasury stock, 2,794 shares at cost | |
| (18,586 | ) | |
| (18,586 | ) |
Accumulated other comprehensive loss | |
| (4,682 | ) | |
| (5,258 | ) |
Total FG Group Holdings shareholders’ equity | |
| 35,149 | | |
| 46,698 | |
Equity attributable to non-controlling interest | |
| 1,858 | | |
| - | |
Total stockholders’ equity | |
| 37,007 | | |
| 46,698 | |
Total liabilities and stockholders’ equity | |
$ | 62,143 | | |
$ | 71,753 | |
See
accompanying notes to consolidated financial statements and report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Consolidated
Statements of Operations
(In
thousands, except per share amounts)
| |
Years Ended December 31, | |
| |
2023 | | |
2022 | |
Net product sales | |
$ | 30,776 | | |
$ | 30,119 | |
Net service revenues | |
| 12,552 | | |
| 10,204 | |
Total net revenues | |
| 43,328 | | |
| 40,323 | |
Total cost of products | |
| 22,871 | | |
| 22,729 | |
Total cost of services | |
| 8,893 | | |
| 6,762 | |
Total cost of revenues | |
| 31,764 | | |
| 29,491 | |
Gross profit | |
| 11,564 | | |
| 10,832 | |
Selling and administrative expenses: | |
| | | |
| | |
Selling | |
| 2,216 | | |
| 2,252 | |
Administrative | |
| 12,802 | | |
| 9,911 | |
Total selling and administrative expenses | |
| 15,018 | | |
| 12,163 | |
Gain (loss) on disposal of assets | |
| 5 | | |
| (474 | ) |
Loss from operations | |
| (3,449 | ) | |
| (1,805 | ) |
Other income (expense): | |
| | | |
| | |
Interest expense, net | |
| (690 | ) | |
| (340 | ) |
Foreign currency transaction (loss) gain | |
| (402 | ) | |
| 264 | |
Unrealized loss on equity holdings | |
| (6,176 | ) | |
| (4,468 | ) |
Other income (expense), net | |
| 3,537 | | |
| (180 | ) |
Total other expense | |
| (3,731 | ) | |
| (4,724 | ) |
Loss before income taxes and equity method holding loss | |
| (7,180 | ) | |
| (6,529 | ) |
Income tax benefit (expense) | |
| 660 | | |
| (473 | ) |
Equity method holding (loss) income | |
| (3,261 | ) | |
| 403 | |
Net loss from continuing operations | |
| (9,781 | ) | |
| (6,599 | ) |
Net loss from discontinued operations | |
| (4,860 | ) | |
| (555 | ) |
Net loss | |
| (14,641 | ) | |
| (7,154 | ) |
Net loss attributable to non-controlling interest | |
| (564 | ) | |
| - | |
Net loss attributable to FG Group Holdings | |
$ | (14,077 | ) | |
$ | (7,154 | ) |
| |
| | | |
| | |
Basic and diluted net loss per share: | |
| | | |
| | |
Continuing operations | |
$ | (0.50 | ) | |
$ | (0.34 | ) |
Discontinued operations | |
| (0.25 | ) | |
| (0.03 | ) |
Total | |
$ | (0.75 | ) | |
$ | (0.37 | ) |
| |
| | | |
| | |
Weighted-average shares used in computing net loss per share: | |
| | | |
| | |
Basic | |
| 19,574 | | |
| 19,293 | |
Diluted | |
| 19,574 | | |
| 19,293 | |
See
accompanying notes to consolidated financial statements and report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Consolidated
Statements of Comprehensive Loss
(In
thousands)
| |
Years Ended December 31, | |
| |
2023 | | |
2022 | |
Net loss | |
$ | (14,641 | ) | |
$ | (7,154 | ) |
Adjustment to postretirement benefit obligation | |
| | | |
| | |
Prior service credit | |
| (24 | ) | |
| (24 | ) |
Net actuarial gain | |
| 7 | | |
| 5 | |
Total adjustment to postretirement benefit obligation | |
| (17 | ) | |
| (19 | ) |
Removal of unrealized gain on available-for sale securities of equity method holding | |
| - | | |
| (121 | ) |
Currency translation adjustment: | |
| | | |
| | |
Unrealized net change arising during year | |
| 593 | | |
| (1,370 | ) |
Total other comprehensive income (loss) | |
| 576 | | |
| (1,510 | ) |
Comprehensive loss | |
| (14,065 | ) | |
| (8,664 | ) |
Comprehensive loss attributable to non-controlling interest | |
| (564 | ) | |
| - | |
Comprehensive loss attributable to FG Group Holdings | |
$ | (13,501 | ) | |
$ | (8,664 | ) |
See
accompanying notes to consolidated financial statements and report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Consolidated
Statements of Stockholders’ Equity
Years
Ended December 31, 2023 and 2022
($
and shares in thousands)
| |
Common
Stock
(Shares) | | |
Common
Stock
($) | | |
Additional
Paid-In
Capital | | |
Retained
Earnings | | |
Treasury
Stock | | |
Accumulated
Other
Comprehensive
Loss | | |
Total
FG Group
Holdings
Stockholders’
Equity | | |
Non-
Controlling
Interest | | |
Total
Stockholders’
Equity | |
Balance at December 31, 2021 | |
| 21,286 | | |
$ | 213 | | |
$ | 50,807 | | |
$ | 23,591 | | |
$ | (18,586 | ) | |
$ | (3,748 | ) | |
$ | 52,277 | | |
$ | - | | |
$ | 52,277 | |
Net loss | |
| - | | |
| - | | |
| - | | |
| (7,154 | ) | |
| - | | |
| - | | |
| (7,154 | ) | |
| - | | |
| (7,154 | ) |
Net other comprehensive loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,510 | ) | |
| (1,510 | ) | |
| - | | |
| (1,510 | ) |
Vesting of restricted stock | |
| 217 | | |
| 2 | | |
| (28 | ) | |
| - | | |
| - | | |
| - | | |
| (26 | ) | |
| - | | |
| (26 | ) |
Issuance of common stock | |
| 761 | | |
| 8 | | |
| 2,342 | | |
| - | | |
| - | | |
| - | | |
| 2,350 | | |
| - | | |
| 2,350 | |
Issuance of warrants | |
| - | | |
| - | | |
| 109 | | |
| - | | |
| - | | |
| - | | |
| 109 | | |
| - | | |
| 109 | |
Stock-based compensation expense | |
| - | | |
| - | | |
| 652 | | |
| - | | |
| - | | |
| - | | |
| 652 | | |
| - | | |
| 652 | |
Balance at December 31, 2022 | |
| 22,264 | | |
$ | 223 | | |
$ | 53,882 | | |
$ | 16,437 | | |
$ | (18,586 | ) | |
$ | (5,258 | ) | |
$ | 46,698 | | |
$ | - | | |
$ | 46,698 | |
Cumulative effect of adoption of accounting principle | |
| - | | |
| - | | |
| - | | |
| (24 | ) | |
| - | | |
| - | | |
| (24 | ) | |
| - | | |
| (24 | ) |
Net loss | |
| - | | |
| - | | |
| - | | |
| (14,077 | ) | |
| - | | |
| - | | |
| (14,077 | ) | |
| (564 | ) | |
| (14,641 | ) |
Net other comprehensive loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 576 | | |
| 576 | | |
| - | | |
| 576 | |
Vesting of restricted stock | |
| 239 | | |
| 2 | | |
| (2 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Payments of withholding taxes for net share settlement of equity awards | |
| - | | |
| - | | |
| (147 | ) | |
| - | | |
| - | | |
| - | | |
| (147 | ) | |
| - | | |
| (147 | ) |
Issuance of SGE common stock in connection with acquisition of ICS | |
| - | | |
| - | | |
| 147 | | |
| - | | |
| - | | |
| - | | |
| 147 | | |
| 46 | | |
| 193 | |
Issuance of SGE common stock in connection with acquisition of Unbounded | |
| - | | |
| - | | |
| 924 | | |
| - | | |
| - | | |
| - | | |
| 924 | | |
| 270 | | |
| 1,194 | |
IPO of Strong Global Entertainment, Inc. and issuance of Landmark warrant, net of costs | |
| - | | |
| - | | |
| 1,341 | | |
| - | | |
| - | | |
| - | | |
| 1,341 | | |
| 212 | | |
| 1,553 | |
Non-controlling interest allocation | |
| - | | |
| - | | |
| (1,894 | ) | |
| - | | |
| - | | |
| - | | |
| (1,894 | ) | |
| 1,894 | | |
| - | |
Stock-based compensation expense | |
| - | | |
| - | | |
| 1,605 | | |
| - | | |
| - | | |
| - | | |
| 1,605 | | |
| - | | |
| 1,605 | |
Balance at December 31, 2023 | |
| 22,503 | | |
$ | 225 | | |
$ | 55,856 | | |
$ | 2,336 | | |
$ | (18,586 | ) | |
$ | (4,682 | ) | |
$ | 35,149 | | |
$ | 1,858 | | |
$ | 37,007 | |
See
accompanying notes to consolidated financial statements and report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(In
thousands)
| |
Years Ended December 31, | |
| |
2023 | | |
2022 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss from continuing operations | |
$ | (9,781 | ) | |
$ | (6,599 | ) |
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities: | |
| | | |
| | |
Recovery of doubtful accounts | |
| (62 | ) | |
| (30 | ) |
(Benefit from) provision for obsolete inventory | |
| (35 | ) | |
| 49 | |
Provision for warranty | |
| 347 | | |
| 303 | |
Depreciation and amortization | |
| 1,136 | | |
| 1,397 | |
Amortization and accretion of operating leases | |
| 290 | | |
| 195 | |
Equity method holding loss (income) | |
| 3,261 | | |
| (403 | ) |
Unrealized loss on equity holdings | |
| 6,176 | | |
| 4,468 | |
Adjustment to promissory note in connection with prepayment | |
| - | | |
| 202 | |
Loss on disposal of assets | |
| - | | |
| 474 | |
Deferred income taxes | |
| (1,137 | ) | |
| (653 | ) |
Stock-based compensation expense | |
| 1,605 | | |
| 652 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 2,207 | | |
| (1,614 | ) |
Inventories | |
| 39 | | |
| (309 | ) |
Current income taxes | |
| 140 | | |
| 329 | |
Other assets | |
| 511 | | |
| 2,235 | |
Accounts payable and accrued expenses | |
| (1,703 | ) | |
| (1,064 | ) |
Deferred revenue and customer deposits | |
| (796 | ) | |
| (1,476 | ) |
Operating lease obligations | |
| (294 | ) | |
| (193 | ) |
Net cash provided by (used in) operating activities from continuing operations | |
| 1,904 | | |
| (2,037 | ) |
Net cash used in operating activities from discontinued operations | |
| (1,748 | ) | |
| (1,535 | ) |
Net cash provided by (used in) operating activities | |
| 156 | | |
| (3,572 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Capital expenditures | |
| (448 | ) | |
| (915 | ) |
Acquisition ICS assets, net of cash acquired | |
| 58 | | |
| - | |
Sale of equity holdings | |
| 198 | | |
| 498 | |
Purchase of common shares of FG Financial Group, Inc. (Note 8) | |
| - | | |
| (2,000 | ) |
Receipt of promissory note | |
| - | | |
| 2,300 | |
Net cash used in investing activities from continuing operations | |
| (192 | ) | |
| (117 | ) |
Net cash used in investing activities from discontinued operations | |
| (503 | ) | |
| (459 | ) |
Net cash used in investing activities | |
| (695 | ) | |
| (576 | ) |
See
accompanying notes to consolidated financial statements and report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (continued)
(In
thousands)
| |
Years Ended December 31, | |
| |
2023 | | |
2022 | |
Cash flows from financing activities: | |
| | | |
| | |
Principal payments on short-term debt | |
| (936 | ) | |
| (697 | ) |
Principal payments on long-term debt | |
| (224 | ) | |
| (164 | ) |
Payments of withholding taxes related to net share settlement of equity awards | |
| (135 | ) | |
| (27 | ) |
Proceeds from Strong Global Entertainment initial public offering | |
| 2,411 | | |
| - | |
Borrowings under credit facility | |
| 9,604 | | |
| - | |
Repayments under credit facility | |
| (7,178 | ) | |
| - | |
Payments on capital lease obligations | |
| (159 | ) | |
| (36 | ) |
Net cash provided by (used in) financing activities from continuing operations | |
| 3,383 | | |
| (924 | ) |
Net cash used in financing activities from discontinued operations | |
| - | | |
| - | |
Net cash provided by (used in) financing activities | |
| 3,383 | | |
| (924 | ) |
Effect of exchange rate changes on cash and cash equivalents | |
| 11 | | |
| (20 | ) |
Net increase (decrease) in cash and cash equivalents from continuing operations | |
| 5,106 | | |
| (5,092 | ) |
Net decrease in cash and cash equivalents from discontinued operations | |
| (2,251 | ) | |
| (1,994 | ) |
Net increase (decrease) in cash and cash equivalents | |
| 2,855 | | |
| (5,092 | ) |
Cash and cash equivalents at beginning of year | |
| 3,789 | | |
| 8,881 | |
Cash and cash equivalents at end of year | |
$ | 6,644 | | |
$ | 3,789 | |
| |
| | | |
| | |
Supplemental disclosure of cash paid for: | |
| | | |
| | |
Interest | |
$ | 693 | | |
$ | 322 | |
Income taxes | |
$ | 526 | | |
$ | 826 | |
| |
| | | |
| | |
Supplemental disclosure of non-cash investing and financing activities (refer to notes to consolidated financial statements for further disclosures on other non-cash investing and financing activities): | |
| | | |
| | |
Issuance of debt, common shares, and warrants in connection with purchase of Digital Ignition building | |
$ | - | | |
$ | 7,609 | |
See
accompanying notes to consolidated financial statements and report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
1.
Business Description and Basis of Presentation
Business
Description
FG
Group Holdings Inc. (previously Ballantyne Strong, Inc.) (“FG Group Holdings,” or the “Company”), a Nevada corporation,
is a holding company. The Company’s holdings primarily consist of equity securities in public and private companies and real estate
holdings in the United States and Canada.
The
Company has historically conducted a large portion of its operations primarily through its Strong Entertainment operating segment. The
Company completed the Separation (as defined below) and initial public offering (“IPO”) of the Strong Entertainment business
on May 18, 2023. Following this transaction, Strong Global Entertainment became a separate publicly listed company, and FG Group Holdings
holds approximately 76% of the Class A common shares and 100% of the Class B common shares as of December 31, 2023. As the Company continues
to be the majority shareholder of Strong Global Entertainment, the financial results of Strong Global Entertainment are presented on
a consolidated basis in the Company’s consolidated financial statements. The Company reports the noncontrolling interest in Strong
Global Entertainment as a component of equity separate from the Company’s equity. The Company’s net loss excludes the net
loss attributable to the noncontrolling interest.
Strong
Global Entertainment manufactures and distributes premium large format projection screens and provides technical support services and
other related products and services to the cinema exhibition industry, theme parks, schools, museums and other entertainment-related
markets. Strong Entertainment also distributes and supports third party products, including digital projectors, servers, library management
systems, menu boards and sound systems. As of December 31, 2023, the board of directors of Strong Global Entertainment approved a plan
to exit its content business, including Strong Studios, Inc. (“Strong Studios”) and Unbounded Media Corporation (“Unbounded”
and collectively with Strong Studios, the “Content Business”) and authorized management to proceed with such plan. The plan
is expected to improve the Company’s focus on its core businesses, reduce general and administrative costs, and improve financial
performance. See Note 3 for additional details of the shutdown of the Content Business.
Following
the Separation and IPO, the operations of the Strong Entertainment operating segment are part of a newly established British Columbia
corporation, Strong Global Entertainment, Inc. (“Strong Global Entertainment”). Strong Global Entertainment’s common
shares are listed on the NYSE American under the ticker symbol “SGE.” In connection with the IPO, the Company and Strong
Global Entertainment (and the subsidiaries of each) entered into a Master Asset Purchase Agreement, an IP Assignment Agreement, the FG
Group Holdings Asset Transfer Agreement, the FG Group Holdings IP Assignment Agreement, the Joliette Plant Lease, the Share Transfer
Agreements and a number of other agreements to govern the separation of the legacy Strong Entertainment business from the Company and
the contribution of certain of the related business and assets to Strong Global Entertainment (the “Separation”). Under the
Management Services Agreement, Strong Global Entertainment and the Company provide certain services to each other, which include information
technology, legal, finance and accounting, human resources, tax, treasury, and other services, and charges a fee that is based on its
actual costs and expenses for those services in the future (with mark-up, if necessary, to comply with applicable transfer pricing principles
under Canadian and U.S. tax regulations).
The
Company owns and operates its Digital Ignition technology incubator and co-working facility in Alpharetta, Georgia.
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and all majority owned and controlled domestic and foreign subsidiaries.
All significant intercompany balances and transactions have been eliminated in consolidation.
The
preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results and changes in facts and circumstances may alter such estimates and affect results of operations and financial
position in future periods.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
2.
Summary of Significant Accounting Policies
Revenue
Recognition
The
Company accounts for revenue using the following steps:
|
● |
Identify
the contract, or contracts, with a customer; |
|
● |
Identify
the performance obligations in the contract; |
|
● |
Determine
the transaction price; |
|
● |
Allocate
the transaction price to the identified performance obligations; and |
|
● |
Recognize
revenue when, or as, the Company satisfies the performance obligations. |
The
Company combines contracts with the same customer into a single contract for accounting purposes when the contracts are entered into
at or near the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends on the
other contract, or the services are considered a single performance obligation. If an arrangement involves multiple performance obligations,
the items are analyzed to determine whether they are distinct, whether the items have value on a standalone basis, and whether there
is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified
performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price
is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using
a cost-plus margin approach. The Company estimates the amount of total contract consideration it expects to receive for variable arrangements
by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects
to provide and the contractual pricing based on those quantities. The Company only includes a portion of variable consideration in the
transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or when
the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate,
its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the
magnitude of the variable consideration to the overall arrangement.
As
discussed in more detail below, revenue is recognized when a customer obtains control of promised goods or services under the terms of
a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing
services. The Company typically does not have any material extended payment terms, as payment is due at or shortly after the time of
the sale. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue.
The
Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced
to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration.
A contract liability is recognized as deferred revenue when the Company invoices clients, or receives cash, in advance of performing
the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related
performance obligation.
The
Company defers costs to acquire contracts, including commissions, incentives and payroll taxes, if they are incremental and recoverable
costs of obtaining a customer contract with a term exceeding one year. Deferred contract costs are reported within other assets and amortized
to selling expense over the contract term, which generally ranges from one to five years. The Company has elected to recognize the incremental
costs of obtaining a contract with a term of less than one year as a selling expense when incurred. The Company did not have any deferred
contract costs as of December 31, 2023 or December 31, 2022.
Screen
system sales
The
Company typically recognizes revenue on the sale of its screen systems when control of the screen is transferred to the customer, usually
at time of shipment. However, revenue is recognized upon delivery for certain international shipments with longer shipping transit times
because control transfers upon customer delivery. The cost of freight and shipping to the customer is recognized in cost of sales at
the time of transfer of control to the customer. For contracts that are long-term in nature, the Company believes that the use of the
percentage-of-completion method is appropriate as the Company has the ability to make reasonably dependable estimates of the extent of
progress towards completion, contract revenues, and contract costs. Under the percentage-of-completion method, revenue is recorded based
on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
Digital
equipment sales
The
Company recognizes revenue on sales of digital equipment when the control of the equipment is transferred, which typically occurs at
the time of shipment from the Company’s warehouse or drop-shipment from a third party. The cost of freight and shipping to the
customer is recognized in cost of sales at the time of transfer of control to the customer. The Company typically records revenue for
drop-shipment orders on a gross basis as the Company (i) is responsible for fulfilling the order, (ii) has inventory risk, (iii) would
be the recipient of any returned items and (iv) has discretion over pricing. The cost of freight and shipping to the customer is recognized
in cost of sales at the time of transfer of control to the customer.
Field
maintenance and monitoring services
The
Company sells service contracts that provide maintenance and monitoring services to its Strong Entertainment customers. These contracts
are generally 12 months in length. Revenue related to service contracts is recognized ratably over the term of the agreement.
In
addition to selling service contracts, the Company also performs discrete time and materials-based maintenance and repair work for customers.
Revenue related to time and materials-based maintenance and repair work is recognized at the point in time when the performance obligation
has been fully satisfied.
Installation
services
The
Company performs installation services for its customers and recognizes revenue upon completion of the installations.
Extended
warranty sales
The
Company sells extended warranties to its customers. Typically, the Company is the primary obligor, and revenue is recognized on a gross
basis ratably over the term of the extended warranty.
Cash
and Cash Equivalents
All
short-term, highly liquid financial instruments are classified as cash equivalents in the consolidated balance sheets and statements
of cash flows. Generally, these instruments have maturities of three months or less from date of purchase. As of December 31, 2023, $0.6
million of the $6.6 million in cash and cash equivalents was held by our foreign subsidiary.
Equity
Holdings
The
Company accounts for its equity holdings using the equity method, at cost, or at fair value depending on the facts and circumstances
related to each individual holding. The Company applies the equity method of accounting to its holdings when it has significant influence,
but not controlling interest, in the entity. Judgment regarding the level of influence over each equity method holding includes considering
key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material
intercompany transactions. The Company’s proportionate share of the net loss resulting from its equity method holdings is reported
under the line item captioned “equity method holding loss” in our consolidated statements of operations. The Company’s
equity method holding is reported at cost and adjusted each period for the Company’s share of the entity’s income or loss
and dividends paid, if any. The Company classifies distributions received from equity method holdings using the cumulative earnings approach
on the consolidated statements of cash flows.
Changes
in fair value of holdings in marketable equity securities of unconsolidated entities in which the Company is not able to exercise significant
influence (“Fair Value Holdings”) are recognized on the consolidated statement of operations. Nonmarketable equity holdings
in unconsolidated entities in which the Company is not able to exercise significant influence (“Cost Method Holdings”) are
accounted for at the Company’s initial cost, minus any impairment (if any), plus or minus changes resulting from observable price
changes in orderly transactions for the identical or a similar holding or security of the same issuer. Dividends on Fair Value Holdings
and Cost Method Holdings received are recorded as income.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
The
Company assesses its equity holdings for impairment whenever events or changes in circumstances indicate that the carrying value of an
equity holding may not be recoverable. Management reviewed the underlying net assets of the Company’s equity method holding as
of December 31, 2023 and 2022, and determined that the Company’s proportionate economic interest in the entity indicates that the
equity holding was not impaired. There were no observable price changes in orderly transactions for an identical or similar holding or
security of the Company’s Cost Method Holding during the years ended December 31, 2023 and 2022. The carrying value of our equity
method, Fair Value Holdings and Cost Method Holdings is reported as “equity holdings” on the accompanying consolidated balance
sheets. Note 8 contains additional information on our equity method, Fair Value Holdings and Cost Method Holdings.
Accounts
Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. The Company determines the allowance for expected credit
losses based on several factors, including overall customer credit quality, historical write-off experience and a specific analysis that
projects the ultimate collectability of the account. As such, these factors may change over time causing the allowance level and bad
debt expense to be adjusted accordingly. The accounts receivable balances on the consolidated balance sheets are net of an allowance
for expected credit losses of $0.2 million and $0.4 million as of December 31, 2023 and 2022, respectively. Past due accounts are written
off when our efforts have been unsuccessful in collecting amounts due.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or net realizable value. Inventories include appropriate elements of material,
labor and manufacturing overhead. Inventory balances are net of reserves on slow moving or obsolete inventory. The Company reviews its
inventory on hand on an item-by-item basis for obsolete or slow moving inventory. The Company’s management considers various factors
to estimate each item’s net realizable value including recent sales history, industry trends, customer demand, and technological
developments. In instances where net realizable is deemed to be lower than cost, the Company decreases the value of that inventory to
the estimated net realizable value.
Business
Combinations
The
Company uses the acquisition method of accounting for acquired businesses. Under the acquisition method, the financial statements reflect
the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are
recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated
fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in estimating the
fair value of assets acquired, particularly intangible assets. As a result, in the case of significant acquisitions, the Company normally
obtains the assistance of third-party valuation specialists in estimating fair values of tangible and intangible assets. The fair value
estimates are based on available historical information and on expectations and assumptions about the future, considering the perspective
of marketplace participants. While management believes those expectations and assumptions are reasonable, they are inherently uncertain.
Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates
and assumptions.
Intangible
Assets
The
Company’s intangible assets consist primarily of costs incurred to develop or obtain software, as well as costs incurred for upgrades
and enhancements resulting in new or enhanced functionality. The Company evaluates its intangible assets for impairment when events or
circumstances indicate that the carrying amount of these assets may not be recoverable. Intangible assets with definite lives are amortized
over their respective estimated useful lives to their estimated residual values. Significant judgments and assumptions are required in
the impairment evaluations and in estimating useful lives.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
Goodwill
Goodwill
is not amortized and is tested for impairment at least annually, or whenever events or changes in circumstances indicate the carrying
amount of the asset may be impaired. The annual impairment test is performed as of December 31 each year. Significant judgment is involved
in determining if an indicator of impairment has occurred. The Company may consider indicators such as deterioration in general economic
conditions, adverse changes in the markets in which the reporting unit operates, increases in input costs that have negative effects
on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could
be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.
The
Company may first review for goodwill impairment by assessing qualitative factors to determine whether any impairment may exist. For
a reporting unit in which the Company concludes, based on the qualitative assessment, that it is more likely than not that the fair value
of the reporting unit is less than its carrying amount (or if the Company elects to skip the optional qualitative assessment), the Company
is required to perform a quantitative impairment test, which includes measuring the fair value of the reporting unit and comparing it
to the reporting unit’s carrying amount. If the fair value of a reporting unit exceeds its carrying value, the goodwill of the
reporting unit is not impaired. If the carrying value of a reporting unit exceeds its fair value, the Company must record an impairment
loss for the amount that the carrying value of the reporting unit, including goodwill, exceeds the fair value of the reporting unit.
Goodwill
was recorded in connection with the acquisition of Peintures Elite, Inc. in 2013. A qualitative assessment was performed as of December
31, 2023 and 2022, and it was determined that no events had occurred that would indicate an impairment was more likely than not.
Property,
Plant and Equipment
Significant
expenditures for the replacement or expansion of property, plant and equipment are capitalized. Depreciation of property, plant and equipment
is provided over the estimated useful lives of the respective assets using the straight-line method. For financial reporting purposes,
assets are depreciated over the estimated useful lives of 20 years for buildings and improvements, the lesser of the lease term or the
estimated useful life for leasehold improvements, three to ten years for machinery and equipment, seven years for furniture and fixtures
and three years for computers and accessories. The Company generally uses accelerated methods of depreciation for income tax purposes.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The recoverability of property, plant and equipment is based on management’s estimates of future
undiscounted cash flows and these estimates may vary due to a number of factors, some of which may be outside of management’s control.
To the extent that the Company is unable to achieve management’s forecasts of future income, it may become necessary to record
impairment losses for any excess of the net book value of property, plant and equipment over their fair value.
The
Company incurs maintenance costs on all of its major equipment. Repair and maintenance costs are expensed as incurred.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. The Company uses an estimate of its annual effective rate at each interim
period based on the facts and circumstances at the time while the actual effective rate is calculated at year-end. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred 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 enactment date. In assessing whether the deferred tax assets are realizable, management considers
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The
Company’s uncertain tax positions are evaluated in a two-step process, whereby 1) the Company determines whether it is more likely
than not that the tax positions will be sustained based on the technical merits of the position and 2) for those tax positions that meet
the more likely than not recognition threshold, the Company would recognize the largest amount of tax benefit that is greater than fifty
percent likely to be realized upon ultimate settlement with the related tax authority. The Company accrues interest and penalties related
to uncertain tax positions in the consolidated statements of operations as income tax expense.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
Other
Taxes
Sales
taxes assessed by governmental authorities, including sales, use and excise taxes, are recorded on a net basis. Such taxes are excluded
from revenues and are shown as a liability on the consolidated balance sheet until remitted to the appropriate taxing authorities.
Research
and Development
Research
and development related costs are charged to operations in the period incurred. Such costs amounted to $0.3 million for each of the years
ended December 31, 2023 and 2022 and are included within administrative expenses on the consolidated statements of operations.
Advertising
Costs
Advertising
and promotional costs are expensed as incurred and amounted to approximately $0.3 million and $0.2 million for the years ended December
31, 2023 and 2022, respectively, and are included within selling expenses on the consolidated statements of operations
Fair
Value of Financial and Derivative Instruments
Assets
and liabilities measured at fair value are categorized into a fair value hierarchy based upon the observability of inputs to the valuation
of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing
the asset or liability, including assumptions about risk. The categorization within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. Financial assets and liabilities carried at fair value are classified
and disclosed in one of the following three categories:
|
● |
Level
1 – |
inputs
to the valuation techniques are quoted prices in active markets for identical assets or liabilities |
|
● |
Level
2 – |
inputs
to the valuation techniques are other than quoted prices but are observable for the
assets
or liabilities, either directly or indirectly |
|
● |
Level
3 – |
inputs
to the valuation techniques are unobservable for the assets or liabilities |
The
following tables present the Company’s financial assets and liabilities measured at fair value based upon the level within the
fair value hierarchy in which the fair value measurements fall, as of December 31, 2023 and 2022.
Fair
values measured on a recurring basis at December 31, 2023 (in thousands):
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Cash and cash equivalents | |
$ | 6,644 | | |
$ | - | | |
$ | - | | |
$ | 6,644 | |
| |
| | | |
| | | |
| | | |
| | |
Fair value method holding | |
| 10,552 | | |
| - | | |
| - | | |
| 10,552 | |
Total | |
$ | 17,196 | | |
$ | - | | |
$ | - | | |
$ | 17,196 | |
Fair
values measured on a recurring basis at December 31, 2022 (in thousands):
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Cash and cash equivalents | |
$ | 3,789 | | |
$ | - | | |
$ | - | | |
$ | 3,789 | |
| |
| | | |
| | | |
| | | |
| | |
Fair value method holding | |
| 16,792 | | |
| - | | |
| - | | |
| 16,792 | |
Total | |
$ | 20,581 | | |
$ | - | | |
$ | - | | |
$ | 20,581 | |
The
carrying values of all other financial assets and liabilities, including accounts receivable, accounts payable, accrued expenses and
short-term debt reported in the consolidated balance sheets equal or approximate their fair values due to the short-term nature of these
instruments. Based on a combination of the cash on hand as well as quoted market prices of the securities held by FGF Holdings (as defined
below), the liquidation value of the Company’s equity method holding was $4.6 million at December 31, 2023 (see Note 8).
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
All
non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which include
non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment).
Loss
Per Common Share
Basic
net loss per share has been computed on the basis of the weighted average number of shares of common stock outstanding. In periods when
the Company reported a net loss, there were no differences between average shares used to compute basic and diluted loss per share as
inclusion of stock options and restricted stock units would have been anti-dilutive in those periods.
A
total of 227,452 and 136,055 common stock equivalents related to stock options and restricted stock units were excluded for the year
ended December 31, 2023 and December 31, 2022, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net loss
per share.
In
addition, options to purchase 490,000 and 489,500 shares of common stock were outstanding as of December 31, 2023 and December 31, 2022,
respectively, but were not included in the computation of diluted income (loss) per share as the options’ exercise prices were
greater than the average market price of the common shares for each year.
Stock
Compensation Plans
The
Company recognizes compensation expense for all stock-based payment awards based on estimated fair values on the date of grant. The Company
uses the straight-line amortization method over the vesting period of the awards. The Company has historically issued shares upon exercise
of stock options or vesting of restricted stock from new stock issuances. The Company estimates the fair value of restricted stock awards
based upon the market price of the underlying common stock on the date of grant. The fair value of stock options granted is calculated
using the Black-Scholes option pricing model. No stock-based compensation cost was capitalized as a part of inventory in 2023 and 2022.
Post-Retirement
Benefits
The
Company recognizes the overfunded or underfunded position of a defined benefit postretirement plan as an asset or liability in the consolidated
balance sheet, measures the plan’s assets and its obligations that determine its funded status as of each consolidated balance
sheet date and recognizes the changes in the funded status through comprehensive loss in the year in which the changes occur.
Foreign
Currency Translation
For
the Company’s foreign subsidiary, the environment in which the business conducts operations is considered the functional currency,
generally the local currency. The assets and liabilities of the foreign subsidiary are translated into the United States dollar at the
foreign exchange rates in effect at the end of the period. Revenue and expenses of the Company’s foreign subsidiary are translated
using an average of the foreign exchange rates in effect during the period. Translation adjustments are not included in determining net
earnings but are presented in comprehensive loss within the consolidated statements of comprehensive loss. Transaction gains and losses
that arise from foreign exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included
in the consolidated statements of operations as incurred. If the Company disposes of its holding in a foreign entity, any gain or loss
on currency translation balance recorded in accumulated other comprehensive loss would be recognized as part of the gain or loss on disposition.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
Warranty
Reserves
In
most instances, digital products are covered by the manufacturing firm’s warranty; however, for certain customers, the Company
may grant warranties in excess of the manufacturer’s warranty. In addition, the Company provides warranty coverage on screens it
manufactures. The Company accrues for these costs at the time of sale. The following table summarizes warranty activity for the years
ended December 31 (in thousands):
| |
2023 | | |
2022 | |
Warranty accrual at beginning of year | |
$ | 309 | | |
$ | 136 | |
Charged to expense | |
| 347 | | |
| 299 | |
Claims paid, net of recoveries | |
| (192 | ) | |
| (117 | ) |
Foreign currency adjustment | |
| 11 | | |
| (9 | ) |
Warranty accrual at end of year | |
$ | 475 | | |
$ | 309 | |
Contingencies
The
Company accrues for contingencies when its assessments indicate that it is probable that a liability has been incurred and an amount
can be reasonably estimated. The Company’s estimates are based on currently available facts and its estimates of the ultimate outcome
or resolution. Actual results may differ from the Company’s estimates, resulting in an impact, positive or negative, on earnings.
Recently
Adopted Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments.” This ASU requires the measurement of all expected credit losses for financial assets, including trade
receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.
The Company adopted this ASU effective January 1, 2023. Upon adoption the Company recorded a cumulative effect adjustment decreasing
net parent investment by $24,000.
In
October 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-06,
“Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”
(“ASU 2023-06”). This ASU incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification
(“ASC”). The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety
of ASC Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were
not previously subject to the requirements, and align the requirements in the ASC with the SEC’s regulations. The ASU has an unusual
effective date and transition requirements since it is contingent on future SEC rule setting. If the SEC fails to enact required changes
by June 30, 2027, this ASU is not effective for any entities. Early adoption is not permitted.
In
November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires
companies to enhance the disclosures about segment expenses. The new standard requires the disclosure of the Company’s Chief Operating
Decision Maker (“CODM”), expanded incremental line-item disclosures of significant segment expenses used by the CODM for
decision-making, and the inclusion of previous annual only segment disclosure requirements on a quarterly basis. This ASU should be applied
retrospectively for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15,
2024. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on the Company’s consolidated
financial statements.
In
December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Taxes Disclosures, which requires greater
disaggregation of income tax disclosures. The new standard requires additional information to be disclosed with respect to the income
tax rate reconciliation and income taxes paid disaggregated by jurisdiction. This ASU should be applied prospectively for fiscal years
beginning after December 15, 2024, with retrospective application permitted. The Company is currently evaluating the impacts of this
guidance on the Company’s consolidated financial statements.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
In
March 2024, the FASB issued ASU 2024-02 “Codification Improvements – Amendments to Remove References to the Concepts Statements.”
The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2024. For all
other entities, the amendments are effective for fiscal years beginning after December 15, 2025. Early application of the amendments
in this update is permitted for all entities, for any fiscal year or interim period for which financial statements have not yet been
issued (or made available for issuance). If an entity adopts the amendments in an interim period, it must adopt them as of the beginning
of the fiscal year that includes that interim period. The Company is currently evaluating the impact that the adoption of this standard
will have on its consolidated financial statements.
3.
Discontinued Operations
In
March 2022, Strong Studios acquired, from Landmark Studio Group LLC (“Landmark”), the rights to original feature films and
television series, and was assigned third party rights to content for global multiplatform distribution. The transaction entailed the
acquisition of certain projects which are in varying stages of development. During the second quarter of 2022, Safehaven 2022, Inc. (“Safehaven
2022”) was established to manage the production and financing of the Safehaven television series, one of the in-process
projects acquired from Landmark.
In
September 2023, the Company acquired all of the outstanding capital stock of Unbounded, an independent media and creative production
company. In connection with the acquisition of Unbounded, the Company issued 0.6 million Class A Voting Common Shares. Unbounded developed,
created and produced film, advertising, and branded content for a broad range of clients. The Company expected Unbounded, in partnership
with Strong Studios, would also further develop its original IP portfolio, under its Fieldhouse Entertainment division, which included
feature films employing Strong Studios’ long form production expertise and industry network.
As
of December 31, 2023, the board of directors of Strong Global Entertainment approved the Company’s plan to exit its content business,
including Strong Studios and Unbounded and authorized management to proceed with such plan. The plan is expected to improve the Company’s
focus on its core businesses, reduce general and administrative costs, and improve financial performance. The Company may receive proceeds
from the disposition of certain parts of the business and could recover development costs incurred in certain of the Strong Studios projects
in the future; however, any recovery is highly speculative, and management is not able to estimate the amount, timing or likelihood of
recoveries. These estimates may change based on the ultimate disposition of the operations and potential recoveries.
The
Company evaluated the classification of the content business as a discontinued operation as of December 31, 2023. The content business
included employees and operations that were dedicated solely to that portion of the overall business. In addition, the Company’s
accounting system and bank accounts were set up in a manner that allowed for the cash flows to be clearly distinguished from the rest
of the entity. The Company determined its content business is a component of an entity and represented a discontinued operation effective
December 31, 2023. As noted above, management began implementing the exit plan in late December 2023. All employees of the content business
were notified of the Company’s plans to exit the business in December 2023 and management immediately began working to implement
the exit plan.
In
connection with the plan to exit the content business, the Company shut down the acquired Unbounded operations effective December 31,
2023.
The
Company also entered into a letter of intent during December 2023 and executed a Stock Purchase Agreement effective January 1, 2024 for
the sale of the majority of the Strong Studios operations. As a result, the Company has classified the assets and liabilities to reflected
as discontinued operations as of December 31, 2023.
Pursuant
to the Stock Purchase Agreement, the Company transferred the Strong Studios legal entity and all assets and liabilities related to Strong
Studios, except the assets and liabilities related to Safehaven. The Stock Purchase Agreement included a sales price of $0.6 million
in cash, to be paid in installments, and assumption of all liabilities except for Safehaven. In addition to the $0.6 million purchase
price, the Company could recoup its investments in the underlying projects in the future if the projects are profitably commercialized.
The first installment payment was due in February 2024, but the payment has not been received from the purchaser, and the Company is
uncertain if the cash purchase price will ultimately be received. As a result, the Company has adjusted the carrying value of the net
assets related to Strong Studios to $0, which resulted in a loss on disposal of $0.6 million.
As
a result of the shutdown of Unbounded and the sale of all outstanding shares of Strong Studios, the Company recorded a loss on disposal
of discontinued operations of $2.3 million during 2023.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
The
Safehaven series, a fully complete and readily marketable project under Strong Studios, was not transferred as part of the sale.
The Safehaven series was completed in mid-2023, and the Company and the other investors in the series began marketing the project
for sale during the second half of 2023. Currently, the parties are involved in a dispute relating to the financial management of the
project. The Company is working to resolve the dispute and management’s intent is to fully exit the project in 2024. As a result
of the ongoing dispute and the impact on the Company’s ability to predict any future revenue participation from the sale/license
of the series, the carrying value of the assets and liabilities has been adjusted to $0. The write down of the Safehaven film
and TV programming rights intangible asset was recorded within cost of revenues.
The
major classes of assets and liabilities included as part of discontinued operations are as follows (in thousands):
| |
December 31,
2023 | | |
December 31,
2022 | |
Accounts receivable, net | |
$ | 27 | | |
$ | - | |
Other current assets | |
| 7 | | |
| 1,666 | |
Film & TV programming rights | |
| 906 | | |
| 1,501 | |
Total assets of discontinued operations | |
$ | 940 | | |
$ | 3,167 | |
| |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 1,321 | | |
$ | 1,805 | |
Long-term debt, net of current portion | |
| 71 | | |
| - | |
Total liabilities of discontinued operations | |
$ | 1,392 | | |
$ | 1,805 | |
The
major line items constituting the net loss from discontinued operations are as follows (in thousands):
| |
Year Ended | |
| |
December 31,
2023 | | |
December 31,
2022 | |
Net revenues | |
$ | 6,385 | | |
$ | 914 | |
Cost of revenues | |
| 7,772 | | |
| 830 | |
Gross profit | |
| (1,387 | ) | |
| 84 | |
Selling and administrative expenses | |
| 1,203 | | |
| 639 | |
Loss on disposal of assets | |
| 2,268 | | |
| - | |
Loss from operations | |
| (4,858 | ) | |
| (555 | ) |
Other expense | |
| (2 | ) | |
| - | |
Loss from discontinued operations | |
| (4,860 | ) | |
| (555 | ) |
Income tax expense | |
| - | | |
| - | |
Net loss from discontinued operations | |
$ | (4,860 | ) | |
$ | (555 | ) |
4.
Acquisition of the Assets of Innovative Cinema Solutions
On
November 3, 2023, Strong Technical Services, Inc. (“STS”) entered into an asset purchase agreement with Innovative Cinema
Solutions, LLC (“ICS”), a full-service provider of technical services and solutions to national cinema chains. The operations
of ICS are being integrated into the existing operations of STS. The purchase price included $0.2 million in cash, $0.2 million worth
of Common Shares of SGE, and the issuance of a $0.5 million promissory note by STS.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
The
following table summarizes the fair values assigned to the net assets acquired and the liabilities assumed as part of the acquisition
of ICS (in thousands):
Cash | |
$ | 160 | |
Accounts receivable | |
| 2,435 | |
Inventory | |
| 638 | |
Property, plant and equipment | |
| 7 | |
Operating lease right-of-use asset | |
| 183 | |
Other current assets | |
| 12 | |
Total identifiable assets acquired | |
| 3,435 | |
| |
| | |
Accounts payable and accrued expenses | |
| 1,337 | |
Promissory note | |
| 465 | |
Operating lease obligation | |
| 183 | |
Total liabilities assumed | |
| 1,985 | |
| |
| | |
Net assets acquired | |
$ | 1,450 | |
The
value of the net assets acquired exceeded the purchase price by approximately $1.0 million. As a result, the Company recorded a gain
on the bargain purchase during the year ended December 31, 2023, which is recorded within other income (expense), net on the consolidated
statement of operations.
As
stated in ASC 805, Business Combinations, the acquirer in a business combination has a period of time, referred to as the measurement
period, to finalize the accounting for a business combination. The measurement period provides companies with a reasonable period of
time to determine the value of identifiable tangible and intangible assets acquired, liabilities assumed, and the consideration transferred
for the acquiree. The measurement period ends when the acquirer receives all necessary information about the facts and circumstances
that existed as of the acquisition date for the provisional amounts (or otherwise learns that more information is not obtainable); however,
the measurement period cannot exceed one year from the acquisition date. The Company is in the process of finalizing the acquisition
purchase price and valuations of certain intangible assets; thus, the provisional measurements of intangible assets are subject to change.
Pro
forma results of operations for this acquisition have not been presented because the effects on net revenues and net (loss) income were
not material to the Company’s historical consolidated financial statements.
5.
Revenue
The
following tables disaggregate the Company’s revenue by major source for the years ended December 31, 2023 and December 31, 2022
(in thousands):
| |
Year Ended December 31, 2023 | | |
Year Ended December 31, 2022 | |
| |
Strong
Entertainment | | |
Other | | |
Total | | |
Strong
Entertainment | | |
Other | | |
Total | |
Screen system sales | |
$ | 14,925 | | |
$ | - | | |
$ | 14,925 | | |
$ | 13,923 | | |
$ | - | | |
$ | 13,923 | |
Digital equipment sales | |
| 12,937 | | |
| - | | |
| 12,937 | | |
| 13,245 | | |
| - | | |
| 13,245 | |
Extended warranty sales | |
| 182 | | |
| - | | |
| 182 | | |
| 347 | | |
| - | | |
| 347 | |
Other product sales | |
| 2,732 | | |
| - | | |
| 2,732 | | |
| 2,604 | | |
| - | | |
| 2,604 | |
Total product sales | |
| 30,776 | | |
| - | | |
| 30,776 | | |
| 30,119 | | |
| - | | |
| 30,119 | |
Field maintenance and monitoring services | |
| 7,808 | | |
| - | | |
| 7,808 | | |
| 6,797 | | |
| - | | |
| 6,797 | |
Installation services | |
| 3,508 | | |
| - | | |
| 3,508 | | |
| 1,889 | | |
| - | | |
| 1,889 | |
Other service revenues | |
| 524 | | |
| 712 | | |
| 1,236 | | |
| 148 | | |
| 1,370 | | |
| 1,518 | |
Total service revenues | |
| 11,840 | | |
| 712 | | |
| 12,552 | | |
| 8,834 | | |
| 1,370 | | |
| 10,204 | |
Total | |
$ | 42,616 | | |
$ | 712 | | |
$ | 43,328 | | |
$ | 38,953 | | |
$ | 1,370 | | |
$ | 40,323 | |
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
The
following tables disaggregate the Company’s revenue by the timing of transfer of goods or services to the customer for the years
ended December 31, 2023 and December 31, 2022 (in thousands):
| |
Year Ended December 31, 2022 | | |
Year Ended December 31, 2021 | |
| |
Strong
Entertainment | | |
Other | | |
Total | | |
Strong
Entertainment | | |
Other | | |
Total | |
Point in time | |
$ | 36,441 | | |
$ | 66 | | |
$ | 36,507 | | |
$ | 33,599 | | |
$ | 139 | | |
$ | 33,738 | |
Over time | |
| 6,175 | | |
| 646 | | |
| 6,821 | | |
| 5,354 | | |
| 1,231 | | |
| 6,585 | |
Total | |
$ | 42,616 | | |
$ | 712 | | |
$ | 43,328 | | |
$ | 38,953 | | |
$ | 1,370 | | |
$ | 40,323 | |
At
December 31, 2023, the unearned revenue amount associated with maintenance and monitoring services and extended warranty sales in which
the Company is the primary obligor was $0.8 million. The Company expects to recognize $0.8 million of unearned revenue amounts during
2024 and immaterial amounts during 2025-2026. The amount expected to be recorded during 2024 includes $0.2 million related to long-term
projects that the Company’s uses the percentage-of- completion method to recognize revenue.
6.
Inventories
| |
December 31,
2023 | | |
December 31,
2022 | |
Raw materials and components | |
$ | 2,021 | | |
$ | 1,826 | |
Work in process | |
| 443 | | |
| 279 | |
Finished goods | |
| 1,615 | | |
| 1,284 | |
| |
$ | 4,079 | | |
$ | 3,389 | |
The
inventory balances are net of reserves of approximately $0.4 million and $0.5 million as of December 31, 2023 and December 31, 2022,
respectively. The inventory reserves primarily related to the Company’s finished goods inventory.
The
following table details a roll-forward of the inventory reserve during 2023 (in thousands):
Inventory reserve balance at December 31, 2022 | |
$ | 486 | |
Inventory write-offs during 2023 | |
| (67 | ) |
Benefit from inventory reserve during 2023 | |
| (35 | ) |
Inventory reserve balance at December 31, 2023 | |
$ | 384 | |
7.
Property, Plant and Equipment
Property,
plant and equipment include the following (in thousands):
| |
December 31,
2023 | | |
December 31,
2022 | |
Land | |
$ | 2,342 | | |
$ | 2,341 | |
Buildings and improvements | |
| 9,484 | | |
| 12,756 | |
Machinery and other equipment | |
| 5,182 | | |
| 4,786 | |
Office furniture and fixtures | |
| 1,016 | | |
| 860 | |
Construction in progress | |
| - | | |
| 11 | |
Total properties, cost | |
| 18,024 | | |
| 20,754 | |
Less: accumulated depreciation | |
| (5,804 | ) | |
| (8,105 | ) |
Property, plant and equipment, net | |
$ | 12,220 | | |
$ | 12,649 | |
Depreciation
expense approximated $0.9 million and $1.3 million for the years ended December 31, 2023 and December 31, 2022, respectively.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
8.
Equity Holdings
The
following summarizes our equity holdings (dollars in thousands):
| |
December 31, 2023 | | |
December 31, 2022 | |
| |
Carrying
Amount | | |
Economic
Interest | | |
Carrying
Amount | | |
Economic
Interest | |
Equity Method Holding | |
| | | |
| | | |
| | | |
| | |
FG Financial Holdings, LLC | |
$ | 4,571 | | |
| 45.1 | % | |
$ | 7,832 | | |
| 47.2 | % |
| |
| | | |
| | | |
| | | |
| | |
Fair Value Method Holding | |
| | | |
| | | |
| | | |
| | |
GreenFirst Forest Products Inc. | |
| 10,552 | | |
| 8.3 | % | |
| 16,792 | | |
| 8.4 | % |
| |
| | | |
| | | |
| | | |
| | |
Cost Method Holding | |
| | | |
| | | |
| | | |
| | |
Firefly Systems, Inc. | |
| 12,898 | | |
| not
available | | |
| 12,898 | | |
| not
available | |
Total Equity Holdings | |
$ | 28,021 | | |
| | | |
$ | 37,522 | | |
| | |
The
following summarizes the (loss) income of equity method holdings reflected in the consolidated statements of operations (in thousands):
| |
Year Ended December 31, | |
| |
2023 | | |
2022 | |
Entity | |
| | | |
| | |
FG Financial Group, Inc. | |
$ | - | | |
$ | (2,578 | ) |
FG Financial Holdings, LLC | |
| (3,261 | ) | |
| 2,981 | |
Total | |
$ | (3,261 | ) | |
$ | 403 | |
Equity
Method Holding
FG
Financial Holdings, LLC (“FGF Holdings”) is a limited liability company formed under the Delaware Limited Liability Company
Act. The Company is a member of FGF Holdings and contributed its 2.9 million shares of FG Financial Group, Inc. (“FGF”) common
stock to FGF Holdings on September 12, 2022. FGF is a publicly-traded reinsurance and investment management holding company focused on
opportunistic collateralized and loss capped reinsurance, while allocating capital to special purpose acquisition companies (each, a
“SPAC”) and SPAC sponsor-related businesses.
In
consideration of its contribution to FGF Holdings, the Company was issued Series B Common Interests of FGF Holdings and 50% of the voting
power over FGF Holdings. The members of FGF Holdings agreed that the powers of FGF Holdings shall be exercised by, or under the authority
of, its managers. FGF Holdings has two managers, one of which was appointed by the Company. The Company designated its Chairman, D. Kyle
Cerminara, to serve as a manager of FGF Holdings. The managers of FGF Holdings, acting unanimously, have the right, power and authority
on behalf of FGF Holdings and in its name to execute documents or other instruments and exercise all of the rights, power and authority
of FGF Holdings. Allocations of profits and losses and distributions of cash are made in accordance with the terms of the FGF Holdings
operating agreement.
The
Company has the ability to significantly influence FGF Holdings through its 50% voting power but does not maintain a controlling interest.
Based on quoted closing stock of the securities held by FGF Holdings, as well as the liabilities and cash balance on hand, the liquidation
value of the Company’s LLC interest in FGF Holdings was approximately $4.5 million as of December 31, 2023.
The
Company recorded an equity method loss related to FGF Holdings of $3.3 million and equity method income of $3.0 million during the year
ended December 31, 2023 and 2022, respectively. As of December 31, 2023 and 2022, the Company’s retained earnings included an accumulated
deficit from its equity method holding of approximately $9.3 million and $6.0 million, respectively.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
Fair
Value Method Holding
GreenFirst
Forest Products Inc. (“GreenFirst”) is a publicly-traded Canadian company focused on environmentally sustainable forest management
and lumber production. In April 2021, GreenFirst announced that it had entered into an asset purchase agreement pursuant to which it
would acquire a portfolio of forest and paper product assets (the “GreenFirst Acquisition”). The Company’s Chairman,
Mr. Cerminara, served as a member of the board of directors of GreenFirst from June 2016 to October 2021, and was also appointed Chairman
of GreenFirst from June 2018 to June 2021. Prior to the closing of the GreenFirst Acquisition, the Company held a 20.7% ownership position
in GreenFirst. The Company’s 20.7% ownership of GreenFirst, combined with Mr. Cerminara’s board seat, provided the Company
with significant influence over GreenFirst, but not a controlling interest. Accordingly, the Company applied the equity method of accounting
to its equity holding in GreenFirst. Following the GreenFirst Acquisition and GreenFirst’s issuance of additional common shares,
the Company’s ownership percentage decreased to 8.6%. As a result, the Company is no longer able to exercise significant influence
over GreenFirst and the equity holding in GreenFirst no longer qualified for equity method accounting. As a result of applying the fair
value method of accounting, the Company recorded an unrealized loss on equity holding of approximately $6.2 million and $4.5 million
during the year ended December 31, 2023 and December 31, 2022, respectively. The Company did not receive dividends from GreenFirst during
the years December 31, 2023 or December 31, 2022. Based on quoted closing stock price, the fair value of the Company’s ownership
in GreenFirst was $10.6 million as of December 31, 2023 and $16.8 million as of December 31, 2022.
Cost
Method Holding
Firefly
Systems, Inc. (“Firefly”) is a private company which operates a media network and digital advertising solutions on taxi and
rideshare vehicles. The Company holds approximately 1.1 million and 0.6 million Firefly Series B-1 and Firefly Series B-2 preferred shares,
respectively, which were acquired in connection with the transactions with Firefly in May 2019 and August 2020. In addition, the Company
holds an additional 0.7 million Firefly Series B-2 preferred shares, which were acquired in August 2020 pursuant to a stock purchase
agreement with Firefly. The Company and its affiliated entities have designated Kyle Cerminara, Chairman of the Company’s board
of directors and a principal of the Company’s largest shareholder, to Firefly’s board of directors.
9.
Goodwill
All
of the Company’s goodwill is related to the Strong Entertainment segment. The following represents a summary of changes in the
Company’s carrying amount of goodwill (in thousands):
Balance as of December 31, 2022 | |
$ | 882 | |
Foreign currency translation adjustment | |
| 21 | |
Balance as of December 31, 2023 | |
$ | 903 | |
10.
Accrued Expenses
The
major components of current accrued expenses are as follows (in thousands):
| |
December 31,
2023 | | |
December 31,
2022 | |
Employee-related | |
$ | 1,466 | | |
$ | 1,399 | |
Legal and professional fees | |
| 521 | | |
| 822 | |
Warranty obligation | |
| 475 | | |
| 309 | |
Interest and taxes | |
| 736 | | |
| 653 | |
Post-retirement benefit obligation | |
| 18 | | |
| 15 | |
Other | |
| 326 | | |
| 168 | |
Total | |
$ | 3,542 | | |
$ | 3,366 | |
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
11.
Income Taxes
(Loss)
income from continuing operations before income taxes consists of (in thousands):
| |
Years Ended December 31, | |
| |
2023 | | |
2022 | |
United States | |
$ | (7,272 | ) | |
$ | (7,401 | ) |
Foreign | |
| (3,169 | ) | |
| 1,275 | |
Total | |
$ | (10,441 | ) | |
$ | (6,126 | ) |
Income
tax (benefit) expense from continuing operations consists of (in thousands):
| |
Years Ended December 31, | |
| |
2023 | | |
2022 | |
Federal: | |
| | | |
| | |
Current | |
$ | 115 | | |
$ | - | |
Deferred | |
| - | | |
| - | |
Total | |
| - | | |
| - | |
State: | |
| | | |
| | |
Current | |
| 160 | | |
| 22 | |
Deferred | |
| - | | |
| - | |
Total | |
| - | | |
| - | |
Foreign: | |
| | | |
| | |
Current | |
| 757 | | |
| 1,173 | |
Deferred | |
| (1,692 | ) | |
| (722 | ) |
Total | |
| (935 | ) | |
| 451 | |
Total | |
$ | (660 | ) | |
$ | 473 | |
Income
tax (benefit) expense from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate to pretax
loss from continuing operations as follows (in thousands):
| |
Years Ended December 31, | |
| |
2023 | | |
2022 | |
Expected federal income tax expense (benefit) | |
$ | (2,194 | ) | |
$ | (1,403 | ) |
State income taxes, net of federal benefit | |
| 771 | | |
| (662 | ) |
Foreign tax rate differential | |
| 285 | | |
| 71 | |
Change in state tax rate | |
| 536 | | |
| (303 | ) |
Change in valuation allowance | |
| (1,813 | ) | |
| 2,568 | |
GILTI inclusion | |
| (161 | ) | |
| - | |
Return to provision | |
| (383 | ) | |
| 61 | |
Foreign dividend inclusion | |
| - | | |
| 69 | |
Deferred tax adjustments | |
| 2,951 | | |
| 15 | |
Other | |
| (652 | ) | |
| 57 | |
Total | |
$ | (660 | ) | |
$ | 473 | |
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
Deferred
tax assets and liabilities were comprised of the following (in thousands):
| |
December 31,
2023 | | |
December 31,
2022 | |
Deferred tax assets: | |
| | | |
| | |
Deferred revenue | |
$ | 142 | | |
$ | 110 | |
Non-deductible accruals | |
| 224 | | |
| 79 | |
Inventory reserves | |
| 102 | | |
| 124 | |
Stock compensation expense | |
| 620 | | |
| 587 | |
Warranty reserves | |
| 115 | | |
| 81 | |
Uncollectible receivable reserves | |
| 40 | | |
| 68 | |
Net operating losses | |
| 2,890 | | |
| 5,888 | |
Tax credits | |
| 1,699 | | |
| 1,699 | |
Disallowed interest expense | |
| 1,697 | | |
| 1,460 | |
Equity in income of equity method holdings | |
| 2,154 | | |
| 13 | |
Depreciation and amortization | |
| 1,863 | | |
| - | |
Other | |
| 127 | | |
| 162 | |
Total deferred tax assets | |
| 11,673 | | |
| 10,271 | |
Valuation allowance | |
| (11,535 | ) | |
| (11,645 | ) |
Net deferred tax assets after valuation allowance | |
| 138 | | |
| (1,374 | ) |
Deferred tax liabilities: | |
| | | |
| | |
Depreciation and amortization | |
| 567 | | |
| 544 | |
Cash repatriation | |
| 2,771 | | |
| 2,933 | |
Total deferred tax liabilities | |
| 3,338 | | |
| 3,477 | |
Net deferred tax liability | |
$ | (3,200 | ) | |
$ | (4,851 | ) |
The
tax expense/benefit for the Content Business have been allocated to discontinued operations.
In
assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income. The Company considers the scheduled reversal of taxable temporary differences, projected future taxable income
and tax planning strategies in making this assessment. A cumulative loss in a particular jurisdiction in recent years is a significant
piece of evidence with respect to the realizability that is difficult to overcome. Based on the available objective evidence including
recent updates to the taxing jurisdictions generating income, the Company concluded that a valuation allowance of $11.5 million and $11.6
million should be recorded against the Company’s U.S. tax jurisdiction deferred tax assets as of December 31, 2023 and 2022, respectively.
The overall change in valuation allowance was a reduction of $0.1 million; however some changes in valuation allowance were allocated
to discontinued operations. The effective tax rate above relates only to continuing operations.
The
Company recorded a deferred tax liability related to withholding tax on the repatriation of earnings from its Canadian subsidiary of
$2.8 million and $2.9 million as of December 31, 2023 and December 31, 2022, respectively.
A
provision of Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was the implementation of the Global Intangible-Low Taxed
Income Tax, or “GILTI.” The Company has elected to account for the impact of GILTI in the period in which the tax actually
applies to the Company. During the year ended December 31, 2023, the Company did not incur any additional taxable income as a result
of this provision. The Company is electing the GILTI High Tax Exclusion.
The
Tax Code requires U.S. shareholders to include its share of its controlled foreign corporation’s income from dividends, interest,
rents, and various other types of income, called Subpart F Income. During the year ended December 31, 2023, the Company incurred $0.9
million of Subpart F Income as additional taxable income in this provision.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
As
a result of the Separation and IPO, the Company recognized an $11.1 million gain under Section 367 of the Internal Revenue Code (the
“Code”) for the year ended December 31, 2023. No deferred tax asset was established as a result of the gain recognition.
The gain is fully offset by net operating loss carryforwards, which are discussed below.
The
Company’s gross net operating loss carryforwards for Federal tax purposes total approximately $8.8 million and $19.7 million at
December 31, 2023 and 2022 respectively, expiring at various times in 2033 through 2037 for Federal losses generated through December
31, 2017. The Company was in a taxable income position for the year ended December 31, 2023 and utilized carryforwards available. This
resulted in an overall decrease to the deferred tax asset related to the net operating loss carryforwards. Approximately $0.9M of net
operating losses remaining are able to fully offset future taxable income; the remaining carryforward as of December 31, 2023 is subject
to the 80% limitation enacted by the 2017 Tax Act.
Also
as a result of the 2017 Tax Act, all Federal net operating losses that are generated beginning January 1, 2018 and beyond will carryforward
indefinitely. The Company has foreign tax credit carryforwards of approximately $1.7 million at December 31, 2023 that expire in 2024.
Utilization of these losses may be limited in the event certain changes in ownership occur.
In
March 2020, The Coronavirus Aid, Relief, and Economic Security Act was enacted and made significant changes to Federal tax laws, including
certain changes that were retroactive to the 2019 tax year. Changes in tax laws are accounted for in the period of enactment and the
retroactive effects are recognized in these financial statements. There were no material income tax consequences of this enacted legislation
on the reporting period of these financial statements.
The
Company is subject to possible examinations not yet initiated for Federal purposes for the fiscal years 2020, 2021 and 2022. In most
cases, the Company has examinations open for state or local jurisdictions based on the particular jurisdiction’s statute of limitations.
Estimated
amounts related to underpayment of income taxes, including interest and penalties, are classified as a component of income tax expense
in the consolidated statements of operations and were not material for the years ended December 31, 2023 and 2022. Amounts accrued for
estimated underpayment of income taxes were zero as of December 31, 2023 and 2022.
12.
Debt
The
Company’s short-term and long-term debt consist of the following (in thousands):
| |
December 31, 2023 | | |
December 31, 2022 | |
Short-term debt: | |
| | | |
| | |
Strong/MDI 20-year installment loan | |
$ | 2,227 | | |
$ | 2,289 | |
Strong/MDI 5-year equipment loan | |
| - | | |
| 221 | |
Strong/MDI revolving credit facility | |
| 2,438 | | |
| - | |
Insurance note payable | |
| 83 | | |
| - | |
Total short-term debt | |
| 4,748 | | |
| 2,510 | |
Less: deferred debt issuance costs, net | |
| (16 | ) | |
| - | |
Total short-term debt, net of issuance costs | |
$ | 4,732 | | |
$ | 2,510 | |
| |
| | | |
| | |
Long-term debt: | |
| | | |
| | |
Tenant improvement loan | |
$ | 126 | | |
$ | 162 | |
ICS promissory note | |
| 446 | | |
| - | |
Digital Ignition building loan | |
| 4,925 | | |
| 5,105 | |
Total long-term debt | |
$ | 5,497 | | |
$ | 5,267 | |
Less: current portion | |
| (457 | ) | |
| (216 | ) |
Less: deferred debt issuance costs, net | |
| (36 | ) | |
| (47 | ) |
Long-term debt, net of current portion and deferred debt issuance costs, net | |
$ | 5,004 | | |
$ | 5,004 | |
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
Strong/MDI
Installment Loans
On
September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement, as amended and restated
May 15, 2018, with Canadian Imperial Bank of Commerce (“CIBC”) consisting of a revolving line of credit for up to CAD$3.5
million, subject to a borrowing base requirement, a 20-year installment loan for up to CAD$6.0 million and a 5-year installment loan
for up to CAD$0.5 million. On June 7, 2021, Strong/MDI entered into a demand credit agreement (the “2021 Credit Agreement”),
which amended and restated the demand credit agreement dated as of September 5, 2017. The 2021 credit agreement consisted of a revolving
line of credit for up to CAD$2.0 million subject to a borrowing base requirement, a 20-year installment loan for up to CAD$5.1 million
and a 5-year installment loan for up to CAD$0.5 million. Amounts outstanding under the line of credit are payable on demand and bear
interest at the prime rate established by CIBC. Amounts outstanding under the installment loans bear interest at CIBC’s prime rate
plus 0.5% and are payable in monthly installments, including interest, over their respective borrowing periods. CIBC may also demand
repayment of the installment loans at any time. The Strong/MDI credit facilities are secured by a lien on Strong/MDI’s Quebec,
Canada facility and substantially all of Strong/MDI’s assets. The 2021 Credit Agreement required Strong/MDI to maintain a ratio
of liabilities to “effective equity” (tangible stockholders’ equity, less amounts receivable from affiliates and equity
method holdings) not exceeding 2.5 to 1, a current ratio (excluding amounts due from related parties) of at least 1.3 to 1 and minimum
“effective equity” of CAD$4.0 million.
In
January 2023, Strong/MDI and CIBC entered into a demand credit agreement (the “2023 Credit Agreement”), which amended and
restated the 2021 Credit Agreement. The 2023 Credit Agreement consists of a revolving line of credit for up to CAD$5.0 million and a
20-year installment loan for up to CAD$3.1 million. Under the 2023 Credit Agreement: (i) the amount outstanding under the line of credit
is payable on demand and bears interest at the lender’s prime rate plus 1.0% and (ii) the amount outstanding under the installment
loan bears interest at the lender’s prime rate plus 0.5% and is payable in monthly installments, including interest, over their
respective borrowing periods. The lender may also demand repayment of the installment loan at any time. The 2023 Credit Agreement is
secured by a lien on Strong/MDI’s Quebec, Canada facility and substantially all of Strong/MDI’s assets. The 2023 Credit Agreement
requires Strong/MDI to maintain a ratio of liabilities to “effective equity” (tangible stockholders’ equity, less amounts
receivable from affiliates and equity holdings) not exceeding 2.5 to 1 and a fixed charge coverage ratio of not less than 1.1 times earnings
before interest, income taxes, depreciation and amortization. The 5-year installment note was paid in full in connection with entering
into the 2023 Credit Agreement. In connection with the IPO, the 20-year installment note did not transfer to the Company. Strong/MDI
was in compliance with its debt covenants as of December 31, 2023. In May 2023, Strong/MDI and CIBC entered into an amendment to the
2023 Credit Agreement which reduced the amount available under the revolving line of credit to CAD$3.4 million, and CIBC provided an
undertaking to Strong/MDI to a release of CIBC’s security interest in certain assets to be transferred to a subsidiary in connection
with transactions related to the IPO. As of December 31, 2023, there was CAD$3.2 million, or approximately $2.4 million, of principal
outstanding on the revolving credit facility, which bears variable interest at 8.2%.
On
January 19, 2024, the Company entered into a new demand credit agreement with CIBC. The agreement consists of a demand operating credit
and a business credit card facility. Under the demand operating credit, with certain conditions, the credit limit is the lesser of (a)
CAD$6.0 million or (b) the sum of (i) 80% of Receivable Value, which includes all North American accounts receivable of Strong/MDI and
STS (collectively, the “Subsidiaries”), and (ii) 50% of Inventory Value, but in no event may the amount in this clause (ii)
exceed $1.5 million, minus (iii) all Priority Claims.
Tenant
Improvement Loan
During
the fourth quarter of 2021, the Company entered into a lease for a combined office and warehouse in Omaha, Nebraska. The Company incurred
total costs of approximately $0.4 million to complete the build-out of the new combined office and warehouse facility. The landlord has
agreed to fund approximately 50% of the build-out costs, and the Company is required to repay the portion funded by the landlord in equal
monthly installments through the end of the initial lease term in February 2027. Through the end of 2021, the Company incurred approximately
$0.2 million of total costs to build out the facility, of which approximately $0.1 million was funded by the landlord. The Company completed
the build-out during the first quarter of 2022 and incurred an additional $0.2 million of total costs to complete the build-out, of which
approximately $0.1 million was funded by the landlord.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
Digital
Ignition Building Loan
In
January 2022, the Company purchased a parcel of land with buildings and improvements in Alpharetta, Georgia. In connection with the purchase
of the land and building, the Company entered into a Commercial Loan Agreement (the “Loan Agreement”) with Community First
Bank (the “Lender”), dated February 1, 2022. Pursuant to the Loan Agreement, the Lender agreed to lend the Company approximately
$5.3 million (the “Loan Amount”), and the Borrower agreed to repay the Loan Amount pursuant to the terms of a promissory
note (the “Note”).
The
term of the Loan Agreement runs from February 1, 2022, until the Loan Amount is repaid in full by the Company or the Loan Agreement is
terminated pursuant to its terms or by agreement between the Company and the Lender. The terms of the Note include (i) a fixed interest
rate of 4%, (ii) maturity date of February 1, 2027, (iii) monthly payments of approximately $32 thousand beginning on March 1, 2022,
and continuing on the first of each month until the maturity date or until the Note has been paid in full, (iv) a default interest of
8% in the event of a default pursuant to the terms of the Note, and (v) prepayment penalties of (a) 3% of all excess payments during
the first two years of the term of the Note, (b) 2% of all excess payments during the third and fourth years of the term of the Note,
and (c) 1% of all excess payments made during the fifth year of the term of the Note.
The
Note includes standard events of default and references defaults under the Loan Agreement and the Deed to Secure Debt as events of default
under the Note. The Company has a right to cure any curable events of default.
Contractual
Principal Payments
Contractual
required principal payments on the Company’s long-term debt at December 31, 2023 are as follows (in thousands):
| |
Tenant
Improvement
Loan | | |
ICS
Promissory
Note | | |
Digital
Ignition
Building
Loan | | |
Total | |
2024 | |
$ | 37 | | |
$ | 233 | | |
$ | 187 | | |
$ | 457 | |
2025 | |
| 40 | | |
| 213 | | |
| 195 | | |
| 448 | |
2026 | |
| 42 | | |
| - | | |
| 203 | | |
| 245 | |
2027 | |
| 7 | | |
| - | | |
| 4,340 | | |
| 4,347 | |
2028 | |
| - | | |
| - | | |
| - | | |
| - | |
Thereafter | |
| - | | |
| - | | |
| - | | |
| - | |
Total | |
$ | 126 | | |
$ | 446 | | |
$ | 4,925 | | |
$ | 5,497 | |
13.
Stock Compensation
The
Company recognizes compensation expense for all stock-based payment awards based on estimated grant date fair values. Stock-based compensation
expense included in total selling and administrative expenses approximated $1.6 million and $0.7 million for the years ended December
31, 2023 and December 31, 2022, respectively.
The
Company’s 2017 Omnibus Equity Compensation Plan (“2017 Plan”) was approved by the Company’s stockholders and
provides the Compensation Committee of the Board of Directors with the discretion to grant stock options, stock appreciation rights,
restricted shares, restricted stock units, performance shares, performance units and other stock- based awards and cash-based awards.
Vesting terms vary with each grant and may be subject to vesting upon a “change in control” of the Company. On December 17,
2019, the Company’s stockholders approved the amendment and restatement of the 2017 Plan to (i) increase the number of shares of
the Company’s common stock authorized for issuance under the 2017 Plan by 1,975,000 shares and (ii) extend the expiration date
of the 2017 Plan by approximately two years, until October 27, 2029. As of December 31, 2023, 1,826,372 shares were available for issuance
under the amended and restated 2017 Plan.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
Stock
Options
The
following table summarizes stock option activity for 2023:
| |
Number of
Options | | |
Weighted
Average
Exercise
Price
Per Share | | |
Weighted
Average
Remaining
Contractual
Term (Years) | | |
Aggregate
Intrinsic
Value
(in thousands) | |
Outstanding at December 31, 2022 | |
| 639,500 | | |
$ | 3.72 | | |
| 5.6 | | |
$ | 127 | |
Granted | |
| 107,500 | | |
| 1.96 | | |
| | | |
| | |
Exercised | |
| - | | |
| | | |
| | | |
| | |
Forfeited | |
| (18,000 | ) | |
| 1.99 | | |
| | | |
| | |
Expired | |
| (144,000 | ) | |
| 4.79 | | |
| | | |
| | |
Outstanding at December 31, 2023 | |
| 585,000 | | |
$ | 3.19 | | |
| 5.6 | | |
$ | - | |
Exercisable at December 31, 2023 | |
| 415,500 | | |
$ | 3.66 | | |
| 4.6 | | |
$ | - | |
The
aggregate intrinsic value in the table above represents the total that would have been received by the option holders if all in-the-money
options had been exercised and sold on the date indicated.
The
Company did not grant stock options during the year ended December 31, 2022 and granted a total of 107,500 options during the year ended
December 31, 2023. Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common
stock on the date of the grant. The weighted average grant date fair value of stock options granted during the year ended December 31,
2023 was $1.96. The fair value of each stock option granted is estimated on the date of grant using a Black-Scholes valuation model with
the following weighted average assumptions:
Expected dividend yield at date of grant | |
| 0.00 | % |
Risk-free interest rate | |
| 3.52 | % |
Expected stock price volatility | |
| 68.2 | % |
Expected life of options (in years) | |
| 5.0 | |
As
of December 31, 2023, 169,500 stock option awards were non-vested. Unrecognized compensation costs related to all stock options outstanding
amounted to $0.1 million at December 31, 2023, which is expected to be recognized over a weighted-average period of 1.9 years.
Restricted
Stock Units
The
following table summarizes restricted stock unit activity for 2023:
| |
Number of
Restricted
Stock
Units | | |
Weighted
Average
Grant Date
Fair Value | |
Non-vested at December 31, 2022 | |
| 206,934 | | |
$ | 2.06 | |
Granted | |
| 541,039 | | |
| 1.95 | |
Shares vested | |
| (256,934 | ) | |
| 2.04 | |
Shares forfeited | |
| (40,000 | ) | |
| 1.96 | |
Non-vested at December 31, 2023 | |
| 451,039 | | |
$ | 1.96 | |
The
Company awarded a total of 541,039 and 120,829 restricted stock units during the years ended December 31, 2023 and 2022, respectively.
The Company estimates the fair value of restricted stock awards based upon the market price of the underlying common stock on the date
of grant. The weighted average grant date fair value of restricted stock units granted during the years ended December 31, 2023 and 2022
was $1.95 and $2.40, respectively.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
The
fair value of restricted stock awards that vested during the years ended December 31, 2023 and 2022 was $0.5 million and $0.6 million,
respectively.
As
of December 31, 2023, the total unrecognized compensation cost related to non-vested restricted stock awards was approximately $0.6 million,
which is expected to be recognized over a weighted average period of 1.8 years.
14.
Compensation and Benefit Plans
Retirement
Plan
The
Company sponsors a defined contribution 401(k) plan (the “Plan”) for all eligible employees. Pursuant to the provisions of
the Plan, employees may defer up to 100% of their compensation. The Company will match 50% of the amount deferred up to 6% of their compensation.
The contributions made to the Plan by the Company were approximately $0.2 million for each of the years ended December 31, 2023 and 2022.
15.
Leases
The
Company and its subsidiaries lease plant and office facilities and equipment under operating and finance leases expiring through 2027.
The Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease
if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over
the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the
use of the asset and (b) the right to direct the use of the asset.
Right-of-use
assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement
date. Certain of the leases contain extension options; however, the Company has not included such options as part of its right-of-use
assets and lease liabilities because it is not “reasonably certain” to extend the leases. The Company measures and records
a right-of-use asset and lease liability based on the discount rate implicit in the lease, if known. In cases where the discount rate
implicit in the lease is not known, the Company measures the right-of-use assets and lease liabilities using a discount rate equal to
the Company’s estimated incremental borrowing rate for loans with similar collateral and duration.
The
Company elected to not apply the recognition requirements of Accounting Standards Codification Topic 842, “Leases,” to leases
of all classes of underlying assets that, at the commencement date, have a lease term of 12 months or less and do not include an option
to purchase the underlying asset that the lessee is reasonably certain to exercise. Instead, lease payments for such short-term leases
are recognized in operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation
for those payments is incurred.
The
Company elected, as a lessee, for all classes of underlying assets, to not separate nonlease components from lease components and instead
to account for each separate lease component and the nonlease components associated with that lease component as a single lease component.
The
following tables present the Company’s lease costs and other lease information (dollars in thousands):
Lease cost | |
Year Ended | |
| |
December 31,
2023 | | |
December 31,
2022 | |
Finance lease cost: | |
| | | |
| | |
Amortization of right-of-use assets | |
$ | 183 | | |
$ | 37 | |
Interest on lease liabilities | |
| 94 | | |
| 12 | |
Operating lease cost | |
| 161 | | |
| 243 | |
Short-term lease cost | |
| 60 | | |
| 53 | |
Sublease income | |
| - | | |
| (32 | ) |
Net lease cost | |
$ | 498 | | |
$ | 313 | |
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
Other information | |
Year Ended | |
| |
December 31, 2023 | | |
December 31, 2022 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows from finance leases | |
$ | 94 | | |
$ | 12 | |
Operating cash flows from operating leases | |
$ | 131 | | |
$ | 202 | |
Financing cash flows from finance leases | |
$ | 159 | | |
$ | 36 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | |
$ | - | | |
$ | 97 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | |
$ | 775 | | |
$ | 703 | |
| |
As of
December 31,
2023 | |
Weighted-average remaining lease term - finance leases (years) | |
| 1.4 | |
Weighted-average remaining lease term - operating leases (years) | |
| 2.3 | |
Weighted-average discount rate - finance leases | |
| 5.2 | % |
Weighted-average discount rate - operating leases | |
| 5.8 | % |
The
following table presents a maturity analysis of the Company’s operating and finance lease liabilities as of December 31, 2023 (in
thousands):
| |
Operating
Leases | | |
Finance
Leases | |
2024 | |
$ | 225 | | |
$ | 371 | |
2025 | |
| 131 | | |
| 619 | |
2026 | |
| 81 | | |
| 483 | |
2027 | |
| 14 | | |
| 8 | |
2028 | |
| - | | |
| 2 | |
Thereafter | |
| - | | |
| - | |
Total lease payments | |
| 451 | | |
| 1,483 | |
Less: Amount representing interest | |
| (30 | ) | |
| (200 | ) |
Present value of lease payments | |
| 421 | | |
| 1,283 | |
Less: Current maturities | |
| (206 | ) | |
| (268 | ) |
Lease obligations, net of current portion | |
$ | 215 | | |
$ | 1,015 | |
16.
Commitments, Contingencies and Concentrations
Concentrations
The
Company’s top ten customers accounted for approximately 48% and 49% of 2023 and 2022 consolidated net revenues. Trade accounts
receivable from these customers represented approximately 47% and 68% of net consolidated receivables at December 31, 2023 and December
31, 2022, respectively. One of the Company’s customers accounted for more than 10% of both its consolidated net revenues during
2023 and the Company’s net consolidated receivables as of December 31, 2023. None of the Company’s customers accounted for
more than 10% of both its consolidated net revenues during 2022 and the Company’s net consolidated receivables as of December 31,
2022. While the Company believes its relationships with such customers are stable, most arrangements are made by purchase order and are
terminable at will by either party. A significant decrease or interruption in business from the Company’s significant customers
could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company could
also be adversely affected by such factors as changes in foreign currency rates and weak economic and political conditions in each of
the countries in which the Company sells its products.
Financial
instruments that potentially expose the Company to a concentration of credit risk principally consist of accounts receivable. The Company
sells product to a large number of customers in many different geographic regions. To minimize credit risk, the Company performs ongoing
credit evaluations of its customers’ financial condition.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
Litigation
The
Company is involved, from time to time, in certain legal disputes in the ordinary course of business. No such disputes, individually
or in the aggregate, are expected to have a material effect on the Company’s business or financial condition.
The
Company and certain of its subsidiaries are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing
materials. A majority of the cases involve product liability claims based principally on allegations of past distribution of commercial
lighting products containing wiring that may have contained asbestos. Each case names dozens of corporate defendants in addition to the
Company. In the Company’s experience, a large percentage of these types of claims have never been substantiated and have been dismissed
by the courts. The Company has not suffered any adverse verdict in a trial court proceeding related to asbestos claims and intends to
continue to defend these lawsuits. As of December 31, 2023, the Company has a loss contingency reserve of approximately $0.3 million,
of which $0.1 million represents future payments on a settled case and the remaining $0.2 million represents the Company’s estimate
of its potential losses related to the settlement of open cases. When appropriate, the Company may settle additional claims in the future.
The Company does not expect the resolution of these cases to have a material adverse effect on its consolidated financial condition,
results of operations or cash flows.
Gain
on Insurance
The
Company has carried key man life insurance covering one of its employees for several years. The covered employee passed away during the
third quarter of 2023. The Company completed and filed a $2.5 million claim with the insurance company in October 2023. The claim was
accepted and fully paid during the fourth quarter of 2023. The gain from the key man life insurance policy was recorded within other
income (expense), net on the consolidated statement of operations.
17.
Business Segment Information
The
Company conducts its operations primarily through its Strong Entertainment business segment which manufactures and distributes premium
large format projection screens and provides technical support services and other related products and services to the cinema exhibition
industry, theme parks, schools, museums and other entertainment-related markets. Strong Entertainment also distributes and supports third
party products, including digital projectors, servers, library management systems, menu boards and sound systems. Strong Studios, which
is part of the Strong Entertainment operating segment, develops and produces original feature films and television series. The Company’s
operating segments were determined based on the manner in which management organizes segments for making operating decisions and assessing
performance.
| |
Years Ended December 31, | |
| |
2023 | | |
2022 | |
| |
(in thousands) | |
Net revenues | |
| | | |
| | |
Strong Entertainment | |
$ | 42,616 | | |
$ | 38,953 | |
Other | |
| 712 | | |
| 1,370 | |
Total net revenues | |
| 43,328 | | |
| 40,323 | |
| |
| | | |
| | |
Gross profit | |
| | | |
| | |
Strong Entertainment | |
| 10,577 | | |
| 9,462 | |
Other | |
| 987 | | |
| 1,370 | |
Total gross profit | |
| 11,564 | | |
| 10,832 | |
| |
| | | |
| | |
Operating income (loss) | |
| | | |
| | |
Strong Entertainment | |
| 1,016 | | |
| 3,316 | |
Other | |
| (445 | ) | |
| (736 | ) |
Total segment operating income | |
| 571 | | |
| 2,580 | |
Unallocated administrative expenses | |
| (4,020 | ) | |
| (4,385 | ) |
Loss from operations | |
| (3,449 | ) | |
| (1,805 | ) |
Other (loss) income, net | |
| (3,731 | ) | |
| (4,724 | ) |
(Loss) income from continuing operations before income taxes and equity method holding (loss) income | |
$ | (7,180 | ) | |
$ | (6,529 | ) |
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
| |
Years Ended December 31, | |
| |
2023 | | |
2022 | |
| |
(in thousands) | |
Capital expenditures: | |
| | | |
| | |
Strong Entertainment | |
$ | 429 | | |
$ | 253 | |
Other | |
| 19 | | |
| 662 | |
Total capital expenditures from continuing operations | |
$ | 448 | | |
$ | 915 | |
| |
| | | |
| | |
Depreciation, amortization and impairment: | |
| | | |
| | |
Strong Entertainment | |
$ | 596 | | |
$ | 697 | |
Other | |
| 540 | | |
| 700 | |
Total depreciation, amortization and impairment from continuing operations | |
$ | 1,136 | | |
$ | 1,397 | |
(In thousands) | |
December 31,
2023 | | |
December 31,
2022 | |
Identifiable assets | |
| | | |
| | |
Strong Entertainment | |
$ | 22,083 | | |
$ | 35,392 | |
Corporate assets | |
| 40,060 | | |
| 36,361 | |
Total | |
$ | 62,143 | | |
$ | 71,753 | |
Summary
by Geographical Area
| |
Years December 31, | |
(In thousands) | |
2023 | | |
2022 | |
Net revenues | |
| | | |
| | |
United States | |
$ | 36,822 | | |
$ | 34,955 | |
Canada | |
| 1,192 | | |
| 1,622 | |
China | |
| 22 | | |
| 327 | |
Mexico | |
| 145 | | |
| 20 | |
Latin America | |
| 593 | | |
| 592 | |
Europe | |
| 1,450 | | |
| 1,076 | |
Asia (excluding China) | |
| 2,265 | | |
| 809 | |
Other | |
| 839 | | |
| 922 | |
Total | |
$ | 43,328 | | |
$ | 40,323 | |
(In thousands) | |
December 31,
2023 | | |
December 31,
2022 | |
Identifiable assets | |
| | | |
| | |
United States | |
$ | 33,518 | | |
$ | 51,423 | |
Canada | |
| 28,625 | | |
| 20,330 | |
Total | |
$ | 62,143 | | |
$ | 71,753 | |
Net
revenues by business segment are to unaffiliated customers. Net revenues by geographical area are based on destination of sales. Identifiable
assets by geographical area are based on location of facilities.
See
accompanying report of independent registered public accounting firm.
FG
Group Holdings Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements (continued)
18.
Subsequent Events
Merger
with FG Financial Group, Inc.
On
February 29, 2024, FGF and the Company completed the previously announced merger transaction pursuant to the Plan of Merger, dated as
of January 3, 2024 (the “Merger Agreement”), by and among the Company, FGF 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, the Company 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, FGF changed its name to Fundamental Global Inc. The Merger was unanimously
approved by the independent members of the Board of Directors of each of FGF and the Company. Additionally, the Merger was approved by
the majority stockholder of FGF and the shareholders of the Company. The Company also filed with the SEC a certification on Form 15 requesting
the deregistration of the FGH Common Stock under Section 12(g) of the Exchange Act and the suspension of the Company’s obligations
under Section 13 and 15(d) of the Exchange Act.
Sale
of Digital Ignition
On
April 16, 2024, the Company completed the sale of the Digital Ignition building and wholly owned subsidiary for $6.5 million. The Company
received approximately $1.3 million in cash, net of closing costs and repayment of debt. In connection with the sale of the land and
building, the Company expects to record an non-cash impairment charge of approximately $1.4 million during the first quarter of 2024
to adjust the carrying value of the assets to the realized value less costs to sell.
Sale
of Strong/MDI
On
May 3, 2024, the Company 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”). FGAC’s currently issued and outstanding Class A restricted voting shares (the
“Class A Restricted Voting Shares”) and share purchase warrants (the “Warrants”) are listed on the Toronto Stock
Exchange (the “TSX”). In addition, FGAC has approximately 2.9 million Class B shares (the “Class B Shares”) issued
and outstanding.
Pursuant
to the Acquisition Agreement, FGAC intends to acquire, directly or indirectly, all of the outstanding shares in the capital of Strong/MDI
(the “MDI Acquisition”). As a result of the MDI Acquisition, Strong/MDI will become a wholly-owned subsidiary of FGAC. The
MDI Acquisition values Strong/MDI at a pre-money valuation of $30 million (as adjusted pursuant to the Acquisition Agreement, the “MDI
Equity Value”).
In
connection with the closing of the MDI Acquisition (the “Closing”), FGAC intends to rename itself Saltire Holdings, Ltd.
(“Saltire”). It is a condition of Closing that the common shares of FGA (the “Common Shares”) be listed and the
Warrants continue to be listed on the TSX.
On
Closing, FGAC will satisfy the Purchase Price (as defined in the Acquisition Agreement) with: (i) cash, in an amount equal to 25% of
the net proceeds of a concurrent private placement, if any (the “Cash Consideration”), (ii) the issuance to the Company of
preferred shares (“Preferred Shares”) with an initial preferred share redemption amount of $9.0 million, and (iii) the issuance
to the Company of that number of Common Shares equal to (a) the MDI Equity Value minus (x) the Cash Consideration and (y) the Preferred
Shares, divided by (b) $10.00.
The
Closing is conditional on, among other things, there being no legal impediments to Closing and all required authorizations, consents
and approvals necessary to effect Closing having occurred, or being filed or obtained, as applicable, the Common Shares being conditionally
listed for trading on a stock exchange, the approval of the MDI Acquisition by the holders of Class A Restricted Voting Shares at a meeting
of shareholders to be held in connection with the MDI Acquisition, receipts having been obtained for both the preliminary and final prospectus
and other usual and customary conditions for transactions of this nature. The obligations of the Company at Closing are also conditional
on, among other usual and customary conditions for transactions of this nature, (a) the truth and accuracy of FGAC’s representations
and warranties, (b) the compliance and/ or performance by FGAC of its covenants under the Acquisition Agreement, and (c) there having
been no material adverse change with respect to FGAC. The Closing is also conditional on, among other usual and customary conditions
for transactions of this nature, the following conditions of Closing in favor of FGAC: (a) the truth and accuracy of the Company and
Strong/MDI’s representations and warranties, (b) the compliance and/or performance by the Company and MDI of their covenants under
the Acquisition Agreement, (c) the completion of all required third party authorizations, consents and approvals, and (d) there having
been no material adverse change with respect to Strong/MDI or its business and there being no events, facts or circumstances that shall
have occurred which would result or which could reasonably be expected to result, individually or in the aggregate, in a material adverse
change with respect to Strong/MDI or its business.
It
is anticipated that, upon completion of the MDI Acquisition, on a non-diluted basis and assuming completion of a $10 million private
placement and the issuance of 338,560 Common Shares to CG Investments VII Inc. as consideration for its deferred underwriting fee, the
Company will hold an ownership interest of approximately 29.6% in Saltire.
See
accompanying report of independent registered public accounting firm.
v3.24.1.1.u2
Cover
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Jun. 18, 2024 |
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